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Check Point Software Technologies (NASDAQ:CHKP)

Q4 2006 Earnings Call

January 24, 2007 8:30 am ET

Executives

Anne Marie McCauley – Director of Investor Relations

Eyal Desheh – Executive Vice President, Chief Financial Officer

Jerry Ungerman – Vice Chairman

Gil Shwed – Founder, Chairman and Chief Executive Officer

Analysts

Gregg Moskowitz - Susquehanna Financial Group

Robert Breza - RBC Capital Markets

Sarah Friar - Goldman Sachs

Dino Diana - UBS

Sterling Auty - JP Morgan

Ed Maguire - Merrill Lynch

Phil Winslow - Credit Suisse

Katherine Egbert - Jefferies

John Walsh - Citigroup

Jonathan Ruykhaver - Raymond James & Associates

Erik Suppiger - Pacific Growth

Presentation

Operator

I would like to welcome everyone to the Check Point Software Technologies fourth quarter 2006 earnings call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Anne Marie McCauley, Director of Investor Relations. Ma’am, you may begin your conference.

Anne Marie McCauley

Good morning and afternoon. I'm Anne Marie McCauley, Director of Investor Relations for Check Point Software. Thank you for joining us to discuss the fourth quarter and annual 2006 results.

As a reminder, this call is being webcast live from our website and is being recorded. To access a live webcast and replay information, please visit the company's website at www.checkpoint.com/ir. The replay will be available through February 7th. If you would like to reach us after the call, please contact the Investor Relations department at 650-628-2050.

On the call with me today is Gil Shwed, Chairman and CEO; Jerry Ungerman, Vice Chairman; and Eyal Desheh, Executive Vice President and CFO.

Before we start our management presentation, I would like to read the following disclaimer: during the course of this call, the company will make certain forward-looking statements. Forward-looking statements include statements regarding Check Point's expectations and beliefs such as our expectations regarding the impact and future development of new initiatives; our expectation that our important new products and solutions will reach the market in the first quarter of 2007; our belief that the increase in headcount during 2006 will help us execute on our 2007 plans; our expectations that we will implement the integration of Protect Data during the first half of 2007; and, our belief that our emerging technologies solutions will be needed by Check Point customers in the future.

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 purposes 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, 2005 which is on file with the Securities and Exchange Commission. Check Point assumes no obligation to update information concerning its expectations.

Now let me turn the call over to Eyal Desheh for financial review.

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Eyal Desheh

Thank you very much, Ann Marie. Good morning and afternoon, everyone. I would like to share with our strong fourth quarter results, a recap of the year 2006, and also provide details on these financials.

In the fourth quarter of 2006, Check Point experienced strong performance in all aspects of our business. This performance relied on many new initiatives which we brought to market during 2006. These initiatives include launching new products -- VPN-1, UTM and Power Solutions; introducing collaborative enterprise support programs, the CES in Europe and Asia; and driving larger transactions within our organization through our strategic account program. These initiatives made important contributions to our results and we expect this trend to continue into 2007.

As will you hear later, during 2006 we created important new products and solutions which will reach the market in the first quarter of 2007. These new products include in-house development as well as the results of our acquisition of Protect Data and NFR.

In the fourth quarter we posted record results and revenues, record growth in sequential deferred revenues and a record number of large deals. We experienced healthy demand for our new perimeter security product lines, especially the UTM product offering, strong business and subscription and support with the success of the CES program, and over 50% growth in Smart Defense, our security update service which we sell as an annual subscription.

Before I dig into the numbers, I would like to remind you that our quarterly and annual results for 2006 include the impact of FAS 123 R, the inclusion of equity compensation expenses in the P&L in our GAAP financial results. In our press release, which has been posted on our website at www.checkpoint.com, we are presenting GAAP and non-GAAP results and reconciliation tables which highlight this data.

Now let me share with you the financial highlights for both the fourth quarter and 2006. Earnings for the fourth quarter were $160 million compared to $156 million in the fourth quarter of 2005, an increase of 3%. GAAP net income for the fourth quarter of 2006 was $80 million compared to $89 million in the fourth quarter of 2005. Equity-based compensation expenses, which accounted for $9 million in this quarter, are the primary difference. We also incurred acquisition-related in-process R&D of $1 million for the NFR Security acquisition this quarter.

Non-GAAP net income, excluding acquisition-related and equity-based compensation charges, was $91 million, the same as in the fourth quarter of 2005. Total operating expenses for Q4 were $80 million, excluding equity-based compensation and acquisition-related charges of $11 million, operating expenses were $69 million. This compares to $61 million in Q4 of last year and $64 million in Q3 of this year.

