Check Point Software Technologies Ltd Q2 FY2022 Earnings Call

2022 Financial Results Video Conference Call. Joining me remotely today 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 website. If you would like to reach us after the call, please contact Investor Relations by e-mail at kip@checkpoint.com. During 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 our products and solutions, expectations regarding customer adoption of our products and solutions, expectations related to cybersecurity and other threats, expectations regarding our Q3 2022 projections, our 2022 initiatives, the market for IT security, competition from other products and services, supply chain, general market, political, economic and business conditions, including the impact of the COVID-19 pandemic. These forward-looking statements are also subject to other risks and uncertainties, including those more fully described in our filings with the Securities and Exchange Commission, including our annual report on Form 20-F filed with the SEC. The forward-looking statements in the presentation are based on information available to Check Point as of the date hereof and Check Point disclaims any obligation to update any forward-looking statements, 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, Kip. Good morning and good afternoon to everyone joining us on the call. I will start with a review of the second quarter and right at the back, you can see that we had an excellent quarter. Both revenues and earnings per share were at the high-end of our projections, $571 million in revenues, which is $11 million above the midpoint of our projections, earnings per share of $1.64, which is also at the high end of our guidance and $0.04 above the midpoint of our projections. Before I proceed further into the numbers, let me remind you that our 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, as applicable non-GAAP information is presented excluding these items. Now, let’s take a dive into the numbers and I will start first with the revenues, which were quite nice this quarter, I will start from the total revenues. Revenues for the quarter accelerated reaching $571 million, which is a 9% increase and increased from the $526 million. It’s basically more than double the growth rate compared to last year Q2, which was around 4%. I know you will ask me about the billing. So let’s hit as we start, billing in the quarter reached $571 million, which is a 6% increase. I want to remind you that the billing for us is affected significantly by the deal timing, duration and the payment terms. Hence, it can fluctuate between quarter to quarter. Specifically, when we have the mega deals, mega deals range from $20 million to $40 million. In Q2 last year, if you recall and go through the script back then, we said specifically, we had quite a few mega deals, which were built in advance. So, a mega deal can happen, but can be built over time or once a year with split payments. Last year, we had a few large deals built in advance, which created the dip in the billing right now, but no effect on the run-rate and on the growth rate in general, which you can see very clearly in the P&L. Deferred revenues somewhat include that, because if you compare the deferred revenues, if deals came instead of in Q2 to Q4 or got advanced a bit, then it will be part of the deferred revenues. So, you can see that deferred revenues is healthy at $1.66 billion, which is an increase of $194 million or 13% growth year-over-year. So, that covers the subject of the revenues. If you go to the split in the revenues, first, let’s start with the two line items that together are called product and subscription revenues, which together showed double-digit growth, 13% year-over-year, reaching $343 million. It’s a double-digit growth in these two lines together for two quarters in a row. So, it’s nice to see it stabilizing on a double-digit, and hopefully it’s planned to continue. So, it’s a great milestone for us. Even more than that for the first time in many, many quarters, probably maybe 10 years, we had a really strong product and license revenues. I will remind you that last quarter, when you asked me about the billing, I told you – some of it is products that had delayed delivery Infinity, where we waited for customers to pull or just delivery of 2 or 3 weeks after the order. It could happen every quarter. It also happened this quarter. We had quite a lot of that as well in this quarter. So, this is also slightly affecting the billing, but you can already see it translating into the P&L and we see a 12% growth in our appliances. It came from, like last quarter when we talked about it also from SMB mid-large appliances, Maestro was very strong, which is the switches that enable us hyperscale network. We see Infinity customers also starting to use their product in loans as they implement the security solution in their organizations. So, it’s a very nice quarter for the product reaching double-digits for the first time in a long time. If you look at the subscription, it was double-digit for a while and it continues to be nice with 14% growth in subscription, reaching $210 million, an increase from the 12% last year of $184 million last year. The growth continues to be driven by all the items growing, Quantum, CloudGuard, Harmony, but the double-digit is driven by CloudGuard and Harmony, both of them considered new pillars