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Check Point Software Technologies Ltd. (NYSE:CKP)

Q4 2007 Earnings Call

January 23, 2008, 8:30 am ET

Executives

Kip Meintzer – Director Investor Relations

Gil Shwed - Chairman and CEO

Jerry Ungerman - Vice Chairman

Eyal Desheh - Executive Vice President and Chief Financial Officer

Analysts

Sterling Auty – J.P. Morgan

Jonathan Doros – UBS

Robert Breza – RBC Capital Markets

Phil Winslow – Credit Suisse

John Walsh – Citigroup

Sarah Friar – Goldman Sachs

Israel Hernandez – Lehman Brothers

Todd Raker – Deutsche Bank

Michael Turits - Raymond James

Walter Pritchard – Cowen

Katherine Egbert – Jefferies

Daniel Ives – Friedman, Billings

[Manish Hemajani] – Oppenheimer

Rob Owens – Pacific Crest Securities

Operator

At this time I would like to welcome everyone to the Check Point Software Technologies Fourth Quarter 2007 Year End Earnings Results Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host Mr. Kip Meintzer.

Kip Meintzer

Good morning and good 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’s fourth quarter and fiscal year 2007 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 website at www.CheckPoint.com/ir. For your convenience the fourth quarter results replay will be available through February 6th. If you’d like to reach us after the call please contact Investor Relations.

Before we begin management’s presentation I would like to bring the follow disclaimer to your attention. During the course of this call Check Point representatives will make certain forward looking statements. These forward looking statement include statement regarding Check Point’s expectations for data security, expectations they continue to execute on a strategic initiative in the fourth quarter and beyond, belief that it will continue expanding and enhancing our product offerings as we continue delivering products utilizing our unified security architecture and integrated management platform.

Expectations for its financial performance and growth for the first quarter 2008 and 2008 fiscal year and beyond. 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 Security 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 would like to turn the call over to Eyal Desheh, Executive Vice President and Chief Financial Officer.

Eyal Desheh

Good morning and good afternoon everyone joining us on the call today. I’m happy once again to begin the review of an excellent quarter and would turn out to be an exceptional year for Check Point. We achieved record quarterly and fiscal year results from revenue non-GAAP income and non-GAAP earnings per share perspective. Our results both quarterly and for the full year came in at the high end of our projections as we continue to demonstrate solid growth across all our business segments.

We continue to see the adoption of our products from new and existing customers throughout the quarter and fiscal year as customers continue to embrace our unified security architecture and total security solutions. Before I go further into the numbers let me remind you that our fourth quarter and fiscal year GAAP financial results include the following; equity based compensation expenses pursuant to SFAS 123R, expenses related to acquisition of Protect Data and NFR which we include in our 2007 results but not included in previous years as well as expenses related to the acquisition of Dunlap which were included in the past.

Keep in mind that non-GAAP information is present 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 last quarter in the way we report results. We’ve updated our financial statement reporting in accordance with the latest reporting standards, we now combine the software subscription line with the services line and it is now called software updates, maintenance and services.

We also split the cost of revenue line in order to present cost of product and licenses, cost of software update maintenance and services and amortization of technology separately. We reclassified our 2006 results to conform with our current presentation.

Now let’s take a look at the financial highlights for the quarter. Fourth quarter revenues were $206.7 million an increase of 29% compared to $160.1 million in the fourth quarter 2006 and a 12% sequential quarterly increase. The Network Security business continues to drive growth contributing a record of $182.5 million to revenues an increase of 14% compared to the fourth quarter 2006 and 12% sequential quarterly increase.

The Data Security business contributed $24.2 million in revenues during the fourth quarter representing a 17% sequential quarterly increase. Half of the overall performance of this business were especially gratified for the 40% operating margin our Data Security business achieved in Q4 this year. In 2007 the total business generated by Data Security including deferred revenue was over $90 million and part of which will be recognized in 2008. This amount also does not include $6 million in deferred revenue which we did not recognize due to purchase accounting treatment.

The Data Security generated very nice growth in America and the business in Europe improved considerably in Q4. In 2007 we transitioned out of the third party reselling business which we inherited with Pointsec. As part of the business generated $17 million in 2006 and was reduced to $6 million in 2007 for the point of business.

We are starting 2008 with a good pipeline of data security deals and believe that the Data Security part will continue to grow faster than the rest of our business. As part of our expense strategy we will combine our Data Security with our Endpoint Security business. This combination will result in new product offerings and we will be looking at the combined results from Q1 2008.