The increase in expenses is a result of important headcount growth, mostly in R&D, sales and technical services. Our total headcount at the end of Q4 was approximately 1,570 employees, and grew by more than 150 employees this year. This increase will help us execute on our 2007 plan.

Our effective income tax rate was stable at approximately 17%. GAAP earnings per diluted share for the fourth quarter of 2006 were $0.35 compared to $0.36 last year. Equity-based compensation expenses had a $0.04 impact on GAAP EPS. Finally, non-GAAP EPS for the fourth quarter 2006, excluding acquisition-related and equity-based compensation charges, was $0.40 compared to $0.37 last year, an increase of 8%.

Deferred revenues this quarter were $204 million, an increase of $31 million, or 18% over Q3 2006. This is also the highest figure in our history. This is also the highest sequential growth we ever experienced. Strong software subscription, CES, Smart Defense, and consumer business drove this number up.

For the fourth quarter our days sales outstanding, DSO, were 67 days compared to 63 days in Q4 last year as our business continues to be back-end loaded. Cash collection continues to be good; in the fourth quarter we generated cash flow from operations of $78 million. Our cash and investment balances at the end of the quarter was $1.65 billion.

During the fourth quarter, we purchased approximately 1.4 million shares for a total cost of roughly $32 million, in support of our expanded share repurchase program. Our fourth quarter revenues again were well diversified with Americas contributing 46% of revenue, EMEA contributing 42%, and the Asia Pacific and Japan region contributed 11% of our revenues this quarter. For the fourth quarter, our emerging products contributed approximately 30% of total product revenue.

Now let's look at 2006 annual financial highlights. For the year ended December 31, 2006 revenues were $575 million compared to $579 million for the year ended December 31, 2005. GAAP net income for 2006 was $278 million compared with $320 million for 2005. Equity-based compensation expenses, which accounted for $36 million in this year, are the primary difference. Non-GAAP net income, excluding acquisition-related and equity-based compensation expenses was $320 million compared to $327 million for 2005.

GAAP earnings per diluted share for 2006 were $1.17 compared to $1.27 last year. Equity-based compensation had a $0.15 impact on GAAP EPS. Finally, non-GAAP EPS for 2006, excluding acquisition-related and equity-based compensation charges, was $1.35 compared to $1.30 last year, an increase of 4%.

During 2006 we purchased 23.3 million shares for an average price of $18.80 per share and for a total cost of approximately $435 million. After year end, we completed a tender offer for Protect Data, the 100% owner of Point Set. As of January 23, 2007 we managed to acquire approximately 96% of the shares. We are working hard on the integration plan, which will be implemented during first half 2007.

In summary, we're pleased with the financial results we posted this quarter but we believe that our performance and execution has improved, and we head into 2007 with a robust portfolio of existing and new products. I will now let Jerry and Gil speak more about business and about our plans.

Jerry, please go ahead.

Jerry Ungerman

Thank you, Eyal. Hello, everyone. Thank you for being on the call with us today. Following Eyal’s comments regarding our financial highlights, I would like to focus my comments on some business highlights for the quarter and the year that we think are important aspects of our growth strategy and will play an important role in 2007 and beyond.

As you have seen, the quarter was very good from a financial results perspective. There are many reasons why, but what is pleasing to me is the contribution we received from a number of the new initiatives we announced recently, as well as some significant new announcements we made during the quarter that we expect to have a positive contribution going forward.

Earlier this year, we rolled out our collaborative enterprise support program -- what we call CES -- in Europe and Asia, and it has been well received, as evidenced by the strength in our subscription and service revenue growth this quarter and this year. As we have previously described, this support program is a combination of subscription and support delivered jointly by Check Point and our partners. It is designed to add more value to customers and partners by improving the support our customers receive. We will continue to focus on expanding this program and modifying it as necessary for adoption in the U.S.

We continue to see positive contribution from our new strategic account program that we talked about last quarter. Through this program, we provide our customers the ability to make a long-term buying decision to acquire a broad range of our security products and deploy them over multiple years. While we have seen a favorable trend both in the size and volume of large deals in both the quarter and the year tied to this program, a significant part of the revenue derived from these transactions will be recognized over the next few years.

This trend of large deals is a result of successful initiatives with large accounts whereby Check Point becomes the major provider of network security solutions. As we continue our efforts to broaden our product portfolio under our unified security architecture, it should become even more beneficial for our customers. While this program has been implemented on a pilot basis, I am pleased to note that we are seeing a broad appeal of this program. Going forward, we plan to implement this initiative in all regions of the world and across many different sectors.

During the quarter, we saw an increase in large deals which is transactions greater than $50,000 as they accounted for more than 35% of total orders. In Q4, we also had 11 transactions between $500,000 and $1 million, and four transactions which were greater than $1 million. In addition, we continued to grow our installed base adding 28,000 gateways, bringing the total to over 556,000 security gateways installed to date.

