Check Point Software Technologies Ltd (CHKP) 2010 Q4 法說會逐字稿

Greetings and welcome to the Check Point Software Technologies fourth-quarter and fiscal-year 2011 earnings conference call.

At this time, all participants are in a listen-only mode.

A question and answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kip E.

Meintzer, Head of Global Investor Relations for Check Point Software Technologies.

Thank you, Mr.

Meintzer.

You may begin.

Thank you, Claudia.

I'd like to thank all of you for joining us today to discuss Check Point's record financial results for the fourth quarter and fiscal year 2010.

Joining me on the call today, as usual, are Gil Shwed, our founder, Chairman, and CEO and Tal Payne, Chief Financial Officer.

As a reminder, this call is being webcast live on our website and is being recorded for replay.

To access the live webcast and replay information, please visit the Company's website at CheckPoint.com.

For your convenience, the conference call replay will be available through February 7.

If you would like to reach us after the call, please contact Investor Relations by e-mailing Kip at CheckPoint.com, or by phone at +1-650-628-2040.

Now before we begin with management's presentation, I would like to bring the following to your attention.

During the course of this call, Check Point representatives will make certain forward-looking statements.

These forward-looking statements may include our expectations regarding demand for our security products, our expectations regarding the introduction of new products and programs, and the success of those programs and products and our expectations regarding our business and financial outlook for the first quarter and full year of 2011.

Other statements which may be made in response to questions which refer to our beliefs, plans, expectations, or intentions, are also forward-looking statements for the purpose of the Safe Harbor provided by the Private Securities Litigation Reform Act.

Because these statements pertain to future events, they are subject to various risks and uncertainties, and actual results could differ materially from Check Point's current expectations and beliefs.

Factors that could cause or contribute to such differences include, but are not limited to, the risks discussed in Check Point's Annual Report on Form 20-F for the year ended December 31, 2009, which is on file with the Securities and Exchange Commission.

As a reminder, Check Point assumes no obligation to update its forward-looking statements.

In our press release, which has been posted on our website, we present GAAP and non-GAAP results, along with reconciliation tables which highlight the data, as well as the reasons for our presentation of non-GAAP information.

Now, I would like to turn the call over to Tal Payne, Check Point's Chief Financial Officer, for a review of the financial results.

Great.

Thank you, Kip.

Good morning and good afternoon to everyone joining us on the call today.

I'm happy once again to begin the review of an excellent quarter and what turned out to be an exceptional year for Check Point.

This quarter, we achieved an all-time record result across our key metrics.

Our results both quarterly and for the full year exceeded the high end of our projections, as we continue to demonstrate solid growth across all regions.

Our revenues for the fourth quarter increased by 17% over the same period in 2009, while our non-GAAP EPS was $0.73, representing 20% growth year over year.

Before I delve further into the numbers, let me remind you that our fourth quarter and fiscal year GAAP financial results include non-cash equity-based compensation charges; amortization of acquired intangible assets; restructuring and other acquisition-related charges; impairments on marketable securities; and the related tax effects.

Keep in mind that the non-GAAP information is presented excluding these items.

Now let's take a look at the financial highlights for the quarter.

Fourth-quarter revenues were all-time record of $319 million, an increase of 17% compared to $272 million in the same period a year ago.

This growth was driven by exceptionally strong product sales and continued growth in our annuity software blades.

Product and license revenue were $143 million, representing a 19% increase over the same period last year.

The growth came from all main network security product lines, including the Power-1, VSX-1, and Smart-1.

Our software updates, maintenance and service revenues reached $175.4 million this quarter, a 15% increase year over year.

Deferred revenues as of December 31, 2010, were $464.6 million, an increase of $68 million or 17% over September 30, 2010.

We had growth in revenues across all geographies, with the Americas and Europe leading the growth.

Revenue distribution by geography for the quarter was as follows -- Americas contributed 44% of revenues.

Europe contributed 40% of revenues.

And Asia Pacific and Japan, Middle East and Africa region contributed the remaining 16%.

From the deal site perspective, this quarter, transactions greater than $50,000 accounted for 64% of total order value compared to 60% in the same period a year ago.

We had 44 customers that each had transactions with a value greater than $1 million compared to 29 transactions in the same period last year.

From an operating perspective, we posted great results.

Our non-GAAP operating income was $183.6 million this quarter, an increase of 20% compared to the same period in 2009.

This also reflected in the highest quarterly non-GAAP operating income in the history of the Company.

Non-GAAP operating margin for the quarter was 58%, an increase from 56% in the same period last year and 57% in the previous quarter.

GAAP net income for the fourth quarter of 2010 was $137.4 million or $0.64 per diluted share, up from $109.5 million or $0.51 per diluted share in the same period a year ago, represented an increase of 25% year over year.

Non-GAAP net income for the quarter was $156 million, or $0.73 per diluted share, up from $129.5 million or $0.61 per diluted share a year ago.

Earnings per share exceeded the high end of our guidance, representing 20% growth year over year, primarily as a result of our top-line performance.

