Check Point Software Technologies Ltd Q3 FY2020 Earnings Call

Greetings. My name is Kip Meintzer, Global Head of Investor Relations for Check Point Software. I would like to welcome you to our Third Quarter 2020 Financial Results Video Conference Call. Joining me remotely today are Gil Shwed, Founder and CEO, along with our CFO and COO, Tal Payne. This video conference is live on our website and is recorded for replay. Before we start with management's presentation, I would like to highlight that during this presentation, Check Point representatives may make forward-looking statements. These statements include expectations regarding business, financial performance, and customers, as well as the introduction and success of new products and programs, the security threat landscape, our strategic focus areas, demand for our solutions, the impact of COVID-19 on our business including product development, sales and marketing efforts, financial condition, and operations, the effect of COVID-19 on our customers, suppliers, business partners, and the broader macroeconomic environment. Our business and financial outlook, including guidance for Q4 2020, is also part of this. Because these statements relate to future events, they are subject to risks and uncertainties. Actual results could differ significantly from Check Point's current expectations and beliefs. Factors that could cause or contribute to such differences are detailed in Check Point's earnings release issued on October 22, 2020, which can be found on our website, and other risks, including those outlined in Check Point's annual report on Form 20-F for the year ended December 31, 2019, which is filed with the Securities Exchange Commission. Check Point does not assume any obligation to update its expectations or beliefs unless required by law. In our press release available on the website, we provide GAAP and non-GAAP results, along with the reconciliation of these results and reasons for presenting non-GAAP information. Now, I would like to turn the call over to Tal Payne for a review of our financial results.

Thank you, Kip. Good morning and good afternoon to everyone joining us on the call today. I hope you all keep safe in these times. We are pleased with our third quarter performance and our financial results which were ahead of earlier expectations. Revenues for the quarter increased by 4% year-over-year to $509 million and our non-GAAP EPS grew by 14% to $1.64. Before I proceed further into the numbers, let me remind you that our GAAP financial results include stock-based compensation charges and amortization of acquired intangible assets and acquisition-related expenses, as well as the related tax effect. Keep in mind that, as applicable, non-GAAP information is presented excluding these items. Now let's take a look at the financial highlights for the quarter. Product and Security subscription revenues were $289 million, a 6% increase year-over-year. Our subscription revenues continue to be strong with 10% growth year-over-year, reaching $169 million. Software Update and Maintenance revenues increased to $220 million. During the quarter, we have seen a healthy growth in our network security products, mainly small, mid, and datacenter appliances. We have seen strength in our strategic areas; our cloud solution continues to have strong results and high double-digit growth. Infinity continues to gain momentum as we see deals closing in many new countries. We were also encouraged to see growth in new customer deals, especially in this environment. We had strong results in a few verticals; government, telecommunications, technology, and healthcare verticals, with significant increases in transactions over $1 million. Last quarter, we launched the vast majority