The growth in our business this quarter comes from a healthy mix of product, subscription and services in different regions of the world. A few areas for specific mention include new license growth for our new VPN-1 UTM solution, the continued positive contribution and growth from our Smart Defense services, which is part of our subscription revenue, and the very nice increase in revenue this quarter from our CES program.

Geographically we saw very strong business contributions from our EMEA organization, good results in the Americas and Asia Pacific, and softness only in Japan, for which this is a seasonally slow quarter.

As you have heard us explain many times now, a key component of our growth strategy is our unified security architecture. This is resonating not only with customers and partners, but is also a concept being embraced by many industry analyst firms. As we continue to expand the product portfolio, as we have done this year, our story is becoming even more compelling.

Our ability to reduce the number of vendors and niche products an account needs to install and have them all managed by a single management console is of great value, especially as we have very important and emerging technologies that address new security layers. Of equal importance is that they are solutions that will be needed over the years by every Check Point customer.

Let me also share with you that just this past week we held our first ever global partner advisory council in Israel and was very beneficial. We reviewed our plans for the first part of 2007 and we received very good input and suggestions from some of our major partners from every region in the world. But equally important is that we also had a chance to hear firsthand the excitement our partners have for our strategic initiative.

Now this week, we are holding our sales kickoff meeting for our colleagues in EMEA and Asia in Tel Aviv; and next week we will be doing the same for our field organizations in Americas so they are aware of and in line with our plans for this year.

In summary we will continue to focus on our execution of the new initiatives we announced this past year, as well as launching some additional ones that we believe over time will result in the top line growth consistent with our strategy. Thank you again for being on the call today.

Now I would like to turn the call over to Gil Shwed.

Gil Shwed

Thank you, Jerry and hello, everyone. 2006 started with some challenges and I'm glad to report that we finished the year in great shape. The fourth quarter showed our business success. Actually, our business volume this quarter was at a record high, reflecting the success of our recent product announcement, many changes we made in the company and the programs we introduced during the year.

More importantly, 2006 was a strong year of building for Check Point. We formed an expanded strategy that led us to make two important acquisitions within the past month. With our new strategy, we intend to accelerate activities in our core market and form the foundation for expansion into an additional layer of security, the data security layer.

In our core network and infrastructure security layer, we introduced the UTM software family during the year, acquired NFR Security to add signature-based intrusion detection and prevention technology, and continued to build Check Point's unified security architecture. We have made significant investment in getting into the data security market with the acquisition of Point Tech and we are now the leading vendor in this field. But this is only first step in our road map for data security.

Combining the steps we have taken in both the network security and the data security layers with the strength of our management platform, we're uniquely positioned to deliver the IT world’s future security architecture. We will share more information with you at our upcoming analyst day that will be held on February 15 in New York. In that meeting, we will be able to provide a more detailed description of our strategy and architecture.

The first quarter is going to be a very busy one for us as we intend to launch new products as well as introduce the recently acquired products into our channel and our field organization. The effect of all these changes provide us with some positive financial outlook, yet raises the level of uncertainty in the near future, given the level and complexity of activities we have planned and the rate at which we achieve acceptance by the marketplace.

Given that, I'd like to share some initial forecasts for the quarter and for the year. As you know, we're working now on the purchase price and location of the Protect Data acquisition. The result of this study will have significant impacts on our GAAP results for 2007. Since the study has not been completed yet, we cannot provide GAAP EPS forecasts at this time.

For the first quarter of 2007, we expect revenue to be in the range of $158 million to $169 million and non-GAAP EPS, excluding the effect of stock-based compensation and acquisition-related charges, is expected to be in the range of $0.32 to $0.37.

For the year 2007, revenues are expected to be in the range of $690 million to $720 million. Non-GAAP EPS for 2007, excluding the effect of stock-based compensation and acquisition-related charges is expected to be in the range of $1.40 to $1.54.

In summary, we finished 2006 in great shape and set the foundation for building a successful 2007. With that, I would like to thank you again for joining us and open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Gregg Moskowitz - Susquehanna Financial Group.

Gregg Moskowitz - Susquehanna Financial Group

Thank you very much, and good afternoon, gentlemen. Now that Q4 is closed out and I realize the acquisition is not completely finalized technically, but I was wondering if you could provide us either with full-year revenue and operating margins for Point Tech or even just a Q4 run rate for Protect Data?

Gil Shwed

Hi, Gregg. As you all know, Protect Data is a public company that trades on the Sweden Stock Exchange. They will provide their Q4 and 2006 numbers on February 8, and very shortly after the shares will be delisted from the stock exchange as we assume 100% control of the company. At this point they are public, and you'll to have wait until they release their numbers.

