Check Point Software Technologies Ltd Q2 FY2023 Earnings Call

Hello everybody and good afternoon. It's Kip Meintzer, Head of Investor Relations for Check Point Software. Joining me today on the video conference call will be Gil Shwed, CEO and Founder; as well as Roei Golan, our CFO. Before we begin, obviously the good old forward-looking statement. 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 Exchange Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, include, but are not limited to, statements related to our expectations regarding our product solutions, expectations related to cyber security and other threats. Our expectations and beliefs regarding these matters may not materialize, and actual results or events in the future are subject to risks and uncertainties that could cause actual results or events to differ materially from those projected. These risks include our ability to continue to develop platform capabilities and solutions, customer acceptance, purchase of our existing products and solutions, new products and solutions, the market for IT security, and everything under the sun 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 on April 27, 2023. The forward-looking statements in this 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 this presentation, 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. And guess what? This year is our 30th year in business. I hope you'll all join us in celebrating toast of glass or what have you of your favorite beverage. We've had an accumulation of $30 billion in revenue over these 30 years, and I hope you'll cheers us to the next 30. And with that…

Thank you, Kip. Let me share my presentation. Can you see my screen? No, no, I know, but can you see? Okay. Great. Thank you, Kip, and greetings to everyone joining the call today. I'm excited to begin the review of the second quarter of 2023. We had a very strong profitable quarter, reaching our highest level of work in over a decade. Our net income increased by 14% to $238 million, while our non-GAAP earnings per share rose by 22% to $2 per share, the highest since 2009. Our revenues were $589 million, which exceeds the midpoint of our projections by $1 million. As I mentioned, our non-GAAP earnings per share reached $2, which is $0.05 above the high end of our projections—very strong results. Now let's delve into the numbers. Revenues reached $589 million, reflecting a 3% growth year-over-year. Our deferred revenues rose to $1,774 million, which is a 7% year-over-year increase, and our current deferred revenue short-term reached $1,307 million, up 8% year-over-year. Our calculated billing reached $566 million, a 1% decline year-over-year but a 70% increase compared to Q1 2023. Our current calculated billing was $581 million, up 4% year-over-year. Similar to the previous quarter, we've observed that due to the high interest rate environment, fewer customers are willing to pay upfront for multi-year deals, leading to shorter billing durations. Additionally, as Infinity gains more importance, you will see in the upcoming slides that the flexibility in billing terms affects billing timing. Revenue growth is driven by strong subscription revenues, which grew by 14% year-over-year to $239 million, primarily due to Harmony Email security, which continues to deliver exceptional results with triple-digit growth year-over-year. However, we experienced a 12% decline in product revenues year-over-year due to longer sales cycles, project delays, and the fact that many customers are now purchasing our products for Infinity agreements, which don’t immediately reflect in revenues due to their flexible utilization allowance, typically within 12 months. It's worth noting that we enjoyed strong renewal business as our customers continue to benefit from our security services and support. As mentioned, we are seeing strong adoption of our Infinity strategy, with Infinity revenues exceeding 10% of total revenue for the first time since its launch. More customers are adapting our platform, consolidating their needs under one umbrella of products and services. Now, let's look at our revenues by geography. We experienced growth across all regions: 45% of our revenue came from EMEA, 43% from the Americas, and 12% from Asia-Pacific. Moving on to our P&L, we made significant improvements in our gross margin, which increased from 88% last year to 90% this year, thanks to enhancements in our supply chain that resulted in lower costs. Last year, we faced significant supply chain challenges that drove our margin below 90%. We expect this positive trend to continue for the remainder of 2023. Our operating expenses increased by 5%, and by 7% on a constant currency basis, mainly due to our ongoing investments in our workforce, cloud infrastructure, marketing, and heightened travel costs. Our non-GAAP operating income remained strong at $263 million, with a 45% margin compared to 44% last year. Our financial income for the quarter was $21 million as we invested more in higher interest rates over time, a trend we anticipate continuing as our security matures and we engage in higher interest deals. The non-GAAP tax rate for this quarter was about 16%, primarily due to indexation and updates in tax provisions from various worldwide assessments. Our non-GAAP net income reached $238 million or $2 per share, which is $0.05 above the high end of our guidance. Our GAAP net income stood at $202 million, or $1.70, reflecting a 25% year-over-year growth. Now, let's review our cash flow and cash position. Our cash balances at the end of the quarter were $3.5 billion, with an operating cash flow of $191 million. Our cash flow was affected by being back-end loaded this quarter; we saw our accounts receivable increase by 20% year-over-year. Compared to last year, the balance is also up by 20%. We noted significantly more bookings and billing during the last month than usual, a trend we expect to continue since the beginning of the year, or actually since Q4. During the quarter, we continued our buyback program, purchasing 2.6 million shares for $325 million at an average price of $125 per share. Over the past 12 months, we've bought back $1.3 billion in total. To summarize our results, we had very strong subscription revenue, with a growth of 40% year-over-year, driven by Harmony Email and increasing adoption of our Infinity platform. Although we faced delays in refresh projects, we experienced robust renewal business. Additionally, we noted improvements in our operating margin, leading to over 22% EPS growth, the highest since 2009. Now I’ll turn the call over to Gil.