GAAP net income for the fourth quarter 2007 was $87.9 million an increase of 11% compared to $79.5 million in the fourth quarter 2006 and 50% sequential quarterly increase. GAAP net income in the fourth quarter 2007 includes acquisition related charges of $10.3 million and equity based compensation expenses of $8.8 million. Net of taxes these charges total $14.6 million.

Non-GAAP net income was a record high of $102.5 million an increase of 13% compared to the fourth quarter of 2006 and an 11% sequential quarterly increase. Total GAAP operating expenses for the quarter were $118 million, operating expenses on a non-GAAP basis were $99 million compared to $69 million in the fourth quarter last year. The increase in operating expenses is due mainly to the addition of Pointsec and increase in cost of goods resulting from the increase in appliance sales.

Our non-GAAP operating margin was 52% consistent with the third quarter of 2007. Our effective GAAP and non-GAAP income tax rate for the fourth quarter was approximately 14% and 15% respectively. GAAP earnings for diluted shares for the fourth quarter 2007 were $0.39 an increase of 11% compared to $0.35 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 earnings for diluted share for the fourth quarter of 2007 were $0.46 compared to $0.40 in the fourth quarter last year an increase of 15%. Deferred revenues this quarter were $274 million an increase of $69.5 million or 34% over December 31st 2006 an increase of $47 million from the end of Q3.

For the fourth quarter our DSO (Day Sales Outstanding) were 72 days compared to 67 days in the third quarter 2007. The increase is first and foremost a reflection of the strong Q4 bookings which was also back end loaded. An exceptional number of large deals which set to close at the end of the quarter contributed to the strong quarter but also to the increase in DSO.

We generated cash flow from operations of $91 million an increase of 10% compared to Q4 last year and we ended the quarter with over $1.2 billion in cash and investments. During the quarter we purchased approximately 2.8 million shares for the cost of $61.9 million as part of our share repurchase program. Moving forward with approximately $73 million remaining from the $1.2 billion board authorized repurchase program.

Now let’s take a look at our 2007 fiscal year highlights. For the year ended December 31, 2007, revenues were $731 million an increase of 27% compared to $575 million for the year ended December 31, 2006. As a reminder our original forecast for the year stood at $690 to $720 million. Network Security accounted for a record $648 million in revenue representing 13% increase over 2006, Data Security contributed $83 million to revenues for the year.

GAAP net income for 2007 was $281.1 million compared to $278 million for 2006. Net income for 2007 include equity based compensation expenses in the amount of $34.1 million, acquisition related expenses of $57 million including [inaudible] in the amount of $17 million. Net of taxes these charges total $77.7 million.

Non-GAAP net income excluding acquisition related and equity based compensation expenses was $358.7 million an increase of 12% compared to $320.3 million for the year ended 2006. Our affective GAAP and non-GAAP income tax rates for 2007 fiscal year were approximately 15%. GAAP earning per diluted share for 2007 were $1.25 an increase of 7% compared to $1.17 last year. GAAP earning per share includes equity based compensation of $0.15 and acquisition related charges of $0.25 which includes [inaudible] of $0.07. Net of taxes these charges total $0.34.

Non-GAAP earnings per share for 2007 excluding acquisition related and equity based compensation charges was $1.59 an increase of 18% compared with $1.35 for the year ended 2006.

Now I’d like to turn the call over to Jerry Ungerman for some color on the quarter.

Jerry Ungerman

I would like to begin today by providing you with revenue and deal metrics for the fourth quarter and physical year 2007 and then address our evolving business strategy. During the fourth quarter our geographical revenue distribution was consistent with prior years but was especially strong in the Europe, Middle East and Africa region which grew in excess of 34% this year.

Specifically we had 43% of revenue coming from Americas; Europe, Middle East and Africa contributed 46% and the Asia/Pacific and Japan region contributed the remaining 11% of revenues for the quarter. For the year the geographical revenue distribution was 45% of revenue coming from America; Europe, Middle East and Africa contributing 44% and the Asia/Pacific and Japan region contributed the remaining 11% of revenue for the year.

During the quarter we continue to see a number of larger deals coming from Network Security and Data Security. As a result, transactions greater than $50,000 accounted for 45% of total order value and we had 19 customers that each had transactions with a value of $1 million or greater.

