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Check Point Software Technologies Ltd. (NASDAQ:CHKP)

Q3 2007 Earnings Call

October 22, 2007 8:30 am ET

Executives

Jerry Ungerman - Vice Chairman

Gil Shwed - Chairman & CEO

Eyal Desheh - EVP & CFO

Kip Meintzer - Director of Investor Relations

Analysts

Sarah Friar - Goldman Sachs

Jonathan Doros - UBS

Mike Turits - Raymond James

Shaul Eyal - CIBC World Markets

Todd Raker – Deutsche Bank

Sterling Auty – JP Morgan

Walter Pritchard - Cowen & Company

Phil Winslow - Credit Suisse

Robert Breza - RBC Capital Markets

Katherine Egbert - Jefferies & Company

Daniel Ives - Friedman, Billings, Ramsey

Brian Freed - Morgan Keegan

Israel Hernandez - Lehman Brothers

Ehud Eisenstein - Oscar Gruss

Operator

I would like to welcome everyone to the Check Point Software 2007 third quarter earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Kip Meintzer, Director of Investor Relations. Sir, you may begin your conference.

Kip Meintzer

Good morning and afternoon to all of you joining us today. This is Kip Meintzer, Director of Investor Relations for Check Point Software. On the call with me today are Gil Shwed, Chairman and CEO, Jerry Ungerman, Vice Chairman, and Eyal Desheh, Executive Vice President and Chief Financial Officer. We would like to thank all of you for joining us today to discuss Check Point's third quarter results.

As a reminder, this call is being webcast live from our website and is being recorded for replay. To access the live webcast and replay information, please visit the company's web site at www.CheckPoint.com/ir. For your convenience, the third quarter results replay will be available through November 5th. If you'd like to reach us after the call, please contact Investor Relations at 1-650-628-2050.

Now before we begin with management's presentation, I would like to bring the following disclaimer to your attention. During the course of this call, Check Point representatives will make certain forward-looking statements. These forward-looking statements include statements regarding Check Point's expectations that the company's pipeline of data security business is healthy for the fourth quarter and beyond; expectations that it continues to execute on its strategic initiatives in the fourth quarter and beyond; belief that it will continue to focus on the execution and development of further products with a pure focus on security, and that it will introduce leading-edge products which our customers will adopt; expectations for its financial performance and growth for the fourth quarter of 2007 and full year results.

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, 2006 which is on file with the Securities and Exchange Commission. Check Point assumes no obligation to update its forward-looking statements.

Now I'd like to turn the call over to Eyal Desheh, Executive Vice President and Chief Financial Officer.

Eyal Desheh

Thank you very much, Kip, and hello, everyone. I'm happy to open the review of an excellent quarter and what so far seems like an excellent year for Check Point. This was a record quarter from a revenue, non-GAAP net income and non-GAAP earnings per share perspective. We also surpassed the high end of our projections as we continue to demonstrate solid annual and sequential growth across all of our revenue segments as customers continue to realize the value of our unified security architecture and pure focus on security. We believe the third quarter results continue to demonstrate the success of the strategic initiatives we've implemented over the past 18 months and we are very proud of this accomplishment and the contribution made by Check Point's employees and our partners.

Before I delve further into the numbers, let me remind you that our third quarter GAAP financial results include the following: equity-based compensation expenses pursuant to SFAS 123-Restaurant; expenses related to the acquisition of Protect Data and NFR, which we include in our 2007 results, but were not included in the previous years; as well as expenses related to the acquisition of Zone Labs, which were included in the past. Keep in mind that non-GAAP information is presented excluding these items.

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

I would also like to draw your attention to a change we implemented in the way we report results. We have updated our financial statement reporting in accordance with the latest reporting standards. We now combined the software subscription line with the services line and it's now called “software updates, maintenance, and services”. We also split the cost of revenue line in order to present separately cost of products and licenses; cost of software updates, maintenance, and services; and amortization of technology.

