Check Point Software Technologies Ltd. (CHKP) Earnings Call Transcript & Summary

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, our 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 cybersecurity 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, et cetera, a political, economic business, 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 to 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 hear us to the next 30. And with that...

Actually a week ago, we just -- yes a week ago.

And with that, I will toss this over to Roei Golan, our CFO. And a reminder again, please do not raise your hands. Thanks.

Thanks, Kip. Just let me to share my presentation. Can you see my screen?

You need doing the presentation...

No, I know, I know. But can you see, okay, great. We got it. Great. Okay. Thank you, Kip, and good things to everyone joining the call today. Excited to be here with you and begin the review of our -- of the second quarter of 2023. We had a very strong profitable quarter, reaching the highest rate of growth for more than a decade. Our net income grew by 14% to $238 million, while our non-GAAP EPS was up by 22% higher since 2009 to $2 per share. Our revenues reached $589 million, which is $1 million above the midpoint of our projections. And as I mentioned, our -- our non-GAAP earnings per share reached $2, which is $0.05 above the top end of our projections, very strong results. Now let's deep dive into the numbers. As I mentioned, revenues were up to $589 million, 3% growth year-over-year. Our deferred revenues went up to $1.774 billion, 7% growth year-over-year, while our current deferred revenue short term reached $1.307 billion, 8% growth year-over-year. Our calculated billing reached $566 million, which is 1% decline year-over-year and [ 17% ] growth compared to Q1 2023. Our current calculated billing reached $581 million, up 4% year-over-year. Same in as in previous quarters, we see that due to the high interest rates environment, we see the fewer customers willing to pay upfront for multiyear deals, which resulted in short-term billing duration. in addition as a result of Infinity becoming more and more significant, and you will see it in the upcoming slides, the flexibility in billing terms affecting, of course, the billing timing, i.e., the revenues growth, driven by strong subscription revenues with 14% growth year-over-year to $239 million. That was driven mainly by our Harmony E-mail security, which continued to deliver great results with triple-digit growth year-over-year. With that, we saw a decline in our product revenues of 12% year-over-year, which was resulted by longer sales cycles and delaying refresh projects, but also to the fact that we saw this quarter much more customers buying our product for Infinity agreements and most of it is not translated into revenues immediately as they have the flexibility to utilize their allowance usually within 12 months. It is important to note that we did see a strong renewal business as our customers continue to benefit from our security services and support. As I mentioned, we keep seeing strong adoption of our Infinity strategy. We saw Infinity revenues exceeded 10% of our total revenue for the first time since we launched Infinity. We see more and more customers adopting our platform answering the needs under one umbrella of products and services. Now let's look at our revenues by geos. We had growth across all geos. 45% of our revenues came from EMEA, 43% came from the Americas, while the remaining 12% came from Asia Pacific. Now let's review our P&L. We had a significant improvement in our gross margin, which went up from 88% last year to 90% this year, we saw a significant improvement in our supply chain, which resulted in lower cost. And I'll remind you that we had a various challenging supply chain last year that drove our margin below 90%. We hope to see this trend continue. We hope to see this positive trend continue in the remaining of 2023. Our operating expenses were increased by 5% and 7% on constant currency. The increase was mainly as a result of our continued investment in our workforce, cloud infrastructure, marketing and increasing in our travel costs. Our non-GAAP operating income continues to be strong at $263 million or 45% margin compared to 44% margin in previous years. Our financial income this quarter reached $21 million as we invest more in higher interest rates over time. And we expect this trend to continue as our securities mature, our securities mature and we invest in higher interest sales. Our non-GAAP tax rate for this quarter was around 16%, mainly due to indexation and updates in tax provision because of several tax assessments we have worldwide. Our non-GAAP net income reached $238 million or $2 per share, which is $0.05 above our guidance, above the top end of our projections. Our GAAP net income was $202 million or $1.70, 