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

[Audio Gap] Presentation. Now [ he's ] recording it. There may be forward-looking statements, and they are provided safe harbor by the Securities and Exchange Acts of the early 1900s. As with any forward-looking statement, there are risks and uncertainties. If you want an expansive list, please review our latest earnings release or 20-F. And with that, Gabriela or Max?

Thanks for joining us at the Check Point session. I'm Gabriela Borges; Kip Meintzer to my left; Max Gamperl, my colleague, and we're excited to talk about Check Point.

I'm excited. I guess it's going to be like a pong match here, I guess, like U.S. Open, back and forth.

We'll be thoughtful about it.

Okay.

Okay. So here's where I wanted to start, which is you've been with Check Point for 16 years.

You say that like it's a bad thing.

It's absolutely a good thing because you have a perspective that you can lend us on how the company's philosophy on growth and investment is changing. And I say that in the context of you all having some of the best margins we see, not just in security but across software space. How would you compare and contrast the executive team's willingness to invest or the trade-off between growth and investment today versus, let's say, 5 years, 10 years ago?

So I think it really comes to what's realistic and what the market really wants. If you look at 5 years ago, we were just beginning to get to the point of where we could deliver Infinity, which is our platform. Prior to that, we were in an environment where it kind of felt like a war. And if you looked at our competitors and you looked at the marketplace, low to no interest rates, really allowed people to spend like there was no tomorrow, right? All that investors cared about was cash flow and revenue growth. They didn't care about profitability. They let people use stock-based compensation like it was popcorn. And it's really hard to compete when you're in a market that way. So we made a choice, and it was a conscious choice, and that was to focus on delivering the best technology. And it looks like today, it gets validated because we built out Infinity. It took us some time to do it. It's a fully integrated solution. We continue to add more parts like you just saw our Perimeter 81 acquisition. And so I would say that the market, since the pandemic seems ripe for what we have. And I think it gets validated because you see everybody else chasing us from a technology standpoint today. You have people that have bought 19 different companies, what have you, deliver a bunch of disparate solutions, but they don't deliver integration. And most importantly, they don't deliver protection and prevention. Everybody is playing Whac-a-Mole. They're playing detection and remediation. Everything they do is detection and remediation. And all you have to do is look at some of the third-party tests to see what that looks like. And so I can see why there's a big focus by our competitors, all of a sudden, to care about security because all they've cared about for 15-plus years is sales and marketing. So now when the market is receptive to what we have, now we'll start spending a little more sales and marketing. We've got a new commercial out there. I would say they are more, how shall I say it? Management wants to apply spend where it does its best. And we applied the spend building out a platform. Now we'll apply it in building a bigger business.

So it leads nicely to a question about CFO priorities at different scales. And you've had the experience of working both with Tal and now Roei. How would you compare...

You forgot I also had the very first one.

Oh, please, yes, of course.

Yes, Eyal Desheh for 9 months.

Okay. So if you were to do the compare and contrast, how would you compare where Roei is focused today at the scale that Check Point is today versus priorities in the prior 5 years?

Well, I think if you look at the prior 5 years, you have the pandemic, you have some things there that are probably a little bit unfair to compare up against, although he was here for a little over 2 of those years as Head of Finance. So he was part and parcel to that. I think if you go back a little further and you think about what we were doing, we were in investment mode, we were building out this platform, we were building out -- hopefully, we've tried several iterations on the marketing and sales side. And I think now where the market is and how receptive they are to a platform, I think Roei gets to spend a little more time in investing for growth than what we had in the past. And I think that's a collective effort by not only Roei, but by the Board, by Gil. Nothing is done with one. It's a group aspect. So I think where we are in the marketplace and where we are with what we have to deliver from a platform perspective, and I think now is the time to put that exclamation point.

The idea that -- we've talked about this before, where the pendulum between consolidation and fragmentation and security, it depends on the macro environment, it depends on the competitive landscape, it tends to ebb and flow. We're now talking about a period of time where a Check Point can [ press the advantages ] in platform. In that context, how do you think about prioritization where you have a platform, you can take it in a lot of different directions. There are a lot of adjacencies. Where are you prioritizing your incremental dollar of R&D and your incremental dollar of sales and marketing?