Gregg Moskowitz - Susquehanna Financial Group

In terms of guidance for Protect Data, at this point no change in terms of how you're thinking about 2007 versus what you had said previously?

Eyal Desheh

Yes, these numbers are included in the forecast we gave for Q1 and for the year.

Gregg Moskowitz - Susquehanna Financial Group

Jerry, you talked about the CES program. It sounds like it's continuing to gain steam. Has it proceeded in Asia, would you say, as successfully as the start that you got off to in Europe? Can you also address your plans to potentially implement this in the U.S. as well?

Jerry Ungerman

It's doing well in both regions. Europe obviously was first, so we're seeing stronger business results there but it's been very positively received in Asia and we expect to see that continue to grow. In the U.S., we don't know yet. We are going to do whatever is right for each one of the geographies and markets relative to the partners and the support and the service that the customers want.

During 2007 we'll do something because we still want to focus on improving the overall experience of our customers and the business benefits to both us and our partners. I really don't know if it's going to be an identical program or a modified one or how we're going to do it, but that is on our list of activities for 2007.

Gregg Moskowitz - Susquehanna Financial Group

Thanks very much.

Gil Shwed

I want to just highlight one of the differences between Europe and the U.S. for this program. In Europe, we had 100% of our support given by our partners so introducing CES was pure upside for us and pure upside for the channel and customers that got better support by having Check Point much more involved in that process.

In the U.S., a significant part of our customers received direct support from Check Point so one of the challenges is how to work this mix model when some people receive direct support, other people receive two-tiered support without cannibalizing our own direct support sales in the U.S., and while providing the partners with the right incentives to provide good support working with us.

So that's the big challenge in doing it in the U.S., and we think that we can address that but it requires a lot of hand-to-hand work with the channel to make sure it's a good program for both sides.

Gregg Moskowitz - Susquehanna Financial Group

Great. That's helpful. Thanks.

Operator

Our next question is coming from Robert Breza - RBC Capital Markets.

Robert Breza - RBC Capital Markets

Good afternoon and good morning. Jerry, I was wondering if you could give us an example as you're working with the strategic account program and seeing these larger deals, I wonder if you could just walk us through an example and what you're seeing from a value increase with the customers?

Jerry Ungerman

Well, it's interesting. They all take a little different shape and form, but generally what we've done in most of the cases in the pilot program, and as we're rolling it out and we see some commonalities is that customers are really looking for a partner for the core part of their security technology and architecture that they can lay out. We have talked for well over a year about a unified security architecture. The larger the account, the more that resonates. If they can look to a vendor that's got this management console that can manage the wide range of security technologies, very innovative, industry-leading and there's no compromising on what they put in, they can now focus on that architecture. Say, here's what we're going to do over the next two, three, four years from a security standpoint, roll out deployment, replacement of what we have. It takes a variety of things. And then they commit to us as a vendor that they are going to take our technology and it's going to be the core of their security infrastructure. So we lay out the various products and the deployments and where it's going to go and we give them an agreement that's commensurate with their volume of purchases over a two, three, four year period, and when they're going to deploy it.

They have found it very, very attractive. We see this gaining a lot of momentum in the marketplace. As we continue to broaden our portfolio of products it becomes even more important to them and beneficial to them, both the customer and the partner, of the ability we give them to have a long-range plan under our unified security architecture.

We saw a lot of excitement, we did with the partners, I have with customers we talk to about Point Tech, about what we're doing in the IPS arena, et cetera. So I think this is going to continue and we're very pleased with the initiatives so far and the success we've had.

Robert Breza - RBC Capital Markets

Just one follow-up for Gil and Eyal. As you look at the new products, Gil, can you give us a little bit of color where those might be fitting? Eyal, when would you expect those to impact the revenue stream? Thank you.

Gil Shwed

Well, we are going to introduce many new products. Some are going to be the ones we just acquired. They will fit on the data security side, the one from Point Tech, the one from NFR in the core network and enterprise security with better ideas like their solution. The other products are going to fit right in the middle of our product strategy and we are going to address a lot of the mid-market needs.

I'm not going to spend too much time on that because we haven't released the product yet and the information, but I hope that in the coming weeks, and February 15 we will be able to share much more about that and give the full details about this product.

Operator

Our next question is coming from Sarah Friar - Goldman Sachs.

Sarah Friar - Goldman Sachs

Eyal, could you let us know, was there an impact from NFR in this current quarter? How should we think about expectations for NFR for the 2007 year?