25% growth year-over-year. Now let's move to our cash flow and cash position. Our cash balances as of the end of the quarter was $3.5 billion, our operating cash flow was $191 million this quarter. What affected our cash flow was very back-end loaded quarter. We see that -- we can see that our account receivables went up by 20% year-over-year. The balance that we have in this compared to the same period last year is up by 20%. We saw much more booking and billing coming in the last month than usual. And it's something that we continue to see, we will continue to see this trend since the beginning of the year or actually since Q4. During the quarter, we continued our buyback program and purchased 2.6 million shares for $325 million at an average price of $125 share. In total, we purchased $1.3 billion in the past 12 months. Now let's summarize our results. We had a very strong subscription revenue with 40% growth year-over-year, which was driven by Harmony E-mail and continued [ stock ] adoption of our Infinity platform. While we saw the refresh project that has experienced delay, we saw very strong and healthy renewal business. Also, we saw improving and strong operating margin that resulted in over 22% EPS growth, 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. This is -- I think we've achieved a lot, but this is just the beginning, and there is plenty more we need to achieve in the coming 30 years. But let me jump right in and give some of my flavor. I think we all have seen some of the kind of recapture what Roei says in the summary for the quarter. Very healthy quarter with 22% EPS growth, revenues above our midpoint of the projection. So pleased with that. Positive trends in the America, very important. That sets the tone for the rest of the world. And I hope it may be setting the stage for -- that shows that we are -- that we should expect better economy in the next 6 months all over the world, strong operating margin. And I think we're seeing that our customers are actually very happy with our products and technology so much that they defer some of the renewal, some of the refresh projects and the renewal is very strong and customers are happy with the product. I think in the future, we want to translate into additional growth. And I think we're seeing something very, very important Infinity, and I'll speak about that, which is the pinnacle of our strategy, exceeding 10% of our total revenue for the first time, and the Harmony E-mail continues its very high growth rates, capturing another segment of this busy cybersecurity market. So let me start by speaking about some of the wins we have in Infinity. And I think our commitment and our vision is to give the best security. Infinity, I think, expresses that vision in the best possible way where we give the customer the full platform, when everything works together to deliver the best security and it can serve everyone. And you see here a few examples of recent wins in the Infinity landscape. One is an important bank, which expanded the network security where Maestro super high speed, but also added to that Infinity architecture. The Harmony E-mail because of its highest catch rate and combined all of that with our new Horizon family that correlates all these events and create a more collaborative security to all these systems. In the middle, you see another sector that in many -- some cases, is underserved in security, but here, it's a pretty large network of educational facilities replaced a competitive vendor products and chose the whole platform network, e-mail, endpoint to secure their entire estate. And to the right, another sector, it is very important. This is an existing customers, large existing customers, was very satisfied with our Quantum solution and translated it into a bigger win with full Infinity implementation, consolidated across the network, the cloud and the endpoint, a sizable deal. So what we are seeing here is our Infinity can serve customers in all sectors and deliver on that vision of the best security for everyone. Adding to that, what I already alluded is the success that we have in the e-mail security market. You can also see here a few examples of customer wins, different customers, one is a large bank, was not very happy with the fact that their existing e-mail security was missing suspicious e-mail and let them through. They tested our Harmony E-mail, and what took them before weeks and months to install to optimize the system to get to reasonable results. They got so much better security in less than 5 minutes for a large organization. Similar to that is, on top, a large pharmaceutical, shows Harmony E-mail due to the fact that it has a much higher catch rate versus the competition. And again, is implementation. We see all of that is starting to echo in the analyst report. We see [ Giga ] Forrester Wave when we are coming relatively quickly from nowhere to the