Our cash flow from operations this quarter was $162.8 million, an increase of 18% from $138.1 million in the fourth quarter a year ago.

This is mainly a result of strong collection as reflected in our DSO, which was 66 days this quarter compared to 76 days in the same period last year.

During the quarter, we purchased approximately 1.2 million shares for a total cost of $50 million as part of our share repurchase program.

Now let's take a look at our 2010 fiscal year highlights.

For the year ended December 31, 2010, revenues were $1.098 billion, an increase of 19% compared to $924 million for the year ended December 31, 2009.

Non-GAAP net income was $528 million, an increase of 21% compared to $435 million in 2009.

Non-GAAP EPS for 2010 was $2.48, an increase of 21% compared to $2.05 in 2009.

On the operating side, we achieved a non-GAAP operating margin of 57% for the year, up from 55% in 2009 and 53% in 2008 as a result of our progress on efficiency and productivity, but driven mainly by the higher revenues that were achieved for the year.

Cash flow from operations for the year reached a record $674 million, bringing our cash balance at the end of the year to $2.415 billion.

Now let's turn the call over to Gil for his thoughts on the fourth quarter and the year.

Thank you, Tal, and thank you, everyone, for joining us on the call today.

I'm very pleased with the fourth quarter and year-end results.

We delivered all-time high record results, which exceeded both our revenues and earnings per share projections for the quarter and for the year.

We achieved close to $1.1 billion in revenues and delivered non-GAAP earnings per share of $2.48.

This was also the third consecutive quarter that we realized 19% or better growth in products revenue, which continues to reflect strong customer demand for network security appliances in the Software Blade Architecture.

During 2010, we [had rolled] several new blades and expect to release additional blades over the coming weeks.

We released new products for data loss prevention, part of our multi-year strategy in data security with new and effective ways to prevent data leakage.

And we have had a great acceptance of our mobility blade, which was just released in October.

It enables secure and simple one-click remote access from every iPhone and iPad; annuity software blade, laid by the IPS blade, continued to experience healthy growth during the year and contributed almost $100 million in aggregate.

And I was also pleased to see that our diversified business around the world kept producing good results.

We had good results in all geographies with the US producing great strength and solid results.

In 2011, we plan to continue expanding our network security platform and our Software Blade Architecture.

But we also plan to take some bold steps in redefining security for the next decade.

I believe that customers should use security in a much higher level, defining their security strategy and accordingly their policies and consolidate the weights being enforced.

Security should grow from a collection of disparate technologies into an effective business process.

In the coming weeks, we're going to reveal this new vision and demonstrate with our technology how to bring security into the next decade.

As for financial projection, the fourth quarter gave us some good reasons to be optimistic for 2011.

We're targeting growth rates of approximately 10% for 2011 with a range around that, balancing between the risks and the potential upside.

So for 2011, we expect the following results.

Revenues are expected to be between $1.185 billion to $1.225 billion.

Non-GAAP EPS for the year is expected to be between $2.65 to $2.75 per share.

GAAP EPS for the year is expected to be approximately $0.30 less than that.

For the first quarter, revenues are expected to be between $268 million and $279 million.

Non-GAAP EPS for the quarter is expected to be between $0.59 and $0.62.

GAAP EPS for the quarter accordingly is expected to be approximately 8% less.

So thank you very much, again, for being with us on the call today.

I want to also thank all our customers, partners, employees, for delivering these exceptional results, and I would like to open the call for your questions.

Thank you, everyone.

(Operator Instructions).

Gregg Moskowitz, Cowen and Company.

Thank you.

Tal, I was wondering if you could just start touching on the recent tax law approval in Israel.

And first of all, I just wanted to confirm, is it the case that there will be no material changes expected in either the non-GAAP tax rate or cash flow from operations?

And secondly, how should we think about potential stock buyback amounts, given the increased freedom around share repurchases?

If you could just address that, that will be helpful.

Sure.

You're right.

I'll give a bit of a briefing on the tax changes for the ones you're not familiar.

A corporate tax rate in Israel, a few months ago, dropped from its 25% to 18% over the next five years, so it will drop 1% each year.

That change is less relevant to us as we enjoy a lower tax rate as a privileged enterprise.

Today, the privileged enterprise was a complex split into three tax brackets that varied every year.

And the law passed a few weeks ago that simplifies and provides a simple flat, reduced tax rate for the privileged income, which will be 12.5% from 2013 onwards.

So that's the plan.

So it's past, which is the good news, which lifts the limitation on distributing additional amounts subject to tax, additional amounts from a buyback/dividend.

So that consideration is off the table and now we are left with the regular considerations of cash being used for acquisitions, cash being used for other purposes, buyback, and so on.

Okay, thank you.

And then Gil, Europe seemed to do a little bit better this quarter.

I was wondering if you can comment on what you are seeing there broadly speaking and also if you could just touch on how the UK performed, I believe you saw some softness there last quarter.