Now I would like to turn your attention to our expanding business strategy which has been one of the key drivers of our Network Security growth over the past several quarters and hopefully will provide you with some clarity over how appliances fit in to our overall strategy and business model. First we began offering our software bundled as UTM-1 appliance earlier this year after looking at the opportunity for some time. One of the reasons we implemented the expanded appliance strategy is that we realized there was a gap between what our traditional platform partners were bringing to market and the total market opportunity. We also believe that it would provide us with a strategic growth opportunity which is supported by our most recent results.

Essentially we put ourselves in the unique and advantageous position with our ability to provide either a software or hardware solution to best fit the customer’s needs. For example, with the introduction of our appliances we are now able to provide customers with a single vendor solution than enables us to compete head to head with our competitors where customers are looking for a single vendor solution. From a business model standpoint appliances should provide a long term growth driver to our top line and bottom line results. Appliances also contributed over the long term because of their three to five year replacement cycle which provides a recurring revenue opportunity.

With this dual strategy we believe we are uniquely positioned to provide customers with the best solution, whether it’s a software sale on a partner appliance, an open server or an appliance from Check Point. In addition, with our acquisition of Pointsec we now provide another layer of security for our customer, Data Security. This has enabled us to create a very significant end point solution for our customers as we integrate the various technologies into a single agent. This has the potential to be a strong and compelling differentiator in meeting the needs of the market.

We were also able to better meet the performance needs of our high end customers with the announcement of our core XL technology and just this past month we enhanced our unified threat management solution by adding messaging security capability to our UTM-1 appliance family. In summary, we believe that we have significantly improved our positioning in an absolute sense and definitely relative to our competitors. This will continue to be our focus in executing our strategy providing the best total security solutions to the market.

We will accomplish this by leveraging our 15 years of technology and innovation leadership and delivering the best security in a unified gateway, a single endpoint which are all managed by a single management console and these are compelling capabilities that could only be provided by

Check Point.

Finally I want to echo Eyal and say we are very pleased with the results for this quarter and our success in 2007. Now I would like to turn the call over to Gil.

Gil Shwed

Thank all of you for joining us today. As you just hear from Eyal and Jerry the fourth quarter and fiscal year 2007 turned out to exceptionally well. From a financial perspective we posted record quarter and annual results across the board which continues to underscore the success of our pure focus on security and the quality of our product offering.

During the year we made a successful entrance in to the Data Security space with the Pointsec acquisition at which point we combined organization and the channel and are ready to move to the next phase in introduce our integrated endpoint solution which we expect will be one of the strongest and most comprehensive in the industry.

In addition, our Network Security product had a very good year and we realized the success across the marketplace but especially with our mid-range and high end customers. As we move forward we believer our unified gateway and end point solution combined with our single console for security measurement presents a compelling value proposition for customers looking for increased security with ease of use and simplified deployment. We believe this will lead them to consolidate more of their security infrastructure with us.

As we look into 2008 our sales force is motivated and enthusiastic about the opportunity ahead of us, however, one must also take into consideration the uncertainties surrounding the global economy. With that I’d like to share our current forecast for the year.

For the first quarter we expect revenues to be in the range of $184 to $193 million, GAAP EPS for the first quarter is expected to be between $0.32 to $0.35 and non-GAAP EPS is expected to be in the range of $0.39 to $0.42. For the entire year, for the year 2008, we expect revenues in the range of $780 to $820 million, GAAP EPS in the range of $1.43 to $1.53 and finally non-GAAP EPS in the range of $1.71 to $1.81.

With that I would like to open the call for your questions. Thank you very much.

Question & Answer Session

Operator

[Operator Instructions] Your first question is coming from Sterling Auty of J.P. Morgan.

Sterling Auty – J.P. Morgan

In the Data Security area if you were to normalize for the third party revenue and the loss of deferred revenue what would the growth in that area have been in 2007 and what should we be thinking about the growth rate in Data Security in ’08 and beyond?

Eyal Desheh

I’ll take the first one on normalizing; if we had normalized we would have generated gross of about 30% to 35% over the results of last year. It’s never apples to apples at Pointsec requires different accounting treatment, different revenue recognition to our GAAP is a little more conservative than what they had so I would say that about 30% to 35% growth, maybe a little bit more for the normalized business and future growth rate I will defer to Gil.

Gil Shwed

For the future we don’t break our expectations or plans according to individual products but I still expect that the growth rate from the Data Security products will be much higher than the growth rate of the rest of the business. Even though at this point if you can see we have healthy growth rates on both sides so I think that’s very good news for the entire business.

Sterling Auty – J.P. Morgan

My follow up question would be macro is on everybody’s minds, can you just give us your thoughts as to how Check Point is positioned given the current macro environment and perhaps if we see further slow down?