Thank you very much, Roei, and great to have all of you here with us, especially now as we celebrate 30 years for Check Point. I think we've achieved a lot, but this is just the beginning and there's plenty more we need to accomplish in the coming 30 years. Let me jump right in and give some of my insights. I think we've all seen some of the things Roei mentioned in his summary for the quarter; very healthy quarter with 22% EPS growth, revenues above our mid-point projection, so I am pleased with that. Positive trends in the Americas are very important; that sets the tone for the rest of the world. I hope this may be setting the stage for what we should expect in the next six months around the world; strong operating margin. I think we're seeing that our customers are actually very happy with our products and technologies, to the extent that they are deferring some of the renewal and refresh projects. But the renewal business is very strong and customers are satisfied with the products. I think in the future, we want to translate that into additional growth. What we are seeing is something very important from Infinity; and I will speak about that, which is the pinnacle of our strategy, exceeding 10% of our total revenues for the first time. Harmony E-mail is also continuing its very high growth rates, capturing another segment of this busy cybersecurity market. Let me start by discussing some of the wins we have with Infinity. I believe our commitment and vision is to provide the best security. Infinity, I think, expresses our vision in the best possible way when we offer customers a comprehensive platform where everything works together to deliver the best security. Here are a few examples of recent wins in the Infinity landscape: first, an important bank expanded their network security, where Maestro super high speed, and also added to that Infinity architecture, including Harmony E-mail because of its highest catch rate, and combines that with our new Horizon family that correlates all events for a more collaborative security across systems. Second, we secured a significant network of educational facilities, where we replaced a competitive vendor product and chose our entire platform—network, email, and endpoint security. Finally, an existing large customer who was satisfied with our Quantum solution translated that into a bigger win with a full Infinity implementation consolidated across the network, the cloud, and the endpoint—quite a substantial deal. What we're seeing here is how Infinity can serve customers in all sectors and deliver on that vision of the best security for everyone. Adding to this is the success we've achieved in the E-mail security market. You can see some examples of customer wins, including a large bank that was unhappy because their existing E-mail security missed suspicious emails. After testing our Harmony E-mail solution, which typically took them weeks and months to optimize before, they achieved much better security results in less than five minutes for a large organization. Similarly, a large pharmaceutical company adopted Harmony E-mail largely due to its higher catch rate compared to the competition. We also see these trends reflected in Analyst Reports. The notable GigaOm report, where we’ve quickly moved to leadership positions in these charts, is a significant breakthrough in our industry. Specifically, our solution offers unparalleled security and the highest catch rate in cloud-based E-mail solutions. I must emphasize that our vision this year continues to revolve around the three Cs: create comprehensive, consolidated, and collaborative security. I’m placing a huge focus on the collaborative aspect, which truly sets Check Point apart in the industry. This means we can identify threats in one location in the network and transition that to full prevention throughout the entire network. This is unique in our industry, considering the scope and the ability to connect many technologies, not only from Check Point, but also increasingly from third-party technologies. An example of how this works is as follows: a single endpoint on the network detects that the user received an email with an infected attachment. This is a zero-day threat, which means most technologies do not identify it immediately. Some might detect it hours after the infection, but Check Point is the only vendor that detects it in real-time before the malicious file has the chance to infect the user’s computer. Once this threat is analyzed by our ThreatCloud AI, we're able to isolate that endpoint, quarantine it, and ensure the network is protected against the file, irrespective of the security state of other computers involved. This happens immediately and automatically, which we’ve seen happen frequently. I believe our strategy, technology, and the collaborative security we provide are driving our growth. Harmony E-mail, Infinity, and our advanced technologies are behind the strong security subscription growth. We expect to see more of this in the second half of the year as we launch more products and technologies with greater innovative collaboration in security. Before I open it to your questions, I want to touch on our projections for the remainder of the year and the third quarter. For the entire year, we are maintaining our previously released guidance; revenues in the range of $2.34 billion to $2.51 billion. Non-GAAP EPS of $7.70 to $8.30, and GAAP EPS is expected to be approximately $1.22. I understand projecting the future is always challenging, and we see the world changing around us constantly. I am optimistic about the second half of the year, but we can never be certain. Now, regarding the third quarter, I'll share our projections, which are based on all the analyses we have done so far. Revenues are expected to be in the range of $570 million to $605 million. Non-GAAP EPS is expected to be between $1.97 to $2.07. GAAP EPS is projected to be approximately $0.35 less than that. With that, I want to thank you for joining us today and I'll be very happy to open the call for your questions.