leadership areas of these charts. One is to the top upper right, one is in the middle, and I think we're making a breakthrough in this industry, especially when we're speaking about cloud-based e-mail, but I think our solution is very, very unique in the way it works. And compared to everything has the best security and the highest catch rate. I think what I've spoken in the beginning of the year is that our vision for the year includes these free sees to create security, which is the best and prevent the attacks instead of just reporting about them and let the bad guys in. And the 3 Cs is comprehensive, consolidated and collaborative. I'm putting a huge focus on the collaborative aspect of the system, not -- the others are also relatively, Check Point is leading in them, but the collaborative is, I think, what makes that security stand out. The fact that we are able to identify threats in one location in the network and translate that into full prevention all over the network. I think it's completely unique in our industry. The way we do it, the scope it, we do it and the fact that we are able to connect so many technologies, not only from Check Point, but we are working more and more to connect also third-party technologies to that architecture. And if we see an example of how it works here is the typical event. And unfortunately, these events happen every day. A single endpoint on the network notices that the user received an e-mail with attachment. The attachment is infected. This is a 0-day threat which means that it's not identified by most technologies. Some don't even detect it. Some detected few hours after the computer has been infected. Check Point is the only one that has it in real time before the malicious file on a 0-day has the chance to infect the user computer, but that's not the end of the story because once this threat is being analyzed by our ThreatCloud AI, we immediately isolate that endpoint, quarantine it, and make sure that the entire network protected against these files and they won't reach any other computer. By the way, whether these computers have our advanced endpoint or whether their security is not sufficient, we will block the download of that file on any mean of communication immediately and automatically. Again, I think this is something very typical. We are seeing examples of that happening on a constant basis. And I think we're the only vendor that can actually make the security infrastructure work together. So it does deliver that level of prevention. So to summarize, I think I've talked a little bit about our strategy about how we demonstrate the technology and how it works. I think we gave you some really good cases of some of the technologies that drive our growth, Harmony E-mail to name one, Infinity, to name the other, which I'm very, very proud of what we see, the Infinity. We are working on several years now starting to be a significant part of the business. Our financial results for the quarter were pretty good, 22% EPS growth, something we haven't seen for more than a decade, a 14% growth in the security subscription again, all our advanced technologies, the ThreatCloud AI, the CloudGuard, the Harmony E-mail are all driving that security subscription growth. And I think we see the collaborative security in action every day, and I think we'll see more of that in the second half of the year as we launch more products and more technologies with more innovation around the collaboration in security. So that summarizes our results for the second quarter. Before I open it to your question, I want to maybe touch a little bit about our projections for the remainder of the year and the third quarter. So for -- let me speak for 2 minutes about the projections. For the entire year, this is -- this slide, you've seen it before. You've seen it at the beginning of the year. There was no change in that slide. We are well within the range that we provided for the year. Revenues in the range of $2.34 billion to $2.51 billion for the year. Non-GAAP EPS, $7.70 to $8.30, and GAAP EPS is expected to be approximately $1.22 less. I always say that we're projecting the future is always challenging. We are seeing the world changing around us all the time. I'm actually more optimistic about the second half of the year, but we never know what will happen. So that's, again, no changes in the annual guidance, just repeating what we've seen before. For the third quarter, we haven't shared the projections that we have. So let me share what we have now based on all the analysis that we've 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 expected to be approximately $0.35 less than that. So that's where we stand in terms of projections. I think well within our projection for well the guidance for the year. And with that, I would be very frank. Thank you for joining us today, and I'll be very happy to open the call for your questions.