of our quantum appliances. We have seen a healthy transition of over 80% by the end of this quarter. Deferred revenues reached $1,302 million, a growth of $60 million, or 5% over last year. We were pleased with sales execution in these times as we continue to see growth across all geographies. Revenue distribution by geography for the quarter was as follows: 46% of revenues came from America, 42% of revenues came from Europe, Middle East, and Africa, and the remaining 12% came from Asia Pacific. We delivered strong non-GAAP operating margin of 52%. This margin is significantly higher than last year in our original plan as a result of the higher level of revenues and the operating expenses declined. The operating expense reductions similar to the previous quarter relates mainly to employees moving to work from home along with lower travel and entertainment costs. Bear in mind Q3 typically has a lower level of expenses relating to vacation provision seasonality, and co-op that is utilized heavily in Q4 versus Q3. Those expenses are expected to return gradually as more countries go back to some normalized business practices, like travel, face-to-face meetings, entertainment, and partial return to office work. As a reminder, interest rates in the US sharply dropped last quarter. And as a result, the yields of our marketable securities are expected to reduce consistently throughout the years as the portfolio is being reinvested, repaid, or sold. Our financial income this quarter reduced to $14 million in line with our guidance in the previous quarter and is expected to continue to drop $1 million or $2 million as we discussed before. Naturally, this reduction is also reflected in the cash flow. As to the US dollar, it's weakened against most currencies around the world. This quarter, for example, 3% against the Israeli Shekel, 7% against the Euro, and the Pound. Remember that 50% of our expenses are in non-US dollar currencies mainly compensation-related. Hence this weakening of the dollar is driving our expenses up. The effective non-GAAP tax rate for the quarter was 17% and in line with our expectations. Remember that in the fourth quarter, we forecast the tax rate will be around zero as the lapse of the statute of limitations is expected to occur by year-end as we've seen in the last two to three years. GAAP net income was $201 million, or $1.42 per diluted share. Non-GAAP net income was $231 million or $1.64 per diluted share, an increase of 14% from the third quarter of 2019. The growth is related to the higher level of income on one hand, and the continued reduction of our diluted outstanding shares. As the share price increased during the last few months, more options are taken into account in the diluted outstanding shares calculation. In Q4, we expect the diluted outstanding number to be around 140 million shares. As to our cash flow, cash balances for September 30 were $3,900 million. Operating cash flow this quarter reached $248 million similar to last year; collections from customers continue to be very strong. During the quarter, we completed the acquisition of Odo Security, a new cloud-based technology that delivers secure remote access to enterprises. Part of the consideration is included in operating cash flow according to accounting rules. Excluding this payment, the operating cash flow increased by 4% this quarter. In February, we approved the expansion of the buyback program for an additional $2 billion and up to $325 million during the quarter. During the quarter, we purchased 2.7 million shares at an average price of $122. This quarter, our aggregated buyback since the beginning of the buyback program in 2004 crossed the $10 billion mark. And now let's turn the call over to Gil for his comments.