Just wanted to get an update.

I think this quarter we had good performance all over the world.

As I said, the quarter itself, Q4, was exceptional in all perspectives.

UK actually did very well.

I think with UK we started the year slow, but we recovered and actually had great results as the year ended.

Just to be clear, UK has become the number two country for us worldwide.

We had like a five-year runoff there.

But it was only slowed down by the first half of 2010 and recovered the second half.

So I mean overall the UK is performing extremely well.

In the US, if I may be allowed to bring a little bit more perspective about our performance all over the world, I did mention that the US has a very solid performance this year because I think -- because overall, while I think the overall growth rates and balance between geographies remains pretty much the same, the US is very smooth results across all regions, across all areas, and excellent results.

Europe, the results are very different.

Some countries performed better.

Some countries performed less, and there is no correlation to the macro economy or anything like that.

I mean it's really I guess our tax trends will drive it.

So while the overall Europe and US looks the same, in the US, everything was extremely smooth every single quarter through the year end, producing results that are on plan or better than plan in all the places, and that was really, really an excellent year for the US.

Great.

Thank you.

Daniel Ives, FBR Capital Markets.

Yes, hey, great quarter.

How are you thinking about blade architecture in terms of the ramp-up of that throughout the year and how that's going to affect growth for 2011?

Can you repeat the question, please?

Yes.

In regards to the move to the blades, how are you thinking about that in terms of a revenue contribution for the year?

And just talk about what you are seeing within your installed base in terms of that move.

Our existing customers deserve to get upgrades based on their maintenance fee that they pay every year, so just upgrading from one version to another does not generate additional revenue.

It does generate a huge amount of revenue based on our subscription model overall.

It does create a new opportunity for customers to purchase new blades, additional blades, for their environment, and we are seeing a nice uptick.

I've already mentioned that our blades in general have a great contribution.

The blades by the way, there's two types of blades.

There are annuity blades, which the customer gets a subscription and pays every year.

And there is what we call it capital blades, which the customer buys only one.

So I've already mentioned that the annuity blades are getting close to our almost $100 million contribution to our results.

And between the blades, there's everything.

So it's not that one blade or another has the major contribution.

I did mention that, for example, the mobility blade which we just released has a great first few months, and performed ahead of expectation for our first quarter.

So overall, I think that the move to our Software Blade Architecture is going pretty well.

That generates upside and mainly I think is good for the customers.

Thanks.

Walter Pritchard, Citi.

Thanks.

Hi, Tal.

I'm wondering if you could -- just a couple of seasonality questions here.

It looks like deferred revenue was about a 17% sequential increase.

And in that number, I think if I look at the five-year average, it's about 19% or 20%.

I'm just wondering, it looks like it's a little bit below the typical seasonality.

And then also, if I look at your guidance for Q1, it looks like you've traditionally been about down 10% or so on a revenue basis from Q4 into Q1.

It looks like you are guiding here down to about 14%.

Just wondering in both of those, what may be driving it to be a little bit different than what you've seen in the past.

Sure, I'll refer to the deferred.

I didn't understand the second part, so if you can repeat that again, please.

Sure.

It was just your guidance for Q1; the revenue guidance implied at the midpoint about a 14% decline from Q4 to Q1 which is more of a decline than you have seen over the last say five years at about 10%.

So just wondering why you are expecting to see more of a sequential decline this year in Q1 than you've seen the last say five years?

Sure.

Okay.

So I will start first with the deferred revenues.

You are right, when we look sequential growth, it's pretty much in line in the last three, four years, around 18, 19%, 20%.

Bear in mind that in years that you have acquisitions, as you decrease significantly the deferred revenues in the date of the acquisition of the acquired organization, then it's tough to pick up over the next three and four quarters.

So last year, growth between Q3 and Q4 also includes the increase in the deferred revenues from the acquired company which was Nokia.

So it's not completely apples to apples, but almost.

The same, by the way, between -- in 2007 when Pointsec was acquired, although less of an effect.

So I will say it's in line with the sequential growth of 17%, 18%, 19%.

You can see it by the way in line completely with the growth in our revenues.

So I think it's according to our expectations.

Between Q1 and Q4, or in the guidance, we provided a range.

And bear in mind that the growth this year was, like Gil said, was significantly faster.

You can see Q3 was 19%, which, again, is not the typical regular growth rate that we saw in organic rate.

So as Gil said, we took a midpoint, which is taking into account the optimistic view that we looked at and on the other hand, trying to be more prudent regarding our projections (multiple speakers)

And I think take into consideration that Q4 was probably at least 5% higher than what we expected, so we're not automatically rolling this 5% into the next quarter with -- you can argue both ways, but that means that having a great Q4 means the Q1 is going to be also very good, which I think is a good argument.

You can also argue the other way around, with the sales force have got many, many large projects and they are starting the year from scratch.

So I think what we are providing is -- I think we are ready for another good year with I hope balanced expectations.

Great.

Thanks a lot, both of you.

Phil Winslow, Credit Suisse.