All right, folks. First up today is going to be Joseph Gallo followed by Tal Liani. As a reminder, please limit yourselves to 1 question so we can get through as many of the participants as possible. With that, Joe.

Awesome, thanks for the question, Kip. And congrats on the 30 years, guys. Appreciate the cycle time commentary and 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 2Q. Did it worse than hold course or ease a little bit versus 1Q -- and then maybe just how would you characterize your billings performance in 2Q? Was it all impacted by macro? Or are there some areas for improvement ?

For the billing, I'll leave it to Roei. I think we had pretty good billings, but Roei will comment about that. In terms of the macro environment, I think it remained tough, but it was better than Q1. I think on all the metrics, we've seen better results than the first quarter, slightly better -- much better product sales, but the metrics are slightly better than Q1, renewal much stronger. And I think what we've seen in things like Harmony E-mails and few other areas, were better. Again, I'm also a little bit optimistic because the U.S. segment of our business has shown some good signs of recovery and some good optimistic signs of growth. So I'm -- I hope that this will be like our bellwether for the future and for the rest of the world. Roei, you want to add something...

Yes. I think we see a significant improvement, I mean, in the billing compared to Q1. I would say that even though we saw that we had -- Q2 had a lot of very nice Infinity deals that are not translated into billings or revenues, especially in America, we had a very strong Infinity business. New customers, new logos and existing customers that move to Infinity. And this -- and some of it, you don't see still in the billing. It's not something in the billing. Some of it, yes, in the billing. But in the end, I mentioned also in the call, we I mean our billing was up 17% compared to Q1 2023. I know there is also seasonality here, but still 17% is impressive. So I think that our billing was okay, it was good. I mean, this quarter, of course, that we want to be better and we want to be high, we want to grow. But I think also you can see the short-term billing, the current billing that went up by 4%. So that's -- so that's -- I think that's much better than what we [Indiscernible]

Our next caller is Tal Liani followed by Shaul Eyal.

I want to take a step back and kind of look at things from a higher level, and it's related to the question before. At the end of the day, your revenue growth is 3% and your billing growth is minus 1. What are your long-term targets in a sense that you invested heavily in new products in the last few years and still the growth is well, well below what other cybersecurity companies are achieving. How do you see the growth accelerating over the next few years? What are the areas that could drive it up? And what are the targets?

Tal, I apologize. We got somehow disconnected. I think I heard your question, but can you see hear me now?

Yes, I can hear you.

Okay. So I think I might have lost the last few words of the question. I think you asked about our growth rate and about our investment and what we are shooting for. And first, we are absolutely shooting for much, much higher growth rates. I think we have the technology. We have the products. I think we have a lot of differentiation and the best in the best security. And I think we have many, many loyal customers. I think we need to translate it to a much more aggressive winning of both existing and new customers to expand that. We are shooting for a double-digit growth in all the metrics, let's put it that way. And I think we've started doing many good investments in our field and marketing organization in the past 1.5 years. Starting from growing the organization and investing in sheer size and growth. And this year, the focus is actually on making sure the organization is performing, calling, reaching out and engaging with customers. I must say that for the last 3 months, we've seen a big change there. I think the field people have done a good job. We're seeing much higher level of engagement with customers. And I think that the cycle is that, the engagement with customers leads to funnel creation to opportunities, and these opportunities eventually should result in increased sales for the second half of the year and especially for the fourth quarter, we already see the increase in the pipeline, even though it's just the beginning because I think most of these performance improvement happened in the last, I would say, 3 months roughly, starting kind of March. And the big improvement was kind of May and June. And I hope it will be translated to the results that I'm expecting. I think we have plenty of potential, and I'm seeing the -- and I'm seeing progress. I don't want yet to say that we are seeing the wins because the numbers are not there yet. But I'm seeing the progress on our internal metrics.

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

Question for Roei. So on the maintenance line front, given that, that product has been declining in recent quarters, what could be the impact on the maintenance line longer term? And maybe I know you mentioned in your prepared commentary, some linearity trends. But maybe can you talk to us how this quarter has been progressing April, May, June?

