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The Hottest Thing in Firewalls

When young Gil Shwed arrived at Optrotech's offices in a dusty industrial park outside of Tel Aviv in 1990, he already enjoyed a reputation as a computing whiz kid. At the age of 18, he was breezing through college computer-programming classes at Hebrew University in Jerusalem. By his early 20s, he was a hired gun, brought in to solve seemingly unsolvable computing problems.

But what Shwed was able to do that day at the medical technology company shocked his eventual partner and longtime friend, Marius Nacht. Fresh out of the army -- military service is mandatory in Israel -- Shwed listened, nodded, and jotted down notes.

GENIUS AT WORK. As Nacht continued his tale of woe, Shwed, his glasses perpetually slipping down his nose, scrolled through reams of spaghetti-looking computer code. He started typing, and typing, writing code as fast as most people can type a letter.

"We had been working on that thing for three months. We were stumped," says Nacht, who adds in tones of awe: "He had it fixed in three days!" (The problem was a bug in software they were building on top of a Sun Microsystems server.)

Eleven years later, the Israeli whiz kid who never finished college is co-founder and chief executive of Check Point Software Technologies, one of the most profitable software companies around. How profitable? Well, in the first quarter ending March 31, Check Point's operating margin was a mind-blowing 61%. It made $83.7 million in profit on just $145 million in revenue. Last year, revenues were $425 million, up nearly 100% from the year before. Goldman Sachs projects 2001 revenues will be $650 million.

BOOMING MARKET. "It's remarkable," marvels Chuck Jones, an analyst at Salomon Smith Barney. To put Check Point in perspective, consider this: Microsoft Corp., which is widely regarded as the best-run software company in the world, has a 40% margin. And Oracle Corp. execs are still thumping their chests because they pushed their operating margin above 30%. When Shwed muses about his good fortune, he is a model of understatement. "We do seem to be in a very good market," he says.

Check Point sells security software, a must-have for any business connecting to the Internet. Despite the gloom surrounding the tech sector, a few silver linings -- companies like Check Point, VeriSign, and Symantec Corp. -- have shown through in the security field. Analysts at Dataquest expect the $2.5 billion market for security software to increase 22% this year.

Few companies sell more security software than Check Point. Shwed's company, with offices in Tel Aviv and Silicon Valley, is making its mark in the constant battle with hackers. It produces two key products, firewall software, which is meant to keep hackers out of computer networks, and virtual private network technology, which allows computer users to "tunnel" through the Internet in an encrypted shell that prevents anyone peeping at what they are writing. According to market researcher IDC, Check Point has a 52% share of the firewall market and 41% of the virtual network market.

A DIFFERENT FIREWALL. Shwed wasn't the first to write a firewall program. That honor goes to Marcus Ranum, then a programmer at defunct Digital Equipment Corp. But Shwed was the first to take that idea, package it, and sell the concept to a mass audience. And he had a different take on firewalls. Rather than setting up an impenetrable barrier, he thought firewalls should let some people in and keep others out.

That was his inspiration for what is known in the security field as "stateful inspection" technology, which produces a flexible firewall than the norm. It can be set to let some things in, others out. And because of this flexibility, it allows the network to run at a good speed. A common criticism of firewalls is that they bog down network performance.

Shwed launched Check Point in 1993, when he was not yet 25. In those days, few people even knew what the Internet was, let alone that it posed a network security risk. The Web was a brand new idea. And browsers yet invented. But Shwed, a friend named Shlomo Kramer, and Nacht saw the potential. Someday, this young public network would connect to businesses. And those businesses would need protection. "We knew eventually people would realize they had to have it," says Shwed, who splits his time between Israel and the U.S.

BUSINESS SAVVY. In those days, Shwed's greatest strength was probably his naivete. He didn't know how he was supposed to act. "What do you call it? Guerilla marketing. We were really good at guerilla marketing because we couldn't afford anything else," he explains. His big break came at a computer trade show in Las Vegas, when industry pundits hailed his new software as best in show. Quips Shwed: "We put out a press release. But back then, we didn't even really know what a press release was."

His youth engendered a habit that Shwed sticks to even now: never revealing his exact age. "Everyone knew I was young when I started Check Point," he says. "But I never wanted them to know how young. Now, you can say I'm in my 30s. Let's just say that." Still single, he spends much of his time traveling, a business reality that has led him to his one passion outside of work: Finding the best gourmet eatery in every city he visits. "He will make you spend hours looking for a good restaurant," says Nacht.

Shwed has matched his technical sophistication with a startling business acumen. "His intelligence is not limited to ones and zeros," says Executive Vice-President Jerry Ungerman, who adds: "That has surprised me." He has created what some would say is a pure engineering company.

Check Point has only a handful of sales and marketing people because Shwed has built up a network of outside consultants and resellers with expertise in his company's software. It is, in fact, one of the few business-software companies that doesn't rely on high-priced sales people. Instead, Shwed pumps that money into research and development, where spending has jumped from $6 million to $9 million per quarter over the last year.

MODEST AMBITIONS. So it's no surprise that Check Point has defied gravity on Wall Street. The company is still trading at $57 per share. And that's just two months after a 2-1 stock split. But Shwed isn't done. Ever modest, he doesn't profess grand ambitions to turn Check Point into a $10 billion company. But he does want to make sure it stays atop the security-software world. Says Shwed: "I hope it doesn't get too big, so we can't relate to each other anymore."

There's plenty of competition eager to make sure that doesn't happen. Cisco Systems and Microsoft have jumped into the firewall business over the last three years. And Cisco, despite Check Point's strength, is already No. 2 in the young market. Shwed is trying to stay a step ahead. His virtual networking software, though just two years old, already accounts for half of Check Point's shipments. Given his record, no one would be surprised if he outsmarts the competition. By Jim Kerstetter

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