Now let's take a look at the financial highlights for the quarter. Third quarter revenues were $184 million, an increase of 29% compared to $142.5 million in the third quarter of 2006 and a 4% sequential quarterly increase. The network security business drove a lot of growth, contributing a record of $163 million to revenue, an increase of 15% compared to the third quarter of 2006 and a 5% sequential quarterly increase. The data security business contributed $21 million in revenue, fueled by large deals in the U.S. including strong business volume and a number of large orders from the U.S. government.

GAAP net income for the third quarter of 2007 was $77 million, an increase of 8% compared to $71 million in the third quarter of 2006 and a 10% sequential quarterly increase. GAAP net income in the third quarter of 2007 includes acquisition-related charges resulting from the acquisition of Protect Data and NFR that were not included last year in the total amount of $6.5 million, net of taxes.

Non-GAAP net income was a record high of $92 million, an increase of 17% compared to the third quarter of 2006 and a 7% sequential quarterly increase. Total GAAP operating expenses for the third quarter were $106 million. Operating expenses on a non-GAAP basis were $88 million compared to $64 million in the third quarter last year and similar to the second quarter of 2007. Our expense control continued to improve as demonstrated by our non-GAAP operating margin of 52%, up from 50% in the second quarter of 2007.

Our effective GAAP and non-GAAP income tax rate was approximately 14% and 15% respectively.

GAAP earnings per diluted share for the third quarter of 2007 were $0.34, an increase of 10% compared to $0.31 last year. GAAP earnings per share this year included approximately $0.03 which was not included last year. These GAAP earnings include equity-based compensation expenses of $0.04 per share and acquisition-related charges of $0.05 per share. Net of taxes, these charges total $0.07.

Non-GAAP earning per diluted share for the third quarter of 2007 were $0.41 compared to $0.34 in the third quarter of last year, an increase of 21%. This is the highest earnings per share on a non-GAAP basis that we reported in our history.

Deferred revenues this quarter were $227 million, an increase of $54 million, or 31% over third quarter of 2006 and a seasonal decline of $9 million sequentially. For the third quarter, our days sales outstanding (DSO) were 67 days compared to 68 days in the second quarter of 2007. We continue to see an increasing number of large deals which tend to close towards the end of the quarter.

We generated cash from operations of $89 million, an increase of 18% compared to Q3 last year, and ended the quarter with $1.2 billion in cash and investments. During the quarter we also purchased approximately 1.8 million shares for a total cost of $42 million as part of our share repurchase program. Moving forward, we have approximately $135 million remaining from the $1.2 billion cumulative board authorized share repurchase program.

Now let's turn the call over to Jerry for some further commentary.

Jerry Ungerman

Thank you, Eyal and hello, everyone. Following Eyal's comments, I would like to provide you with a little more color on our key business activities over the past quarter. During the quarter, we continued to experience solid demand across our product lines, of which we had a particular standout that contributed to further growth in the third quarter. Once again, the UTM-1 products continued to shine with double-digit percentage growth increases for the quarter.

We also saw a continued trend of an increasing number of large transactions coming from some of the largest companies in the world, from a variety of different sectors, and across all geographies. Transactions greater than $50,000 accounted for 40% of total order value and 15 customers had transactions with a value greater than $1 million each. This group included some of the world's largest financial institutions, consumer goods manufacturers, telecommunication companies, and government agencies. These network security and data security transactions represented a combination of new sales, further sales into our installed base, and the displacement of competitors.

We also continued to experience geographical revenue distribution, consistent with the second quarter, with the Americas representing 47% of revenue; Europe, Middle East, and Africa contributing 42%; and the Asia Pacific and Japan region contributing the remaining 11% of revenues for the quarter.

Several items I would like to bring to your attention that were announced or occurred during the quarter, which we believe demonstrates Check Point's industry leadership and commitment to a pure focus on security. These include Gartner's recognition of Check Point in the Leaders Quadrant of the 2007 Mobile Data Protection Magic Quadrant Report, which we believe continues to validate our continuing success and commitment to securing sensitive information with our unified security architecture and pure focus on security. Check Point was also awarded a new government certification for Pointsec Protector in the cryptography module utilizing Pointsec PC and Pointsec Mobile. The FIPS 140-2 certification ranks among the most difficult to achieve and is required before any encryption products can be offered to government entities. Check Point's products meet and exceed the stringent requirements established by government standards, government approval process, and security industry testing.