Interesting. Well, you see from our latest acquisition, P81, we -- even though we had a SASE product, it wasn't where we wanted it to be. It was more of a time-to-market issue. So we bought P81 that gives us a little bit of a jump start. We'll sell it once we get it acquired, right? It should close at the end of this month. But you can assume we'll sell it and then we'll also be integrating it fully within the platform. And I think that's our strength. When you look out there, nobody has anything that's integrated. So what we'll be selling as a separate solution will be on par with what everybody else is selling as far as integration wise. But once we get it integrated, it will take it to the next level. So I think right now, I don't think we starve any part of the beast. I think we're very good at taking incremental dollars and adding value where we see the opportunity, whether it be like we did at the end of last year with the release of Titan. We added SD-WAN, we added IoT protection, DNS, et cetera, into the native platform. So we don't -- I don't think we sacrifice any place. I think we find value -- that our customers will find value in our platform. And so I don't think that's ever stopped. I think that's how we delivered the protection and prevention levels that we have in this marketplace today.

So if I connect the dots between some of the themes you're talking about, it sounds like through Check Point's perspective, the competitive landscape is actually getting easier. Is that a fair statement? Or am I overstating it?

It's probably me sounding a little more rosy than I should. Let's face it, it's still a battle every day. Our competitors are still claiming they do something they don't. And they spend a lot of money on sales and marketing trying to create a reality out of that. And they've got a ways before they can turn slideware into reality. So I would say it's more hopeful right now. Hopefully, we'll start to see customers make better decisions with their money. I think the pandemic and the ripping off of the Band-Aid with SolarWinds, Log4j, the Exchange hacks and everything else that you saw occur probably bought a new sense of reality to this world that just because somebody says they have the best single product doesn't mean they have what's best for you. I mean integration is key if you want to be successful in security. It's the only way to deliver prevention. Otherwise, everybody else would have the levels of protection and prevention like we have, like you saw earlier this year from Miercom, we delivered 99.7% efficacy on advanced network security prevention, and our nearest competitors were 70% and 48%. So if it was easy to do, I'm sure everybody would be doing it. And so that's where I think we really stake our claim. And I think that's what matters for the future because I don't think anybody is looking for 48%. Max, what do you have for me?

I think one of the most interesting things on your last earnings call was Gil's comments of signs of life at the top of the pipeline. Would love to have more color there. What metrics are improving?

You're always digging deep for the stuff I can't give you. I would just say this, we've seen deals slip in every quarter, right? Delays is what I would characterize them as. I think the exciting is when you start to see deals turn into something bigger than they may have been before, like we've seen Infinity, a deal that's smaller turned into an Infinity deal, which underscores what we're doing, right? We're trying to provide that extensible platform for people to take and deliver prevention and protection across our whole organization. We saw an 8-figure Infinity deal in the last quarter. So for us, these are signs that are very nice to see. And I think you got -- you wouldn't be giving me this question if you didn't see the enthusiasm that Gil was showing. So it's definitely there. It's just nice -- it's nice to see something start to work when everybody's told you, "oh nobody wants that," right? So I'm sure you guys remember like 5 years ago, when somebody said nobody wants a platform, it's all about point solutions. You got to have best-in-breed point solutions. I mean, everybody, I mean, every analyst out there -- were you covering me 5 years ago? You were, weren't you? I won't say it was you, but you might have said it also. And look, the wind was blowing that way, right? That was all appearances. We made a choice when we started building Infinity, what, 2012, we made a choice, and it was a commitment, it was a strategy. And so we achieved it. And sometimes you're early. And now the market is coming our way. So I think all of these things are benefiting us. And I think that enthusiasm is what you saw Gil alluding to. You also saw the productivity in the sales force from the first quarter to the second quarter, right? I believe -- if I remember right, you said a 60% improvement in the -- what rate was it? Engagement rate. So these are all good things.

I also want to ask about supply. How have industry-wide supply constraints impacted Check Point's [indiscernible]?

One question first. Are you going to be pawning off your security? Is that why you have Max up here?

It's a team effort. Max is [indiscernible].

All right. All right. He's too far in the weeds. I just had one of my analysts called me and say he was going to take all the software and his associate is taking all the securities.