Thank you, Tal, and hello to everyone joining us today. First, I'm glad to see you all in this new format I really like. And hope that you and your families are all safe and healthy in this new normal. At Check Point, we are closing the third quarter in a virtual manner. Based on my recent discussions with our employees around the world, it seems that people generally are adapting well to this new mode of operation and business continues with few disruptions. You can definitely see it in the first quarter results, which were better than expected in almost every measure. Revenues are ahead of expectations and EPS was much higher than planned. And the first is a result of foreign business activity and the second is driven by the reduction of physical activities. On the business front, we continue to see many healthy indicators during the quarter. In the core business, we saw a growth of about 10% in network security gateways. Keep in mind that this figure includes subscriptions that are sold as part of the product and now integrated into our offerings. This trend is quite positive, especially given the fact that customers today are a little bit more reluctant to perform physical upgrades on their data centers, which brings me to the other growth areas in our market, cloud and emerging technologies. Cloud sales continue to perform well; we added many customers and expanded our footprint within existing customers resulting in strong double-digit growth every quarter this year. This is coming from both our native cloud security solution and our virtual gateways in the cloud, the entire CloudGuard family, the CloudGuard native, which includes the workloads, posture management, and the CloudGuard SaaS for the virtual gateways. The same is also true for our other emerging segments. Our Beyond the Perimeter or BTP business, which provides Advanced Threat Prevention for endpoint computers and mobile devices, also grew quite fast. Both categories are important in delivering our full vision of providing the highest level of security prevention, utilizing our consolidated infinity architecture. Sales of Infinity Total Protection, our solution for full and consolidated Enterprise Security also had great results and almost doubled compared to last year. Infinity sales are still in their infancy. But I'm happy to say that I hear more and more feedback from our channel partners that Infinity is becoming an important door-opener and a differentiator for Check Point. Last but not least, we continue to focus on new customer acquisition, and this quarter, we generated significant growth in this area, another good indicator for the future and what we plan for our potential for growth. Overall, I believe that we have the right approach for the future of cybersecurity: real-time threat prevention, protection, and consolidation using one architecture. It addresses the complexity and the economics of cyber while providing a much higher level of security. Our Infinity architecture is powered by threat cloud which identifies new threats and performs immediate prevention across all attack vectors for all customers and solutions. Our research team continues to generate amazing findings about the state of cybersecurity. We continue to fight against cyber threats by building our security architecture to protect the world from a potential cyber pandemic. We uncovered several vulnerabilities that could have led to such a pandemic. Earlier this quarter, we talked about the significant vulnerability in Microsoft DNS and Active Directory servers. Just this week, the NSA put SigRed on the list of top vulnerabilities targeted by Chinese hackers. Later in the quarter, we published vulnerabilities that could have been devastating such as basic stock vulnerabilities that allowed pictures on social networks to take over billions of mobile devices and over 400 vulnerabilities in Qualcomm mobile chipsets affecting a huge number of Android devices. We see more and more mobile malware, which remains a largely untapped market. There are many trends in the attack landscape, one of which is the increased amount of ransomware attacks we are seeing. Over the past months, we've seen more than a 50% increase in what's called double extortion ransomware, where the attackers demand payment to get your encrypted file, and if you don't pay, they will publish the file. The attackers have also tuned their business model and are targeting businesses of various sizes from industries to hospitals, and are achieving significant success these days. We continue to invest in the future of cyber, addressing today's most important needs. Last month, we acquired Odo Security, a small startup that has built an amazing platform for secure remote access. The new platform provides the foundation for what's called Secure Access Service Edge or SASE. This solution will be the basis of our future remote access solution, which will provide easy and secure access portals for all types of assets, cloud, web, datacenter applications, remote desktops, and others. I'm really excited about this acquisition and its potential in our marketplace. In the coming days, we will release our latest major software version for the year, R81. R81 provides many new capabilities. Let me just go through the top three of these capabilities. First is a higher level of security with automatic AI technology designed to provide real-time prevention against zero-day attacks, which we call autonomous threat prevention in our gateways. Second is automatic hardware and core allocation on the gateway to optimize its operation and provide a higher level of performance and security. And third is a quick response to changing security needs with super-fast policy installation down to as little as 10 seconds per minute, quick upgrades and many other features that continue to underscore the leadership of our management console. When we look into the future, I believe that we're working on key initiatives to provide the world with a safer cyber environment that is needed now more than ever. 2020 was and is a very unique year. We've all learned the criticality of the internet and cyber infrastructure. Imagine going through the COVID-19 crisis without the internet or with an internet that is not performing well. The crisis is far from over. We're experiencing a strong second wave of COVID-19 in Europe with restrictions and lockdowns; the US still faces challenges with the first wave and now has the risk of facing a resurgence with the upcoming elections. Moreover, the pandemic has accelerated many aspects of digital transformation, making cybersecurity even more important. So I remain very positive about the future of our market. However, with the current world trends, the level of visibility and predictability for the short term remains low. Having said that, we decided this quarter to provide guidance with a wider-than-normal range, while reminding you of the level of uncertainty that remains high just as we've outlined for you. For the fourth quarter, we expect revenues to be in the range of $525 million to $575 million. Non-GAAP EPS is expected to be quite healthy in the range of $1.98 to $2.17 or $2.18.

