Check Point Software Technologies Ltd Q1 FY2021 Earnings Call

Greetings. My name is Kip Meintzer, Global Head of Investor Relations for Check Point Software. I’d like to welcome everyone to the first quarter 2021 financial results video conference. At this time, all participants are in a listen-only mode during the formal presentation, which will be followed by a question-and-answer session. Joining me remotely today on the call are Gil Shwed, Founder and CEO; along with our CFO and COO, Tal Payne.

Right, thank you, Kip. Good morning. Good afternoon to everyone joining us on the call today. I’m pleased to begin the review of our first quarter results.

Thank you, Tal, and hello, everyone. I’m pleased to have you. This time, we’re going to have a slightly different format than usual. We are moving along to the 21st century, so instead of just talking about our written comments, I want to share with you a presentation. And the focus this time won’t be just general comments about the quarter, but we will share a little bit more about our strategy, the Infinity 2021 that Check Point is carrying. There’s a lot of slides here that we share with our customers and partners, so let me jump right in and go ahead with that. Hope it will work well for the first time on an investor call. So let’s start with the forward-looking statement you heard from Kip, so we don’t need to go through that. So I’ll speak a little bit about three or four slides about business highlights, and the main focus here will be about the Infinity strategy, the Check Point – and the Check Point strategy around that. So results, I think you’ve all heard from Tal. I’m actually quite pleased that we are continuing to execute on our plans, increase the EPS by 9%, increase revenue by 4%, and then you’ll see it later in the presentation, and achieved a lot in our strategic areas. On the financial side, again, the numbers you heard from Tal, $22 million more in revenues, 12% more EPS, and $109 million increase in deferred revenues, so we did increase our installed base and our contract long-term and short-term. A little bit about news from Check Point. Over the past few years, we started the transformation in our sales force, reenergizing a bit. We have amazing people, and we want to reenergize and move the sales force to a much more productive and higher growth mode. Around two years ago, we started with APAC with Sharat. He’s now with us for almost two years, and actually, the last few quarters the results in APAC were amazing, this quarter specifically were very good.

Thank you, Gil. Before we begin the Q&A session, due to time constraints and in consideration of other participants, please limit yourselves to one question and one question only. If you have any difficulties, just type that question into the chat. Today, we’re going to start with Matthew Hedberg with RBC, followed by Gregg Moskowitz of Mizuho. Go ahead, Matthew. Mr. Hedberg, unmute yourself. All right. Let’s move on to Gregg Moskowitz from Mizuho.

Hey, thanks, Kip. Hi, everybody. So, Gil, you mentioned that 60% of the Global 2000 have bought Quantum. But my question is how significantly do you think that you can cross-sell CloudGuard and/or Harmony into your enterprise installed base, because if you can do that, clearly it could drive expansion rates quite a bit higher?

I think there are opportunities on both sides, and yes, I think we can leverage it. We’ve actually, by the way, divided now some of our installed base into three categories, what we think are developed accounts, which are buying their fair share, but almost all of them can buy some of the new technologies, the Harmony and the CloudGuard. What we call development accounts, are accounts that purchase Check Point product and are our good customers, but there is plenty of potential in all three pillars. And what we call prospects, these are accounts that are either very small or non-accounts at this moment, and we can develop them. I think the potential is there. I think we need to invest a lot in getting higher in the organization and getting to the CSOs. I think the CSO loves to hear our story. In my experience, almost every CSO likes Check Point and likes to hear about our story. We need to develop a lot of our own cut on discipline and going to that and not being doing a good job with the people that we already work with at the network level and not expanding. So the potential is there, and by the way, we are seeing more and more in that. We’ve actually seen very good growth in the Infinity platform when we sell customers not just individual products but the entire platform. Generally speaking, the Infinity customers are showing a high level of satisfaction. They like the fact that they can buy more pillars and we’re building more and more Infinity programs to address them and let customers expand.

That’s helpful. Thank you.

Our next question is with Patrick Colville. Patrick?