for us in the last year or two. Our Harmony email security continues to deliver great results and reminding you that we acquired some of the email service from an acquisition in September last year, which will be annualized in September. So, we see nice growth in both of them, both cloud and in Harmony. All in all, it’s about 37% of our revenue is subscription now. So, it’s becoming quite a large engine for us in revenue growth and creation. If I am going to revenues by geographies. So what you can see here, the percentages are the same as last year. So, you see 44% in EMEA, 44% of our revenues coming from Americas and 12% from APAC. If you calculate year-over-year, you will see the revenues grew across all geographies in quite a similar rate. So, quite healthy business across our regions. That’s also pretty nice and stable. Moving to profitability, of course, we hear it from many, many companies, including us – we discussed revenues. Gross profit moved up from $470 million to $501 million, strong gross margins. So, we continue to have strong margins at 88%. It’s a slight tick down. We actually pay significantly – we talked about this in the last two quarters in a row. And I actually expect it to continue for the rest of the year, which is part of the pressure on the margin, but it’s okay. It’s a temporary increase in the costs relating to either securing our hands on raw material on the open market or expediting shipments, because you need to get it early to the production line. These are strong margins taking into account these higher material costs and also shipping costs. Hopefully, this temporary phenomenon will go back to normal towards in 2022. It’s too early to say, but it looks like for the second half of the year, it's still here. We see the raw material coming in. This raw material we produce now is going to be part of the cost in the next two quarters. Great results, taking into account the massive pressures that all the companies are seeing in the raw material market. Operating expenses are very similar to last quarter. We see operating expenses increasing faster than the revenues at 18%. This is in line with our plan from the beginning of the year. I want to just remind you, our plan was to continue to increase our workforce, mainly in sales and R&D. We continued elevated investment in our bucket, which is mainly CloudGuard and Harmony. So, in line with the plan, we increased our workforce year-over-year, even double-digits, both in sales and in R&D. In sales, we still have some recruiting to continue. The year-over-year operating expenses increased mainly due to that fact, the compensation. Of course, return to travel and face-to-face interaction has caused some cloud expenses and the acquisition we had last year of Avanan and Spectral this year. So, that’s also part of those expenses. And there was not part of the original guidance; therefore, us meeting the EPS after these acquisitions also shows the strength of the results. Moving to operating income, we can see here, operating margin is higher than we planned. It’s actually 44%. We planned it slightly below, because we are still in the recruiting process. We still haven’t finished. Financial income, we are starting – you don’t see it here, because Q2 versus Q2 is $10 million, but if you compare to Q1, the sequential quarter, you will see it’s an increase. As our portfolio is being released, we invested in higher interest rates and we start to see an increase there. On the other hand, on the taxes, tax provisions are getting indexed since – as you know, the index is quite high. The inflation, which is the indexation, is quite higher than everybody planned for it. It’s part of our tax expenses. That’s why you see it moving up to 19%. They deducted each other. Therefore, the net effect was minimal this quarter. The total net income is $209 million, earnings per share of $1.64, which is $0.04 above the midpoint of our guidance, so quite good earnings per share and operating income. Moving on to our cash position and cash flow, I will start with the cash balances. Our cash balances as of the end of the quarter were $3.7 billion. Our operating cash flow this quarter was $212 million. I remind you that we hedge our balance sheet against currency fluctuations in order to minimize the effect on the P&L. So as you do balance sheet hedging, it minimizes the effect on the P&L and protects our P&L and also this quarter it happened, but the fluctuations you see in the cash flow. This quarter, the fluctuation in the cash flow was significant. It was about $47 million, the hedge cash expense versus $6 million income in Q2 last year. Net operating cash flow, excluding the effect of the hedge and taxes is an increase of 2%. So, quite a healthy cash flow with continued strong collections from our customers and expenses in line with the growth of our headcount and expenses in the P&L. During the quarter, we also continued our buyback. We purchased 2.6 million shares for $325 million at an average price of $127 per share. So, that’s the cash position. If I summarize, we had strong results, revenues, and EPS in the high-end of our projections with accelerated revenue growth, double-digit growth in products, and double-digit growth in subscription, and we continue to focus on the top line while maintaining very strong profitability. Now, I will turn over the call to Gil for his insightful comments.