During the quarter, we also hosted Check Point Experience events for partners and users in Asia Pacific, Europe, Middle East, and Africa. These events included technical and business discussions, along with product demonstrations to improve technical know-how and the expertise of attendees. We were pleased that we experienced growth in attendance of over 30% in the European event held in Germany.

As you can imagine, we are pleased with our continued success and remain focused on executing our strategic initiatives in the fourth quarter and beyond.

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

Gil Shwed

Thank you, Jerry. Good morning and afternoon, everyone. As you have heard from Jerry and Eyal, our results in the first quarter were good and represent the successful execution of initiatives in all of our business areas. A few good examples that highlight these successes are the network security initiatives such as our new UTM-1 appliances; the continued success of our annuity program and focus on major accounts; our data security business also continued to deliver results; and together, they posted record results in a seasonally challenging quarter.

The most important in all of these initiatives is the fact that it is all part of a single focus strategy: Check Point’s pure security strategy. I have been meeting personally with many of our customers and partners at the recent Check Point Experience event, and the reoccurring theme which keeps coming across during my conversations is that our customers are beginning to realize the benefits of our unified security architecture, and that they are strong supporters of our integrated security management platform.

Both our unified security architecture and our integrated management platform are unique in our industry. We believe this will be even more important as we incorporate more products into the platform and deliver greater value to our customers.

Now I'd like to address the fourth quarter and the full year projections and guidance. In light of the good quarter that we had, we are raising our forecast for the quarter and for the year. We expect the fourth quarter results to be as follows:

Revenues are expected to be in the range of $196 million to $208 million, GAAP EPS is expected to be in the range of $0.35 to $0.39; non-GAAP EPS for the fourth quarter, excluding the effect of stock-based compensation and acquisition-related charges, is expected to be $0.42 to $0.46.

When we translate it to an annual forecast, what we see is revenues in the range of $720 million to $732 million; GAAP EPS in the range of $1.20 to $1.24; and non-GAAP EPS in the range of $1.55 to $1.59.

Overall, we are very pleased with what we've seen this year so far and we are looking forward to excitement, a lot of execution, and a lot of hard work in the fourth quarter.

With that, I would like to open the call for your questions.

Question-and-Answer Session

Operator

Your first question comes from Sarah Friar - Goldman Sachs.

Sarah Friar - Goldman Sachs

Eyal, could you give us a little bit more color on the expense line? You obviously did a terrific job this quarter on your operating margins. As we look forward into '08, is this a good level to think about? Is there a reason why you would either invest more, or actually even see more leverage, as we think about the out year as Pointsec now gets fully integrated?

Eyal Desheh

First of all, we are growing our business and we're adding some more people all the time to support the growth; sales people, development, R&D people, so you could expect our expenses to continue to grow. It's not going to stay where it is right now. We're also adding selling more appliances and appliances are adding some to our cost of revenue lines, as I'm sure you have noticed. So I can see expenses continuing to grow. Hopefully, revenue will be able to grow faster.

Sarah Friar - Goldman Sachs

The margin that we're looking at, though, is a good margin level?

Eyal Desheh

I guess so, but our focus is not on the margin, you know that. We've said it so many times before. We focus on top line and bottom line; growing both is our main priority.

Operator

Your next question comes from Jonathan Doros - UBS.

Jonathan Doros – UBS

Of the $77 million in license, can you break that out between Pointsec and the core business? How much of the core business was on appliances?

Gil Shwed

We don't break out the product and licenses between these two -- between the data security and the network security -- even though we said that the overall for data security was about $20 million.

Jonathan Doros – UBS

Can you assume an 80/20?

Gil Shwed

Again, I don't want to assume. There is some portion of both, and I think we overall had a nice business in both of them. We don't have the reporting to break those out in a detailed level. I don't remember the exact percentage of appliances off our network security business, but it is growing. I believe it represents something around 24% of overall product sales right now.

Jonathan Doros – UBS

Where do you see that going as you exit '08? Could it hit 50%? Could appliances be 50% of product sales as you exit '08?