Hey, thank you so much for taking the time to answer my question. So the one I have here is around, I guess, the go-to-market. So you’ve got these three new pillars: Quantum, Harmony and CloudGuard. Is - yes, so how are the sales team incentivized to sell these products? I mean, is there a change versus the kind of previous motion of selling them individually? Just kind of any color there would be very grateful.

The fact that we’ve consolidated them around these three pillars gives us a lot of ability to manage it better. Each one of them, I mean, the Harmony and the CloudGuard, they’re what we call an overlay sales force that supports the sales team, that provides the technical expertise. So getting into new technologies becomes a little bit easier for the sales force. The existing sales force has very clear measurements about what’s their target in each pillar, what we need to do. I think the main issue is really our own education and our own openness about being out there and being assertive enough in expanding our presence with existing customers and new customers. And I think it’s there, and we are seeing now in some areas, in some sense people have already cracked the code and they’re doing great, and many others have the potential to learn how to do that.

And, Patrick, to your question, of course, what Gil said is important, but of course also the commission plan is aligned with these incentives to sell more the new dollars, the new customers, the new cloud and so on. So it’s aligned also with the compensation plan around.

Okay. So just to clarify, did you mention that there’s an overlay sales team for that? Was that correct?

Yes, for CloudGuard and for Harmony. And again, now that we’ve combined a lot of technologies, it makes things very, very focused. It’s not now an overlay for a specific technology or an expert, but the overlays are organized according to these pillars.

Thanks, Patrick. Our next question is with Jonathan Ho, followed by Fatima Boolani and Keith Weiss. Go Jonathan.

Hi, good morning. I just wanted to get a sense of what you think maybe Jeff can bring to the Americas market that could reaccelerate the growth there? And what changes did Torsten make in Europe that maybe had a similar impact in EMEA in the past couple of quarters? Thank you.

First, I want to go over our strategies and insights, so I'll keep it brief. I believe Jeff is an excellent choice for us because he brings more than just sales leadership. His diverse experience goes beyond the typical sales role. Coming from VMware, where he established the cloud overlay and business, he possesses significant expertise in the cloud sector. This knowledge will be invaluable as we aim to deepen our market penetration and strengthen our relationships with cloud customers and partners. Regarding Torsten, while we are optimistic about the developments in Europe, it's still early to make definitive judgments. However, Torsten has provided us with valuable perspectives from an outsider's viewpoint. He emphasized the importance of focusing on new business. Although renewing support contracts and security subscriptions is vital, there's a pressing need to pursue new opportunities—both with existing and new customers. It’s crucial not just to renew or minimally expand contracts but to enhance security and take on new projects. Our current emphasis is on these new business areas. When our sales team prioritizes this and embraces it, they will concentrate on the right objectives. If we effectively cater to our customers, renewals will naturally follow. Therefore, our emphasis should be on expansion rather than just maintenance.

Thank you, Jonathan. Our next question is from Fatima Boolani, followed by Keith Weiss and Saket Kalia.

Good morning. Thank you for taking the questions. Tal, this one’s for you. I want to focus on the deferred revenue specifically, and just a two-part question. Can you talk to us about some of the drivers and factors behind the acceleration and the long-term mix this quarter, and to the extent there was anything unique or one-time in nature? And also, maybe bigger picture in terms of the deferred revenue mix, especially as you see the Infinity business build very quickly, can you share with us the mix of the deferred revenue today between subscription revenue or blade revenue versus traditional maintenance? That detail would be very helpful. Thank you.

The long-term increase is primarily due to more long-term contracts that allow for invoicing. This can be unpredictable and often depends on customer budgets. Some customers choose to pay the full amount for a three-year contract upfront, which leads to invoicing and an increase in deferred revenues. Others might opt for an annual payment plan over the three years, which means only the first year is reflected in the short term. In this quarter, there were some customers who preferred to pay in advance, contributing to the long-term figures. However, this doesn’t affect the overall total, and it aligns with our expectations. Some quarters can experience fluctuations due to large deals, but this quarter saw several healthy deals that were invoiced. Regarding the revenue mix, we provide a split between product support, subscription, and deferred revenues in the annual report. I don’t anticipate a significant change this quarter; it remains consistent. Overall, subscription revenues are growing faster, while product support usually gets recognized in the same quarter, except for specific circumstances. Typically, the acceleration comes from subscription revenues.

