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

Greetings, and welcome to the Check Point Software 2026 Second Quarter Financial Results Video Conference. I'm Kip E. Meintzer, Global Head of Investor Relations. And joining me today are Chief Executive Officer, Nadav Zafrir; and our Chief Financial Officer, Roei Golan. Before we begin, I'd like to remind everyone that this conference is being recorded and will be available for replay on our website at checkpoint.com. During the presentation, Check Point's representatives may make forward-looking statements. Forward-looking statements generally relate to future events or future financial and/or operating performance. These statements involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Any forward-looking statements made only as of the date hereof, and Check Point Software undertakes no obligation to update publicly any forward-looking statements, except where 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. If you have any questions after the call, please feel free to contact Investor Relations by e-mail at kip@checkpoint.com. Now I'd like to turn the call over to Nadav Zafrir.

Our Q2 results were in line with our expectations, and we continue to make tangible progress strengthening our go-to-market organization. We're actually encouraged by improving execution and a growing sales pipeline. We expect Q3 to mark the trough followed by a stronger Q4 that supports second half performance, and we are maintaining our 2026 guidance. As a next step, we are significantly expanding our sales capacity by hiring hundreds of additional salespeople. We've launched a focused hiring campaign, reflecting our confidence in the long-term growth opportunity. Over the past few weeks, I met with more than 1,000 security leaders at Check Point Engage events in Chicago, Paris and Singapore. Their message is consistent and unmistakable. Our industry is at an inflection point. AI and particularly the latest frontier model is driving a collapse in scarcity of adversarial capabilities. This is democratizing and industrializing sophisticated cyber attacks and challenging many of the assumptions that have guided cybersecurity for decades. We cannot stop AI adoption, and we must prepare to defend against sophisticated attacks at unprecedented scale. This is the time for decisive action. At Check Point, securing our customers' AI transformation means executing the fundamentals better than ever, while building the next generation of cybersecurity, and we must do it in parallel. The fundamentals start with prevention, powered by our Threat Cloud AI intelligence, more than 100 AI agents and telemetry for millions of enforcement points, prevention for security is in our DNA. But fundamentals alone are no longer enough. We must build security that operates at machine speed, learns continuously and evolves as AI evolves. And so today, I'm excited to introduce the industry's first AI network firewall. We believe AI has created a new class of network traffic and it deserved a new class of firewall. The AI network follower gives customers visibility, control and security for prompts, agent actions and model interactions. The AI network firewall is a part of our AI Defense plane. It's a full stack AI security platform continuously trained on our threat research and intelligence and built to protect applications, users and agents from AI-based attacks. With the release of the AI network firewall, we are embedding the AI defense lanes across networks, private and public cloud and SASE, giving network security teams control they can put in place today. Beyond AI demand across our emerging technologies portfolio remains healthy. Subscription revenue grew 12% year-over-year in Q2, and we continue to integrate the capabilities from our recent acquisitions across the platform, strengthening our competitive position and expanding the value we deliver to customers. We're building momentum by expanding our go-to-market capacity and strengthening our product portfolio. The launch of our AI network firewall, combined with our AI defense play reinforces Check Point's mission of securing our customers' AI transformation. We remain focused on disciplined execution, accelerating growth and delivering long-term value for our customers, our partners, employees and shareholders. And with that, I'll turn over the call to Roei to review the financials.