Eyal Desheh

Well in the current quarter the impact of NFR, both on the top line and the expense line, is way below $100,000. So I can say negligible. Going forward, we believe that this is going to be an important product line for us, definitely technology that we wanted to add. It could have a positive impact in basically two places. One in selling those products. The other position, Check Point as a vendor for network security solution wanted the broadest set of solutions in the marketplace. So there is an impact, but we're not going to break it out separately.

Sarah Friar - Goldman Sachs

I wonder if more broadly you could talk a little bit about your thoughts on Check Point and having more hardware underneath your solution. Obviously you do today, and you do it with partners, but are there any thoughts as you start to progress further into that UTM market that you start to just do the whole appliance yourself?

Eyal Desheh

We have talked a long time that our strategy and the strength in what we do with is the software and we intend to make that it way. The places that we do get involved in the hardware space, of course we are involved with our partners -- the open platform, the appliance partners all the time -- but in places we don't see we can achieve the best results for the customers we tend to also come up with our own integrated hardware and software. That happened before in the low end of the spectrum with VPN-1 EDGE.

It's not unforeseeable that it will happen more in the future, and it will be in the places where we feel that doing it ourselves we can achieve things that we don't achieve for the customer benefit with our appliance partners today. I think we see an important growth for all the hardware partnerships and appliance partnerships we have in the marketplace.

Sarah Friar - Goldman Sachs

A final one for you Eyal, just on share repurchase. You actually did a fair amount of it in '06. Now that Protect Data is getting close to closure will you come back into the market and should we assume a similar share repurchase rate for 2007?

Gil Shwed

We do not give details or provide any forecast on our share repurchase plan. The plan has been approved by the board and it is open. We will use it as we see fit. Of course, it depends on all the parameters surrounding the buyback program but it's not out of the question that we'll continue to buy.

Eyal Desheh

That is in effect today.

Operator

Thank you. Our next question is coming from Dino Diana - UBS.

Dino Diana - UBS

Can you talk about the date you expect to be able to first be able to recognize revenues from Point Tech? Is this later or earlier than you had originally expected when you gave the $95 million to $105 million guidance?

Jerry Ungerman

We don't see a major, big impact. Basically the day that we can start consolidating the company is when we reach 87%, that's January 17. So the first two-and-a-half weeks of the year should not have a meaningful impact. I don't see a reason to change this number.

Eyal Desheh

When we gave the $95 million to $105 million, we said these are for a full year, but as we said, I don't think that the difference in the two weeks caused us to change that range in any significant way.

Dino Diana - UBS

What is the expected revenue contribution from Point Tech in 1Q '07 and the full year? I guess you just answered that -- $95 million to $105 million for the full year. What is it for 1Q '07?

Jerry Ungerman

As we said, we gave the annual number, but at this point we will not provide the quarterly breakdown.

Dino Diana - UBS

Looking at your core business, bookings up 6% for the quarter and 1% for the year, it seems like you stabilized your core business. Can you talk about how we should look at license going forward in the core business and should we see more going on at the subscription line as you get more success at CES, Smart Defense, and some of the larger deals? Or could you stabilize license revenue organically as well?

Gil Shwed

First, our objective is to grow the license line at all times. We don't always achieve that, but I think it's the general objective that we have is to clearly grow that line and we do have it planned for 2007.

The subscription line, we also intend to grow it and we actually are pretty pleased about the changes we made in our business into driving more and more business into our new UPN, that's true for software subscription, that's true for the CES program, that's true for Smart Defense and we are going to come up with more and more programs like that, that create more and more annuity.

We think it's important, especially given the large installed base that we have in the marketplace and the fact that we think that customers do need to get security updates at all times. During the shift from software subscription to the support line and I think Eyal alluded to that a little bit by explaining that that's because the CES program combines the two elements together and the accounting treatment changes that a little bit. So I think you should look at these two numbers in the support and subscription and see the combined growth of them, and we intend to keep growing both of them.

Dino Diana - UBS

In terms of those subscription programs, are you fairly early on? Obviously CES is pretty early on. You went from 8% to 10%, I'm wondering that delta, is that something that you feel like you just are starting to gain traction or do you feel like it's well underway?

Gil Shwed

I think it is underway. I don't have in front of me any analogies about what should be the total impact and so on. I think all the numbers that we have are already embedded into our forecast. But I think we can grow that, and that's the intention. Right now we cover more than half of the world with that. We still have the U.S. that's not fully covered, but let's not forget some of the U.S. is covered with direct support, which will generate even more revenue to us.

As I said, we have some more initiatives to drive more value in our support and subscription offerings to customers around the world.

Operator

Thank you. Our next question is coming from Sterling Auty - JP Morgan.