Very helpful, thank you, Tal.

Thanks Fatima. Our next question is coming from Keith Weiss, followed by Saket Kalia and Rob Owens.

Excellent, thank you guys for taking the question. I wanted to talk about the breadth of the product portfolio. You guys have a really nice breadth of solutions, and some of the numbers being presented at that CloudGuard - 50%-plus AR growth is very striking. Any chance we could get a breakout of the relative sizing of these businesses, of Quantum, Harmony versus CloudGuard, kind of how they fit within the overall portfolio, number one? Number two, maybe you could talk a little bit about the up-sell potential into the base. How far into the base have we gotten with some of the newer stuff, like CloudGuard and Harmony, and what’s the opportunity on a go-forward basis to get existing customers to take on more of this portfolio? Thank you.

I’ll start with the second part, and Tal may add more details on the financial side. I believe there is significant potential. Customers appreciate it and find great value. It’s not just about being a customer of one company; it's about how everything connects. We sometimes need to educate customers on the drawbacks of having different silos in cybersecurity, which often leads to systems that are more complex and do not offer a sufficient level of security. For instance, if I have a system that detects an infected file, security's role is not just to block that file. Unlike most competitors who allow an infected file to be received through email—the main method of delivery—only to later inform you of the infection, our task is to block it proactively. We excel at that, and then we ensure that the file does not spread to other sources, preventing downloads from the web. If it exists on any endpoint, we identify it because we’ve detected it, allowing us to manage it comprehensively. Therefore, there is indeed potential to reach more customers. We currently have several thousand customers; for example, over 4,000 customers for CloudGuard, most of whom were previously Quantum customers. This means we also attract new customers through CloudGuard or Harmony, who then expand to our Quantum offerings. However, the majority comes from our existing customer base that is being introduced to the Check Point vision.

I think I will say first, I want to refresh your dress code. I think there’s a change from people working at home. For Keith, it’s no good for you! Yes, okay. I will say the following - the potential is huge, because Gil, I don’t want to provide additional information to what you show on the slide, but when Gil was referring to out of the Global 2000 in the cloud, I think you said one out of five, so it shows one out of five already purchased from us that solution. There’s a huge potential because on the one hand, it’s very early days both in Harmony and the cloud. I will even say in Quantum, if you look at the Sandblast, which has advanced threat protection, even that didn’t pass the 50%, so the potential to up-sell is massive in all of these pillars, both in the Quantum, in the Cloud and in the Harmony. All of them need it, and Infinity gives them, I’ll say, the best tools to do it. How quick it will happen? It’s really up to us and the execution of the field, so the potential is very large there.

Thank you so much, guys.

Thank you, Grizzly Adams. Our next caller is Saket Kalia, followed by Rob Owens and Gray Powell.

Okay, great. Can you hear me okay, Kip?

Yes, we can.

Okay, excellent. All right, thanks folks for taking my question here. I’ll just keep it to one housekeeping question. Gil or Tal, thanks for the Q2 guide. Apologies if I missed it, but did we mention anything about the full year guide, and are there any assumptions about the full year that have changed from the last time that you provided that?

As far as I’m concerned no, it stays the same. If you remember when we talked in the beginning of the year about the margin, that we said about the fact that we expect the world to come out of COVID, in Q1 it’s still so it was slightly better as a result of that but nothing dramatic, because we already embedded in the plan. When you think year-over-year from the next quarter, last year is fully under COVID, therefore in the next quarter we expect to be in line with the margins that we did indicate, which is we’re returning to out of COVID over time, while the comparable has a full effect of COVID saving in the expenses. So we’re pretty much in line, and you can see those in our guidance for the next quarter.

