Check Point Software Technologies Ltd Q3 FY2021 Earnings Call

Welcome, everyone, to our Third Quarter 2021 Financial Results Video Conference. At this time, all participants are in 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. As a reminder, the video conference is live on our website and is recorded for replay. To access the live conference and replay information, please visit the company's website at checkpoint.com. For your convenience, the replay will be available on our site. If you'd like to reach us after the call, please contact Investor Relations by mail at kip@checkpoint.com. During the course of this presentation, Check Point's representatives may make certain forward-looking statements. These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 include, but are not limited to, statements related to Check Point's expectations regarding business, financial performance and customers, the introduction of new products and programs and success of those products and programs, the environment for security threats and trends in the market; our strategy focus areas of demand for our solutions; the impact of COVID-19 on our business, including our supply chain, product development and sales and marketing efforts, and then on our financial condition and results of operations, the impact of COVID-19 on customer suppliers business partners in the macroeconomic environment as a whole. Our acquisition of Avanan, the growth of markets in which we operate and our business and financial outlook, including our guidance for Q4 2021. Because these statements pertain to future events, they are subject to risks and uncertainties, actual results could differ materially from Check Point's current expectations and beliefs. Factors that could cause or contribute to such differences are contained in Check Point's earnings release issued on October 28, 2021, which is available on our website, and other factors and risks, including those discussed in Check Point's latest annual report on Form 20-F, which is on file with the SEC. Check Point assumes no obligation to update information concerning its expectations or beliefs, except as required by law in our press release, which has been posted on our website, we present GAAP and non-GAAP results along with a reconciliation of such results as well as the reasons for our presentation of non-GAAP information. Now I'd like to turn the call over to Tal Payne for a review of our financial results.

Thank you very much, Kip. Good morning and good afternoon to everyone joining us on the call today. I'll just remind you all that before I go into the numbers, the GAAP financial results include stock-based compensation charges, amortization of acquired intangible assets and acquisition-related expenses as well as the related tax effects. Keep in mind that as applicable, non-GAAP information is presented excluding these items. So let's start. Revenues showed strong performance this quarter, as indicated by the figures we've reported. Both revenues and earnings per share exceeded our guidance. Revenues reached $534 million, which is $7 million above the midpoint of our guidance, and earnings per share outperformed our expectations, hitting $1.65, which is $0.01 above the upper limit of our guidance. In terms of revenues, billings, and deferred revenues, we saw a 5% increase to $534 million compared to a 4% rise last year, with billings at $517 million. We calculated the implied bookings by considering the change in deferred revenue and a 9% year-over-year increase in revenue. Last year during this quarter, billing growth was about 6%, so this represents an acceleration in our performance, which is encouraging. Deferred revenues reached $1.466 billion, showing a $154 million increase, or a 12% growth year-over-year. Notably, the acceleration and success in revenues are closely linked to the growth in our security subscriptions. This quarter, our security subscription revenue hit $190 million, which accounts for approximately 36% of our overall revenues, demonstrating a 13% growth year-over-year compared to 10% last year. The growth was attributed to three factors: One, continued double-digit growth in Harmony; second, double-digit growth in CloudGuard, both are new that we announced in the beginning of last year. And Infinity continues to be very strong with a strong adoption of the Infinity solution. I'm reminding you it's other adopting two pillars or three pillars in the financial model. And we can see an increase last year, the growth was very nice as well, was 81%. This year, triple digit this quarter, reaching 172% and becoming a nice number, which already starts to affect the growth index in the subscription, hence the 13% growth year-over-year. If I move to revenues by geography, 44% in EMEA, 44% in Americas and 12% in APAC. So we can see double-digit growth both in EMEA and APAC year-over-year. A big highlight in the P&L, I'll go through some of the line items as usual. Gross profit continued to be strong, reaching $474 million with an 80% margin. If we see compared to the sequential quarter, same percentage, 89%, compared to last year, a small reduction. We continue to invest in two items. One is the, of course, the investment in the cloud infrastructure as we see the growth in our revenues in the business and the services of the cloud, also the investment in our cloud infrastructure. And secondly, as you are aware, there's some supply chain constraints in the market in general. We delivered on time to all of our customers with slightly higher costs relating to some items. We talked about the reduction quarterly of about $1 million to $1.5 million. This quarter, it's reduced slightly less than $1 million, standing on $9 million. We expect that to continue, of course. Our income taxes, similar to the sequential quarter was 19%. Year-over-year, a slight increase relating to the fact that we have provisions in our taxes, provisional linked to the index. And we see, in some countries, including Israel, index moving up, resulting in an increase in the tax rate. Just related to Q4. Q4 is in line with our expectations. If you recall, every Q4, if everything goes as usual and there's no things that I can't predict, then we have lapse statute of limitation in Q4. Therefore, the taxes are expected to be around 0%. Of course, it can be slightly higher, slightly lower, but that's the indication as you know. Our cash flow position remained strong, with a cash balance of $3.8 billion. This quarter, we acquired Avanan, which had a net cash effect of $234 million—$220 million reflected in investment activity and about $14 million in operating activity. Our operating cash flow was $251 million, marking strong collections, with payment cycles around 56 days. Without the Avanan acquisition, this represents a 4% increase, aligning with our expectations. We continued our share buyback program, acquiring 2.6 million shares this quarter, totaling 2.64 million shares at an average price of $123, amounting to $324 million. Having exhausted the previous program, we approved a new share repurchase program in August for an additional $2 billion, with $325 million allocated this quarter under the same rules. Overall, it was a solid quarter. Now, I will hand it over to Gil for his business highlights. Thank you.