So, thank you, everyone, and glad to have you all join us. I will jump right in to give a little bit more color to the business and the environment and mainly about some customer wins, but before that I want to congratulate Kip for his birthday. You see that Kip picked the very special day for his birthday and the best group of people that you wanted to celebrate with. So, happy birthday, Kip. And now, let’s talk a little bit about the first landscape, which as you can see continues to intensify. We have continued – I mean, we are seeing it for a very long time and it’s actually quite rare that for so many years, we are seeing such a, I would say, tense market, but we are seeing a 32% increase in overall cyber attacks. We see per organization on a global basis and 59% are sophisticated attacks like ransomware. You can see the statistics from last quarter; 1 out of every 40 organizations was impacted by ransomware. Even more so, these attacks are now going beyond just small scale attacks or just hacking groups to a much bigger impact. We have seen country extortion. We have seen nation-state organizations using Generation 5 attack tools. And we have even seen a lot of geopolitical attacks happening in many parts of the world when one country is either spiking or actually even attacking and using cyber warfare as a way to disrupt life in another country. So, this is something that’s now part of our real life. With that, we anticipate and I think almost everyone around us anticipates that the strong demand for cybersecurity will continue with that continuous wave of fifth-generation cyber attacks. I believe and I think we are seeing that customers, of course, will need the best security, which is what we stand for and what we aim to provide. I am pretty sure that customers will understand and will prefer solutions that are focusing on prevention and not just on detection of cyber attacks. At the end, I think consolidation will also take a bigger pace both because it delivers better security and also because most organizations cannot manage the complexity of using tens or even more of different cyber solutions, which is happening in many cases. So, that’s kind of the big threat landscape. How do we address that? Just to remind you, we have in Check Point what we call the Infinity architecture. I think it’s by far the most integrated, the most comprehensive cybersecurity architecture in the market built on three pillars or three product families; Quantum, which covers most of our business network security; CloudGuard for the cloud; and Harmony to secure user access and now even email, it’s built upon a common management layer; and on ThreatCloud, which actually makes sure that all that information is being shared, integrated and proliferated in real time from one vector to another to achieve the highest level of security. How did we do on all these three pillars in the last quarter? The good news is that we have seen accelerated core growth in every product pillar. In Quantum, we have seen nice growth from the low end, from the branches and SMBs all the way to the large installations. You heard about the product numbers, the product double-digit growth, but even more so, the unit growth was also very good and again, all the way from the very small to the very large. CloudGuard, same thing continues double-digit growth and with Harmony that we have extended Harmony with a big investment in email security last year, we have seen over 50% growth in the email security part, which is great. I think you have already seen this slide from Tal. So, I will just repeat that shortly. We have seen 9% revenue growth, the highest growth in years, more than double than the rate that we have seen in the last couple of years. That’s really fueled by the double-digit growth in products and subscriptions. You see the green line here and you see the correlation between the lines when the green line takes up eventually the blue line, the total revenue growth. So, I mean, we are very happy about that trend. We have been investing in it for a long time. And in the last two to three quarters, we are glad that restraint has intensified. How does it go with the different pillars? So, I think the story here is kind of repetitive. In Quantum, we have seen strong product demand from SMB to large enterprises, double-digit growth from the gateways. Let’s look at a few wins. I will actually start from the small gateways here, both for branch offices and also for small businesses. Here are a few examples. A utility company in Europe secured over 6,500 ruggedized gateways for different power stations located all over the country. Another example is a European telco using our products to secure shops across the country, with zero-touch deployment, a very nice type of deployment. A little bit less usual in Europe, another humanitarian organization is using our gateways for a project in Fuji housing. It’s nice to see that our products are used for such purposes and it’s also nice to see that in 2022, one of the first things that refugees get is actually Internet access and even secure internet access. That’s so important. Last but not least, 2,500 gateways in APAC at a big telco using that to manage service for again 2,500 small businesses across the nation, which somewhat represents some of the wins we have in the lower market segment. If you look at the upper end of the market, I picked here two examples. Both of them are new customers. Both