In Israel's High-Tech Hotbed, Check Point Casts a Long Shadow - TheStreet

In Israel's High-Tech Hotbed, Check Point Casts a Long Shadow

Adam Lashinsky checks in with the software company, a Silicon Valley-style success story, in Tel Aviv.
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TEL AVIV -- Imagine you've just arrived in Silicon Valley from halfway around the world and you want to quickly take the pulse of the high-tech community. So you arrange back-to-back meetings with Jerry Yang, the young co-founder of

Yahoo!

(YHOO)

, and Michael Moritz, the not-quite-as-young venture capitalist at

Sequoia Capital

who originally backed Yang's company.

With allowances for differences in relative financial success, precise job descriptions and other important details, that's the effect I captured in my first two meetings in Israel last week, with Gil Shwed, president, CEO and co-founder of

Check Point Software Technologies

(CHKP) - Get Report

, and Nir Barkat, managing director of

BRM Technologies

, the VC firm that staked Check Point in its infancy. Shwed's story appears today, Barkat's will appear later.

But first, why Israel? The answer is simple: After Silicon Valley, Israel easily is the most exciting market for technology investing in the world. And despite the distance from North America -- where every Israeli tech company that matters is listed on the

Nasdaq

-- Israel is like an all-American story. Its entrepreneurs, schooled in the Israeli military and in the country's first-rate engineering programs, are applying their knowledge from previous careers and building fast-growing companies. Some of the best ideas in Internet communications begin here, like the

ICQ

messaging service, which

America Online

(AOL)

bought, or

DSP Communications

(DSP)

, which

Intel

(INTC) - Get Report

last week agreed to buy for $1.6 billion. More, Silicon Valley's venture capitalists are combing Israel for their next investments, pumping up the confidence of start-up executives but threatening to crowd out the budding Israeli VC community. It's like a very distant Silicon Valley where everyone is one nationality, and nearly no one plans to sell products within their home market.

So on to Check Point, a good starting point for its homegrown Israeli history but with an immediate focus on the U.S. for its development.

Like Yahoo!'s Yang, Shwed is youthful; he allows only that he is in his "very early 30s." But he was even younger when he and two partners founded Check Point six years ago. Unlike Yang, Shwed has maintained firm control of the management of his company, which has sprung up to a $3 billion market capitalization since going public in 1996. Shwed and his co-founders first comercialized the concept of "firewall" software to protect networks from intrusion by hackers and other miscreants. He applied skills learned both as a longtime computing geek and in his time doing networking projects for the Israeli military. "Unfortunately, I cannot talk much about it," he deadpans of his intelligence-related work.

Shwed is as perfect a prototype for Israel's high-tech phenomenon as Yang is for Silicon Valley's

Stanford

-educated, VC-backed, up-from-the-garage stereotype. Shwed and his partners took their military know-how, built a product the emerging Internet needed and then tirelessly sold their initial products to big U.S. corporations. (

Sun Microsystems

(SUNW) - Get Report

was Check Point's first major customer-distributor.) After initial success, Check Point established a significant presence in the U.S. -- its Silicon Valley base is in Redwood City, near

Oracle's

(ORCL) - Get Report

Emerald City-like campus -- but maintained its brain trust and the bulk of its employees in Israel.

As subsequent columns will show, numerous Israeli startups are following precisely this formula of keeping the entrepreneurial and technical brains in Israel while hiring the marketing and deal-making talent in the U.S. -- nearly every company's initial target market. Check Point is arguably the most successful example.

Shwed himself is a bundle of concentrated energy. Speaking just before a regular Check Point board meeting on Friday, the first day of the Israeli weekend, Shwed literally bounces about in his chair as he describes the company's early days. At times the black-clad entrepreneur jumps out of his chair, looks at a nearby table as if to grab something from it and then walks around -- all for no apparent reason other than to burn some nervous energy.

After passing on an opportunity to go public in 1995, Shwed hired

Goldman Sachs

to conduct Check Point's IPO the following year. By providing what software types call "best of breed" products, Check Point has been able to keep ahead of its two most relevant competitors,

Cisco

(CSCO) - Get Report

and

Network Associates

(NETA)

.

"We want to be the operating system for security on the network," says Shwed, in his suburban Tel Aviv office.

Check Point on Fire
The software company's shares have left the Nasdaq in the dust.

It's working. The upstart has grown from $35 million in revenue in 1996 to $142 million last year. Net margins in that year were nearly 50%, a Microsoftian accomplishment. In fact, Shwed's eccentrically focused demeanor is downright

Gates

-like. His level of commitment to his company to exclusion of all else most reminds me of Henry Nicholas, the sleep-deprived and publicity-hungry CEO of chip maker

Broadcom

(BRCM)

. The comparison with Broadcom is instructive. The American company's revenues last year were about $60 million greater than Check Point's, while its profits were about half. However, Broadcom's market value is roughly four times that of Check Point.

Check Point's stock has tumbled at times, often when Cisco flexes its muscles. But then it recovers. It closed Friday (when it dropped 3 1/4, or 4%) at 83, roughly 5 1/2 times its 52-week low.

"Check Point is expanding its lead over the competition by offering comprehensive, high-end network-management and security products targeted at Fortune 1000 organizations," wrote Elan Zivotovsky, an Israel-based analyst for Goldman Sachs, when the stock was worth 53 in late June. "Moreover, we believe demand for Check Point's solutions is accelerating as organizations increasingly embrace the Internet as a mission-critical business tool, but are faced with increasing security risks." As noted, Zivotovsky's firm is Check Point's underwriter, and he remains bullish on the stock.

Shwed, who has bucked the trend of most young Israeli tech executives by keeping his own residence in Israel, is similarly bullish. "I believe that securing the Internet is a market that will grow for many, many years," he says.

Check Point trades for more than 35 times Wall Street's estimates of its 1999 earnings but is growing its per-share profits at a rate of about 25%. That makes the stock pricey, but not in comparison to older execution machines

Microsoft

(MSFT) - Get Report

(56 times earnings on 13% EPS growth) or Cisco (forward P/E of 68 and 31% forecast EPS growth). To understand Israeli high tech, begin by understanding Check Point.

For a look at Barkat, the man who was there with the cash when Shwed and his friends were working out of one of their grandmothers' apartments, check back later this week.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

alashinsky@thestreet.com.