Sterling Auty - JP Morgan

Thanks, guys, two questions. I wasn't quite clear, could you give us some color on what the contribution from CES was in the quarter? You mentioned it was good, but I didn't hear anything quantitatively in terms of either sequential growth or absolute dollars of contribution.

Jerry Ungerman

We wouldn't provide the breakout. You can see that in the growth of our support revenue line and most of the CES is in there, but as Gil said, accounting-wise the split is a little complex, and CES is a hybrid between EDS and support, and sometimes the split to a separate line could be artificial, but it's definitely a driver and the best way to see the numbers as we report them are in the support line.

Sterling Auty - JP Morgan

On Protect Data, at what point can you fully introduce the product to the entire Check Point channel in terms of both training as well as having the SKUs available?

Gil Shwed

We plan to start doing that in Q1. How quickly will the channel ramp up and everybody will be trained? It's too early to say. But the initial enthusiasm is very high. As Jerry mentioned we had here last week, the partners from around the world and both of the distributors that were here represent a big portion of the market and the top resellers are all enthusiastic about that, and we believe it will start as early as February to start introducing it to the channel.

Operator

Our next question is coming from Ed Maguire - Merrill Lynch.

Ed Maguire - Merrill Lynch

Good morning. Could you comment on the trends you may be seeing in the consumer business?

Jerry Ungerman

Yes. Q4 was a good quarter for the consumer business. As you know, we're not the biggest player in this market. We are the small competitor giving headaches to all the big players, so I can't sit here and tell you that we have the best view of the consumer market. For us it's an opportunity, and one which we have been working very nicely on.

Ed Maguire - Merrill Lynch

The growth in Smart Defense has been pretty strong. Do you have any estimate in terms of what proportion of your installed base is a subscriber to Smart Defense?

Gil Shwed

We did analyze it. It's still under 20% of our installed base, so we do have a way to go in the introduction and the adoption into the Check Point installed.

Ed Maguire - Merrill Lynch

Great. Finally, could you just comment on what you may be seeing competitively in the core market against Juniper and Cisco in terms of competitiveness and pricing tactics?

Jerry Ungerman

I think we're doing very well. We see it especially in the large transactions, the large accounts, the big strategic deals we're doing. Portions of all those transactions have been competitive displacements, and generally when you saw that our whole quarter was very good, very solid -- we'll have to see what everybody else did -- but I feel anecdotally we're doing very well in the marketplace.

Again, it goes back to the unified security architecture, it goes back to the broadening portfolio, it goes back to these long-term commitments from people looking at a security vendor to provide them a security layer. I know that's debated somewhat, but that resonates very well with large customers that buy security independent from their network infrastructure. We see that continuing. So I feel very good about our competitive positioning. As we continue to expand our portfolio products and everything under the unified security architecture we are going to strengthen that position in the marketplace, across all market segments, not only enterprise but also in mid-size and small businesses.

Operator

Thank you. Our next question is coming from Phil Winslow - Credit Suisse.

Phil Winslow - Credit Suisse

Hi, guys. Just wanted to look at your plans for introduction of Point Tech into the U.S., obviously it's a very EMEA-focused revenue contribution right now. How do you sort of see that trending over time? What are your plans for Point Tech in really looking at the indirect channel here in the U.S.?

Gil Shwed

We intend to introduce Point Tech to the channel all over the world. I think there's a great enthusiasm in the channel to have it. Point Tech has already started working with the channel but we feel that the product itself is a very good product and very mature product in its ability to grow into the channel. It's relatively simple to install and work with. Point Tech also has a very good named account or direct sales force which we intend to incorporate into our sales force.

Just remember we do have named accounts. We do work the named accounts through the channels and over time we'll have to see how to unify the structure and make sure that we work in the clean and simple way with the channel all over the world.

Phil Winslow - Credit Suisse

Then Eyal, you guys continue to see pretty solid strength in technical services. Just wondering what your expectation for that is going forward here as far as growth.

Eyal Desheh

In our technical services, as we said before, the impact of the CES adoption and introduction into U.S. could definitely have a more accelerating impact on technical services business. Revenues, we have been doing some more professional services than in the past. We rebuilt our professional services group during 2006 and we are beginning to see more revenues coming from that area. So definitely, as you can see in the numbers, the numbers for Q4 and for 2006 in general compared to 2005 are telling the story here. Definitely there will be more growth in that part of our business.

Operator

Our next question is coming from Katherine Egbert - Jefferies.

Katherine Egbert - Jefferies

Hi, thank you. Just a quick question on the UTM products. That's a pretty crowded market and you guys seem to have distinguished yourselves a bit there. Can you talk about why?