Got it. Very helpful, Tal. Thanks.

Thanks, Saket. Our next caller is Rob Owens, followed by Gray Powell and Ben Bollin.

Thanks Kip, and good afternoon guys. In and around Infinity 2021, just wanted to get your thoughts around marketing spend and whether you would lean into this with incremental programs, MDF or anything the like, and then Tal, you kind of answered it before, but relative to a reopening, how are you thinking about spend and timing?

We are being very proactive in our marketing efforts while also being strategic. The main goal is to engage customers and capture their interest. There have been significant successes in our marketing, such as the increased participation in our virtual conferences. Remember last year when we were all at home? The primary way to connect was through these conferences. Now that people are attending, it shows their genuine interest, and we are pleased to see more customers joining our virtual CPX. We have achieved many things and plan to maintain our engagement with C-level executives, which is crucial for building the community we want to expand. We're seeing a notable increase in customer interest in our technology. Currently, when you search online, we're often ranked first or even at the top position for many relevant keywords. For instance, we are number one for cloud security and often hold the top position for cyber attacks as well. This prominent visibility is what drives more traffic to our website. Overall, we are making significant strides in almost every area, and I am particularly proud of our SEO achievements, as they indicate that the value we provide is being acknowledged worldwide.

I want to emphasize that a significant portion of our expenses is related to our workforce. We aim to accelerate hiring because we want to bring in more people. To answer your question, Rob, increased staffing will naturally lead to higher expenses, which is part of our plan. Our main focus right now is on growing our headcount. While we would like to increase our marketing efforts if they're effective, the priority is definitely on hiring. Regarding the return to normal operations, it's difficult to predict how travel and entertainment expenses will rebound. Many individuals have realized they can maintain high productivity without flying. It’s uncertain whether the levels will return to 20%, 50%, or 70%, and I doubt we'll see a full return to 100%. I'm not sure if it will settle around 50, 60, or 70%. We need to assess the situation worldwide to determine the best approach for our customers and employees.

All right, thank you.

Thanks Rob. Our next question is coming from Gray Powell, followed by Ben Bollin and Brian Essex.

Hey great, thanks. Can you hear me okay?

Yes.

Cool. Yes, so I guess how should we think about the mix of product revenue and subscription trends within the context of guidance this year? I think you hit on this in the prepared remarks, but is there anything going on, like a shift towards Infinity or bundled offerings, that could impact that mix and cause product revenue to be recognized more ratably?

I would say that what I mentioned in the script aligns with this. It’s a great question and something we have been addressing for the past few years. Like many others, we are seeing a shift towards subscription models. Infinity operates entirely on a subscription basis, providing both product and support within that model. The same applies to Harmony and Cloud. If someone purchases just the appliance, it counts as a product sale, which explains why our product line has felt some pressure over the years; this isn’t unexpected. There can be fluctuations, with some quarters performing better than others, but we always evaluate the overall situation. As I’ve mentioned, it’s important to consider total growth. Subscription revenue takes longer to impact the profit and loss statement, but you will eventually see its effects. This quarter, subscription revenue grew, which is encouraging, moving from 10% to 12%. We also saw an increase in support revenue, largely driven by professional services, as customers seek more comprehensive solutions. While I can’t guarantee it, I suggest focusing on the overall picture instead of just product spending, since product sales can vary significantly based on bundling. Greater bundling leads to more pressure on the product line.

Understood. Okay, thank you very much.

Thanks Gray. Our next question is coming from Ben Bollin, followed by Brian Essex and Sterling Auty, which will most likely be our last question for the day. Go ahead, Ben.

Good morning, good afternoon. Thanks for taking the question. It’s fairly specific, but I’m interested if you’ve seen or you’re thinking about component availability concerns for your appliances. Did you have free availability throughout the quarter, or are you anticipating any tightness as you look forward? That’s it.