Hi, everyone. Pleased to have you all on our call today, and I'd like to start by giving a little bit of the business update. I'd focus on the state of cybersecurity and how do we fit into that framework. So I think as we probably all know, the threat landscape has never been greater. I mean it's really, really the attack surface has expanded, and we are seeing a surge in large-scale Gen V attacks. I don't know if you remember, but almost four years ago, we formed this category of fifth-generation Gen V attacks. Back then, these attacks were fairly rare, and most attacks were from previous generations. This year, 2021, we're seeing that Gen V attacks are actually taking over. And you can see here a few examples like the SolarWinds Quadcore, the Colonial Pipeline, many, many other attacks that we're seeing on an ongoing basis, sophisticated, multivector polymorphic, zero-day attacks that are very, very hard to identify and block and that's the challenge of our industry to actually stop these attacks and keep them out of our environment. I think what we see is the reason that we're seeing such a surge in attacks and especially sophisticated ones is due to multiple factors, but I'll just point out the three main ones here. One is the fact that the employees are everywhere. And that means that our attack surface has expanded. It now includes our home computer, our domestic and familial environments. Secondly, many things on the corporate side have opened that were never opened before, our manufacturing floor, our trading floor, our development environment. Many of these environments were either completely isolated from the network or had very rare connections to the Internet, and now they are widely connected. And to the cloud, which is open and relies on multiple applications from multiple vendors, both our own, but also applications from additional vendors, the hybrid data center which means that we are seeing more and more connections between applications and each connection is a vulnerability point, and we see an explosion of very high-risk profiles that hackers are exploiting. The challenge in our industry is that the existing solutions often fail to adequately address security needs. There are several reasons for this, but primarily, there is a lack of focus on prevention. A significant portion of the industry emphasizes detection, which identifies breaches after they occur, and remediation, which is also too late and costly. Many security solutions exist—upwards of 1,000 vendors—yet a typical enterprise may manage between 12 and 55 different solutions, creating complexity that is overwhelming. Worse still, this approach does not enhance security. These solutions operate independently rather than collaboratively to block attacks. One solution might detect an issue, but if it enters through a different, unprotected channel, it could still cause harm. We truly need a new approach, which is what we are achieving with Check Point's Infinity architecture. This system secures the cloud, the network, and user access through our offerings like CloudGuard, Quantum, and Harmony. Our integrated management platform, along with the threat cloud, ensures that all these solutions work in unison to effectively tackle critical attack vectors in a way that no other security architecture on the market can currently achieve. That's not easy to deliver that. That requires a lot of effort. It's not just a supermarket of solutions. They actually need to work together. They actually need to be tightly architected, and that's a challenge that we've taken on ourselves, and I think we're delivering on that very, very well. I think you can see some recognition and we get more and more industry analyst recognition. You can find a lot on our website. You can find them on our press releases. But here is an example of G2, one that actually takes the view of the product from multiple angles, and this is a great testimony to the strength of our architecture. We appear on six different leadership breeds, leader in these six categories: cloud data, mobile, e-mail security, endpoint protection, firewall and cloud workload which is chosen by users. So this is based not just on theoretical discussion, this is based on actual user experience and sentiment. We have an impressive group of customers using our Infinity architecture and our entire range of solutions. I’d like to highlight a few examples today, particularly focusing on Infinity. Infinity sales refer to customers who have multiyear agreements with us that encompass various aspects of our architecture. These customers designate us as their main security vendor, and in return, we view them as significant strategic partners that we prioritize and support closely. Typically, Infinity deals are more complex than simple product purchases, as they provide customers extensive access to a large part of our portfolio. The goal is to secure deals across our entire portfolio. Some Infinity deals incorporate only two of the three pillars we offer, and their size can vary. Typically, these deals involve both large and small customers, with many evolving into significant and strategic partnerships. We have a few examples from the deals we've secured this quarter, representing various industries such as oil, healthcare, services, medical devices, oil and gas, telecommunications, utilities, and insurance. Most of these deals are substantial, involving multibillion-dollar