All right, folks. First step today is going to be Joseph Gallo, followed by Tal Liani. As a reminder, please limit yourselves to one question so we can get through as many participants as possible. With that, Joe, please take the floor.

Awesome. Thanks for the question, Kip, and congrats on the 30 years, guys. I appreciate the cycle time commentary and the delayed refresh commentary. Can you just talk through the new logo side of the business and then maybe just talk about the macro dynamics in Q2? Did it worsen, hold course, or ease a little bit versus Q1? Also, how would you characterize your billings performance in Q2? Was it all impacted by the macro or do you see areas for improvement? Thanks.

For the billing aspects, I'll leave that to Roei, as I think we had pretty good billings; but Roei will comment further on that. In terms of the macro environment, I think it remained tough, but it was better than Q1. We observed better results in all metrics during Q2; notably, product sales showed much improvement. Renewal rates were much stronger as well. I sense that certain products, like Harmony E-mail and others, performed better. I am slightly optimistic, especially given the recovery signs in the U.S. segment of our business; it may signal positive growth for the future. Roei, do you want to add a comment?

Yes. I believe we see significant improvement in billings compared to Q1. Although we did have several impressive Infinity deals that didn't translate into billings or revenues yet, especially in America, we had strong Infinity business, new customers, and existing customers moving to Infinity. Some of this might not reflect in the billing immediately, but in total, our billing was up 17% compared to Q1. I acknowledge there is some seasonality here, but still, 17% is an impressive growth. I would say our billing was good this quarter. While of course we aim for better growth, it's encouraging to note the current billing went up by 4%, which is much better than before.

All right. Our next caller is Tal Liani, followed by Shaul Eyal.

Hi guys. Gil, I want to take a step back and kind of look at things from a higher level. It's related to the question before. At the end of the day, your revenue growth is 3% and your billing growth is minus one. What are your long-term targets in the sense that you invested heavily in new products over the last few years, yet still, the growth is well below what other cybersecurity companies are achieving? How do you see growth accelerating over the next few years? What areas could drive it up and what are the targets?

I apologize; we somehow got disconnected. I believe I understood your question about our growth rate and the focus of our investments. First of all, we are certainly aiming for much higher growth rates. I believe we have the technology, we have the products, and we enjoy a lot of differentiation, making us the best in security solutions. We also have many loyal customers. We need to convert them into a more aggressive winning strategy for both existing and new customers. Our target is double-digit growth across all metrics, and we have begun many investments in our field and marketing organization over the past year and a half, focusing on growing the organization. This year, our aim is to ensure that the organization is fully performing – we need engagement with customers. I can assert that in the past three months, we've seen a significant positive change in engagement levels with our customers, which should lead to more opportunities and eventually increased sales, especially for the latter half of the year. We are witnessing progress, although metrics may not yet reflect it — as many improvements transpired recently.

All right. Next up is Shaul Eyal, followed by Joel Fishbein.

Thank you. Good afternoon, guys. A question for Roei: so regarding the maintenance line front, given that product has been declining in recent quarters what could be the longer-term impact on the maintenance line? I know you mentioned in your prepared commentary some linearity trend; can you share how this quarter has progressed in April, May, and June? Thanks.

Sure. I would say that we had a very strong renewal business. This means that customers who didn't purchase products continued to renew their support and maintenance. So for the short term, I'm not anticipating any effect on this line item as long as renewals maintain their strength. Regarding linearity, we have been witnessing significant portions of deals coming in the last two or three weeks of the quarter. This has affected our cash flow, which I mentioned. We can expect a stronger cash flow in Q3 as evidenced by our increased accounts receivable, indicating that most of the bookings and billing occurred in the last weeks of the quarter. I anticipate that this trend will continue.