Great quarter.

Just have a few questions.

Just first, Gil, on just the blade adoption, I wonder if you could give us a sense of -- you mentioned the IPS blade and the mobile blade, but just sort of which blades you are seeing the most success in and sort of I guess what the attach rate is, as people convert over to the blade architecture.

And then second, Tal, obviously there's been a fair amount of fluctuation and currency here.

Wondering if you can give us a sense of just the impact that you are baking in, in terms of operating margin for this year and exactly how you guys are hedged.

Thanks.

So I think the main blade that has real substantial contribution of our results so far is the IPS blade.

I think as I mentioned, the annuity blades are around $100 million.

And most of it is IPS which I think is great because I think after a few years of building an IPS offering, we are becoming one of the major players in the IPS space.

The recent report that we -- that just got out of NSA [club] showed our leadership and showed that, for the first time, an integrated IPS is not only in par with standalone IPS, it's actually much better and much better in terms of security, much better in terms of performance, and much, much better in terms of operating costs and other operational aspects.

So I think we are gaining leadership in that space and not just leadership in reviews and in technologies, but in terms of revenue, it's also starts to be really, really significant.

Other blades that we have all have nice contribution, but I don't think they are material or not material, they are so significant to the revenues.

The mobility blade has just started, and we don't break out revenue by product or by blade.

Specifically, I will give you -- maybe one number that -- as indication of how successful it is, we're getting close to 1,000 customers that have already started implemented or both with blades, in less than three months, and that's a very, very high number.

You think about our industry, about companies.

The company spent five, 10 years to get to 1,000 customers with a new product and a new offering.

So if I compare it to our success with our new products, new blades getting sort of to the 1,000 in terms of order of magnitude, in one quarter, it means that it's right on target in terms of the products and in terms of what customers want.

The currency, yes.

So, I'll just relate to the currency.

Right now, we assume the same rates of last year.

About let's say around $200 million or so of our expenses are in non-dollar currency.

And as I say each year, the currency will move by about 10% theoretically, then it should affect us in $0.02, $0.03 a quarter.

That's about the calculation since we have 215 million shares.

So that's the effect.

We plan this year to do just like last year.

We're going to hedge the major currencies, which are typically the Israeli shekel and the euro and maybe one or two other currencies, but that's the main two, and protect the budget for next year.

Great.

Thanks, guys.

Rob Owens, Pacific Crest Securities.

Thank you very much.

Could you give us some more color on the large deal metric?

I think you said 44, which is up over 50% just in terms of the number of customers that are doing deals over $1 million.

So, is this the Software Blade Architecture just larger deals in general, some budget flesh help that?

It's basically the result of the basic map of the transactions of the quarter.

We had quite a lot of booking, as you can see in the results, and many transactions.

Remember [that this] acquisition of Nokia, we have now larger deals with the same customers as well.

You see both the transaction over $50,000 increased also to 64%.

And you're right, we have many large transactions, which is probably a reflection of the fact that we have much more to sell to our customers in terms of our product portfolio, services, blades and so on.

Great.

And then second on the competitive front, obviously, a couple of you guys are growing much faster than the industry overall.

Who do you think is the major share loser out there and who are you seeing in most competitive situations?

I don't think it changed much.

The two large competitors are Cisco and Juniper.

I do think that we gained share against both of them, significantly this year.

So that's pretty much the situation.

All right.

Thank you.

Philip Rueppel, Wells Fargo.

Great.

Thank you very much.

Could you give us a little -- talk a little bit about your endpoint products and strategy and what you expect sort of from the new endpoint product?

And is that sort of a cornerstone of this new vision that you are going to unroll or unveil over the course of the next few months?

First, I think we have -- after many years of working about the new unified endpoints, we finally, at the end of December, released the unified version.

It's called R80.

Of the unified endpoint, it's by far the strongest offering for an endpoint solution.

If you look today at what endpoint is something we all can relate to.

We all have it on our laptop.

So we have the only endpoint suite that combines both the anti-malware part and one of the best malwares in the industry; the remote access VPN; and the data security disk encryption USB media control and things like that that are essential.

Almost from any other vendor you will be talking -- actually there's no single vendor that produces all of them today, absolutely no one.

And from other vendors, some other vendors can give you two out of the three, but it will not be one unified product.

It will be separate products, maybe sold together but separate products.

So we have one unified client with the best technologies in each sector, and now we have unified management to that.

That's [helping the two cars] after assembling several acquisitions, investing a lot in R&D, took us many years to come up with, and that's now out in the marketplace.

So far it receives pretty positive acceptance in the marketplace.

Still, having said that, we are -- it will take us a long time to build that up.

We are still fairly a small vendor in the entire endpoint space, and I think that's still a long road ahead of us for that.

I'm glad to say that in the enterprise end point last year, we still -- we started seeing some growth, and I hope that that will be the case also in 2011, when we have such a better offering for that.

As for what we're going to reveal in the next few weeks, it's not going to be about the endpoint.