It's actually, sorry; it's actually $2 to $2.18.

Okay. $2 to $2.18. GAAP EPS is expected to be approximately $0.22 lower. Even though we pulled our annual guidance at the beginning of the crisis, our results so far have been quite consistent with the guidance we've provided at the beginning of the year. So there's no change to our annual projection. And now I would like to turn the call over to Kip for your thoughtful questions. Once again, I will repeat the guidance in case you missed it. Revenues are expected to be in the range of $525 million to $575 million and EPS is expected to be between $2 and $2.18.

Even though we withdrew our annual guidance at the start of the crisis, our results have remained consistent with what we outlined at the beginning of the year. Therefore, there is no change to our annual projection. Now I will hand over the call to Kip for your questions. I will reiterate the guidance in case you missed it. Revenues are projected to be between $525 million and $575 million, and EPS is anticipated to be between $2 and $2.18.

Thank you, Gil. Before we begin with the Q&A session, due to time constraints and consideration of the other participants, please limit yourself to one question and one question only. If you run into difficulty, please type your question in the chat and we'll address that question later. Now for the first question of the day, it comes from Jonathan Ho, followed by Saket Kalia from Barclays.

Hi, good morning, and congratulations on a strong quarter. This is a strong product revenue quarter; can you give us a little bit more color regarding the cross-sell opportunity with Infinity Total Protect and perhaps what elements of the platform partners are most excited about?

I think the opportunities are almost unlimited. Because again, today, most of our customers are using our network security solutions and have not upgraded to the portfolio. When a customer looks at it, trying to really understand their security opportunities, it's a really big chance out there. With Infinity, it's a great door-opener and not just to come and say, I have these 12 products and someone else has seven products, but really outline the full spectrum of solutions which neither than speak about architecture. We're seeing an increasing number of people buying into it, buying the whole architecture. However, we’re also seeing more customers saying, well, what's really interesting is that I may not be ready now to change all my security infrastructure, but the fact that you have this vision architecture allows me to buy more cloud solutions, buy more Beyond the Perimeter and point mobile, more IoT solutions. There are a lot of other elements. This quarter, we launched Infinity SOC for our security operations center. I think that's a great way to elevate our presence throughout the organization and expand the solutions to new and existing customers.

Next question is Saket Kalia followed by Philip Winslow.

Okay, great. Hey, thanks. Thanks for taking my question here. And thanks for holding the call in this format again, guys. Tal, maybe for you, a little bit out of left field. But I remember this happened a couple of years ago where Yom Kippur actually fell at the very end of the quarter and had a material impact on billings. I believe it was also at the end of the quarter of this year. So the question is, can you talk about whether that had any impact this time? And how, if at all, that could be impacting your Q4 bookings expectations?

If you remember, the previous one I think it was Yom Kippur a few years ago where we warned you that it might have an effect. The good news was that it didn't, if I recall. We managed that internally with our backup teams, mostly in the US for order entry. I will say, right now, we don't expect any holidays to land exactly on the last day of the quarter in the next few years. So I don't anticipate any effects there.

That would be clear. This quarter, Yom Kippur technically fell at the quarter's end, but we still had two business days. Those were enough to get the business in order. I think the last time it was really the Yom Kippur that fell on the same day, leading to a complete closure on the country, and people actually don't work. We had a stronger lockdown in the country this time, but at least we could have worked from home.

Our next question is from Philip Winslow, followed by Gray Powell.

Hey, thanks for taking my question. And congrats on another good quarter. A question to Gil, I mean, Gil, earlier this year, it seemed like businesses were very focused on call triage and capacity, whether it be VPN or just call it bandwidth throughput. But are we now transitioning into more strategic decisions made by customers about their security architecture? Are you starting to see that, and where are you starting to see that in your revenue and in your pipeline?

First, I say that the market is behaving relatively as expected. We see it in our results. Overall, the IT market is suffering a small number of interruptions from the world crisis around us. In terms of cybersecurity, people are really speaking about the day after and what they need to do. However, I haven’t seen yet people taking the step to really secure their infrastructure. It’s clear to our industry that we need to do that. That’s been the discussion around in multiple forums. The need is huge because we opened up so many things, our tech landscape and enterprise increased the surface that can be attacked. Many companies are now opening more than they ever thought, and their need to secure it is increasingly clear.

Maybe I would just add that, again, not just looking at what happened in Q3. We sold quite a number of nice Infinity transactions. When you look at the uplift in the ACV, it was nice to see that it’s not just 10%, 20%, 30%, but it’s more; it’s growing nicely. It’s not just a conversion of ACV with ACV, which is similar, which shows there’s a great opportunity in Infinity. The more we get there, the better it will do for our customers and ourselves. I think the largest cloud deal for a native cloud happened this quarter. So it was nice to see customers adopting solutions and purchasing million-dollar solutions as well.

Our next question is from Gray Powell of BTIG followed by Sterling Auty of JPMorgan.

All right, great. Thanks for taking the question. So yes, can you give us a sense as to how much Maestro is helping growth on the product revenue side? And then do you see that as a big differentiator versus peers going forward?