Yes. Sure. So as for the first question, so I would say like that we mentioned, we had a very strong renewal business. So although customers didn't buy the product. Didn't buy mean the [ deal might not product ]. We sold less refresh project. We did see them renew the support, renew the maintenance. So therefore, -- on the short term, I mean, again, it's tough for me to say what's going to be long term, but short term, I don't expect any effect on this line item. As long as the renewal business will keep -- will be strong and as we've seen in the last -- this quarter and also in the last few quarters. So that's in terms of that. In terms of linearity, yes. So we've seen -- it's something that we've seen, by the way, also in Q4, since Q4 2022. And also, of course, in Q1 and also this quarter, we see much more back-end loaded. I mean, we see that a significant part of the deals are coming in the last 2 or 3 weeks of the quarter. And that's affected I mentioned that's affected our cash flow. But therefore, we expect a very strong cash -- I mean a stronger cash flow in Q3 because you can see our account receivables that went up significantly because most of the billing, booking and billing came in the last few weeks of the quarter. So that's something that I'm assuming will continue with us also in the next quarters as long as this existing macro environment will stay with us.

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. Maybe you could share some specifics about investments that you're making in the go-to-market. Obviously, having a lot of new products, Infinity's getting some good traction. But how are you balancing this profitability and growth and give us some specifics around these go-to-market initiatives that could potentially lead to this revenue acceleration that you're speaking about?

First, again, last year, we had a big focus on increasing the field size, making sure we have people making sure we show our field that we are willing to invest. This year, we moved into understanding are we what's our productivity? Are we engaging with enough customers? Are we engaging with enough prospects. And I think the big focus is making sure that all the Check Point people are in connection with their customers are creating this I mean, customer engagement, which, in the end, leads to the sales. And at the end, I mean, a customer want to buy our vision. If they don't know about our vision, if we don't communicate to them, that -- and I think that's where most of the investment is, we are doing more seminar. We're doing more conferences. We're working on new programs for partners and for ours and I think we should expect much more on that front as well. But the #1 investment that we are seeing is, again, engaging with customers, making sure that customers know our story. I can tell you firsthand every meeting that I have with CISO, with Chief Information Security Officer, ends with wow. I didn't know that you had this amazing strategy. Your architecture is something I should definitely continue. And that's the good part. Another good part is that they all say that they have a very warm place in their heart for Check Point. Check Point enjoys a very good reputation with them for being a great partner for being a great for provide security. So these are the good parts. The bad parts is usually and it's 95% of the case is how come I didn't hear from you for such a long time. So this is something we can change, we can fix by engaging with them by delivering out vision by meeting with them by showing them what we can do. And by the way, that's, by the way, explains some of the growth in Infinity. It's still potentially still huge there. But when we show customers the potential of Infinity, they buy into that vision, they realize the value, they get far more security technologies and far more security to their environment than they used to do before.

Ray followed by Brad Zelnick.

Gil, you mentioned you're more optimistic on the year. And one of the things we started to pick up in our conversations with partners is that refresh activity is actually starting to pick up. So when you talk to customers, do you sense we're at the point where sweating assets is becoming less feasible, meaning should we start to see more refresh activity in the back half of the year and into '24. How should we think about when refresh activity really comes back here?

First, I would like to think that we will see some this quarter and more in Q4. I know when I think that I have all the reasons to believe that we'll see far more than that next year in 2024. But also, I'm, by the way, pretty positive about the fact that such a big portion of our business become annuity business. When we look at these Infinity contracts, and I think as Roei mentioned, even some of the product has moved from the product line to the Infinity kind of backlog deferred revenues, financially on the balance sheet, it ,maybe on the balance sheet, it may be even be off the balance sheet, it depending on how the deal is recorded. But this is not a bad thing. This is creating the more stability, more long-term relationship with the customers. And I would like to see a bigger part of the business moves to annuity. Of course, not at the cost of a slower growth rate, I think over the long term, we want to increase our growth rates. So no doubt about that. By the way, I really, really want customers to refresh some of the older appliances to get new technologies. This will give them better performance, in some cases, better security. In some cases the same security, just newer box. It will definitely give us more revenues. But the fact that customers are not so anxious to do that is actually a very, very good testimony to the quality of our products. These products, some of them are 3 years old. Some of them are 10 years old are working really, really well. I just had a conversation with a large customer that have a relatively products that are end-of-life, and they want to upgrade, they don't do it on time, but they are very happy with the product that they have, which is a very, very good testimony to a company that can produce products that 10 years later are still delivering. And I'm talking, by the way, about environments that are mission-critical, high performance, high security, not about a small business that may make -- may or may not care about that.