companies and Fortune 500 firms with tens of thousands of employees. I should note, however, that we also have many good deals in the pipeline with companies that have hundreds of employees. Even with 200, 300, 500, or 700 employees, signing up for Infinity becomes a strategic partnership for both parties. For instance, we had a significant win this quarter with a large manufacturer that has over 60,000 employees and operates in 160 countries. This was a seven-digit deal due to their desire to consolidate multiple components, primarily to connect their network, data center, and cloud. The two main pillars of the deal were Quantum and CloudGuard. While this was just one of many competitive deals, it stood out because our top competitors were arguing for better performance to gain entry. The company even hired a third-party evaluator to assess the products, and we were pleased to rank highest in performance. The customer appreciated our superior management and the capability to scale nearly indefinitely with our Maestro solution, which facilitates a cloud-like architecture in the data center, crucial for connecting to the actual cloud. These are common reasons for our successes, and it's encouraging to see this with large, sophisticated customers. This example illustrates a typical Infinity success, and we hope to continue expanding our pipeline of similar deals. Let me switch gears a little bit to the Harmony family. And this quarter, I wanted to focus on Harmony because we've expanded it because we've done a lot of it. Tal already stated that we've seen nice double-digit growth in Harmony. Like Infinity, many different customers, different industries, different case studies, and you can see here some really nice examples, semiconductor manufacturer, 75,000 employees, water purification, 40,000 users, a software company, which was a competitive replacement, healthcare services company which has a lot of patience, and a government institution with more than 90,000 endpoints now using Check Point Harmony. Once again, I want to give you one simple example of a customer win case. This one is a very interesting one. This customer was using security on the endpoint from multiple vendors. Good reputable vendors, by the way, and not niche players, good nice reputable vendors. On July 3, they were attacked by ransomware. We have a good relationship there and they contacted us immediately, and we got our incident response unit, by the way, which is second to none, really high-quality incident response team that we have at Check Point. They got in the same day and started investigating the case, found out what happened, found out the type of ransomware and so on. The next day, the customer requested to see what the Check Point product could have done better for them, and they've seen a demo in the trial of our Harmony suite. And 10 days later, we already won the deal and replaced multiple vendors with a solution that's superior that works better with threat intelligence, threat hunting, real-time blocking, and real-time alerts that work together and deliver better security to this customer with 40,000 employees. So this is pretty impressive and pretty big. But I think the big news this quarter was that we expanded the Harmony family, and we really extended it with a stronger cloud email offering. So I want to maybe explain a little bit the opportunity here and what we are doing in the field of cloud email security. The cloud security today is about $800 million. Gartner is expecting that it will grow by 150% to almost $2 billion in the next few years. And I think the big change here is that enterprises are moving a lot of their email to the cloud. Some of it is due to all the regular benefits of the cloud and the general shift. Some of it is a strong push from Microsoft to move the exchange installations to Office 365 installations on the cloud. So this is a very dominant force in the marketplace. The challenge is that the conventional email security solutions don't really fit the cloud email. For example, they require rerouting all your email to their what's called MTA, mail transfer agent. When in the cloud, you already enjoy the fact that the cloud email arrives directly to the cloud provider. So there's no need to reroute it. There are many, many other issues with the existing solutions, not to mention the technological challenge, which they don't address all the different phishing, zero-day files, suspicious links that are contained in email, that's also a challenge. So both the security and the delivery are challenges for email security. Now usually, I would say this is a big market with big players, so it will be hard to enter it. I think we have a unique opportunity here because of the shift in the market to cloud solutions. Now one important thing to remember that the vast majority of cyberattacks start with some form of email. Again, it can be a phishing email, that gives somebody their credentials by mistake, and that is used to break into the company. It can be an email with links that go to a malicious site or it can be just an attachment, and this is the worst part, can be documented with unknown vulnerabilities, documents with non-vulnerabilities. Some of the existing solutions effectively block known viruses that they can identify. However, there are many threats that these solutions do not handle effectively. For instance, most current solutions, even those equipped