We do see it's a huge differentiator. It's becoming a game changer. I don't have the numbers in front of me, so I can't quantify that. But we do see more and more deals won with it this year. It's not just the super high end; it allows customers with millions of dollars of budgets to get super high performance and sophisticated systems. Now it's available to everyone, even customers in the mid-range of the market can build a scalable architecture and add capacity when they need to.

Our next question is coming from Sterling Auty of JPMorgan followed by Joel P. Fishbein of Truist Securities.

Hey guys, so Gray's question kind of broke up for me. So hopefully this isn't the same one. But Tal, in your prepared remarks, you talked about some really nice new company or new customer additions. I’m curious about what was either the product or the use case that you saw most common in those new customers coming on board.

First, we saw new customers coming from many different countries, which was nice. You also saw large deals that were nice, because typically new customers can be smaller. We saw a few large customers, making this a record quarter for new customers, which was excellent to see. The differentiator in each deal can be different; however, the Infinity vision is highly repetitive. Maestro is a significant differentiator—our holistic approach, the fact that we have Infinity, when you think of the full, broad spectrum of solutions we can provide to customers, is a considerable advantage especially in this environment.

Our next question is coming from Joel Fishbein of Truist Securities followed by Walter Pritchard at Citi.

Hi guys, just a quick one from me; Tal, if things stay the same as they are currently, do you think that you can continue to grow in 2021 at the same growth rate you’re currently growing?

You're asking for 2021 guidance. I think we just moved from no guidance to a guidance with a wide range to say we are moving forward; we want to give you more visibility. But remember, Q4 is massive in terms of understanding where the markets are going for next year. Q4 significantly influences product sales, which can sometimes be 30% higher. It's a critical quarter, so we need to see Q4 before we begin talking about 2021.

Our next question is from Walter Pritchard, followed by Ben Boland of Cleveland Research.

Thanks. Gil, wondering just on the quantum appliances; you launched those, and I believe you're at 80% volume this quarter as you mentioned. Can you compare how the impact of this quantum appliance rollout has differed from prior ones? And how are you looking at that refresh opportunity in the coming quarters as drivers of demand, especially given the Q4 guide?

Usually when we had successful transitions, it was like a 50%, 60% transition over two quarters. Now we're at 80%. The transition is actually going better than previous times, which makes sense. I wouldn’t say it will have a big impact on Q4; however, we have seen healthy growth in appliance sales. It’s not staggering growth, but it is healthy growth even in the market today. It is impacted by the fact that people are minimizing physical changes to their infrastructure, so it's good growth overall. Whether it will continue for a few more quarters or will just be a nice bump this quarter is hard to say, but overall, it’s positive.

Our next question is from Ben Boland of Cleveland Research followed by Brad Zelnick of Credit Suisse.

Good afternoon, thank you for taking the question. Could you talk a little bit about what you're seeing from your customers in terms of how the work-from-home mix is settling out? Or what you're expecting? And could you talk through how you think that's influencing the adoption of things like quantum in the cloud portfolio? Hopefully, you could touch on CloudGuard, Dome9, Infinity, and Odo. But that's it. Thanks.

That varies a lot around the world. When we ask people, this varies by country. Asia has a high level of openness; some countries are open for business, others are not. Europe is mixed but unfortunately trending negatively right now, with more restrictions and lockdowns in Europe being very unfortunate. Meanwhile, in the US, it's a different situation. Overall, when I look at Check Point, about 16% to 17% of employees are currently onsite, while around 80% remain working from home. In the US, it’s around 90% working from home; in Europe and Asia, it depends on the country, but it’s often 20% to 30% of employees at the office. Regarding our business, first, it’s bound to make companies think more about remote access solutions. We created thousands of connections, but it opens a huge opportunity for hacking. We find that around 40% of home computers aren’t secured enough. The need for security is significant; we need to invest more on that front.

Our next question is coming from Brad Zelnick, followed by Rob Bowens of Piper Sandler.