of them are competitive replacements. You can see on the right, the healthcare provider in Asia, supporting high capacity to get to 20 sites. They liked our management. We replaced their Fortinet and won against Palo Alto. On the left side, a very similar story, slightly different product sets, super high performance with our Maestro scalable performance. They picked us not just for the performance, although we took Maestro, but because our solution was the only one that blocked the malicious files they were receiving. They were getting malicious files that all the average solutions they tested merely detected but let through. So, people could open the attachment and still be infected, even though the system, in some cases, could recognize them. With Check Point, we were the only solution that actually blocked the malicious files and didn’t let them through. That should be a winning factor to get such installations. This is for Quantum. Let’s look at one or two examples around CloudGuard. Again, here continued growth. In Europe, an important financial institution had a business acquisition. As a result, they were seeking a way to control their more sophisticated cloud environment that spans between AWS, Azure, and Google Cloud. They wanted better compliance, better visibility, and they actually replaced another solution and won this account. Another organization in Europe, a leading retailer, part of our cloud transformation. They wanted to achieve better manageability. They liked our roadmap of how we provide more security to the cloud and another winning factor was the fact that they can connect and control both their on-premise environment and our public cloud solution using the same unified experience and the same tools to connect them in a better way. Last but not least is the Harmony sector, which secures users. Again, we have augmented Harmony with email security towards the end of last year and you see the numbers really accelerated there. They were good before, but even better after the consolidation. Three quarters later, the numbers are still growing very, very nicely with over 50% growth. Here, you can see two examples in the U.S. One is a holding company. They were challenged similar to what we have seen with Quantum before, and that’s the nice thing about Check Point. We apply the same principles and the same technology to different attack vectors of different entrance vectors into organizations. With Harmony email, their old security solution didn’t stop the ransomware attempt. Harmony email identified over 2,800 attacks from their mailboxes and not only identified them but also blocked them. The highest effectiveness of email security packages they had come across. To the right, another major company in the U.S. in the safety and regulatory compliance industry, Harmony was the only solution that was able to deliver a unified experience across email, endpoint, and mobile. In both cases, these were new customers and competitive replacements, which is, in many cases, the best situation. As you can see, we have this winning streak across all product pillars, across all geographies, and across many customer segments. So to summarize the quarter, I think you see that the main theme here was the double-digit growth, the fact that we doubled the revenue growth, and the fact that we had double-digit growth in our products and subscriptions that drives the new business and promotes business growth. We achieved the upper end of our projection on both revenues and EPS – and we also continued to see healthy demand both from Quantum, from small-to-large businesses, and from Harmony and CloudGuard. Overall, I am very pleased with the results this quarter and I hope that we will keep seeing good momentum in the coming quarters. Now, before we open up for questions and answers, let me touch a little bit on the guidance and projections for the next quarter. Our projections for the third quarter, as you can see on the slide, revenues will range from $555 million to $585 million, non-GAAP earnings per share between $1.60 to $1.72, GAAP EPS is expected to be approximately $0.32 less. I always say this caveat: projecting the future is not something given to humankind. I mean, it can be better than what we anticipate or worse. I think overall, we are seeing, on one hand, good execution on the Check Point field side, good enthusiasm from us and our team, and the healthy demand in the marketplace. On the other hand, I think you all know that the economy is showing some signs of softness and there is a lot of uncertainties around that. Some things we see and we know will affect us, like the increase in costs, the fact that the supply chain remains challenging in our regional model. For example, we had predicted that supply chain issues will kind of get solved in the second half of this year and costs will return to normal. Right now, we don’t think it will happen in the next half of the year, and that has an impact on the expense side. The revenues and the business growth side, that’s even less in our control and ability to project. But again, we remain quite positive, and we have actually increased the range for revenue. So, you can see our third-quarter projection is actually better than our original plan and better than what many of you expect based on your current models. So, that’s for the forecast. Tal, do you want to add something on the projections before we open it for questions? You are on mute, Tal?