with zero-day detection technology or cloud file analysis capabilities, often still allow emails to pass through. As a result, recipients can open an attachment without realizing they have been infected. This could happen within two minutes, half an hour, or even a day later. Eventually, people receive alerts indicating that their systems have been compromised, but by then, it's too late, and the damage has already occurred. This presents significant challenges in tackling email threats in today's market. We've decided that it's an important market. We've been offering a solution for that space for, let's say, the last two or three years, partly with partnership, partly homegrown. And this quarter, we decided to really expand upon this opportunity and acquired Avanan. Avanan has been the company we've been partnering with before. So we know them quite well. They are the fastest-growing cloud email security vendor. So this is a very, very important thing. And they actually enjoy very nice data, 5,000 customers, 2.5 million protected users, number one on peer insights. So people really love the solution. It's really simple, five minutes to set up and 30% more attacks are prevented with the Avanan solution. So we decided that this is a great opportunity to expand our market presence, to expand our scope, and to go strong into this changing market. Some of the unique capabilities that we have here. First, this is born to the cloud. It doesn't require you to reroute your email traffic, API-based. So it plugs directly to the cloud solution. What I mentioned about preventing. We are prevention first. No email should pass our solution without either being cleaned or analyzed before it reaches the user. We have the unique technology for threat extraction that cleans up the suspicious adjustment. Avanan technology has been amazing for phishing. The Check Point technology is very good at analyzing the file, so the combination delivers even stronger results. Remember, the 30% Avanan claimed before being acquired. So now together, I think that we have even better catch rates. And I think together, we can deliver a solution that's very much needed in the industry and opens up a very interesting market for us. Overall, I believe we've successfully integrated Harmony into the cloud email space. Additionally, we have solutions for other email platforms. The Infinity architecture effectively addresses all significant attack vectors, setting us apart from some of our larger competitors. This presents a substantial expansion opportunity and signifies an important acquisition for us. To summarize what Tal and I have shared, I think we’ve had a strong quarter, with revenues in the upper range of our guidance, increasing growth rates, which are reflected in our new security pillars, subscription growth, and rising billing rates. We are witnessing significant progress and positive indicators. Our earnings per share surpassed our guidance range, even as we made substantial investments in the company. I believe we will continue to see the benefits from these investments, with some results already evident this quarter. Our Infinity architecture is gaining momentum. And again, we see it also in the growth rates on CloudGuard, the Harmony and the triple-digit growth in Infinity. And I think the expansion in cloud email security marks an important opportunity for us which I hope will deliver the results. So that kind of summarizes Q3. I think it was a good quarter for us. I want to thank you for joining us today. And actually, before we jump into the Q&A, one more thing, I want to share with you our projections for the fourth quarter and the update or the increase of the projection for the full year. Looking ahead to the fourth quarter, we anticipate revenues to fall between $560 million and $605 million. We expect earnings per share to range from $2.02 to $2.22. GAAP earnings per share is projected to be about $0.26 less. I want to emphasize that forecasting future results is quite difficult due to many unknowns and a significant level of uncertainty. While there is considerable potential upside, there are also numerous risks that could arise. It's essential to keep this in mind, and the situation this quarter is similar to previous ones. Nonetheless, we are currently dealing with a rather unusual situation due to the pandemic and various supply chain challenges. So we hope so far we weren't affected by the supply chain, we were affected by your supply chain. We were able to mitigate that and supply all our products to our customers in a very timely manner without that affecting our quarterly results. There's always a risk that we will change. We, of course, are getting ready to continue and supply that, but there are always risks that are hard to predict or easy to predict, depends on how you look at it. Having said that, again, we still expect a very healthy and good Q4. For the year itself, following three quarters, and I think we've exceeded our guidance, at least the midpoint of our guidance, we are actually uplifting a little bit the full year projection. So revenues are expected to be between $2.127 billion to $2.172 billion. EPS is expected to be between $6.81 to $7.01. GAAP EPS is expected to be approximately $0.94 less. So this summarizes our projection. And with that, I'll be very happy to listen to your questions and hopefully provide Tal some good answers to that. So thank you very much.