Great, thank you so much. It's really nice to see everybody. It's also great to see the stable trends in the business. Gil, as we think about your R81 release, which I know a lot of customers have been anticipating, can you just remind us what impact does a new release of the OS have on the business and on the financials of a company, especially one like this with so many new capabilities? Like, should we think of this as helping win rates competitively or inspiring some existing customers to come to the table and refresh an existing appliance?

Overall, it helps the business because customers look for innovation, and for new features. However, it’s difficult to quantify in the short term because while it may help close deals, everyone is also busy with upgrades and those upgrades take cycles. So that's something we need to be cautious of. Sales engineers need to engage more closely with existing customers, who access the new version through subscription or support contracts. So while it is helpful overall, I don’t anticipate material impact or any immediate effect on the business. We need to manage things correctly to ensure we don't slow down new deals while busy with existing infrastructure upgrades.

Our next question is from Rob Owens of Piper Sandler followed by Fatima Boolani of UBS Equities.

Great, thank you very much. I’ll give you the easy one before Fatima comes with the hard one. Gil, you mentioned a 10% increase in network security gateways; just looking for some color there in terms of how that's trended? And then are these capacity-based upgrades or is it the aging installed base being replaced at this point?

It's all over; I wish I could confirm a great trend with everything moving. We saw a little bit here and a little bit there; we saw some volume increasing the number of gateways. In different models, we’re seeing varying growth rates in volume. Overall, it's positive. I did not find one trend driving the business entirely, so I can't confirm any specific patterns.

I will say it's both. We see some that need more capacity as companies move more to remote work; they need a higher capacity on their gateways. We also have some that have older appliances and are using this opportunity to refresh. Maestro is definitely a driver here because when we analyze our wins, it is indicated as a differentiator—the ability to scale effectively as needed adds significant value, especially in an environment where many companies are facing challenges under COVID.

Our next question is with Fatima Boolani from UBS Equities followed by Shaul Eyal at Oppenheimer.

Thanks, Kip. Good morning and good afternoon, Check Point team. Thanks for taking the questions. Tal, the question is for you; you still have about 40%, a little over 40% of your revenue derived from updates and maintenance and very traditionally flavored support revenue. As I think about some of the dynamics around the adoption of the cloud portfolio and the Infinity portfolio, how should we expect the trajectory of your maintenance and support revenue to trend as physical form factors become perhaps more challenging to go to market with?

Long-term, the direction is pretty clear. Subscription, everything that we introduce with every new product and capability comes with a subscription model. Cloud is a great example, with most of it moving to subscription, as is Infinity. Therefore, theoretically, it supports our maintenance line. As more Check Point products come in via subscriptions, that should lead support to be affected over time. However, maintaining support revenue growth is more challenging, especially given competitive pressures.

Our next question is from Shaul Eyal of Oppenheimer followed by Brian Essex at Goldman Sachs.

Thank you. Good afternoon, everybody. Gil, you might have addressed that indirectly. I want to try and ask it more straightforward. So you've indicated COVID-19 numbers are rising. We're hearing reports that Europe is going into regional lockdowns while the US remains more open. Hypothetically, speaking, do you think we might see a near-term incremental spending wave similar to what we observed back in the April, May timeframe? Do you think businesses are mostly done with their initial spending wave of work-from-home, or do you think we could see a tailwind over the next few weeks or even months?

It would be speculation, but I think most companies are content with their current infrastructure after moving to work from home. The next push will likely be security-focused, not about quickly changing infrastructure again. Therefore, I'm not anticipating a huge push in security based on COVID. That said, I hope we can move past the pandemic so we can elevate business practices. The good news is that we haven't suffered too much economically from the crisis, but there could be future risks.

I want to add from a CFO perspective; we didn't experience significant challenges, but our customers are under increased pressure. Companies are becoming cautious, and budget considerations affecting their acquisition patterns could impact what we see moving forward.

Our next question is from Brian Essex of Goldman Sachs followed by Gregg Moskowitz of Mizuho.