Next up is Brad Zelnick followed by Adam Borg.

Thanks very much, Kip, for taking the questions and happy anniversary to you all. Gil, there are lot of religious debates in the market around architecture. Some are adamant that native cloud proxy is the right architecture, Other than just firewall is here to stay and it just needs to be embedded natively in the cloud. What's your view on how this plays out over the next 5 years? And specifically, I'm interested in your thoughts on the future proxies as it was actually an old friend of yours reminded me last week that the earliest firewalls were proxy firewalls that actually lost out to Check Point's network firewall almost 30 years ago.

So first, you're absolutely right, and that is true. 30 years ago, there were some proxies. They weren't flexible. They didn't support all the protocols. They require every client to change. And I think we've really revolutionized the market by having kind of this transparent firewall that can support any protocol, any communication high speed, high performance without the applications kind of even aware of that, that still what we do, and I think we've shaped up the entire market. I think in the future, we will continue to see a lot of firewalls. The firewalls remain, by the way, the most important element today in securing the networks. Unfortunately or fortunately, for us, they are not really replaceable. It doesn't mean that they cannot be augmented with many, many other technologies. So, yes, in the cloud, we also need to use cloud-native technologies in the cloud. We also need the posture management to understand that the cloud is configured well. And cloud environment are far more susceptible to attacks. Simply because we are public, simply because they are exposed. I mean there's a lot of good things that exist on the cloud, but when your environment is more exposed, it means that it can suffer from more attacks. And again, unfortunately, in our business, we see it almost every day. By the way, the fact that the cloud is shared is also at the level of risk because that means that the same thing can be replicated, the same threats can be replicated. The data can leak from one environment to another is things that are less likely to happen when it's every customer is in isolated environment. Now I think that in the future, we're seeing multiple technology. I don't think that there is one that will win. The market is far more sophisticated than that these days. I think we are active in both. We have very good posture management for the cloud. We have very good firewalls or network, virtual network firewalls in the cloud, and I think we should make them simpler and easier to use even in a cloud environment. And by the way, what we also have is a huge benefit that we can connect the hybrid cloud environment, the private data center to the public cloud, which in almost every large enterprise is crucial. Because all of you, all of us, we have data centers. We have private application, and we have cloud application, and we need to connect them together.

All right. Our next up is Adam Borg followed by second Saket Kalia.

Awesome. Thanks so much for the question, Kip. So Gil, great to hear about the positive trends you're seeing in Americas. And maybe love to hear a step deeper, just what exactly are you seeing there? What's giving you the optimism, especially as you think that could help translate to the rest of the world later this year.

I think the bottom line is that in my internal metrics of sales and so on, I'm seeing that the Americas is showing growth, and that's on all parameters. The America, a commercial region for us is showing growth, and that's great. That's what we wanted to have. I also see it in other indicators like the level of engagement with customers and so on. Americas have peaked at slightly better than average. We also have changes in other places in the world. But -- that's what called me to be optimistic. How much of it is the macro economy outside, how much of it is our own execution. It's hard to say. I'd like to think that both -- I mean in terms of engagement, I know that it's our execution. In terms of results, I don't know if it's us or if it's the macro economy out there, let's say, slightly improving.

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

Okay. Great. Cheers to 30 years as well. Gil, maybe for you. Great to see Infinity make up roughly 10% of total revenue. Maybe the question is, what products as part of Infinity are customers really using more broadly beyond network security. And as part of that, can you share anything on what impact Infinity may be having on metrics like revenue run rates or deal size or net retention. Does that make sense?