Great. So thank you, Nadav, and thank you, everyone, for joining the call. As Nadav mentioned, the second quarter was as planned with 1% growth in revenues, driven by 12% growth in subscription revenues. Our total revenues reached $674 million and were $1 million below the midpoint of our projection as a result of lower product revenues as the lower demand for firewall appliances. When we're looking on our subscription revenues, it reached $333 million and were at the midpoint of our projections. Our adjusted free cash flow reached $161 million, $1 million above the midpoint of our projection and represents 24% of our revenues. Our non-GAAP EPS was $2.55 per diluted share and exceeded our guidance and grew by 8% year-over-year. As mentioned, we had 1% growth in revenues, while our deferred revenues grew by 7% to $2.025 billion. Our calculated billing totaled to $639 million and was similar to last year, while our current calculated billing grew by 2% to $641 million. Our remaining performance obligation grew by 7% and reached $2.55 billion. Our current RPO reached $1.6 billion and representing 4% increase compared to last year. As we indicated in the call back in May, we had -- we expected lower product revenues, mainly as a result of our disruption affected by the changes we made in the go-to-market organization. Our product revenues declined by 14% in the second quarter. As we are looking on the second half of the year, we do expect to see similar trends in the first quarter with our firewall appliances, while we do see significant improvement in our pipeline and the opportunities and the qualified opportunities in Q4, and we do expect to see back to growth in product revenues in the fourth quarter. When we are looking on the subscription revenues, it continued to accelerate to 12% growth this quarter, driven by the strong demand for our emerging technologies as email security and system continue to have strong demand. When we are looking on the third quarter, we do expect slight acceleration in our subscription revenues as a result of large appliances deals that were pushed from Q3 to Q4 and have also an impact on our subscription line item. As indicated, our total subscription business continues to be strong as we continue to experience strong demand for our emerging product portfolio, which remains the primary driver of our revenues growth. In the second quarter, we are looking on the e-mail security, CTEM and AI security, accumulative, they exceeded 40% growth in ARR year-over-year, while the calculated billing from these products grew by 35% year-over-year. Looking on our revenues by geographies. So our revenues from EMEA and America were 44% each for the second quarter, while the remaining 12% came from Asia Pacific, similar to what we had last year. When we are reviewing, we are looking on our P&L for this quarter, so our gross profit increased from $585 million to $588 million, representing a gross margin of 87%, the slight decrease in the gross margin was explained due to higher memory costs. Our operating expenses, excluding R&D grants, increased by 13%, while on a constant currency basis, our operating expenses increased by 11%. Our Q2 results include approximately $28 million of benefit from R&D grants to be received from the Israeli government. When we are looking on our operating expenses, net of R&D grants, they were -- the expenses were $328 million and increased by 5% year-over-year. The increase -- the net increase is primarily the result of increase in our workforce and as a result in continued investment in AI security and investment in our sales and marketing programs. When looking on the operating income, it continues to be strong at $260 million or 39% operating margin. Our non-GAAP net income increased by 1% and reached $264 million, while our GAAP net income reached $194 million and decreased by 4% year-over-year. Our non-GAAP EPS grew by 8% and reached $2.55, 8%, as I said, growth year-over-year, while our GAAP EPS was $1.87, a 2% increase year-over-year. Our number of fully diluted outstanding shares for Q2 was 103.5 million shares. And while we continue to do our buyback, we expect the number of shares for the next quarter to decrease by approximately 1.5 million shares. Moving into our cash flow and cash position. So our cash balances as of the end of the quarter was $4.2 billion cash and marketable securities and deposits. Our adjusted free cash flow reached $161 million as planned and in line with our projections. We also continue to do our buyback program and purchased approximately 2.5 million shares for $325 million this quarter at an average price of $131 per share. During the quarter, the company announced also a $2 billion expansion of the company's share repurchase program. So we're going to continue to do this buyback. To summarize, so from one end, definitely strong demand -- continued strong demand for emerging technology led by e-mail security and CTEM that's becoming more and more significant to our total business. On the other end, we did see, as expected, lower demand for firewall appliances this quarter. As I mentioned, we do expect similar trend to continue also in Q3. But definitely, we do see significant improvement on the appliances business in Q4, and we do expect to be back to growth in Q4 in the product revenues. We're going to move to the guidance to the business outlook. So first, regarding the full year, we are not touching the full year guidance. We are maintaining the same guidance as we gave you back in May in the last call. Looking on the Q3 outlook. So the total revenue range is between $665 million to $685 million, subscription revenue between $332 million to $343 million, non-GAAP EPS between $2.43 to $2.53, while our adjusted and GAAP EPS is $0.70 less. And our adjusted free cash flow is expected to be between $235 million to $265 million. It is important to note, as I mentioned in the call earlier that we do see significant opportunities and deals that are being pushed from Q3 to -- that are expected to be pushed from Q3 to Q4 and therefore, that has an effect, a negative impact mainly on our appliances revenues. And as I said, we -- if I'm comparing to what we've seen in the pipeline for Q4 in May and now, definitely, we do see even stronger pipeline for Q4. Definitely, it's a more back-end loaded year also is a reflection of what -- of the go-to-market discussion that we've done. But definitely, we do see a positive sign. first, of course, with the emerging products that continue to have a strong demand. And also with the appliances and the firewall, we see positive signs that we are seeing the end in Q3 in terms of the decline and we're going back to growth in Q4. Thank you, and we are moving to Q&A. Kip, the floor is yours.