Great, thank you. And thank you very much for taking my call. A question for Gil or Tal, whoever wants to pick this one up? Cloud and emerging technology, how do you think about disclosure of the emerging growth businesses versus what we would call the core businesses? How big is cloud and emerging technology? Is there a threshold where it would hit that prompt us to provide better disclosure in terms of faster growth businesses and subscription revenue?

I understand the need to differentiate, but in reality, most deals can't be strictly segmented; rather, they cut across accounts. The customer typically purchases everything, meaning the splits are somewhat artificial in nature. The good news is that in this quarter, cloud revenue has been brought up to around 10%, surpassing that threshold. So that was pleasing to see, continually helping toward disclosure.

Overall, the categorization depends on how one defines the cloud. There are several layers; one is securing customer cloud infrastructure, and the second is delivering security solutions from the cloud. When examining our industry, some companies label themselves as cloud-centric, even if they are providing the same security we offer. However, almost every product today contains some cloud components. Internally, I'm trying to quantify our cloud business and believe that, combining all elements, we're nearing 10% of our total business—not just subscriptions.

Our next caller is Gregg Moskowitz with Mizuho followed by Keith Bachman, BMO.

Thank you. I had a follow-up, actually, for Gil on cloud. You now have a lot of products or offerings under that CloudGuard umbrella. I think Tal mentioned this may have been your largest ever cloud deal signed in Q3. It would be helpful to get some context, perhaps around what customers are buying significantly and maybe looking at the larger cloud deals this quarter. Can you share insights on how that customer is deploying Check Point in the cloud?

Among the many subcomponents and technologies in the CloudGuard family, two main categories stood out: managing cloud-native security posture and delivering security from cloud gateways. Both have similar size and weight in terms of deployment and both are proving to be strong segments. Additionally, there are emerging technologies catching on, such as securing serverless functions and containers, and delivering security through the cloud. There's robust growth in both these areas currently.

Our next question is from Keith Bachman at BMO followed by Adam Tyndall of Raymond James.

Hi, thank you. I want to direct this to Tal if I could. I wanted to see if you could describe the trends on two different areas. One is, if you could think about the percentage of bookings that are driven by new customers versus existing ones? And how do you believe that was shaped over the last couple of quarters versus how you see it unfolding over the next year? Is it 80:20 existing versus new, 90:10? If you could give us a little perspective on that. The second part of the question is similar; what is the net retention rate on your existing customers, recent trends versus how you see that unfolding, particularly attrition rates?

I can't give you specific numbers because we don't provide that information. However, both numbers have remained steady, with new customer acquisitions being a key focus for us. Retention has never been a major concern; our customers tend to like us, and our renewal rates are consistent over the years. The challenge lies in upselling and matching their increasing size within a competitive environment. We see a big opportunity in new customers as we have a significant market share left to explore.

Salespeople are reporting that during the COVID crisis, customers have generally preferred to stick with their existing vendors, but we have witnessed good trends with new customers this quarter and hope that this trend continues.

Our last question of the day is going to come from Adam Tyndall from Raymond James. Adam?

Perfect. Thanks, Kip. Tal, I just want to start by thanking you for the Q4 guidance. I think you mentioned in an earlier question that Q4 is massive, and it will help us understand trends for 2021. When I review the Q4 guidance, it looks like revenue could be up around 8% sequentially at the midpoint, whereas it’s usually up 12% to 14% in Q4. So my question is, why are you indicating below seasonal trends compared to the past few quarters? And if Gil wants to add any qualitative commentary, do you think this is just digestion after strong trends or something else?

Now you're looking for exact math. Remember, we come from two quarters where we didn't want to provide guidance. It was a leap of faith for you to accept our broad range. It’s a risky time, and we want to ensure you understand this. Q4 is typically bigger, with higher visibility on subscription and support. However, because the product portion is quite significant, it reflects the risk that is part of this Q4 guidance. Looking at the total for the year, we would be close to the original guidance provided before COVID impacted us.

Thank you guys for joining us today. We appreciate your participation. Again, we'll see you throughout the quarter. If you have any questions, please reach out to us after the call, and we'll try to get back to you as soon as possible. Thank you, guys, and have a great day. Bye-bye now.

Thank you.

Thank you.