Jerry Ungerman

I think first in the UTM space there were many different changes that happen. Initially the UTM market started with a few low-end vendors that provided the appliances for more the small business market, markets that we weren't that big of a player in. I think more and more we're seeing that also mid-size companies and mid-range installation and large companies are also interested in that. I think here we do have some unique differentiation in the fact that we have the scalability of management, we have the scalability of products. We also have to remember that this is a very early market, and despite some market data showing big numbers from this market I believe that this market is still fairly small.

For example, things that we have checked, and it is for two reasons: one, some people call UTM products, products that are not fully UTM. In other cases people that are buying UTM products don't actually activate them and use them as a UTM. For example, some of our surprise is by using very well-known vendors that we acquired their product, we have set up to use all the UTM capabilities, and turned them on, and the product simply wouldn't work. I'm not talking about won't work in the performance that it's supposed to.

We are addressing all these things with our UTM offering. So first, we believe that our products do work, and we do have a well-integrated solution. It's not a bunch of different solutions piled up on a single piece of hardware. It's a fully integrated product with single management, with things that do work together. As I said, we have just made our first step in this market and I think that the full effect of some of our UTM solutions, or not the full effect, but the next steps in our UTM strategy will be seen in 2007 and we'll see that these solutions take more share and gain more credibility and share in the marketplace.

Katherine Egbert - Jefferies

That's a nice segue to my next question which is, now that you've begun to get a little more aggressive on the M&A side, can you talk about other areas where you might want to add pieces of technology inorganically?

Gil Shwed

We keep looking for acquisitions in both the core network security space and in the data security space. Even though I don't think we should expect too much happening in the near future, because right now we have in our hands two important acquisitions that we need to integrate, that's our focus. I also think that we made a pretty big step with Point Tech, that's a very large vendor in that space. I think the order of magnitude is almost larger than most players in the different niches of the data security space.

I also think that today with the amount of developers that we have and the amount of know-how that we have inside Check Point we should expect to see even more coming up from the Check Point development, both the core development teams that are here and also the new development teams that we are just adding with the acquisition. So we now have a very broad spectrum to look at. We are looking and meeting and learning all the subfields and what's available there, but in the near future I'll expect most of what we do to come from within Check Point.

Operator

Our next question is coming from John Walsh - Citigroup.

John Walsh - Citigroup

Could you just talk about the vertical markets and any particular areas where you saw strength relative to plan or weakness? And then comment specifically on the government market.

Gil Shwed

I don't know that specifically we saw any strength or weaknesses in different verticals. I have a lot of anecdotal examples of places that we won and that we have seen some companies and some wins from the same industry, but I don't think that I can say something about specific ones. I mean I have few examples on the financial services wins that we had, where there were specific solutions for financial services or overall strategic wins in the financial sector. I even have some examples of telcos and service providers, very few recent examples; automotive companies, there have been few important project that we recently did.

Government, I think we're doing well against our plans as well. So I don't know that I can point out any particular strength or weaknesses in specific verticals.

John Walsh - Citigroup

Fair enough. On the strategic account side, could you talk about the revenue recognition there and how that has contributed, for example, to the four $1 million-plus deals in the quarter?

Jerry Ungerman

Without going into details on accounting, but basically these are long-term transactions and long-term engagements, from which we recognize very little at the beginning and revenue recognition occurs as the transaction materializes and specific orders come in. At the end, the entire agreed-upon business volume would come in within, if it's a three-year deal, within year one, year two, and year three. But revenue recognition here is a little more back end loaded, which means what we're doing here is we’ve create a backlog for business something that in our business model we never had before.

I think this is very good. It gives us a little more visibility, but still not the biggest part of our business. But we're working, we're developing this, and it will definitely improve our visibility, give us much larger opportunities to book and also the ability to increase the components of product and licenses.

John Walsh - Citigroup

Could you give us a sense of how many of these strategic accounts you have signed? Even a broad range, of under 10 or 15 or more than 20?

Gil Shwed

Last year I think it was in the order of magnitude of 10, but let's remember last year we introduced it only to two or three small countries. We haven't even started exploring it in the bigger countries that we serve. So actually we were very, very pleased with the fact that after formalizing the program in the second half of the year, within three, four months we already had some customers signed up. Because let's remember, these are long term deals and so the sales cycle for them should be long.

John Walsh - Citigroup

Just one final one on that. Is it still fulfilled through the channel even though there's some kind of direct engagement by Check Point?

Gil Shwed

Yes.

John Walsh - Citigroup

Thank you.

Jerry Ungerman

Check Point is not different than any of our other type of business.

Operator

Our next question is coming from Jonathan Ruykhaver - Raymond James and Associates.

Jonathan Ruykhaver - Raymond James

Hi. In the fourth quarter, Nokia began licensing the Source Fire 3D system for its suite of network security appliances. I'm just wondering, does this have any kind of impact on Check Point, specifically the license opportunity and Nokia appliances for your VPN power application -- also the NFR product as well?