So actually, since COVID started you have that, meaning every quarter it’s something else that has an allocation issue. We dealt with all of them very well. Also, the recent one, we’re dealing very well. I hope it won’t develop to be bigger, but we are so far in line with our planning. By the way, there can be some increase in pricing, but nothing that will be very apparent to you. For some components, prices are moving up as a result of allocation. It’s all around the markets.

All right, thanks Ben. Our next question is coming from Brian Essex. Hey Brian.

Hey Kip, thank you. Gil, just a first question for you, and then I have a follow-up. You mentioned that you wanted to move your sales force into a more proactive high growth mode. If you take a step back, what are your expectations for high growth mode, so to speak, and what might that translate to for revenue growth as you consider where some of the core maintenance and potential appliance revenue may track over the next few years, versus some of the newer initiatives that you have driving subscription growth? If you had to set a range, like I would like Check Point to be this level of growth, that’s my goal, how would you frame that?

The market is expected to change significantly over the next few years, and we aim to grow at least in line with the industry, if not faster. This year, we have set a clear goal for our sales team: they are expected to increase the new business they generate by 20%. This is the main target for all salespeople, though individual results may vary. How much new business we generate will influence other metrics, as the new business growth will impact our subscription revenue as well. New business includes everything—new subscriptions, support, products, and more. The primary objective for our sales force is to achieve that 20% growth in new business this year, and the growth targets for 2022 or 2023 will depend on market conditions.

Great, that’s super helpful. Maybe just a follow-up, you obviously have some fantastic domain expertise around threat intelligence and research, and we’re seeing some of your peers kind of work towards maybe establishing a practice around that, monetizing that. How do you think about potentially enhancing the monetization of that threat intelligence and domain expertise in the future?

It's a great point and we have been thinking about it for quite some time. We are currently involved in several boutique projects, such as analyzing applications in company app stores with our specialized tools. There are multiple initiatives in that area, though I can't disclose the clients. Our incident response team has been around for many years and is busier than ever due to the rise in supply chain attacks. We are equipped with excellent tools to address these challenges. Most of our research focuses on identifying common vulnerabilities globally. Our incident response team has published nearly 100 papers in the last year, uncovering some extraordinary vulnerabilities. One notable finding from last summer received a perfect 10 out of 10 score regarding how one could exploit a WinDNS server to compromise Active Directory. While this research area is intriguing for us, it's equally important for us to maintain openness and continue our research efforts.

Helpful, thank you.

Thanks Brian. Our last question is going to come from Sterling Auty from JP Morgan. Hey Sterling.

Hey guys, thanks. Appreciate it. The changes that are taking place here in North America, you mentioned Mr. Waters’ first day, but I think there may have been one or two other changes as well. I’m just wondering how much disruption did that cause to the quarter, looking at the results in the Americas, and how do you anticipate trying to minimize any disruption as you go through kind of this sales transition in North America?

Overall, the level of attrition at Check Point is quite stable. There was a decrease in attrition in the second and third quarters last year due to the pandemic, but the market has largely returned to normal. We have some exceptional individuals we would prefer not to lose, but our industry is very competitive. Companies are attracting significant investment, and many professionals are seeking opportunities at larger firms or exciting startups in hopes of being part of a successful venture. Some turnover is unwanted, while some is necessary for refreshing our team, even when individuals have made valuable contributions. We anticipate some level of change and recognize that it is essential for our growth, but in the long term, we aim to retain our top talent while also bringing in new leadership that can introduce innovative management styles and perspectives.

Thank you.

Thank you guys. Thank you for all of you joining us today. Later we’ll have the presentation posted on the website for any of you that would like to download it and review it further. Other than that, we look forward to seeing you during the quarter at the conferences, and look forward to next quarter’s earnings call. Thank you, guys.

Yes, and I’d appreciate if you have any feedback on the presentation, we will appreciate to get it and to get better.

On the format, on the call, we’d love to hear your feedback as well. Thank you.

Thank you. Bye bye.

Have a nice day.