All right, everybody. As always, we hope that you'll keep to one question during the Q&A. And our first step today is going to be Saket Kalia followed by Sterling Auty. And go ahead, Saket.

Okay. Great. Hey, thanks guys for having me on here and for taking my question. I'll keep it to one. Maybe for you, Gil. I'd love to dig a little bit deeper into ITP platform contracts a little bit. I'm wondering what products are you seeing the most usage around? You've got such a nice integrated sort of offering there with ITP. I imagine that Quantum is very heavily used. But can you talk a little bit about qualitatively, how much usage are you seeing in the other newer products for ITP customers?

So first, for those who are not familiar, ITP stands for Infinity Total Protection, which is our growth platform. It allows customers to access our complete range of technologies and products in an almost limitless manner, depending on the size of their organization. We examined some data recently, and usage can vary significantly. Many customers utilize our network solutions, but I want to highlight a few examples of customers who primarily use Harmony. The range of cloud usage varies widely, between 4% and 60%, depending on the customer and their specific situation. Notably, we recently held a customer advisory panel with key systems from around the world, and cloud adoption emerged as a high priority. However, even with its growth, cloud usage remains relatively limited today. For instance, if a customer begins with 10% of their deployment in the cloud, I anticipate that percentage will increase over the next two to three years. It's also worth noting that most ITP contracts span three years or sometimes even longer.

Very helpful. Thank you.

Our next question is coming from Sterling Auty, followed by Shaul Eyal.

Hi. Thanks guys. So Gil, the commentary that you made on email security, I'd be curious what is kind of the experience that you've got versus some of the incumbent competitors. The ProofPoint or Mimecast and Microsoft has been a growing presence in email security as it shifted to the cloud. And do you feel that you have all the solutions that you need to be effective in that market, or would a major acquisition yesterday news reports hit that Mimecast is exploring options, including a possible sale. Would a major acquisition be something of interest to Check Point?

So first, these things might make sense. We are evaluating. We're looking into many of these opportunities. I think the big opportunity here lies in the fact that there is a strategic change in the market and the shift to cloud email. Now I'm not underestimating the opportunity on traditional email, but there's an opportunity there because traditional email security is also growing, but then there is a risk. And the risk is, of course, that will be a cloud transformation and with a large installed base with the traditional solutions, this will be translating into a challenging market when the growth is replaced by the cloud. On the cloud, you mentioned very well that one of the risks is Microsoft itself. Microsoft does offer multiple levels of subscription to their cloud service, E1, E3, E5. The top levels offer a lot of security features. So we are looking at are we competing with the platform itself, something that, by the way, is very common and happened in many of the security spaces, competing with the native security that vendors like Microsoft are offering. And that, by the way, puts a big risk on the traditional email security. As I mentioned, there are unique technological capabilities that I think we are very strong in, and we believe that we may be stronger than the incumbent players like the API security, like prevention first, the fact that we can take files and either clean them up, what we call threat extraction and analyze them before we deliver them to the user, something that I think is relatively unique to Check Point. Other vendors simply deliver the file. And again, you open the file, you opened the infection. And the next day, the admin sees that you’ve been infected. Too late. So I think the prevention first architecture. But so again, I think we should definitely look at other options to expand our participation in email security. But I think it wasn't trivial for me, but I think we found a unique place in the marketplace with Avanan, that has been, by the way, the fastest growing email security vendor to get into this market and hopefully maximize our ability to participate and minimize the risk in that.

Got it. Thank you.

Our next question is coming from Shaul Eyal followed by Gray Powell.

Thank you. Hey, good afternoon, guys. Question on hiring, so with a robust hiring environment in Israel globally, many R&D people opting to set up their own companies. How are you able to attract and maintain talent? And maybe housekeeping associated with that, Tal, the additional 250 R&D related people so far as indicated in your slide, does that include Avanan people?

Tal, you're on mute.

Yes, that was a new feature. The answer is yes, Shaul. It's including Avanan people, which were about 100 people.