Gil Shwed

It doesn't. Again, Nokia has been putting multiple vendor applications on their appliances for the last ten years. We think it's very smart because they should provide a security platform for more than just Check Point. Up to now, Check Point was the vast majority of the software sales of their appliances but we believe the more they sell of their appliances, actually the better it is because they will be able to invest more in developing better hardware architecture and building a stronger business for Nokia and I think that helps all of us.

Jonathan Ruykhaver - Raymond James

How much of your sales come from the Nokia platform today?

Gil Shwed

Sales don't come from the Nokia platform. We are selling in conjunction with the Nokia platform. Our products are deployed on Nokia platform, it's around 20%.

Jonathan Ruykhaver - Raymond James

Excuse me, 20%?

Gil Shwed

Yes, but channel sales, not Nokia.

Jonathan Ruykhaver - Raymond James

I understand that. Then just one final question. Looking at your two product lines, the VPN UTM and the VPN Power, where do you see the bigger opportunity based on what you believe are the strengths you bring to the market for each one of those product lines?

Gil Shwed

Which of your children do you love most?

Jonathan Ruykhaver - Raymond James

So you see an equal opportunity for both those product to do well going throughout 2007?

Gil Shwed

I believe it's different opportunities, and these opportunities tend to grow in different phases and different paces. Right now we see a lot of momentum around the VPN-1 UTM. At the same time, activities that we do with our strategic account programs and our high end accounts do contribute more to the VPN-1 power line.

So just like Eyal said, I think there is potential in both of them. We were blessed in the fact that we serve a very wide audience in terms of customers and market segments and so on, and it's critical to our strategy that we serve all customer segments with the high quality and capture the opportunities available to us in all the market segments.

Jonathan Ruykhaver - Raymond James

Okay. Thank you.

Operator

Our final question will be coming from Erik Suppiger - Pacific Growth.

Erik Suppiger - Pacific Growth

Good afternoon or good day. First off, just on Asia, I understand it was seasonally weak but it was down year-over-year. Were there any other issues going on in Japan that would have caused some additional weakness?

Gil Shwed

Japan wasn't doing as well as we'd like it to be, but that's a continual process that we started to improve by installing new strategies and new management in Japan in the middle of the year. The rest of Asia actually did pretty well. In China we had very high growth year-over-year. India and the rest of Asia did pretty well, so I think the number that you may be looking at, the main impact is Japan and the rest of Asia is actually doing pretty well.

Erik Suppiger - Pacific Growth

The market in Japan is still healthy? You're just taking care of some internal issues, you think?

Gil Shwed

I don't know if the market is healthy or not. I think that we had execution issues in Japan for several years. Many of them relate to the Japanese culture, and the success that we had in Japan. The key issue was that we had great success in Japan and our channel and our people were very reluctant to change and grow together with the rest of the world. As you know in Japan, creating change is more difficult than in any other part of the world.

I think now we have new management, but understand the challenge extremely well, very motivated to create that change. But we have to remember that creating a change in Japan also takes longer than any other country, so I don't know exactly when we are going to see the results but I can tell you that the enthusiasm there and the change of attitude is evident every day.

Erik Suppiger - Pacific Growth

Secondly, the messaging security market, we saw some consolidation recently there. Any comments in terms of whether customers are asking for Check Point to bring in some kind of messaging security technologies or any thoughts on that front?

Gil Shwed

First, I think we're going to have some of that in future generations of our UTM software, so that's going to address some of that in the foreseeable future. Not immediately, but it's in our plans. On the more bigger area of having appliance and things like that that took place recently, that's not in our plans there right now.

We will look at it in two contexts within Check Point. One context is within the UTM space, with which we are likely to have capabilities like that; and the other context is the data security space in which case I think some of that actually goes in the outbound direction, not in the inbound direction. It's part of our two or three-year road map.

Erik Suppiger - Pacific Growth

Very good. Thank you very much.

Operator

Thank you. At this time, I would like to turn the floor back over to Eyal Desheh for any further or closing remarks.

Eyal Desheh

Well, thank you. Thank you, everyone for your participation with us today. If you want to speak to management or to our Investor Relations following this call please call our Investor Relations department at area code 650-628-2050 and we will be happy to take your calls.

Also, I'd like to remind all of you that we are hosting our investor day event for 2007 on February 15 in New York, in the Reuters building. I will look forward to seeing all of you over there for more details about our strategy, about our technology, about our new product, and about financials for 2007 and beyond.

We'll be very, very happy to meet all of you in a few weeks. Thank you very much and good-bye.

Operator

This does conclude today's Check Point Software Technologies conference call.

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