Eyal Desheh

You know I specialize in micro and not in macro. We already [inaudible] tend to be confusing nobody will take a risk in predicting how the year will turn out macro wise. I think that for different parties that we are at Check Point we are equipped with more tools in our toolbox than any year before and hopefully the market share that we added in 2007, the pipeline that we see in 2008 will be able to compensate for any foreseeable slow down in the economy. It’s a complex question because right now we are not seeing much of it but it doesn’t mean it doesn’t exist.

Operator

Your next question is coming from Jonathan Doros from UBS

Jonathan Doros – UBS

Can you give us an estimate of what percentage appliances made up of working security, where you see that going?

Eyal Desheh

Going forward?

Jonathan Doros – UBS

In the quarter and then maybe?

Eyal Desheh

The assumption is similar growth rates for product revenue and services.

Eyal Desheh

The mix will remain similar more or less the same thing.

Jonathan Doros – UBS

Can you talk a little bit about the Pointsec market and have you seen ASP’s or is it a pipeline issue that caused ’07 to kind of miss the original?

In the pointsec business was it an AST issue that caused the sales to be lower or what it more of a pipeline deals getting frozen due to Safeboot?

Gil Shwed

I think we didn’t see any pressure on the AST that we haven’t seen before, it is a competitive market but we actually saw light bills and a very reasonable AST’s. I think overall what we did in Pointsec during the year is transition them from a stand alone start up like environment to working with the Check Point channel and I think we’ve seen a lot of success in that. The best evidence is what we’ve seen in Europe, in Europe in Q4 we saw a huge jump in sales in Pointsec which means that the new Check Point sales force and channels have helped create a healthy pipeline and move it to the Check Point structure. Beyond that I think again we have a lot of potential ahead of us and we will continue with that.

Operator

Your next question is coming from Robert Breza from RBC Capital Markets.

Robert Breza – RBC Capital Markets

I was wondering if you could kind of talk about the Data Security end point strategy here. Are you bringing those products into the single agent, as you go to market with that strategy how are you kind of leading with historical Pointsec up and kind of get them to turn on the old Zone Labs AB and personal firewall how should we think about your strategy moving into that end point and how do you plan to lead with it?

Gil Shwed

I don’t want to get too much into details with that but I’ll give you the highlights. I think our entry into that market can come from two or three different angles. One is the Data Security, where we are unique and we are the leaders in Data Security so people deploy our Data Security we can utilize additional features that we have.

Another entry point which we are also leading in this market is the remote access and VPN so again customers that are using our remote access have all the leverage and ability and we have the ability to cross selling and sell more functionality like Data Security.

Finally, there is the Firewall which we call Program Advisor Security for the Endpoint which we are also leading in the marketplace and again each one of these three can lead us to sell the other two or three or maybe even more functionalities which we have in our Endpoint Security which we are not going to do with time and not to focus in the beginning we are not trying to be a competitor in the AV space, we might have the functionality and it might be an important element but we are not going to try and tackle the AV vendor which I think is a monetized market and I think what we are going lead is much higher value in terms of the security functionality I just described and in terms of the ability to manage that kind of an environment especially the link between the Network side and the Endpoint side.

Robert Breza – RBC Capital Markets

Maybe a quick follow up for Eyal, when you look at the third party business which has been historically getting out of you mentioned there were $6 million of it still in ’07, can we expect that to go to zero throughout 2008 or what’s kind of the outlook for that third party business.

Eyal Desheh

I don’t know if it will go to zero but you know with $6 million in ’07 its really an insignificant number anymore and by the way one of the reasons are the improved profitability of the Pointsec business is that transition out of that obviously third party is a non-profitable business not in terms of the high levels that we have so it’s going to wind down slowly, not a one timer, probably disappear over a few years.

Operator

Your next question is coming from Phil Winslow – Credit Suisse

Phil Winslow – Credit Suisse

I was wondering if you count on your appliance business and you know last quarter you said that it was 24% of product sales, I’m wondering what it was in Q4 but also just the strength in deferred revenue just curious if any of the appliance success is driving that with the add on subscriptions and sales?

Eyal Desheh

In Q4 appliances were about 25% of product sales and as you’ve seen product sales has grown considerably in Q4 compared to Q3 and compared to last year this is 25% of all our products including the Pointsec and everything not just the Network Security products. It is tracking very well increasing very nicely and we are very happy with that. What was the second part of the question?