It's going to be about two parts.

One is going to be about the overall vision to security, and I think I alluded to some of the message, even though I won't give you here the full announcement and the full detail.

So I think it will talk about the vision of high-end security -- high-end vision for security for customers, and how to implement an effective security strategy.

And in terms of products, it will actually be supported by our core network security products with the new version with a lot of new extension, with incorporating all the new technologies, the software blades and some new blades, so I think it's going to be pretty exciting in the next few weeks with our new announcement.

Great.

Thank you.

Brent Thill, UBS.

Thanks.

I was wondering if you could give us a sense on what percent of installed base is upgraded to R70 now?

And, do you believe the end of life for R65 at the end of March will provide some type of inflection point for the installed base to move up and then, therefore, move to the blade architecture in a stronger mass?

So I think that about 80% to 90% of new sales in 2010 were already an R70.

The number for older releases and older customers, it's a little bit harder to say.

Some of them we know because they actively upgraded and switched their license.

Some can use the old license with the new version, so we don't really know how much of them upgraded.

And, I think the fact that after -- I think it's now two or three years now, R65, two years after the release of R70, R65 is not going to have new major upgrades and so on, but that's the meaning of end-of-life or I don't know the exact terminology even.

It's going to be a nice boost to R70.

Customers -- more customers are going to upgrade.

As I said, most new customers are -- implemented R70 and customer gets a very good feeling about that.

So, I think that should give us some good push in technology and the ability to offer new blades and more technology to the customers.

Thank you.

Sterling Auty, JPMorgan.

Thanks.

A couple quick questions.

First, back to the deferred revenue, Gil, how should we think about it?

You talked about the significance of the annuity-based blades and you also talked about kind of the acquisition impact.

But as we look forward, I know there's a little bit of lumpiness with maintenance renewals and like that, but how should we think about the deferred revenue growth in relation to product revenue growth and total revenue growth going forward?

Tal can give a little bit more on the numbers, but in terms of the qualitative, I think what we have is a very positive balance in our business.

On one hand, we are seeing almost the same growth rate in deferred as we had in previous years.

On the other hand, when you think about moving to the appliance model, and now 75% of our business is selling appliances, appliances are not renewing in the same rate with software.

Software, you renew forever because that's how you keep your investment in the software; and appliances, once every few years, you actually upgrade the appliance and stop the renewal process in that.

So, all in all, I think what we have in the annuities is great.

I think you compare it to every networking company or hardware company.

We have much, much more annuity revenue with that.

We actually even have a high number to compare.

And yet at the same time, we have a very high number of new products.

Actually if you compare it to our software company, that's also a pretty nice substantial revenue.

So I think we have a very balanced revenue stream.

And I hope it will continue that way moving forward.

And I might add one thing.

I'll say, I would also always recommend to look at the total growth of the revenues for that kind of services together exactly because of the mix that Gil mentioned of appliances versus software, so all that can be mixed between the different growth rates of the products.

And on the revenues of the services, you can see it in previous years as well.

In general, I will say as a significant part of the booking comes in Q4, then you should expect to see a reduction in deferred revenues in Q2 and in Q3 and then an increase again in Q4.

So remember the same last year, we had those questions; I will say you need to predict that the deferred revenues are reducing over the year and then increasing again towards Q4.

Okay.

And then the follow-up, as we think about the IPS blade, which you've gotten really good reviews and response from, as well as the new blades that are coming, can you give us a sense of maybe how many of the units that are actually out there in the field, what's the size quantitatively of the number of units that might be able to upgrade and take down one of these new blades?

The number of people that can upgrade it is in the hundreds of thousands.

It's not -- it's high.

I think we already got a nice number of these, a similar number of people that have already upgraded, but potentially still on tap.

We're still very, very high potential.

And last question is, on your distribution strategy, did anything change materially in 2010?

So in other words, when you look back at 2010, who are your largest one or two distribution partners for you?

I think it's the same distributor that we had before.

I do think that you have to keep in mind that on one hand, we really enjoy value-add distributors that have a lot of value.

On the same time, some of our growth and a lot of it is driven at the end by the account teams that we have and by the resellers.

So we have, again, I think a lot of the I think good qualities of our business is that balance, but it's not driven by some large distributor that's pushed the software, yet on the same time, it's also driven by named accounting.

It's a very, very healthy and balanced distribution channel when everyone contributes their part, but there's no reliance on one element except, of course, for the customers that, at the end, need to love the software and purchase it.

All right.

Thank you.

Shaul Eyal, Oppenheimer.

Good afternoon, guys.

Good quarter.

Two quick questions on my end.

I want to go back to the potential buyback initial question.

Gil, what needs to happen for you guys to announce let's say a sizable buyback more than the typical $250 million, $300 million, $400 million that we have been seeing over the past few years?

So I think over the past few years, we were pretty consistent with about $200 million a year buyback.

A big part of it was driven by the amount that we can do in terms of the taxation, without tax affect.

I think that will change 2012, 2013.