Sorry, let’s leave it, because they are probably going to ask questions about it. So, let’s open the floor for questions.

Good. I will start the presentation, and we’ll open it to your questions.

Alright, Gil. Today, we’re going to start out with Gregg Moskowitz from Mizuho followed by Tal Liani of BofA.

Alright. Thanks, Kip, and happy 28th birthday to you.

Thank you.

So, question for Gil or Tal or perhaps both of you. Regardless of the macro environment, Gil, if I’m understanding your tone correctly, it sounds like the demand drivers for Check Point are still healthy and intact. But similar to last quarter, your billings were a little below consensus. In the Q1 period, you had called out that bookings grew strong double digits year-over-year, and RPO grew over 20%. I’m wondering if you’re able to share with us what the bookings growth and/or the RPO growth was this quarter? Thanks.

I will let Tal talk about that. But before that, I’ll just say the main reason for that is that a year ago, we had some mega deals. And these mega deals again, we had a group of like a dozen customers worldwide that even got to – not even a dozen, less than a dozen customers. I think a year ago, we had three of these customers that signed a 3-year contract prepaid in advance, and I’m talking contracts for tens of millions of dollars, which had a very positive impact on the billing last year. That’s the main reason in this year since they were a 3-year deal, they are not even a renewal or anything like that in this year. Overall, for the quarter and for the first half, I think we finished it in line with or slightly better than what I wanted. And again, Tal, you can speak more about the numbers.

Maybe I’ll just add another one because it’s important. I know we’re going to be asked about it every quarter. And you know, Gregg, because you’ve been following us for so many years. I always said, billing is not a relevant indicator, but I will provide it to you because you’re asking. The reason I said it is always because of that. The mega deals dramatically changed that number and the timing of the payment as well. If a deal is pulled one quarter forward, and it’s a big one, then you will see an effect on the billing with absolutely no effect on the real run rate and vice versa. They can come one week later. It can affect your billing and then a week later enjoy very high. So it is an indicator, but I would look at it as part of the bigger picture, and that’s why I’m trying to give you more color. Last quarter, it was not about the comparable. Last quarter was about – we talked about that we had the booking that came, and there was not even invoiced yet. We talked about that in length last time. This quarter end goes. You had invoices for billing or bookings that came in and were not invoiced. They are part of the booking. I can say that the new business grew in double digits this quarter as well, okay? But the biggest effect was really relating to the last year’s comparable that had a few really large deals. If a customer had a large deal last year, it will create a big increase in the billing, thus translate over time to deferred revenues and so on. In this quarter, you won’t have it, so it will actually create a flat or even a reduction, although the business is very healthy with that customer. I will say be careful from just concluding for billing. That’s why I always say look at the deferred revenues, look at the revenues over time, and look over four quarters and so on. I keep saying the same thing. This quarter was mainly about the fact that there were quite a lot of deals last year that not only were booked in advance but also built in advance.

Helpful. Thank you both.

Hi, guys. Good morning. I want to talk about demand and ask. Can you talk about your expectations for demand cyclicality, meaning in past years, we had better years of higher growth and lower growth, and we’re coming here after 3 years of very strong growth in demand for core products. Beyond just the new products, can you talk about your expectations for any demand cyclicality, any reasons for demand to slow down or accelerate for core products? And second, on the same topic, you have new sales management in certain regions and new products. Can you talk about the breakdown of new customers and old customers, meaning are the new efforts helping you to bring in new customers that you didn’t have before? Thanks.

First, I don’t see much pattern right now in the cyclicality. There are of course many factors. Some people anticipate that the network security business will slow down because there is a shift to the cloud. Until now, we haven’t seen that. Actually, if there’s a mistake that we made in the past, it’s maybe under-investing in the network security and over-investing in the cloud. At the same time, again, cloud will be and is becoming a very important factor. I think the investment we have here is well justified. But I think the network security so far remains a strong element. From the cyclicality, again, we have customers of all sizes all around the world. I think a lot of it is our execution. But again, we may see larger factors than just that. In terms of sales management, I think you’re hitting on a good point. We do have relatively new sales management reenergized, leading our field. Rupal Hollenbeck, who is running our Global Commercial Organization sales, marketing, and all these functions, joined us about a quarter ago. This was our first quarter at Check Point. Before that, she was a Board member in Check Point. She knows us quite well and it was very enthusiastic about the opportunity. It’s great to see that refreshed energy. Her team is also relatively new. Our Head of Americas has been with us for just over a year, and our Head of Europe where both is about a little more than 1.5 years. Overall, it’s a very, very good thing. By the way, interestingly enough, when you look at this new world, this week, we are meeting here in Tel Aviv for the first time in person. So, it’s interesting to see that we are a global management team from, I don’t know, five countries, maybe more, that have been working together for anything from a year, 2, 3 years and are meeting, seeing each other for the first time in person just this week. We started the week by asking everybody to stand up and say, well, you got legs because for the first time, we met the entire team. In terms of new customers and existing customers, I do put a strong emphasis on new customers. We are seeing that success, especially in Europe and Asia. We also got some nice wins. I think I showed them in the Americas. But in America, in the U.S. especially, we have plenty of potential to reach more new customers that will join the Check Point family. A lot of our growth also comes from existing customers that expand. In many cases, we win new customers with our network security, and with existing customers, we actually expand and add CloudGuard. I think the pattern in many cases is that they like Check Point because of the network security and then we expand to the cloud. With Harmony, I’ve seen both cases, some new customers that start with Harmony and some existing customers that expand to Harmony.