I think, first, it's a very interesting environment today all over the world and definitely in Israel where many people are moving when the market is very hot. It's actually been a good market for us in hiring. August, for example, was our all-time record month in hiring, all-time in Check Point, all-time in I think most of all geographies. We've been able to hire the most amount of people. So the challenge is actually keeping up. There's a lot of movement in the marketplace. It's still hard to find strong talent all around the world. It's a little bit easier to find younger people, which I think for the long run, it's the right thing, the right – for the long run, we should hire junior people and grow them within the company. So the challenges are there. But I must tell you, it's been an amazing market for hiring. Actually, we had a record number of CVs sent to our HR department and record number of hiring’s and hopefully we will continue with that trend. We had a slow start at the year, but I think Q3 has been an amazing record in terms of hiring and hopefully, we'll keep that momentum.

Thank you.

The next question is coming from Gray Powell followed by Matthew Hedberg.

Great. Thanks for taking the question and congratulations on the good numbers. So my question is Check Point has been growing billings, I'd call it a high single-digit pace the last four quarters or so. At some point, does that translate into a revenue growth rate that's kind of close to that pace or at least higher than the 4% to 5% revenue growth rate we've seen? Just how should we think about the relationship between billings and revenue and billings as a leading indicator?

So the reason we don't provide billing on a regular basis is exactly because of your question. It doesn't necessarily correlate on a quarterly basis because it's basically your invoicing, but there is a clear link. So I would say over time, if you see consistency in the growth of the billing, you will see consistency in the growth in the P&L.

Okay.

Did that answer your question?

Yeah. I mean it's been four quarters in a row. So I guess it was curious...

Yeah. So that’s what I’m saying, so you will see and you started to see this quarter, it's already moved up. So you can see – even if you just look at the subscription, you can see it's starting to go up, right? So it was 10%, moved up to 11%, 12%. Now it's 13%. So yes, absolutely, there is a link. All I said is the caveat that in a specific quarter, you can see some changes. But in general, you're absolutely right.

Okay. That’s really helpful. Thank you.

The next question is coming from Matthew Hedberg followed by Patrick Colville.

Hi, guys. Thanks for taking my question. Gil, what is just sort of the Check Point view on return to office, starting to travel again for salespeople? And I guess I'm wondering, as sales reps get out in the field with more face-to-face visits with clients, do you think that could have a positive impact on pipeline generation into 2022?

It's a great question. We are already operating in a hybrid model, which varies across different regions. For instance, in Europe, over 40 percent of employees come to the office daily, and Israel is similar. However, the U.S. is still experiencing low attendance. Generally, I believe our future will embrace a hybrid model. Our employees have made it clear that they prefer to continue working in a hybrid setup, which I support. Initially, I was concerned that the pandemic would negatively impact our business, but I've changed my perspective. People have adapted to remote work effectively. In our field, finding the right mix is crucial. While in-person meetings are valuable for building stronger relationships, working through platforms like Zoom can be significantly more efficient, allowing for multiple meetings in a day without the need for travel. We are currently exploring how to reopen, and we've implemented new global guidelines to facilitate more customer meetings and resume travel.

Thanks, Gil.

Next question is coming from Patrick Colville followed by Joel P. Fishbein, which then will be followed by Philip Winslow.

Thank you for taking my question. Supply chain issues seem to be a major topic among investors. It was interesting to hear Commvault mention supply chain problems earlier this week, as well as Check Point. However, the results this quarter suggest that there wasn't much impact from the supply chain. Can you discuss how you have managed these challenges? Also, as we approach the end of October, how have things been trending in the fourth quarter? Please help us understand the supply chain situation as we enter the final quarter of the year. Thank you.

I don't know, Tal, if you want to take it, maybe I'll get one sentence and you will complete it. So far, I think the logistical team that we have had the reporting to Tal has done an amazing job in keeping our product supplies without delays, by the way, shipping very, very quickly. We ship product very quickly to our customers, and that's been very, very good. I think there may be risks in that. I mean, they've been working hard. We've been spending more in order to get this. So, Tal, I don't know if you want to expand a little bit on that and say what you've been seeing recently.

Yes. I agree, Patrick. We've been managing this situation effectively, monitoring it daily and weekly.

I think Tal has cut out.

I will do my best to address the situation. If I was affected, then so were you and Tal. Tal's team has done an excellent job managing the different supplies. We are working to secure inventory for items we previously lacked. So far, we have spent over $10 million to acquire the necessary items in a factual manner. I believe we are prepared for the fourth quarter, although it comes with risks, as I mentioned in my guidance. We hope to navigate past the challenges we are facing. This has been a significant issue for us, and I expect we will maintain the same pace in supplying products effectively and swiftly from our global suppliers.