Gil Shwed

I’ll maybe answer the second one it’s also driving some of the deferred revenues. The answer is that overall yes it does especially if you look at the model of Total Security that we launched at the end of the year which include three year packages and especially because the accounting rule is that means that every addition to the product and every bigger and bigger portion of the product revenue or the sale, the product revenue actually goes in to the deferred revenue and to recognition over one to three years. I don’t think it has a huge effect in Q4 yet but I think what will see moving forward that our new products are actually going to have an even bigger impact from deferred revenues than product revenues.

Eyal Desheh

We are selling our UTM products with a full set of UTM functionality and add-ons that customers pay for while at this point it’s still on a low volume it is increasing penetration and the coverage rate they are going to play a much bigger role in 2008 as we sell more UTM and also the coverage and the number of customers that will buy these add-ons is increasing all the time. Of course this is service so it will add at the beginning deferred revenue that will be amortized over the lifetime of the agreement on the services.

Phil Winslow – Credit Suisse

Could you give us a sense for what appliances were for the full year as a percentage of product revenue?

Eyal Desheh

Yes, about 21%.

Phil Winslow – Credit Suisse

Do you know what that was in 2006?

Eyal Desheh

If I recall it was about 12% but don’t test me on that.

Operator

Your next question is coming from John Walsh of Citigroup

John Walsh – Citigroup

Just to go back to the Data Security side of things, if you looked at the actual $83 million versus the $95 to $105 million original estimate what kind of delta was due to accounting assumptions you made at the beginning versus what actually you were able to recognize with the accounting rules?

Eyal Desheh

It’s hard to estimate between $5 to $10 million I guess.

John Walsh – Citigroup

So $5 to $10 million in delta was the assumption going in versus what you were able to do?

Eyal Desheh

Yes.

John Walsh – Citigroup

You were just talking about the three year subscriptions that follow in our add-ons for the appliance side, how much of that is built up front when you do the multi-year that would hit deferred revenue?

Eyal Desheh

Right now it is a very small part of it, we expect this to grow in the future as we sell more of these three year bundles, we just launched this in the fourth quarter and pipeline only building them.

John Walsh – Citigroup

Last question, any update on the CFO search?

Gil Shwed

No, when we have an announcement we will be happy to share it with you.

John Walsh – Citigroup

Any estimate on the time frame?

Gil Shwed

Not at this point, it could take some time.

Eyal Desheh

I’ll be discussing Q1 results with all of you guys in the middle of April.

Operator

Your next question is coming from Sarah Friar from Goldman Sachs.

Sarah Friar – Goldman Sachs

A quick question on the America’s the sequential growth was weaker than the historically seen from you I’m just wondering if you could comment on specifically on the spending environment in the US and is there any impact if customers maybe hold back on project deployments given the economic environment?

Jerry Ungerman

We had good growth in the America’s to me it was really strong I think we said Americas grew at 24%. Compared to the market and competitors and whatever I think we just had a very very good growth rate they just didn’t keep up with. We had a lot of major winds which I talked about 19 transactions greater than $1 million, we had some that were way over $1 million, with significant winds on the competitive both Data Security, Network Security very large institutions. I think it was an exceptional quarter, I think sales organization on a global basis did a good job we are well positioned I’m excited about some of the stuff we’ve done from a product standpoint and what we are going to be doing in 2008. Our competitive positioning is just really improved and its continuing to get stronger and we just need to keep on focusing.

Gil Shwed

Maybe one more thank I’d like to add that in certain segments purchasing also turned out to be global. In many sectors for example if I take the financial sector many of our and the largest customers that we have on the financial sector are purchasing on the global basis and I think it’s very hard to contribute their contribution to one region or another. Actually many of the large financial institutions that are large and global that are making their purchases out of Europe.

Eyal Desheh

Sequential growth also depends on the base, you look at Q3 America was very strong in the third quarter so the base was very high there and I think that delivery of the fourth quarter was awesome, was exceptional and also throughout the year.

Sarah Friar – Goldman Sachs

On the cash flow growth, the cash flow came in below a net income growth what’s the drag there and if we look in ’08 should we expect cash flow growth to come in line with net income growth?

Eyal Desheh

The correlation between cash flow and net income is never one to one on a quarterly basis not even on an annual basis. You’ll see that reverse next quarter as we collect all the booking of Q4 in Q1 and usually what you see is Q1 is the biggest cash flow quarter for the year for us and Q4 on the back of the Q3 booking is the slow one.