Next up is Joel Fishbein, followed by Ray McDonough.

Thanks for the question and great job on the margin front. Gil, I wanted to follow up on Tal's question: Could you share some specifics about the investments you are making in go-to-market? Obviously, with all the new products, Infinity is gaining traction, but how are you balancing profitability with growth? I would like some specifics around these go-to-market initiatives that could lead to the revenue acceleration you spoke about.

First, I think last year we focused heavily on increasing our field size to ensure we have more personnel available. This year, we are concentrating on understanding our productivity; are we engaging with sufficient customers? The key focus is ensuring that Check Point team members connect with their customers, fostering engagement that leads to sales opportunities. Every meeting I have with a CISO ends with, 'Wow, I had no idea you had such an amazing strategy.' That's a positive sign. However, it's important to note that customers often say, 'How come I haven’t heard from you for so long?' This is something we can change by improving customer engagement, delivering our vision, and showcasing what we can accomplish. We also expect to do more seminars, conferences, and partner programs. Overall, enhancing customer connection is our foremost investment area. Our Infinity product's potential is substantial; when we demonstrate that to clients, they recognize its value, resulting in increased sales.

All right. Next up is Ray, followed by Brad Zelnick.

Great, thanks. Gil, you mentioned you're more optimistic about the back half of the year, and we’ve started to notice that refresh activity is starting to increase. When you talk to customers, do you sense that the point of sweating assets is becoming less feasible? Should we expect more refresh activity in the back half of the year and into 2024? How should we think about when refresh activity will truly bounce back?

I hope we see some improvement this quarter, and I anticipate further growth in Q4 and next year, 2024. There’s a noticeable shift in many clients, where a significant portion of our business has transformed into annuity business through Infinity contracts, creating stability and long-term customer relations. While I want clients to refresh old appliances for improved performance and security, the fact that many are content with current products reflects our quality; some of these products are years old and still functioning exceptionally well. I aim to foster greater demand for upgrades to ensure we capture additional revenues, while also benefiting from clients' positive experiences with our products.

All right. Next up is Brad Zelnick, followed by Adam Borg.

Great. Thanks very much, Kip, for taking the question, and happy anniversary to you all. Gil, there are a lot of debates in the market around architecture. Some assert that native cloud proxy is the ultimate architecture while others insist that firewall's presence is essential and should be embedded natively in the cloud. What's your view on how this plays out over the next five years? Specifically, I'd like to know your perspective on the future of proxies, especially considering that the initial firewalls were proxy firewalls that lost out to Check Point's network firewall almost 30 years ago.

You are absolutely correct, and that is indeed true. 30 years ago, proxy firewalls had few limitations; they were inflexible and required modifications on every client. We revolutionized the market by providing a transparent firewall that efficiently supports communications across all protocols without the applications being aware of the transition. Looking ahead, I anticipate that the need for firewalls will remain significant. They are crucial in securing networks and, unfortunately, are not easily replaceable. This does not mean they cannot be complemented by other technologies. In cloud environments, we must leverage cloud-native technologies; there are threats due to increased exposure. However, I believe firewalls will continue to play an essential role in network security. We are active in both areas—offering effective posture management for the cloud and robust virtual network firewalls. Streamlining their use in cloud environments remains critical. We also benefit from connecting hybrid cloud environments with private data centers, which is crucial for all large enterprises.

All right. Next up is Adam Borg, followed by Saket Kalia.

Awesome. Thanks so much for the question, Kip. It’s great to hear about the positive trends you’re seeing in the Americas. Could you elaborate on what you're observing? What gives you optimism, and how could that translate to the rest of the world later this year?

The bottom line is that, based on my internal metrics, sales, and so on, the Americas region is showing growth. This is excellent and aligns with our goals. We've observed that engagement levels with customers are rising. Although we've faced challenges globally, the Americas has picked up a bit better than other regions. I also see changes in various places, but this observation is what fuels my optimism. It's hard to determine how much improvement is due to our execution versus macro trends; ideally, it’s a combination of both.

All right. Next up is Saket, followed by Andrew Nowinski.

Great. Hey guys, thanks for taking my question here, and cheers to 30 years as well. Gil, it's encouraging to see Infinity comprising approximately 10% of total revenue now. What products within Infinity are customers adopting more broadly beyond network security? Are there noticeable impacts from Infinity on metrics like revenue run rates, deal size, or net retention? Does that make sense?