Thank you.

Alright. Thanks, Kip. I just wanted to ask, you’ve got some company-specific tailwinds to both growth and margins as we look forward, and I wanted to double-click on each. On growth, maybe you could recap the pricing actions that you’ve taken to date. If I’ve got it right, I think there was maybe another one just about a month ago that you took. So, pricing actions to date that should catalyze growth moving forward? On margin, Tal, you mentioned material costs. You also have some currency that I’m not sure immediately reflects. So the tailwinds to both growth from ASP increases and margin from material costs and currency moving forward would be helpful. Thank you.

Yes. So maybe first on the pricing, you’re correct. We had a price increase from the beginning of July. It’s not relevant for this quarter; it theoretically should be relevant for the future. But I would say there’s a gap between the theory and actuality in terms of what you see when the deals are coming in. Hopefully, it will help, but I’m not counting on it, let’s put it this way, because there’s a lot of pressure also on our customers now because we’re all in this new economic environment. So it’s a tool to try to, but I hope it will help, but I’m not sure.

Just to capture that. I think so far, the price increases we are doing are trying to pay for the increase in COGS. At the same time, there is a counter pressure on discounts. Overall, it kind of balances off. It’s not – customers are not paying – let’s say, if you look at the average, customers are not paying a higher unit cost to Check Point at the moment.

So, Adam, the good result is that the discount will not increase, right? I don’t plan for it to actually increase, but maybe who knows. I don’t think so, but we will see. When we’re looking at the cost, it’s definitely increased. To be honest, I’m not that concerned about it because I believe at this point in time that it’s a short-term phenomenon, and much more important is to be able to deliver. You can see in many industries there’s simply no ability to deliver, and that kills the entire model. It kills your ability to deliver. Our focus is, even if we need to pay more, we want to pay more in order to get it and to be able to ship it to our customers and keep them secure. Regarding the pricing we lose a few sales, but I don’t think it’s a big deal. I was hoping that it would fade away in the second half of 2022, but it doesn’t look like it’s going to fade away at this point. We will follow up and update you as we see some changes. But again, for a company like ours, $10 million is not nice, but it’s not something that moves us to a problem, right? We have profit. It’s okay. So that’s regarding that. Will it stay the same or increase? The gap might even increase, right? Remember, every time there is something new showing up, there are problems resolved in certain raw material – and some problems are not solved. If you follow the companies or chip companies that published, it doesn’t look like they are going to solve the problem in Q3, I hope, in the future. So everything they see in the public is affecting companies like us, like servers and all the raw material that the server needs. It’s quite a lot of effect.

Alright. Our next up is Saket Kalia, followed by Joel Fishbein.

Okay. Great. Hey, thanks, everyone, and happy birthday, Kip.

Thank you.

Tal, maybe for you, just on the mega deals from last year. You talked about a few customers and tens of millions of prepaid. Just to ensure that everyone is on the same page, can you fine-tune that so that we could kind of think about that normalized comparable? How do you think about – you called out in Q3, Avanan, I think, is going to lap just as we calibrate our Q3 billings; how much should we think about Avanan sort of lapping year-over-year, if you will?