Gil Shwed

Let me just summarize what Eyal said, first we will make up cash flow in Q1 because that’s where the collection happens, one more thing, two more events did happen in ’06 and ’07 that we moved to new headquarters for the first time we had relatively large capital expenditures during the year again comparing to our balance sheet its not a very significant but it’s still the capital expense we made approximately $50 million is what we used to spend for five years of capital expenditure.

Sarah Friar – Goldman Sachs

That would come back to more normalized levels now that you’ve made that shift?

Eyal Desheh

Yes

Operator

Your next question is coming from Israel Hernandez from Lehman Brothers.

Israel Hernandez – Lehman Brothers

You talked about the success at the high end of the market could you perhaps touch on what you are seeing out there competitively how your new appliance strategy is helping you take some share stacking in the market? Of the large deals were those primarily into the install base or did you have some rip and replacements as well?

Jerry Ungerman

It was an exciting time, we did both, some are with some customers but in many cases, I’m trying to think of most of the large ones, we expanded our base but we also displaced competitors. Some of our really large corporations that have multiple vendors across and the UTM was going to the mid-market branches but you know our high end solutions, the integrated solution we have there was very successful this quarter, very large accounts with big numbers and they were all competitive situations and yet I bet, I’d have to guess, a number of them were replacing installed competitors.

Operator

Our next question is coming from Todd Raker of Deutsche Bank.

Todd Raker – Deutsche Bank

I was hoping you could give us a sense in terms of expected growth profile of Network Security versus Data Security in ’08. How should we think of the relative growth profile?

Gil Shwed

We are not breaking with estimates for separate product lines but right now on the net base Data Security is faster than Network Security but the good news is that we’ve seen last year and we hop to see next year healthy growth in both so not one compensate for the other.

Todd Raker – Deutsche Bank

Can you quantify your exposure to the financial services vertical?

Eyal Desheh

Our all time exposure to financial service is around 16% this is the analysis of our install base. That was the number more or less during 2007 was between 15% to 20% depending on the quarter, the average is around 16%. About half of that is US and half of that is the rest of the world.

Todd Raker – Deutsche Bank

Can you give us some insight in terms of stock buy back $73 million left on the authorization you guys continue to accumulate cash on a quarterly basis and the stock is near a 52 week low and why not get more aggressive on the stock buy back?

Eyal Desheh

Nobody said the opposite.

Todd Raker – Deutsche Bank

Are there any scenarios where you would consider selling the company?

Gil Shwed

Personally I think that Check Point has a lot of potential to be a stand alone leader in the Pure Security space and I think the world does need a company that is purely focused on security, that’s been our strategy for 15 years and I hope it will remain so.

Eyal Desheh

Maybe I could add something not as a major shareholder. If you look why companies are being sold always a few parameters affect I think that none of that exists in the case of Check Point.

Operator

Your next question is coming from Michael Turits of Raymond James.

Michael Turits - Raymond James

I just wanted to get more detail on John Walsh’s question, can you just bridge the gap between the original $100 million guidance for Data Security and the $83 million how much of that was from greater than expected accounting changes in terms of a write down, how much of it was from the loss of the third party vendor and how much of it was from less business?

Eyal Desheh

We can try to put it in order, about $5 to 10 million has to do with accounting treatment and again I don’t want to give an exact number because I don’t have an exact number analysis. About $11 million was the reduction of the third party business which we did not account for early on but what we understood of this and the level of contribution and the focus is on selling Data Security products and not third party re-selling product. Between these two it could be around $20 million.

Michael Turits - Raymond James

Basically all of it was with these two items in terms of the actual amount of business “x” these two it was what you expected?

Gil Shwed

Roughly, again if you look at if from one side its more than what I said at the beginning of the year at the very high end. If you look at it from a different perspective it’s in the middle to the lower rate of the year. I think what we are pleased with is the business is progressing and it’s clearly like what we expected would happen and that’s the most important part.

Michael Turits - Raymond James

If you could give me a follow up, an update on two items, one is on the CES services program what do you think the penetration of that is in various international markets? Anything you can do to update us on consumer which we haven’t talked about in a while?

Gil Shwed

CES is fully implemented in international market outside the US by now and I think was the case for the entire 2007.

Jerry Ungerman

Almost from the end of ’06 we had full covered.

Gill Shwed

We had full coverage outside the US. In terms of the consumer market I think this year our consumer market didn’t do that well especially because it took us some months to come up with a Vista version of our Zone Alarm product to changes in API for Vista. I think we picked up quite nicely from the middle of the year.