Great. Thank you so much.

Our next question is coming from Joel P Fishbein, followed by Philip Winslow.

Can you hear me?

Yes, we can hear you, but we can't see you yet. So...

So it wasn’t because…

We are waiting for the next question.

This is Jonathan Ho. Just wanted to understand a little bit if you can just give us a sense of the financial contribution around growth rate and impact to margins from Avanan? And perhaps how much you're including into guidance for that acquisition? Any color would be helpful. Thank you.

Yes. The simplest color that it's immaterial. So it's below. It's very, very low this quarter, maybe 1 million effect and on the bottom line and another $1 million. In general, very low millions. The projection going forward is hopefully as we concur market share, as Gil said, it can become very interesting. But at this point of time, it's not material and therefore, we didn't change our guidance, we didn’t lower. We didn't increase the loss in a sense. It's an organization that makes a few million and loses a few millions, but the product is an exciting part.

Our next question is coming from Rob Owens, followed by Adam Tindle.

Great. Good morning and thanks for taking my question. Tal, when you talked about the subscription line and the success you're seeing in the software revenue, you did mention multiple factors. Can you talk about how Infinity is contributing? And that's been a transition that's been happening for a while. So how is that playing out? Is it still a reasonable proxy to look at product plus software? Are we just seeing more in deferred relative to Infinity? So we need to start incorporating more of a billing, short-term billings type of analysis. Thank you.

It's a bit early to do a more complicated analysis, but you're right in the sense when you take unlike Harmony in cloud, the majority of the dollars are going through the subscription line. When Infinity, it's actually been split between product support and subscription. Still a majority of the dollars are going to subscription. Because remember, because most of the product that we sell nowadays subscription, at the fair value of the accounting drives everything into the subscription actually. Also, the delay in revenue recognition because now we follow the subscription rhythm, right? Second thing, product, unlike before, when someone orders a product, you ship it and you recognize immediately the revenues. Now even the portion that is allocated to Infinity, you need to wait until the customer pulls that equipment and only then you recognize revenues, meaning also product portion is now being accumulated in the deferred revenue.

All right. Thank you.

All right. Thanks. I wanted to ask a question on the US geography. I know you talked about it stabilizing. You had some new management in there. It takes a couple of quarters to get bearings. But – if I saw the slide correctly and inputted it, it looks a little bit flattish on a growth rate. Maybe just give us an update on traction in the US. And if you could maybe dovetail any public sector commentary given federal fiscal year-end and outlook for US public sector would be helpful. Thank you.

I don't know if we have too much on the US public sector. But definitely, we have new leadership in the US. We are working hard to get the potential there up and running. We've seen some nice deals that we from the US. Yet, at the same time, it will take us time to get it up and running in the speed and in the growth rate that we need to have. I think we've seen this quarter, we've seen the US stabilize. Hopefully, in the next 2 or 3 quarters, we will see resuming growth, resuming fast-paced hiring and creating all the levels of sales people, leadership, and so on. So we can really, really take advantage of the opportunities. I think the very good news here is that the opportunity is unbelievable in the US. We are still seeing a strong momentum with US large deals, but I think we're seeing only on the tip of the iceberg in terms of the potential in all the different segments in the large enterprises, in the enterprises, in the midsized businesses, even in the SMB sector and all geographies, and I think in all the verticals. So great potential there.

Maybe I'll just relate to something from the previous question because I'm getting comments on that. Avanan did not affect materially any financial metrics, neither the billing nor the deferred revenues, nor the revenue, nor the loss. So I hope I covered fully that question.

Good morning, everyone. Thanks for taking the question. I wanted to address something at a bigger picture, a higher level, I suppose. The industry has been talking a lot about consolidation, new postures cloud. And yet the environment seems more complex than ever, all the new acronyms, new approaches. Can you talk a little bit about how you think Check Point plays in that environment? What's checkpoint doing differently? What are you doing to make customers' lives easier in the evaluation and deployment of new technology and consolidation? Thanks.