I think Max and I both love security too much for that.

Okay. Okay. So your question is about supply chain constraints. So we didn't have the same problem -- sorry, guys. That's bad of me. We didn't have the same problems that our competitors had. And I think a lot of it had to do with we don't have customized hardware. And we also have ability to go out into the open market and get much of the parts that we have. We're an x86-based system. So what we would do is we would get the shortages from our ODM. And then we had our own purchasing people go out and acquire these products. And we paid a little more. That's why our margins went down. If you go back in time, it went down 3 or 4 points on the product side. So we did have that hit, but the furthest we were out was 2 to 3 weeks. So if you were ordering towards the end of the quarter, you weren't going to get it till the next quarter. So that was the worst we had on the supply chain side. And you can see over the last several quarters, we've actually seen -- started to see improvement on the gross margin side, and that's because there's becoming more of a rationalization on the supply chain side. In fact, some folks probably get stuck with too much stuff.

And moving out of this period, what's your longer-term outlook on the growth of the appliance-based firewall market? Do you expect this market to grow? And how do you view the risks of proxy technologies and virtual machines eating into this market?

Oh, man, you're killing it. He really is in the weeds, isn't he? Oh, man. So let's start off with your first question on the firewall side. So I'm not sure it's shrinking, but let's just say, it's probably not growing as fast as it used to. But it's the same aspect. When we deliver Infinity, we're usually displacing a secondary firewall vendor. So I think there is potential for us to grow as we start to remove the other vendors out of organizations. So if you believe, like we do, that Infinity is a competitive advantage, we go from being -- and we've seen this happen already. It's been going on for a number of years, especially, I think it started with Maestro actually giving us an inroad into being able to spread out further inside organizations. No, it's not happening at a mass amount yet. So you're not seeing it show up in that way. But I think in the future, if things can go the way that Infinity appears to be going, if that accelerates, then that becomes an opportunity. But on the proxy technology side and all that, I'll have to pass on that one. I don't have a real good answer for you.

Well, I think it leads to an interesting conversation about how you think about market share displacements because you made an interesting comment there that you displaced secondary firewall vendors with the rollout of Infinity. So help us understand your product appliance growth today or even more holistically, the growth that you're seeing today? How much of that is cross-sell into the installed base, which is greenfield versus displacement of vendors, whether it's point products or core network security [indiscernible]? How do you track that? How do you measure it? Or is it not the right question to...

We don't provide the metric, but I will say that when it comes to Infinity, sometimes it's going to be a company that doesn't have the products, the additional products that we're throwing into the mix. And in other cases, there's vendors that are losing, that are being removed, particularly when it's hardware, when somebody is taking our total Infinity or taking Quantum with CloudGuard or Quantum with Harmony, then it doesn't make sense for them to do anything else but get rid of the secondary vendor. And understand, no matter what in this world somebody is going to tell you, displacement of the secondary vendor doesn't happen overnight. Companies aren't in the mood to lose money. So what they usually do is they slowly get rid of the secondary vendor. So when it's time to refresh those appliances, they jettison them, and they add the new boxes. And that's generally -- generally, it occurs over a 2-, 3-year period, sometimes even longer. So rip and replace isn't a reality unless maybe coming up with the FCC regs for material breaches and then reporting in the 10-K, I could see where Boards might say, just get that stuff out of here if it's causing us a problem. And given the levels of protection and prevention my competitors provide, I think there's a good opportunity something like that could happen. I mean you see it happen with material weaknesses from a financial standpoint. Usually, it's the CFO that's gone or somebody like that. But I definitely think the seriousness around security has definitely changed.

So Max and I have been having this debate on the changes in FCC regulations. Help us put that in context. Because we've seen all the catalysts in security before GDPR comes to mind, where there's a lot of excitement about it and then ultimately, the benefit was maybe a continuation of a trend rather than a step function change. Based on what your customers are telling you and what you know about the way regulations are changing, do you think that the most recent set of changes in the FCC regulations can catalyze a more material shift?

So I don't want to have my optimism overshadow reality. So I'll say I'm hopeful. I am definitely hopeful.

Okay.