In the meantime, the numbers might grow because we have a bigger amount of money that is -- that was already taxed and we can do that.

And I do expect that it is possible that we will -- that the amount of buyback that we do will grow.

I think in general, I'm not trying to create big dramas here or to try and out-get the market and do one quarter or something like that, something big.

I think we're trying to go over time, and I think it is a very reasonable expectation to think that we may be able to grow that amount in the near future.

Got it.

A question on the blades.

Standard blade package, does it still consist of five separate blades, and is it still around $5000 for the standard package?

First, no, I don't like there's a standard -- first every new product or new appliance that we sell comes with a certain set of blades.

Probably some models that are very, very basic, let's say to be in some cases especially in the low end to be very price competitive comes with only two blades.

There are many others that come with five and six blades already built in to the product.

From that place on, it's the customers are -- can add blades, can renew blades as they wish.

We are sort of not in the same model that we've been in the past of selling big bundles of what we used to call three years ago, Total Security.

We are much more into the selling of individual blades and individual offerings.

And so far it's working quite well in sort of shifting from selling annuity packages to real software blades when the model is cleaner and clearer.

And again, that has (multiple speakers) new customers that will renew it in a year, and with old customers which will just not implement the blade for the first time.

Thank you.

Brad Zelnick, Macquarie.

Thank you.

My question is around R65 reaching end-of-life this quarter.

And the question is, around the revenue impact that we should expect.

Are there any prior events -- the last event that I recall was I think in Q2 2009, when you had a similar large end-of-life.

Is there any expectation for what it can contribute to revenue and purchases?

And if so, what's included in your guidance?

There should be no affect in the revenues.

The customers pay the subscription; the subscription is the same percentages for all the versions and all the products, and there shouldn't be any changes in that.

Thank you.

Michael Turits, Raymond James.

First, a couple questions.

First, where are you in terms of the percentage of your product from appliances and where do you expect that to go?

Right now it's the 75% that Gil related to, give or take a percentage.

And I think we don't know how high it can go, but we've seen it stabilizing around that area for a few quarters now, so I can't predict the future, but I don't expect any significant changes soon.

So right now we're in a healthy mix in that, and that is pretty stable.

Yes.

Oh, good.

Annuity blades, a big number for 2010 of $100 million.

Can you just give me, just for order of magnitude, some sense of what it had been in 2009?

I think we had about 30 -- high 30%s growth in that; between 35% and 40% growth in that last year.

Yes.

And then last question, I may have missed it already, but on the taxes, it had been around 19%.

I know there's a lot going on, but should we expect that's roughly the effective tax rate for the next year or two?

It's around 20% -- 19%, 20%, and we expect it to be in the same area for next year as well.

And looking forward, it will go down with the change in taxing interest.

(multiple speakers)

So 19%, 20% --

I would expect it for now to be around the same, 19%, 20%.

Okay, great.

Thanks very much, guys.

Keith Weiss, Morgan Stanley.

Nice quarter.

I was wondering if we could delve into sort of the operating margin outlook for 2011.

If I'm doing my math right, it looks like we're looking for a slight decline in operating margin in 2011.

I wanted to see a, whether that was a correct assumption.

B, if you could give us a little bit of insight into how you guys are thinking about investment into 2011, perhaps where we should think about headcount going in the forward year; and then finally, would be how acquisitions play into that investment paradigm, what the current thinking is on acquisitions into 2011.

Thank you.

I will just relate to the first part.

It's not really an assumption regarding operating margin.

It's -- bear in mind the number of shares that we have continued to increase.

We closed the year with 214 million shares while we started with 212 million.

So the number for next year is higher than the average of 2010.

So I think I would also relate to that.

I think over the past 15 or 16 years, we always predict the operating margins to go down, and so far it hasn't really happened.

So I'm not -- I think the focus -- and that's not because we are trying to predict in a different way, but because our focus is not on operating margin.

I think trying to preserve the operating margin that we have is not necessarily the right business goal.

The goal is to grow the revenues, the top line and the bottom line, and I think that's where we will be focusing.

And I think what we are seeing in general is if our top line is higher than what we expected, then the operating margin improves.

Because a part big part of our expense is sort of the headcount, which is a fixed expense.

It doesn't change every quarter.

In terms of the assumption for next year, yes, we plan to grow.

We plan to hire more people.

We plan to hire more in sales.

We plan to hire more in R&D.

That's the two big areas for next year, and I think last year we grew the headcount by about 7%.

Next year, I don't remember the exact numbers.

But I also think that we will want to grow in these two areas.

Last, about your question about M&A, yes, we are looking at the acquisition.

I hope that we will find the right target.

It's not easy finding the companies looking to have a true exceptional technology that can be scaled to a large installed base or a company that already has a large installed base that we can find synergies with.

But I think I'm very, very much open and I think I really want to find the right opportunity for acquisitions, large and small.

Excellent.

Thank you.

Katherine Egbert, Jefferies & Company.

Good morning.