Operator

Your next question is coming from Walter Pritchard from Cowen

Walter Pritchard – Cowen

Just a couple of financial questions, the G&A expense looked like it picked up quite a bit sequentially was there any particular driver around that number this quarter?

Eyal Desheh

Nothing special, probably a couple of legal bills, they like to do it at the end of the year.

Walter Pritchard – Cowen

Secondly, so we are all on the same page on tax rate next year, was are you assuming in terms of your tax rate in ’08?

Eyal Desheh

Probably a little higher than what you’ve seen this year. I know I’m telling you that every year but probably go up to around 17%.

Walter Pritchard – Cowen

Around the Endpoint strategy it seems like while you mentioned the Antivirus is a commodity space the Endpoint space in general seems fairly crowded and very competitive and I’m wondering it sounds like you’re not willing to talk about the whole strategy but maybe you could give us a glimpse in terms of beyond the Data Security point and the VPN client which seems to be somewhat of a separate technology today what your differentiation would be to the mass market outside of your customers that have your VPN client?

Gil Shwed

First I think that every customer needs Data Security on their Endpoint which by the way both the side of data encryption and controlling the ports or the electrical cord on the desktop computer, which one people need. I think people also need to protect the desktop and control which program can run and which program can access the network and VPN Technology that we have is very unique from Check Point and for mobile users again everybody needs their remote access capabilities and the personal firewall capabilities and the VPN is included in that.

I think it is a relatively universal need. Today when you look at customers if they need to implement three, four, five different security agents on every desktop and every laptop computer it is extremely expensive. The purchase cost of this product is a small part but updating, maintaining, finding all the collisions between all the agents on every endpoint that is the hard part for the IT department and by the way for good reasons some IT departments don’t have all the security measures and I think that’s one of the unique things that we will be able to offer to the marketplace, combining many of these functionalities into a single agent with single policy with the ability to know exactly what is going on and with very easy updates and much much lower TCO costs and that would be a unique valuable position for Check Point.

As far as I know no other companies today in the marketplace has it. I don’t think that many people are close to have it or even have a vision, they actually if you look at many of the companies in those spaces they are shifting to other areas, definitely none of them has anything to do with the networking and finally which I forgot to mention is the link between these technologies and the networking is the ability for the network to identify what kind of security measures are used on the endpoint and again the fact that we supply both the gateway technology and both the endpoint technology is a very big advantage over theirs. So I think we will come up with a nice proposition.

The good news is that for us it is primarily up side, we don’t have much exposure to that market from a down side perspective and I think it’s a multi-year opportunity that we will be focusing on in 2008 and hopefully we’ll see some results in ’08, ’09 and ’10.

Walter Pritchard – Cowen

What should we expect mostly an organic strategy or do you need to do anything meaningful on the acquisition side to fulfill in the endpoint area?

Gil Shwed

Primarily right now it’s organic because we did make several large acquisitions in that space from our entry into that space four years ago with the acquisition of Zone Labs through the acquisition of Pointsec which again is around Data Security but at the endpoint. Not excluding the option of having additional acquisition but clearly we’ve made an entry through acquisition to that space. We had our VPN clients and personal firewall software for many years so it’s a good combination.

Operator

You next question is coming from Katherine Egbert from Jefferies.

Katherine Egbert – Jefferies

A couple of questions in the large deals, what’s your assumption on the number of large deals for Q1 and also how many of the large deals in Q4 were Data Security only?

Jerry Ungerman

It depends what you call a large deal but I think if I remember correctly we had four over $1 million Data Security deals in the fourth quarter. For Q1 and entire 2008 this is not a way we plan, we know the pipeline, the large transactions definitely have higher visibility so they are very well know and followed from the first day of the opportunity but it’s not something that we communicate in our metrics on a quarterly basis.

Katherine Egbert – Jefferies

Do you have any indication yet is it meaningful to talk about the penetration of the Data Security Technology into your installed base as a percentage?

Gil Shwed

I think it’s still very early and very low in our install base what indication we are getting is there’s a lot of cross selling and some [inaudible] the credibility we got on the Network Security really helped us and Network Security I can mention one deal for example that was a very large deal that early on was won by a competitor, the competitor, like most these deals for that competitor didn’t perform very well and the fact that we have credibility on the Network Security side led the customer to ask us to help and then we displaced the competitor on that deal that was one of the largest deal that we had this year. I think our sales force was very pleased to see the leverage and the fact that Check Point is there is a positive awareness to our customer have to our technology

Eyal Desheh

I wanted to add one thing here to understand the potential of Data Security. It’s not so much into large deals, large deals are very nice we are very happy when we win them and they have a very high profile but there are only so many of them. The big piece is the tens of thousands of companies with 100,000, 200,000, 300,000 dollar transactions which we are beginning to see also to our channel and adoption of the product by the channel. That’s the key for success and the nice thing about the second half 2007 especially in Q4 is that we are beginning to see a larger number of transactions of mid-size and that is one of the keys for growth.