Avanan actually joined in September, so that’s not a big deal. In general, remember, Avanan is a few low millions. When we acquired it, it will have some effect, maybe on the subscription, but it’s not 10%. It’s 1%, maybe 2%, right? It’s nothing dramatic there. Regarding the Spectral acquisition, a few million dollars increased expenses by it were this year. Again, nothing dramatic, but when you accumulate a few acquisitions, it affects things like when you look at our expenses, it also added to our expenses a few millions of dollars as well. That’s part of that growth you see year-over-year when you compare Q2 versus Q2. Remember, on the mega deals of going back to the billing, it’s also very hard to predict it, right? Even if you know that you have in a final specific deal, you don’t know if it will account for 1 year or 3 years and what the payment will be. This is something that’s hard to predict. That’s why I would say billing is a trick. It’s okay for you to measure it, but be careful not to give it too much weight. That’s all I’m saying.

Very helpful.

Happy birthday, Kip.

Thank you.

For you, you did – you helped us with the customer wins around Quantum. But I was hoping that you would help give us a little color around some of the customer wins regarding CloudGuard and Harmony and what the competitive dynamics look like in those two areas. So I think I gave the examples on all fronts. I provided a few examples with Harmony. We won because we were – we were blocking files that others were not blocking. Again, that’s ransomware that was impacting the customers. Another one, it was that plus the fact that they received a more consolidated view. First, in both cases of Harmony and CloudGuard, the markets are a little more fragmented. We actually compete against many, many different vendors. In cloud, for example, there are probably at least half a dozen major subsegments of the market. With Harmony, it’s even more; it comes from endpoint, mobile, email, disk, and data security, so many categories. The value proposition we provide is not to compete necessarily against each vendor, especially on the cloud side, but also on the endpoint, but more providing the overall architecture, providing an end-to-end cybersecurity solution. I think that completeness of solution, the architecture, and the vision is something that’s very unique to us, especially because these are all integrated. When we see a malicious file coming from your email, this file will also get blocked when you try to download it on the network. I don’t think any other solution does that; actually, even worse, many of these average solutions will see the malicious file, let it through, and then send an alert that says you have been infected, and that’s too late. I don’t think we get the full credit from customers that understand that. We need to do a better job demonstrating and winning that. This is a fact, and this is something that makes Check Point’s security much better than anyone else.

Thank you so much.

Alright. Our next question will come from Brad Zelnick of Deutsche Bank, followed by Shaul Eyal of Cowen.

Excellent. Thanks so much, and happy birthday, Kip.

Thank you.

Gil, congrats on the accelerating top line results, which seem to demonstrate strong resiliency in the business. You overachieved first half expectations; you’ve guided stronger for Q3. You also gave some caveats when you guided about the environment, and you didn’t update your full year guidance. Is there something you’re seeing in real time that gives you hesitation? Or is not raising the full year just your typical conservatism? Regardless, Check Point has weathered many cycles, and people seem to expect spending on security to be resilient during a downturn. What is your experience from prior downturns, and what are you seeing today?

Okay. That’s very multiple parts, and I think they are all related to the same subject, but your question is something many people here probably worry about. First, I don’t see anything that you don’t see. I mean, my concern about the global economy is what we all see in terms of the Check Point sales force and customers; I don’t see any changes. I mean, our forecast, our pipeline, the feedback, as I mentioned, we are just seeing here for the first time, our sales leader in person. I haven’t sensed from them that they detect anything different about the third quarter or the rest of the year, but we also see the economy, and we know that things can happen. In terms of full-year guidance, we didn’t want to open the full-year guidance. We are still within the range we’ve provided at the beginning of the year, but we’ve actually looked into that and it’s likely that we will be slightly to the right there. I mean, we probably won’t get to the lower part of it because we have already received over $10 million in additional revenues from the first two quarters. I don’t know, Tal, if you want to discuss it in a little more detail. But yes, the guidance for the – we can calculate a narrowing range a little more to the right, more to the upper end of the guidance that we provided at the beginning of the year.