But like with any regulation you see, we'll have to see how it gets implemented, right? We've seen the guidelines that are implemented or put out there in July. Everybody has an opinion. All of the leading legal firms have put out their little diatribes on it. I think it's going to remain to be seen. The one thing I am for sure of is that Boards care about their reputations and companies care about their reputations. And if you have any financial services aspect or data aspect to your business and you're putting out there every time you get materially breached, you're putting out an 8-K, or you're putting this in your 10-K in an expansive view to talk about it and discuss it, I can't imagine Boards are going to be too happy because that's their reputation, they're running that. They are the overseers of that company. And so I think reputation has a lot to do with it. So we can hope. I mean, we all hope people do the right thing. Taking shortcuts and dealing with technologies that only provide detection and remediation, that's not the way forward. I mean you really have to deliver protection and prevention if you want to say you're doing security.

I want to shift the discussion over to the product side. And I want to focus on both SASE and cloud. So perhaps first on SASE. We already talked a little bit about Perimeter 81. Check Point also has a new SD-WAN product that was released recently. Where are we in the SASE product cycle, both from a Check Point building out all of the pieces of it and from an industry willingness to invest in Check Point?

It's a good question. If you look at how small the market for SASE is right now, I mean, in the scheme of things, I mean, I think the largest player has maybe 8,000 or 10,000 customers. I think it kind of puts it into perspective. Because last time I looked, we have over 100,000 customers. Some of my competitors have several hundred thousand, most of them smaller and one is not quite to 100,000. So that's a lot of folks and a lot of opportunity. And so I think somebody threw around a ridiculous number of like it's a $20 billion industry or opportunity. And I always look at those kind of numbers and I shake my head because reality is, if everybody remained a stand-alone point solution, probably. But the future is a consolidated platform. And that's not the way the value proposition works. You get more for less. I mean that's how my competitors sell their products, right? They give multiple years and give you a 1 year for free or something. So I think they already know how that works. So when you look at it as a platform, you get the same principle. You're selling a lot of products and they get a discount. And that's what happens when you go with one vendor. The power of the platform.

So it sounds like there are 2 countervailing forces. The first is more penetration, SASE still being early on. But the second is as you get into later stages of maturity, you see more consolidation and that maybe is -- manifests itself as either pricing pressure or wallet share consolidation.

Well, I think it's just the natural evolution of consolidation of platform, right? I mean, have you ever seen anybody's TAM come true? I mean, the only way you can create a TAM is by adding up all of the opportunities you see in front of you, and that's created by the individual players, right? And then you add your extra on top. It's not realistic. It's almost disingenuous. This is a 30-year-old industry. I mean we've been in this industry since the beginning, 30 years. And reality is, it shrinks. As you deliver more value, you're delivering more value. So they get more for their money, and that's what a platform does. Unless you corner the market and have the only thing in town, but I don't think we're there yet. I'd like to believe it is with our protection and prevention but unfortunately, not yet.

Similar question on your set of cloud products where I think there are some parallels. There are a fair number of point products. There are different pieces of the portfolio that are being built out, whether it's cloud security posture management or Workload protection, DevSecOps. How do you see the cloud piece of the portfolio evolving? And welcome your comments on competitive environment in cloud.

So I think it's interesting about the cloud is you have companies that are cloud-first, and they tend to go with startups. Wix comes to mind off the top of my head. They tend to go all in on that side. I think your more mature level companies that are looking to go with the platform, I think that's where it becomes, "Look, I have that continuous management. I have policies that I can carry over. I can all -- I can do this from one management console, one platform." And it comes back to something else is when you're dealing with one vendor and you have a platform, it also -- it's more efficient, right? Like when you do Infinity, you're paying per seat and you're writing us one check. You get one invoice. You get to use the technology as you wish. And I think that has a very compelling nature to it instead of being nickeled-and-dimed and everything else along that line. So when it comes to the cloud, I think more mature companies will start going with the -- their platform they choose or the provider they choose, no matter where it be today or down the road. But I think in the immediate, people are picking still best-of-breed. I don't want to make it sound like everybody has chosen to move to a platform. By no means is that the case, right? It just seems that, that is the evolution of what's going on and people are in different stages of where they're going to be. And I think if you look forward 5 years, I think you're going to have a lot more platform revenue than you do today, much more.