You're right in your assessment. People recognize that the current complexity is excessive and see a need for consolidation. However, many in customer IT departments continue to purchase separate solutions from various vendors. This situation is evolving in both directions. Our goal is to create a unified platform, which is quite unique, as most vendors tend to specialize in one specific area rather than offering a comprehensive solution. While some of our main competitors promote a similar architectural approach, they often lack a cohesive architecture and integrated product set, resulting in offerings that are divided both business-wise and technologically. Some of them have clearly stated and say that their focus now is not in adding more value to their platform, but rather integrating what they already have. So I think in that regard, what we aim to offer with Check Point is an architecture that works better. And again, it's in two dimensions, actually more than two dimensions, at least three dimensions. One dimension is the management of the products and the deployment of the product, which is very important. One dimension is the increased level of security. And I gave the example of Avanan, which I think that within 30 to 60 days from the acquisition, we'll have a product that has joint engines, so that we didn't have before. So it will have better security even though we are within, again, a month or two. So that's super fast integration because of the way our platform works. So it's not just getting into one constant and seeing different features but actually enjoying the threat extraction and the threat emulation engines that we have in our SandBlast engine that we have in our cloud on all the vectors, including the email, for example.

Thank you. Our next question is coming from Gregg Moskowitz followed by Hamza from Morgan Stanley.

Hey, thank you for taking the question. So the acceleration in Infinity growth, 172% year-over-year, obviously, extremely strong. But can you give us a sense of how much Infinity is impacting your total billings growth today? And secondly, do you think that you can sustain double-digit Infinity growth for a little while longer?

So let me first relate in the P&L is triple digit, of course, the number will grow. There will be some slowdown, but because we're ramping up actually enough so you still see nice growth. Or when you look at the deferred revenues, remember, we don't issue invoices for the entire period. We issued invoices only for the first year. Remember, most of it is supported subscription. So it's in line with the regular system of billings, so there's no pulling forward of billing from the next year. This is annual invoicing in line with the regular and it is growing very fast, both in the deferred revenue and in the revenue.

Thank you.

Our next question is from Hamza followed by Tal Liani, who will be our last question.

Thanks guys, and good morning. Thank you for taking the question. Gil, my first question for you was on the endpoint protection business. It seems like we've been hearing some good things about that recently. The solution screened pretty well in the Mighty evaluation. I'm curious how much is that contributing to your growth? And what are the plans to be more competitive in that space relative to some of the other vendors?

I completely agree. We have a top-notch solution that stands out in the market. Our capabilities surpass those of nearly every vendor, despite the challenges in the endpoint market. New entrants are gaining significant momentum and have nearly unlimited resources, while established vendors are strong, large, and possess a solid understanding of their customers and a firm grip on the market. This is why we've chosen to enhance our offerings with Harmony and Infinity architecture. It's no coincidence that this quarter I focused heavily on Harmony because we've achieved outstanding results with it. Harmony primarily encompasses our endpoint solution, and we intend to expand it further. We have numerous capabilities such as EBR, MBR, and XBR, and the connection between the endpoint and our broader solution is crucial. Overall, we are confident in our prospects, as the potential for growth in this area is vast. While it's a good question, we are diligently working to capitalize on this opportunity, and last quarter was a significant highlight for us.

Yes. Thank you.

Our last question will be from Tal Liani. Maybe not. There. How about Brian Essex? Our last question will be from Brian Essex.

Thanks, Kip. Thank you for taking the question. And congrats on the results. Maybe I'd like to get maybe a sense for you about the overall spending environment, how CIOs are looking at their enterprise architecture from a firewall perspective. So we're one of the strongest, I think, firewall spending cycles we've seen in recent years. What are your thoughts with regard to refreshment, a refresh, replacement, capacity enhancement versus migration to cloud and demand for rearchitecting enterprise security network architecture?

I believe we are observing all of these trends. The challenge lies in quantifying them. Customers do need to refresh their systems and are seeking consolidation. In many instances, this consolidation benefits us. With our Maestro offering, we can merge 20 to 30 older firewalls into a single solution. We have virtualized the gateways within that framework, providing us with cloud-like scalability. While I can't recall the exact percentages, I recently reviewed our Maestro platform, which facilitates high-scale deployments. A significant portion of this includes standalone gateways, as well as virtualized gateways, indicating that customers are indeed consolidating. This presents a good opportunity. Customers continue to need increased capacity, especially as workloads migrate to the cloud, which is typically linked to the data center. Additionally, the shift to remote work requires more capacity for employees to connect from home. The potential for growth in this area is significant. We also have the opportunity to expand our market share, and we plan to actively pursue it. Thank you very much.

Thank you all for joining us today. That concludes our videocast for the Q3 earnings. We look forward to seeing you guys at the end of the year, but also throughout the quarter at conferences and such. Thank you very much. Bye.

Thank you very much.