[Operator Instructions] Today, to begin, we're going to have Joseph Gallo from Jefferies, followed by Patrick Colville from Scotiabank.

It was great to hear about the investment in sales capacity. Can you just remind us what the normal cadence of sales ramp to productivity is? I'm just trying to understand better the confidence in a 4Q rebound when hiring today would be more indicative of 2027's benefit.

The latter, right? So -- the impact to sales is expected in Q1 and Q2 of 2027. So the guidance and what we're expecting for Q3 and Q4 does not take into consideration the ramp-up. The ramp-up obviously has its momentum, but it's going to take some time. However, it is very significant. For us, hiring hundreds of new frontline sellers is a major move. I don't know if you've seen it. I hope you have. We have started an aggressive campaign. So it's not just the number, it's also the people that we're hiring and the invigorating of our sales force across the globe. It's really meaningful and it's a company-wide effort. So the guidance that we gave today does not take that into consideration. That is sort of preparing for a stronger 2027.

All right. Next up is Patrick Colville, followed by John DiFucci.

I guess I wanted to ask about kind of Mythos preparedness and advanced AI preparedness. There's all excitement in the market around what advanced AI means for cybersecurity. You kind of touched on this in your prepared remarks a little bit. But just vis-a-vis Check Point specifically, are you seeing changes in buying patterns as a result of enterprises kind of concerned about the risks brought on by advanced AI models? And then I guess, specifically, like where is that hitting the financial model? Is it the firewall layer for Check Point? Is it the non-chat subs? And any changes to sales cycles?

So if you zoom out, really the phenomena that we're seeing is very interesting. It's -- when you think about it from the attacker's perspective, you want to think about it from an ROI perspective. So the way we see it is from the attackers now have access to resources that they didn't have before. That's what we call the collapse of scarcity. They literally have access to what used to be very scarce resources. And that's sort of what leads into the democratization and industrialization. So we're going to see more sophisticated attacks at a much higher cadence. That is happening already, but we think it's going to accelerate within the next couple of years. So when you think about the security paradigm that -- or the assumptions that we have around security, we're seeing signs that some of these assumptions and the current paradigm does not necessarily withstand the change that's coming from the attackers. And that leads us to like an [ acunian ] way to really a world between true paradigms. And so that's what I mean when I say, number one, going back to fundamentals. This is the proactive prevention first. That's our DNA. That's where we shine. That's what our customers expect from us. And we have to do everything that we have learned just much better, much faster, much more diligently. At the same time, in parallel, we have to look into the future. We have to imagine different possible futures, give them different probabilities and start simulating how the attackers are going to change. So for example, I believe -- we believe that detection and response are going to be much less relevant because we're going to have to go to automatic remediation at machine speed. And so we're making massive investments. Last year, we spoke about hiring hundreds of new individuals to build the next generation. Today, we announced the launch of the first AI network firewall integrated into our AI defense plane. And there's a whole strategy around that. Now to your question about the buyer's perspective, I think that they realize that on the one hand, back to basics and at the same time, they're looking to what's next. So I'll give you a couple of examples. I think the continuous threat exposure management based on three acquisitions that we made that is growing last quarter, we spoke about that growing at almost 100% is a part of that. Why? Because it gives you the ability to understand what's coming at you, but also creating a real pathway to understand what the real threats mean and automatically remediating that in an open platform approach. And that's why CTEM, for example, is having such success. At the same time, the reason I'm so excited about the AI network firewall is that it's also happening at the network level. And so customers that already have our firewall can now also take advantage of the network to understand what their employees are doing, what agents are running and control that. So I really think to summarize, it's sort of a tale of two cities. On the one hand, everything that we've learned, we must do better than we've ever done before. At the same time, we're creating the new technology, the new products, the new -- and I think within the next couple of years, you'll see a new paradigm emerging. So that's sort of the story of where we are right now. I think that in some way, some of the frontier models may be hyped, but the phenomena is the phenomenon cannot be overhyped. So we're seeing it in a very tactical level in the amount of vulnerabilities that are out there and how fast we need to patch them. And so that's what we're doing today. But as we move forward, we need to change that paradigm, and we're working on this in different buckets. The last one is actually running these models on our own software to make sure that we can simulate, imagine and get ahead of the curve before attackers do it.