Jerry Ungerman

We haven’t finished the 2008 plan yet. Let's finish 2007. We do expect to see the percentage of appliance increase as part of our network security sales. At what level exactly it's going to be, that's a little too early in the game.

Operator

Your next question comes from Mike Turits - Raymond James.

Mike Turits - Raymond James

On Pointsec, $21 million was roughly flat sequentially by my calculations. It looks like it might have been down year over year. Any further commentary on that and are you still guiding to $95 million to $105 million for Pointsec for the full year?

Gil Shwed

First, it wasn't down year over year. It is up, and it is also up quarter over quarter. I think what we've seen this quarter, first we had the very good business in the Pointsec business which specifically sees very nice growth in the U.S. market. Some highlights with the U.S. government deal, which is all very positive and I think shows the right trend.

Let's remember that right now the Pointsec business, a big part of it is still driven by large deals and large deals are not very common in the third quarter. I think we are still targeting good contribution of that in the range that we've set for the year. I'm not sure where exactly it will come to, but I think we've said around $100 million and we think that we will be around $100 million for the year.

Mike Turits - Raymond James

You said there were some large government deals booked near the end; are some of those Pointsec and could some of those have been off the balance sheet?

Gil Shwed

I don't know what “off the balance sheet” means, but we had good deals for Pointsec with the U.S. government.

Operator

Your next question comes from Shaul Eyal - CIBC World Markets.

Shaul Eyal - CIBC World Markets

Eyal, deferred revenue, slightly down sequentially, is that seasonality? What's the thinking there?

Eyal Desheh

Yes, our seasonality if you look back five or even more years, you see that in the third quarter our deferred revenues always go down and then they go back up again in the fourth quarter and this year is no exception.

It is mostly about renewal of services, support, maintenance, subscription. Most of this happened in Q1, Q4; to a lesser degree in Q2 and even lesser in Q3. That is a seasonal trend that we have been following for years and was very well within what we thought it would be.

Shaul Eyal - CIBC World Markets

Thank you for that. Jerry, with respect to ASPs, I know we spoke about it last quarter, what were the trends this quarter? Is it still sequentially up?

Jerry Ungerman

Well, you saw the number of large deals we did, and the large deals continues to increase, which does has an impact on it. But we are very pleased with the pricing in the marketplace and the value we are getting for our products. I think it all contributes to the success we are seeing, both the number of orders, number of large orders, and the overall business level. So it has been very positive.

Shaul Eyal - CIBC World Markets

Even as it relates to the core product?

Jerry Ungerman

Yes.

Operator

Your next question comes from Todd Raker – Deutsche Bank.

Todd Raker – Deutsche Bank

I just want to follow up on Michael’s question on Pointsec. You have owned that business now for three quarters. Would you say it has lived up to expectations? How should we be thinking longer term in terms of what the growth trajectory of the business can look like?

Gil Shwed

I don’t know that I have the long-term projection, but right now it is tracking pretty much exactly in accordance to our plans, and that is good. We still have a big quarter, the fourth quarter, ahead of us and there is a lot of potential. I don’t think we have fully unleashed the potential that we have with Pointsec. Right now, we are just starting to see the benefits of our channel and we are just starting to see the deal growth by the extended distribution channel, the Check Point channel, coming in. So far what we have seen is a big portion of the pipeline that keeps building, that we have with Pointsec.

So I think it is going to be an interesting market, but clearly we have not unleashed all of the potential that is in that business.

Todd Raker – Deutsche Bank

In that market, Gil, do you think that you guys are picking up market share, stable market share or losing market share on a competitive basis?

Gil Shwed

Our belief in what we are seeing is that we have a very good market share and that we are winning many deals. I haven’t seen recent reports and I don’t know that necessarily we addressed today all of the different market segments that we can. But overall, I think that our leadership is just right and I haven’t seen any competitor becoming stronger in the past six months.

Operator

Your next question comes from Sterling Auty – JP Morgan.

Sterling Auty – JP Morgan

Thanks. What do you think has been the biggest positive influence on the core business? You mentioned the initiatives that you put into place for the last 18 months, but what do you think is having the most benefit for the core business to drive this reacceleration?