Katherine Egbert – Jefferies

Just a follow up on that last point, what’s the average transaction size for Data Security versus the Network Security?

Eyal Desheh

We don’t communicate average deal size or average transaction size. Data Security is bigger than Network Security. Network Security includes a lot of renewals of services and subscriptions a lot of smaller deals from smaller customers because we are over the place from the very small business all the way to the largest enterprises. Network Security the business is still concentrated on the larger account and its going slowly, slowly down market so average is larger but we don’t have numbers to communicate.

Operator

Your next question is coming from Daniel Ives from Friedman, Billings

Daniel Ives – Friedman, Billings

I just want to clarify I know some people asking question to support their Armageddon thesis but so you guys beat on the quarter you gave mid point above for 1Q in 2008 which is some conservatism and the UTM business the core business grew 14% year over year is that true?

Gil Shwed

Yes

Daniel Ives – Friedman, Billings

I just wanted to make sure I was looking at the same report.

Eyal Desheh

This is not a question that we are getting here but I want to clarify something about the mix of our deferred revenues and the length of our deferred revenues. Most of our deferred revenues more than 95% of our deferred revenues are one year deals. The percentage of over one year deals and then go up to three is less than 5% of the total deferred and its similar to historical rates it hasn’t changed dramatically with the addition of our Total Security and our UTM-1 three year bundle. This right now is a very small component of our total deferred. The entire growth in deferred comes mostly from regular bread and butter one year deals.

Operator

Your next question is coming from [Manish Hemajani] from Oppenheimer

[Manish Hemajani] – Oppenheimer

How do you see ASP’s trending in the quarter?

Gil Shwed

Hopefully up, with all the product mix that we have in general I think we are building in to our model is give the customer more bundles and more value and which in turn will increase the ASP.

[Manish Hemajani] – Oppenheimer

Within UTM’s are you seeing more customer coming in the high end of the appliance range or the low end in terms of mix what do you see there?

Gil Shwed

Right now the short term focus is on the higher end but I think we want to expand these lines on both the high end and the low end.

Operator

Your last question is coming from Rob Owens from Pacific Crest Securities.

Rob Owens – Pacific Crest Securities

Could you just give a little more granularity on the deferred relative to your appliances? Do appliances sitting in the channel is that booked into deferred number one? Is there an expectation for deferred revenue in the first quarter?

Eyal Desheh

Appliances are right now the contribution of appliances to our deferred, the services that we sell on top of that is higher than on the regular software sale but not substantially higher so yes it is contributing and the tax rate of services on appliance is higher than regular because people usually buy a piece of hardware together with a service package so we get the services on most of them with a very high tax rate.

The install base don’t forget most of our deferred revenues created by renewal of our large install base and the appliances are fairly new the proportion is still low as to deferred revenues for next quarter we don’t guide that but up to the very big jump that we’ve seen in Q4, Q1 is always slower in growth. In Q1 last year we had acquisitions so part of the growth in deferred came from adding the Pointsec deferred, what’s left of it after the accounting treatment. In this Q1 deferred revenue is expected to grow moderately, no specific numbers of guidance.

Gil Shwed

One clarification to what you asked, deferred revenue does not include channel inventory and as much as I know we don’t have much inventory anyway.

Rob Owens – Pacific Crest Securities

Appliances that are effectively sitting in the channel are those in your inventory balance or how does that?

Gil Shwed

There not too much appliances sitting in the channel.

Eyal Desheh

We don’t do that, we don’t have a channel inventory model. Most of the deals are sell through and channel orders the product when they have a customer to sell to.

Once again we’d like to thank all of your for your participation today if you would like to speak to management or investor relations following this call we are all in the California office you could please call our Investor Relation Department. We will be happy to take your call. We look forward to talking to all of you in the middle of April with the release of the first quarter results.

Operator

This concludes today’s Check Point Software Technologies conference call.

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Source: Check Point Software Technologies Ltd. Q4 2007 Earnings Call Transcript
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