To go back to an earlier question, you talked about market share gains, but yet it seems like the growth rates for you and others in this space like Fortinet, is really accelerating over what it's been even historically.

It feels like this is a rising ride.

Can you talk about the demand environment?

And is there anything going on in sort of corporate spending, either catch-up spending or protection of the increased number of virtual servers?

What exactly is driving such a great expansion in the market?

I think that the demand is good and healthy, but I don't see any strong acceleration from that demand.

We're measuring by different factors.

I think one big factor that works in our favor is the use of more value from our products.

It's actually a higher ASP per deal, higher ASP per system, whether it's because it has more performance or because it has more functionality with the blade.

That's the main factor.

I do think that we win a lot of deals, and I do think that we see a lot of -- still a lot of potential in the marketplace, some of it by taking shares, some of it by new projects and the overall market growth.

Okay.

Then one quick question, just a clarification.

You keep saying 100 million to the annuity blades.

Are you including perpetual blades with that or would perpetual blades be on top of the amount of the annuity?

No, perpetual blades would be included in the basic products number, and they are not part of the annuity.

In the annuity, one thing I may not -- not to be misunderstood, I think not all of it necessarily has been recognized.

That's what the combination of the deferred and the recognized.

It's all in the -- it's all in our financials, but some of it is still in the deferred revenues.

Okay, thank you.

Jeff Evenson, Sanford Bernstein.

Thanks.

In general, when I talk to customers in the field, I hear high satisfaction with Check Point products.

One exception is some companies that are consolidating data centers don't find your throughput high enough to meet their needs and are looking to competitors.

Are you satisfied with where your throughput roadmap is taking you?

And what might you need to do?

I believe that we have an excellent roadmap on that, and I think that we are winning many, many of these customers.

And I do think that there are other companies in our field that their entire value proposition is being fast and cheap.

Recently we've seen some erosion with some of these.

First, I think that for the future, we have an either a very aggressive roadmap that will get us to a real nice leadership position.

And recently I heard some examples of where customers weren't really happy with what they got.

They got a lot of promises.

At the end what they got delivered wasn't exactly what they were promised.

And some of it is evident because when you actually dig deep into some competitor offerings you see that.

Some of it is not evident when it's about reliability and things like that that, again, sometimes we hear from customers.

But overall, I think it's -- we have a competitive market.

There are good competitors there, and I think we're making good progress in all fronts.

The international press is portraying Egypt as Israel's gateway to the Arab world, and implying that instability in Egypt could be troublesome for Israel.

Are you all doing anything special on the management front or contingency planning to manage those risks?

Again, I am far from being a political expert, but Egypt, in terms of a buyer of technology and the business gateway for us is not really a factor.

We do sell globally, and in general, the Middle East or the Arab world doesn't represent any significant part of our business.

And again, Egypt is not -- I won't delve into the details of that, but Egypt is not a gateway or any kind of an importance for us.

And I do hope that Egypt reaches peace and quiet soon.

Thank you.

Brian Freed, Wunderlich Securities.

Great quarter.

A number of folks have asked about sizing for the opportunity for new blades.

So could you kind of tie it all together a little bit and give us some sense as to the total number of customers you have out there who would be available to buy software blades?

The current kind of percentage of those customers who have adopted blades at some level that would kind of give us a framework for a pivot table around the incremental opportunity for that market?

I wish it was that simple.

First, I think we have way more than 100,000 customers, close to 150,000 customers.

And different sizes, different stages of usage of our products all over the world; they are all potential for our software blade, and it's not one or the other.

The reason I am saying it's not that simple because you can't just take a customer and say okay, here is a, I don't know, a Fortune 500 account.

There are on software blade.

Most of the Fortune 500 accounts would have -- I mean if it's a small account and has one gateway, then it's very simple.

If they didn't upgrade -- if they upgraded to forward blade, they can implement new blades.

If they don't and they have a small installation, they can upgrade within a very short period of time, within days or weeks.

And again, the same potential exists.

When we're talking about large customers and [where there] the complexity lies, they all have mixed environments.

Some have versions that are five or six and 10 years old.

And yet on the same time, they have new products that they purchased last quarter, and they all have mixed versions.

And it's pretty hard to say exactly what will be the pace of migration, pace of upgrades and pace of deployment of new technology.

So all in all I am just saying all of our customers are a good potential for an upgrade, and we are seeing nice pace of upgrade.

And I can say that in general, we are seeing in the, I don't have exact percentage, but in terms of large and complex accounts that we have, they are all interested in the new version and most of them I think are also deploying it to, in some extent, in their environment.

Okay.

Could you perhaps give us any metrics on, if you look at the sales in the last year or 18 months, what percentage of customers who are buying the bladed architecture today are adopting new blades at the time of purchase?

Kind of give us a sense of the upgrade opportunity on recent sales?

I think almost all customers of new systems, I mean 70%, 80% of new customers, are buying the blade version.

In terms of -- now, we include a nice set of blades in the first year included in the price.