Gil Shwed

I don’t think it is one thing, I think it is a combination in execution. I think on one hand, we have the UTM-1 appliances that are contributing nicely. On the other hand, we have more and more focus on major accounts that also showed very nice results. We have very good annuity programs that we keep expanding, and they also contribute.

So I don’t think that there is a single silver bullet, but the good thing that I can clearly see the influence of all the initiatives we have executed. And by the way, just in terms of our people, execution and the sales leadership that we have, I think that the people we have today in the sales organization are doing a very good job and are executing very nicely on that.

Sterling Auty – JP Morgan

I want to circle back to the Pointsec item. You mentioned that you are still targeting that 95 to 105. It would seem like it is an awfully big jump in the fourth quarter to get you back in that range. What is it that you are seeing in the pipeline or elsewhere that makes you think that you can even get to the low end of that range?

Gil Shwed

I think that we have a healthy pipeline. With Pointsec, it was historically characterized by many large deals, a very nice pipeline of that. So I hope that we will be able to make something close to that range.

Operator

Your next question comes from Walter Pritchard - Cowen & Company.

Walter Pritchard - Cowen & Company

I am wondering if you can just talk to us a little bit about the annuity business, which continues to do pretty well year over year and sequentially. I know there are a variety of components there with the new support program part of it, the traditional software subscription as well as the annuity stream from Pointsec. Maybe you can just help us breakdown what is contributing more growth or less growth to that piece.

Gil Shwed

I think they are all growing equally in a balanced way. The new support program that we have implemented in Europe is contributing nicely, and it is 100% of the annuity business in Europe.

In the U.S., we have a combination of the older subscription program and the direct support program, which is different. Again, both of them are tracking pretty well. We do have the Smart Defense program, and the Smart Defense is very important because it is a new program – well not new, it is already several years – but it is another program that gives security updates and real-time security. The Smart Defense program is actually tracking quite well and keeps contributing more to revenues every single quarter. I think we are tracking somewhere between $40 million and $50 million contribution of this program on a year-on-year basis, on an annual basis and with very nice double-digit growth year over year. So I think these are the big programs that keep contributing.

On top of that, actually the other programs we have like training and professional services are all tracking well, but they are completely insignificant compared to this programs.

Jerry Ungerman

Maybe I should add one more component, which is right now small but has a very nice potential to grow, our UTM-1 install base is still small, but our UTM services that are being sold on top of the UTM-1 gateway, that number as the install base grows, it will continue to grow. It is a new dimension in our annuity-based sales.

Walter Pritchard - Cowen & Company

On the support program, I note you mention you had not changed the program in the U.S., you are still doing a direct support program. What is the likelihood going into next year that you move to that type of program in the U.S.? As I note from ’07 results you had a pretty good acceleration in that business when you made that change in Europe.

Jerry Ungerman

We haven’t made any changes to our model in the U.S. We are offering more services and we are seeing more business coming in. Before we make a change, we will communicate it to our customers and partners first, and not this way.

Operator

Your next question comes from Phil Winslow - Credit Suisse.

Phil Winslow - Credit Suisse

I wanted to talk about the new product pipeline. Obviously the UTM appliance has been doing very well. Gil, should we think about any new products coming out over the next six to 18 months here? I believe at the analyst day you talked about potentially looking at data loss prevention there. I was wondering if we could get an update on that.

Gil Shwed

We are not going to provide any specific updates on upcoming products, but we are going to have more products coming forward. We are going to execute on our data security strategy. We are going to have more products in all areas. Network security, LAN port security and in the data security spaces.

Phil Winslow - Credit Suisse

Your acquisition of NFR Security for intrusion prevention, I was wondering if you could just give us an update on that as far as the integration of that in with firewall 1 and VPN 1?

Gil Shwed

That is still a small part of the business, but it is actually tracking very well. Every quarter, we win more deals and we slightly increase the percent of revenue and the dollar amount that it contributes. We are putting more and more into that technology in terms of incorporating both management and enforcement into our general gateways. I believe that sometime next year we will see more of those benefits showing up.