Yes. I just said, Brad, I know you know us, but it’s not only about knowing us. We gave guidance at the beginning of the year. We are in a very, I would call it, bizarre macroeconomic environment, many different metrics showing up in different directions – unemployment on one hand, inflation on the other hand, interest rate – many moving parts; Ukraine and Russia, there are many things happening, and you should be cautious. On one hand, we don’t see anything to worry about, except for everything that we see around us, right? We never – if you look at our history, I don’t think we ever updated our guidance because we don’t think you should not beat your guidance for the year. Some companies provide guidance only for one quarter. We provided a year at the beginning of the year, and then each quarter going forward. So in the short-term, looking into Q3, you see quite a good guidance. That means we don’t see anything dramatic. Q4 looks like beyond the mountains, right. We need to wait to see what’s happening in general in the market. Q3 is ahead of us, and it looks like we gave a very good guidance there. So there are not too many details in that logic.

Okay, thank you.

Thank you for that. Good afternoon, everybody. Maybe let me try and continue on Brad’s prior question on narrowing the annual range. Tal, I understand that maybe you haven’t done it in the past, but in the past, you haven’t even had a PowerPoint presentation, but you started that two or three quarters ago. It’s a great thing, by the way.

Thank you.

So, maybe it’s a good point to reconsider that.

Okay. So I will tell you what I will do.

In other words, any reason to think that you wouldn’t be growing at least the midpoint or above your former wide-range guidance?

I was going to say, you know what, I’ll take you advance. Next quarter, I will update the annual guidance.

We are probably going to come. Again, I want to tell you, don’t kill me, but I think we will probably be roughly at least $10 million more than – the new midpoint should be probably at least $10 million more than the previous midpoint. On the revenue side, and I think we are very happy about that.

I would say, just I would just say, if you look at Q4, which is the biggest quarter, the biggest risk is always related to the product line, right? It’s a huge product quarter and very low visibility by the nature of the beast, right? So taking into account the general situation, think about it like six months away because all the booking is coming in December. It’s just a bit too early to be brave about December. That’s my opinion.

No argument. Alright.

Alright. Our next question is going to come from Matthew Hedberg, followed by Gray Powell of BTIG.

Great. Thanks. Happy birthday too, Kip.

Thank you.

You’ve been around security for a long time. In prior downturns, you were primarily a firewall appliance center. Obviously, now it’s a much more diversified platform. How do you think some of the newer lines like CloudGuard and Harmony will do versus Quantum? I guess specifically, is there a higher ROI aspect to some of the newer products, maybe quicker implementation versus maybe some historical transformational type sales?

First, you’re right. I mean, if you implement the full Infinity architecture, you can get an amazing ROI and you can get much better security in much shorter time. We’ve seen it. We’ve seen it in some installations. I think I gave the example in Q1 about one, we’re getting installed through the Harmony agent immediately. Malware that we didn’t stop there. This security architecture transformation usually takes between 6 to 18 months in most organizations. If customers implement our CloudGuard, our Harmony, and our Quantum solutions as part of the Infinity architecture, they will get a huge return on investment and much, much better security.

Alright. Our next question and last question will be coming from Gray Powell of BTIG.

Okay. Great. Thank you very much for welcoming me, really appreciate it. Yes. So just to follow up on the macro line of questioning, I was hoping we could drill down on Europe a little bit. How have customer conversations been in Europe in the last three months? Are you seeing any changes in sales cycles there or any additional scrutiny on deals? Just any additional color you can give us on Europe would be great?

No, I haven’t noticed any change in Europe. I mean, the markets are open. It looks like our discussions around in Europe is the fact that we are seeing everything being opened up. People behave like there is no corona, and you have increased infections. But in terms of cyber spending, I don’t think that I’ve seen much discussion; maybe with the exception of Russia which has impacted our revenues.

Now, it’s actually the results in Q2 were very good. So we didn’t see issues with that.

Okay. Just in terms of the 12% product revenue growth, was that pretty evenly split across geographies, or did anything stand out in Europe or elsewhere?

Yes, you can see that we had the slide that shows the sales by geography. The percentages remain the same this quarter and last year: 44% in Europe, and in America, and 12% in APAC, both in Q2 last year and Q2 this year in terms of revenues.

Fair enough. Alright. Thank you very much.

Alright, guys. Thank you very much – guys and gals, thank you for attending today, and thank you for all the birthday wishes. We look forward to seeing you during the quarter. We will be speaking to you after the call, obviously. So take care and have a great day. Bye-bye.

And thank you, Kip, for sharing your birthday with us.

Thank you. Have a great day, everyone. Bye-bye.

Bye-bye.