It actually allows us to get more value for the first year and from the initial product purchase.

And I think it's also good because we expect that by including some of the blades in the first year, like IPS, for example, which included in most of our system, it will increase the renewal rate in the second year.

And so far, that theory has proven right in the last year.

And, in most of our IPS blade is coming from renewal of customers like that.

And so I don't know necessarily to size that currently.

But I think it's all new customers are using some of our blade architecture in some way or not all, most of them.

Okay.

Thank you.

Jonathan Ho, William Blair.

Good morning.

Great results.

Just wanted to talk a little bit about the IPS blades.

Can you give us a sense of what the renewal rate is for the blades currently based on your existing user base?

It's -- I don't want to disclose that actually but I can say it was higher than we expected originally.

We see very nice renewal rates.

Okay.

And can you talk a little bit about application control?

That's been a pretty hot topic in the firewall space recently.

And do you view that as potentially an incremental refresh driver, just given the activity in the space?

I think it's going to be an amazing refresh driver.

I think what we have there is a real change in the environment.

I think customers that have been looking in their firewall for the last 10, 15 years when he did the job, it performed very well.

Suddenly with the new application control blade, they will be able to see not just http, but they will be able to turn hundreds of events into a smaller number, much more meaningful.

Now you see YouTube, file sharing, social networking, peer-to-peer networking; each one of these will get security priority.

So out of all systems, you'll suddenly see something completely new if you upgrade.

I think it's going to be a major driver for upgrade.

I think what we have in that offering in the first version that just now started shipping, it's actually we haven't been shipping, but we haven't yet made the big announcements around that.

It's going to be really important for us and for our customers.

What we have is an amazing offering.

We support more than 10 times more applications than many competitors in that space.

It's fully integrated to approve an architecture.

It has an amazing cost structure because it's just a small blade that's added to existing gateway.

So I think it can be a game changer in the core markets that we are in.

Again, you see my excitement about that, so I want to balance it, and I don't want to create an impression that suddenly this will change all the numbers.

But I think in terms of the technological dynamics of the marketplace, it has a great rate potential.

Great.

And just last question is on your DLP solution.

It seems pretty differentiated from other products that are out there and it seems to be a relatively hot space.

Can you maybe talk about the demand environment around DLP and specifically around your solution?

So I think first we are seeing the highly increasing level of interest on that.

I think in my career, it's for the first time in many, many years that suddenly the discussion of security and specifically data security is not just a technological discussion, but gets to the level that you seek to CEOs of Fortune 500 and even Fortune 10 companies suddenly are really, really interested in how we're going to implement security to control data leakage, and for obvious reasons.

The challenges that data security and data leakage, it's not something that can be just solved by technology because people are the weak link in that category.

And you're absolutely right, our solution is differentiator.

It does take that factor into account.

It does -- involve the people, allow people to be -- to take ownership of what we are sending and whether it's a leak or not leak, and give them tools not just to understand what we are doing, but to remedy the situation.

So, I think what we have in the unique offering.

We've seen it in some banks that we've initially worked through, whether we will need it or not that have been using other products for years, without seeing much results, but within hours of installing our products, they immediately see the situation that they need to remedy and they remedied them with our products.

So we have a lot of very nice case studies like that.

Yet on the same time, I think customer perception is still that DLP is a complex area, that it takes years to implement it.

And we have to fight hard to show that that's not the case, that we can get results from DLP within hours and days and not within months and years.

And I think that that's a true area that I see high level of potential in our results.

Great.

Thank you.

Scott Zeller, Needham & Company.

Hi, great quarter.

Wanted to ask about the IPS business again.

Could you tell us if there's been a change in the competitive landscape there?

Obviously you are doing quite well.

Is there any change in competition?

First, I think it's a good market with good competitors.

I have high regard to many of the competitors in that space.

I think we've just had the recent report from NSF about that space in which we came up in the great leading position.

I think I mentioned that earlier, but I will repeat some of that -- that shows that our integrated IPS can be superior to almost any other solution in the marketplace and can produce the highest level of security, the highest levels of performance and the lowest level of price and operational complexity.

By the way, their report measured both the security, the performance, the cost and one more thing it measured, which is unusual, it measured the complexity of deployment and maintenance.

And I think we shine on all the parameters, from like the level of protection that you get from installation, the level of protection that you can increase when you optimize it, the amount of hours it takes to get it up and running, the amount of hours they expect you to spend on maintaining the product every year, the overall level of security.

We really, really -- on the performance and so on, we really come up well.

And I think that that definitely changes our competitive situation.

And on the same time, as I said, I have high regard for the competitors in that space.

There are companies that specialize in that market for many, many years.

It's not, by the way, necessarily, our direct competitors -- the big competitors in the Network Security space.

It's more -- it's companies that are specialized in IPS.

And I think that that's going to be very, very interesting and very high potential for us.

Thanks for the color.

Thank you, everyone, for joining us today.

We look forward to catching up with you later and -- during the quarter and have a great day.

Thank you.

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