Next up is John DiFucci, followed by Brian Essex.

Nadav, I sort of have a high-level question, I think. I mean, Check Point has always been a respected technology company and a thought leader in its field. Long before the term platformization came out, I remember your predecessor talking about the Infinity platform. And I know it became products too, but it was a platform. It was the first time we had heard about one company working to secure an enterprise from top to bottom. Even today, partners in the field acknowledge the strength of the technology at Check Point, but there seems to be a customer perception of the sort of dreaded word legacy, even though your installed base is really loyal and pretty much Check Point diehards. I guess what is it other than hiring a lot of new go-to-market people that you think has to be done to change that perception? Because that's really important. That's hard. And is the issue really just not enough feet on the street?

No, I think it goes beyond that. Not enough feet on the street is one thing, and that's why we started this campaign. Now that -- and this is a second phase of the go-to-market changes that we announced last time. So now that we've stabilized, we're ready to add hundreds of new people based on the new model in the organization that -- or the reorg that we announced. I think second, it's marketing, right? So we need to be louder. I really believe that when it comes to this world that we're walking into, this world where, on the one hand, security, real security, proactive prevention has never been more important. I think that's our DNA. And I think we can provide real security based on the current paradigm. And at the same time, the announcement of the first AI network firewall. It's a big announcement. It's taking the firewall and preparing it for the AI era, but not as a stand-alone to your point, but as a platform play. And this is where integrating the AI network firewall into the AI defense plan. and having the ability to look at different choke points within the network, not just for observability, but also for enforcement is a huge advancement. And we are seeing the demand for our AI capabilities grow very, very fast. In fact, some of the hiring that we're doing across the globe is because we just can't get to enough customers fast enough with the high demand that we have because this is a specialized field where you need people on the specialists that can come in and do all the more technical stuff for our customers. And when you bring all these things together, it makes us very optimistic about the future. One thing that I'll say about the platform, yes, consolidation is important. But I think it needs to be an open platform, right? And so -- and an open platform means that we acknowledge the fact that, number one, from the approach should not be a monolithic approach, especially at the enterprise level, that's not going to lead to resilience. Number two, whether we like it or not, a lot of our customers are going to be multi-vendor, and we need to appreciate that and have their security front and center in our policy. And so with our unified management, which I think is one of the strongest features that Check Point has, within the next few months, we're going to offer our customers the ability to manage different products and different firewalls, even if they are our fiercest competitors because at the end of the day, especially in the Mythos era, we just don't have the time to take care of things one by one with an SLA of days and weeks. We need to be able to see what's coming. We need to be able to understand what the real impact may be. We're using AI to do that to actually simulate the paths to the vulnerabilities that we're seeing. And then we're moving into an automatic remediation capability, whether it's patching or virtual patching or segmenting or segregation within the network so that at the end of the day, we can have this real proactive prevention first mentality and at the same time, starts with the new paradigm of autonomous remediation.

By the way, that makes a ton of sense, and it's truly unique, that open platform to work with others, and it's in the customer's best interest. I think you got to have Roei loosen up that marketing budget a little more and go out there really loud. Had Kip run the [indiscernible] because he's pretty loud.

Yes, I agree. I totally agree, and it's -- some of it is already happening. Some of it is work in progress. And I think we're starting to see the impact. We're starting to see that turn into the funnel. And as Roei said, we're already seeing a very strong Q4 ahead of us.

Next up is Brian Essex with JPMorgan.