So far, this business is a relatively small part of the business but tracking very well.

Operator

Your next question comes from Robert Breza - RBC Capital Markets.

Robert Breza - RBC Capital Markets

Gil, I was wondering as you look at Pointsec, specifically the integration effort that you have been working on the last three quarters, how far along do you think you are in terms of the integration throughout the worldwide geographies? Is it 100% across all geographies? Then could you talk about your plans in terms of just moving that division forward? Thanks.

Gil Shwed

I think the integration is pretty much complete all over the world. There are more benefits and more business which we can develop around it. As I said, right now we are still seeing a lot of business coming from the big, named account business that Pointsec and we want to have even more of that moving forward, but we still have a long way to go to get the channel to sell just small and medium deals on an ongoing basis in big quantities. That is true, probably worldwide.

So these are the two big moving parts. But overall the salesforce is well-integrated, they operate as one group, they are managed under one umbrella and I believe that they are doing it quite well, especially in the U.S. when Pointsec has, in the past, the biggest success and it continues moving forward.

Jerry Ungerman

I think that the next value that will be realized from this transaction is when the Check Point channel will generate deal flow on a regular basis. We have made progress in this area. We have seen traditional Check Point customers that buy both network security products and data security products in their quarterly ordering. That part of the integration has the biggest value. We are just at the beginning of seeing that.

Operator

Your next question comes from Katherine Egbert – Jefferies.

Katherine Egbert – Jefferies

Outside of Pointsec, what else led to the strength in the large accounts? Did you change quotas or somehow encourage your VARs to start selling larger deals? What other products might have contributed there?

Gil Shwed

I think a lot of the efforts that we have done within the salesforce have contributed to that business, and mainly focus. Now a big part of that focus is actually the Check Point named account people, who do deal with our VARs and we fulfill through our VARs, but many transactions that we are doing right now were driven by the Check Point named account people, and we have built that salesforce through several years. It shows more and more fruition in the way it is being managed and the way we get the benefit.

We did develop some programs that are targeting the named accounts in a very particular way. Support programs, system integration programs in which we give them more and more value and customize what we do. These programs are actually showing a lot of benefit, because they value that type of close relationship that they have with us, and as a result of that, they buy not just more services, but they buy much more product in their environment.

These are generally the things that we have done, and so far it shows very good results.

Katherine Egbert - Jefferies

Is there any risk that you disrupt that large account focus, particularly for Pointsec as you roll it out to the channel?

Gil Shwed

Well we hope we don’t; we already fulfill most of the Pointsec business through the channel, so we did make most of the transition in terms of fulfillment through the channel.

Jerry Ungerman

Over 80%.

Gil Shwed

Over 80% of the Pointsec business is already fulfilled through the channel, so we avoid most of the theoretical competition that might appear with the channel. But I am differentiating here between fulfillment, involvement and really the channel bringing up the deals that they generate with less involvement from Check Point. As to their model of business, we have the entire spectrum. We have from zero Check Point involvement to 90% plus Check Point involvement, depending on the deal, depending on the customer, depending on geography.

Because we have no conflict with the channels, it works in a very nice and in very good harmony with the channel.

Operator

Your next question comes from Daniel Ives - Friedman, Billings, Ramsey.

Daniel Ives - Friedman, Billings, Ramsey

Good quarter. Throughout the quarter, was there any discernible change with customers spending habits? Maybe specifically within the financial institutions, as that is a focus of some investors.

Gil Shwed

Not that we have seen. The financial sector kept as a big, good client. Some of our largest deals came from some of the world’s largest financial institutions. The financial institutions contributed somewhere in the mid-teens, between 10% and 20% of our transactions.

Eyal Desheh

About 16%.

Gil Shwed

About 16% is coming from financial institutions, and that is a good number. I think this is healthy and we have long roadmaps to come.

Daniel Ives - Friedman, Billings, Ramsey

Another question, which was asked before, a few quarters ago, even last year the core business was struggling and then you bought Pointsec and all of the excitement. Now Pointsec is doing well, on target, but the core business has really just started to take off.