Absolutely. In order for deals to qualify as 'Infinity,' they must encompass several criteria: firstly, they should involve more than one product or family from our portfolio—some involve multiple product families. Notably, we see an increase in large clients purchasing Infinity; every day, we observe growth in our Harmony E-mail solutions, which is gaining rapid adoption, as well as cloud security. Additionally, the recent launch of our Horizon family, concerning security event analysis and orchestration, is increasingly becoming part of new Infinity deals.

Let’s try that without mute. Next up is Andrew Nowinski, followed by Shebly Seyrafi.

Great. Thank you and good afternoon. I wanted to ask about your guidance for the year. It seems a little more back-end loaded now in Q4 given the modest guide below in Q3. Why not lower the annual guidance slightly in case some of those pipeline deals push out or customers decide to delay their firewall refreshes even further to rely more on the cloud?

I’d like to start, and then Roei can add. There is no reason for us to change our guidance because I believe we are within the set range. Whether we perform at the top, middle, or lower part of the range, we will remain bound by that range. Our objective is to maintain optimism around our pipeline despite potential market challenges impacting performance. So without any substantial changes in guidance, we’ll stick with our optimistic outlook.

Yes, I want to add that we don't foresee any risks that could take us outside the guidance range. We also view a positive pipeline for upcoming deals in Q4. We're remaining cautious due to the macro environment and potential delays on projects, but we continue to see positive indicators that may lead to backend-loaded transactions. Therefore, we don’t expect to see any risks that could jeopardize this guidance.

All right. Next up is Shebly Seyrafi, followed by Shrenik Kothari.

You mentioned targeting double-digit growth in all metrics, and I'm trying to figure out what needs to happen to achieve that goal. For instance, do you need a better economy, better SASE momentum, or for Infinity to grow to 25% of revenue? What are some reasonable scenarios to reach that double-digit top-line growth?

Many factors contribute to double-digit growth: primarily, better traction through acquiring more customers and winning projects. Areas driving growth include Quantum under network security and converting more clients to Infinity, as well as successes in cloud security. The potential exists across multiple business aspects. Competitors' performance can be a strong indicator; several are facing challenges while others find success. Long-term, we want to boost our growth, and while market conditions can cause short-term slowdowns, we can push forward and improve our security deliverables to more clients.

All right. Next up is Shrenik, followed by Joshua Tilton.

Thank you for taking my question, and congrats on the 30 years. Gil, you mentioned the Harmony traction and provided some examples. Given the recent challenges Microsoft has experienced in the E-mail security space, has that factored into Harmony's adoption? Are you trying to capitalize on that with your offerings, and how do you expect Microsoft’s challenges to affect your market share?

Firstly, Microsoft has been investing heavily in enhancing their security. Our main competitors are often those that fill gaps beyond core market offerings. We view our relationship with Microsoft as a synergistic partnership while sometimes competing in various sectors. Most of our Harmony E-mail sales take place within the Office 365 environment where Microsoft provides basic security for free but offers advanced security for a fee. So, when a client purchases our Harmony E-mail, they are augmenting Microsoft's offerings. Our strategy for the past 30 years has been about providing advanced security beyond what typical platforms offer. Better and more comprehensive security is needed now more than ever, and we are augmenting our offerings to meet that demand, which is why our security architecture focuses on comprehensive, consolidated, and collaborative aspects. Many platform vendors struggle with the collaborative aspect, which is our unique advantage.

All right. Our last question of the session is going to come from Irvin Liu.

Hi, thank you for the question. It's great to see Harmony E-mail continue to perform well. Are you able to differentiate how many of your E-mail customers are standalone versus historical Check Point customers? Do you see an opportunity to upsell the Infinity platform to some of these single-solution Harmony customers that emerged from the Avanan acquisition?

I may not have captured all aspects of the question, but generally, we offer Harmony E-mail to various customer segments, including small and mid-size customers, as well as MSSPs that use managed security services, and large enterprises. Over the past year, we have successfully doubled the Harmony E-mail customer base, which is a considerable increase. We see a growing client segmentation where more customers are discovering our Harmony solutions—not only from our established check point base but also among new customers. We are increasingly integrating Harmony E-mail into broader customer engagements, which should foster significant growth and revenue opportunities.

All right, folks. Thank you for joining us today. We'll look forward to seeing you throughout the quarter and here's to another 30 more years of success. Thank you, everyone. Have a great day.

Thank you very much. Appreciate it. Thank you.

Thank you.