I want to follow up on some of that commentary, particularly with regard to platform and your AI firewall. I think it's great to see the innovation of the platform. I think that's another thing that we've heard customers are really focused on is the rate of innovation to kind of build that platform. Would love to know what is your vision in terms of how you see the AI firewall technology stacking up against what seems to be an emerging AI gateway market. Are you targeting platforms that span -- I mean, I guess, are you thinking about expanding the platform to span across broader observability, tracing, performance optimization, cost control features, which is one thing that I think [ Zayes ] are very focused on? Or do you intend to like stick towards more security and governance? It seems like maybe some of your peers are looking at things more of a consolidated broader observability and security platform, but would love to know what your focus is going forward?

Yes. So I want to start by saying that we need some, I would say, humility as we try to understand where this is going. There are different possible futures in where this is going. And I think we must look at it from different perspectives. One perspective, which I spoke about at length is the attackers perspective. The second perspective is different industries and how they are adopting AI. So again, a lot of hype, but it's a process. And there's a lot of trial and error within this process of adoption of AI, whether it's sort of the bread and butter that all of us have already, it's the [ MOE ] usage of AI. moving into independent agents that in the beginning, take over some of the human more redundant mundane day-to-day tasks, but over time, becoming more and more independent and autonomous. And that's where the game changes not only from the attackers perspective, but also from the attack surface. Having said all that, our mission remains the secure -- securing the AI adoption journey. And the way we approach this is with our customers. And so we have a design partner program with different industries, with different verticals because health is different than finance. And finance is different than energy and energy is different than production and logistics. For each one of them, we have to sit down with our customers, understand where they're going in the next couple of years, simulate what kind of new threats emerge from that and coming up with the right mechanisms to govern, to control and to secure these new capabilities so that on the one hand, they can deploy it, but on the second, but from a different perspective, they can do it with security in mind. Now being very direct to your question, Brian, we are focusing on the security part. But security is becoming much broader than just observability. Observability in many ways, when you think about the next paradigm or the emerging paradigm doesn't really matter because going to the [ SOC ] or to the [ CISO ] or to the VP of Engineering and giving them a list of things that may go wrong is not going to help them. We need to be able to autonomously remediate. And so we're building those capabilities. But at the end of the day, we're not looking to go beyond the security level. We think security is very broad, very deep. We're building very deep capabilities. But when you think about controlling this from a cost perspective, that's not necessarily where we're going. Of course, when you have the observability, you can add that to it.

Next up is Todd Weller, followed by Adam Tindle.

Nadav, I would love to get your perspectives on potential AI tailwinds for the network security business. There's different kind of angles to this. There's AI application and infrastructure deployments related to that AI data centers. And then there's an angle around potentially increasing traffic volumes and spectrum requirements. So how do you think about framing those dimensions? How do you think about magnitude and timing of those opportunities? And then within your kind of core large enterprise base today, what are you seeing any of that? And where do you think we are?

Yes. I think that to your point about the tailwinds for security, I would look at it from -- I think there are two different aspects that are relevant to look at. The first one is how the network is a part of the overall AI defense plan. And the overall AI defense plane is on the device. It's in the cloud. It's in workloads, it's in the DevOps. And the network is at the heart of that and needs to play within that. And that's why the introduction of the AI network firewall as a part of the overall AI defense plan is so important. And I think that's going to have a meaningful tailwind for the industry and for Check Point specifically. With thinking about that, it's not just about securing, it's also about managing. So our AI-driven unified management, which is becoming an open platform and allows us to manage different components and different vendors, different firewalls connected as a platform to the continuous threat exposure management, which gives us the ability to understand the intelligence from the outside in, the attackers path and combining that is one aspect. The second aspect is emerging new capabilities that enterprises are building. So for example, some enterprises are -- have already invested and some are thinking about investing in AI factories, right? So localized capabilities sort of going back on-prem, whether it's because of privacy issues or cost issues. We're also seeing a plethora of rising investments in different parts of the world regarding data sovereignty, which is another issue. And finally, very specific data centers that are going to be either for inference or for training, which require different capabilities. So if you remember, a few months ago, we announced that we're working with NVIDIA to embed our firewall capability within the GPU level because in those data centers, latency is so important and East-West traffic is so much more imminent that we literally need to do it at the hardware level in order to remain very, very efficient. And so that's the second tailwind that we're seeing. However, to be transparent about that is something that we're seeing in a little bit of a further future. So 2027, we need to start seeing that.