So the platform piece of this leads to a question about Microsoft as a competitor. Where do you think they will be strong versus where do you think the independence and best-of-breed nature of a platform like Check Point will be strong?

Interesting. So I think -- from a Microsoft perspective, I think they're very complementary to what we do. I think it's the same way with AWS or even a GCP. There are offerings they have. That's what cloud posture management is all about. It's about taking that native security, making sure that across accounts, you have consistency, you don't have holes, you're not naked to the world in having your data subjected to being put out there in the public all the time. So I think there's a place for them. I don't think they're going to come in and displace us in the enterprise. I think what they do will have an offering. I don't quite understand how the SD-WAN piece from a SASE -- I can see the SD-WAN, but I can't see the SASE or the SSE part because what you want is enterprise-grade security and you want to have that consistency of policy, whereas if you were to opt, you're going to be fragmented again. And so the delivery mechanism, the SD-WAN part of it, maybe there's a way for that to work. But the SSE part, I think, is the more difficult part.

Because the [ SSE ] policy needs to be consistent with core network security...

Exactly. And you want the unification, you want the checks and balances. When you start out with something that's disparate, there's always the chance that you won't have consistency.

That make sense. All right. I'm going to pause and go to questions from the audience.

I'm in rare form, guys. Come on.

All right. Max, let's go to [indiscernible].

Okay. Let's do it. You grew your sales headcount by about 15% last year. How do you feel about the ramp of these employees? And then, can you tell us a little bit about your hiring expectations into the second half of the year and also into next year?

So for starters, I'm glad you got that 15% right. Most people seem to only remember the 25% goal we had. So the productivity, I think Gil called that out, we saw a nice change between the first quarter and the second quarter. And I think those expectations, hopefully, are going to become even better going forward. As far as where are we on the hiring front, well, we're doing the acquisition of P81, and with them, they had a direct sales force. They didn't use the channel. So we have a fair amount of salespeople coming over. We've also -- they've continued to hire. If you go out there and look on the job board, P81 continues to hire, and we continue to hire ourselves. I wouldn't say we're at an accelerated pace, especially now that we've acquired P81 or in the process of acquiring P81. But I think stay tuned for next year. It depends on how the year finishes and what budgeting for next year looks like. We'd love to add more sales force like we did last year, but we want to see a reason to do it. So time will tell.

And it's been some time since you've given disclosures on direct versus channel sales. Would you be able to give that split...?

Everything is indirect. So we have direct sales force, but everything is a meet-in-the-channel model. And so that will even be going forward with Perimeter 81. So once they roll over, all that will go into the channel and it's a meet-in-the-channel model. We don't do anything direct.

I wanted to stay on some of the comments that you're making on investment into next year. So I want to clarify, the productivity improvement that you saw in 2Q versus 1Q, what were the drivers of that?

I'd love to say it was a great talk or a beautiful e-mail or something along that lines, but I couldn't attribute it to any one thing. All I can tell you is that we saw sales force engagement improve. I think Gil called out 60%. You're the man with all the numbers, Max.

Yes, I think so. Yes.

Okay. So I believe he said it was a 60% improvement, and we look for further improvement. Investments in the next year, let me qualify something. We haven't even begun our budgeting process for next year. And so what I can tell you is I'd love to see more sales force. But obviously, you have to see if the business supports it. So once we get budgeting and get that all solidified when we give guidance for the next year, whether it be the quarter, the full year or both, we'll probably go into more color there. But right now, I couldn't give any indication other than what my hope is.

If I were to be hopeful and optimistic about the continuation of increased productivity as a trend, do you think there is a scenario where you can get to 10% revenue growth and the margin expansion in 2024?

Well, I'd say, from your lips to God's ears. But the reality is we have a goal of hitting double-digit revenue growth. And we've had that goal for some time, so much so that some people probably get tired of me saying it. But last year, we got to what, 8% revenue growth? Macro stepped in and impacted that, I think, at the end of the year. We're hopeful that we can get there, and we think we have the products, we think we have the platform. We definitely know we have the right security level. Protection and prevention, I think everybody is chasing that. And so hopefully, customers will start chasing it a little more.

Good stuff. Let's leave it there. Kip, thank you, and thank you all for joining us in the room.

Thank you, guys.