Is there any specific thing, or did it all just click at the same time, relative to a year ago? Has it surprised you on the positive, or this is in line with where you thought the business would be a year ago when things weren’t that good?

Gil Shwed

I think we are tracking according to plan this year. I don’t know if surprised – I mean, I am personally a strong believer in our business and I think I say it every time, that long term I believe that our core business in network security is a very important area and should show good results.

Now by the way, just remember, every single quarter we show good results, the question is how much will we grow and how much growth they will show? I think this year, generally speaking, we are tracking in the core network security business at plan or slightly ahead of plan, in terms of my internal expectations. So this is very good and very positive.

You've asked, what initiatives have we done? We've done many initiatives. I will repeat what I've already said a few times. We had the UTM-1 appliances, we had a strong focus on major accounts, we had the annuity program that changed and expanded last year, we had the Smart Defense, which is part of the annuity program, and we have overall sales management and execution and product strategy.

The good thing about that is I believe that all these things contributed and they all worked quite well. So it's no single silver bullet, but the combination of execution across the entire product.

Jerry Ungerman

If you look back at the analyst day presentation from the beginning of the year, it was all there. I think the rest was good execution, hard work and also a reasonable market, which always never hurts.

I think that we have really learned to execute, and execute fast, and take our ideas and great technology and innovation to market and convince our customers. It starts from the large one and goes all the way down the value chain that putting their security with Check Point is the right thing to do strategically for them, as well as it is for us, and I think it all shows. It's a long-term thing. As Gil said before, it is no single silver bullet here, and there is no magic here. It's a lot of hard work and many new ideas and initiatives.

Operator

Your next question comes from Brian Freed - Morgan Keegan.

Brian Freed - Morgan Keegan

Hey, guys. Good quarter. It sounds like you guys are pretty much wrapped up with the integration of Pointsec. Do you see additional acquisition opportunities, areas where you could strengthen your portfolio to drive additional growth going forward? What's your general acquisition strategy at this point?

Jerry Ungerman

As we said before, we're looking to expand our presence in the data security market. We're looking at additional areas that could be complementary to what we sell and we'll do it when the time is right and we'll communicate when the time is right, as we have always done.

Operator

Your next question comes from Israel Hernandez - Lehman Brothers.

Israel Hernandez - Lehman Brothers

I know you are optimistic on Q4 data security and the contribution that you're expecting, but if Pointsec is unable to achieve the low end of your annual guidance, is Q4 at risk? Do you think you have enough in the pipeline in the core business, which seems to be doing very well to compensate for that?

Gil Shwed

I think we've just upped our guidance for Q4 and we've upped it from what we had at the beginning of the year and what we said a quarter ago. That says what we expect about the fourth quarter.

We've just raised all our expectation in terms of revenue, earnings, earnings per share, so that means that we think -- again, it's always a risk, but at least the data that we have in our hands right now points to a healthy Q4.

Operator

Your next question comes from Ehud Eisenstein - Oscar Gruss.

Ehud Eisenstein - Oscar Gruss

Can you comment on the headcount at the end of the September quarter? How do you expect to exit '07?

Jerry Ungerman

We have approximately 1,900 employees all over the world with some modest growth from Q2 to Q3. We'll probably continue to add a few tenths towards the end of the year. That's the run rate right now. We're not jumping up and down; we're increasing consistently to support the increase in business.

Ehud Eisenstein - Oscar Gruss

With the strength during the quarter, what was the forex effect in the September quarter?

Eyal Desheh

A weak dollar, just to remind you, the dollar was also weak compared to the European currency and we have about 300 people in Europe. A weak dollar doesn't help. We sell in dollars and we expense in many other currencies. The impact was not big. You've seen the numbers. I think they speak for themselves. We are thankful that we don't need the currency excuse. We had a good quarter and the impact was not huge.

Operator

At this time I would like to turn the floor back over to management for any closing comments.

Jerry Ungerman

Once again, I would like to thank you all for your participation in our conference call today. If you would like to speak to management or to Investor Relations following this call, please call our Investor Relations department, 650.628.2050. Thank you very much and talk to you next time.

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