All right. Thanks, Todd. Next up is Adam Tindle, followed by Shaul Eyal.

Nadav, I wanted to ask on the business outlook. You're reiterating the fiscal year guidance this year. And if I back into the implied Q4, you're going to need to do about an $800 million revenue quarter at the midpoint of guidance. And I was going back through the model, I've never seen that. That would be a record quarter. You also mentioned earlier that guidance doesn't take the ramp into consideration. So I know it's more of a -- really question on guidance, but I wanted to hear from you, the debate oversetting that expectation today and what markers you're looking at for Q4. And Roei, any comments that you could give us on billings? I know we kind of lost track. We were thinking 6% to 7% for the year entering the year. We've got this very difficult comp in Q3 that I think some are struggling to model. So just correct us a little bit on the billings trajectory as well?

Roei, do you want to start?

I'll start. Yes. So definitely, you are right in terms of your calculation for Q4, it's around 6.5% growth for Q4 in order to meet the be in the midpoint. I mentioned during my script that we do expect to be back to positive growth in product revenues. I remind you the main headwind that we see today on our revenues, the decline in revenues is coming from the product revenues, which declined this quarter of 14%, expected to be similar levels in Q3. And in Q4, we are expecting to be back to green to be positive in product. So that's one aspect that definitely -- And I remind you also that Q4 is a more product-driven quarter. The portion of product out of the total revenues is bigger than any other quarter in the year. So that's one aspect. And again, I think that when we are looking on the funnel for Q4, I know that it's much higher than what we guided for Q3 and Q4, I mean this growth. But when we are looking on the funnel, on the qualified deals, I'm talking about qualified deal, I'm not talking about now potential stuff. We do see much better funnel, much better pipeline for Q4. And again, we went through with our sales leaders on all the large deals, everything -- and again, some of them are deals that have been pushed from Q3 to Q4. That again, is expected to be pushed because there might be some that will be placed in Q3, but Q3 is more tricky because of the summer. So we took a more conservative year approach that some of this significant deal will be pushed to Q4. So definitely, it's a high bar in terms of Q4. But when I'm looking on the internal metrics, there is the support for that. And you asked about the billing. So you're right, when we started -- I'm not giving any guidance for billing, but I was asking about billing for the year. When we started the year, it was around mid -- mid-single digit, we talked about 5%, 6%. When we came back on May, we told -- again, because of the higher disruption that we did see, it resulted more back-end loaded year, and we do see it in the numbers for Q2. And when I'm looking on H2, I don't want to give any specific guidance, but definitely, I do see much better billings in Q4 in terms of growth. Q3, you are right that the comparables are tougher. So there might be -- so as we said, Q3 is going to be -- might be more challenging with billing. But Q4, definitely, we are expecting, again, if we are looking on the funnel on large deals and definitely, we expect to be a strong bidding quarter.

Yes. Just to add to that, Adam, remember that when we spoke in our last earnings, we were very transparent about the reorg that we did in our go-to-market org. That's going according to plan. And so that's why we think Q3 is the trough. And when we look at what's happening in the future in Q4, like Roei said, we're seeing a much better outcome, and that's why we are maintaining the guidance. With regards to the hiring, the reason we're not taking that into consideration is the natural ramp-up, right? So it's the second phase. And in fact, when you think about it now because this is a company-wide effort and many of our folks beyond selling need to recruit and onboard. And so actually, we're not going to see the impact of the hiring in 2026. We're only going to see the impact of the hiring in 2027, right? So some of it in Q1 and hopefully more of it in Q2. But it's the prudent thing to do. And it's a part of the plan and a part of the strategy that we spoke about last time. So -- and for us, hiring hundreds of new sellers is obviously a great investment, and we're investing in our future. So last year, we spoke about hiring about 500 new R&D folks to start doubling down on the future products for the AI era. Now we feel we're ready with some of the products. We've done the reorg and we're ready to ramp up. But as you said, that's only going to have an impact in 2027.