General Dynamics Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2023

There are 13 speakers on the call.

Operator

I'm Kippie Meintzer, Global Head of Investor Relations. And joining me today are Founder and CEO, Gil Schwed and our Chief Financial Officer, Roy Galan. Before we begin, I'd like to remind everyone that the conference is being recorded and will be available for replay on our website at checkpointdot Tom. During the formal presentation, all participants are in listen only mode to be followed by a Q and A session. During the presentation, Check Point representatives may make forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 of the Securities and Exchange Act of 1934.

Operator

These statements involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those discussed and Check Point Software's latest filings with the Securities and Exchange Commission. Any forward looking statements made speak only as of the date hereof, and Check Point Software undertakes no obligation to update publicly any forward looking statements. 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 presentation of non GAAP information. If you have any questions after the call, please feel free to contact Investor Relations by email at kipcheckpoint.com.

Operator

Now I'd like to turn the call over to Gil Shwed.

Speaker 1

Hi, everyone. Good morning, and glad to see all of you here. Before I turn it into Rohit to go through the financial, I want to make a short statement. I think as you all know, Israel gone through a very terrible terror attack 3 weeks ago. And 1st and foremost, our hearts go to all the people that are suffering from the situation and all the people that lost their loved ones In this situation and unfortunately here in Israel and around us, there are many of them.

Speaker 1

We all know people that have Suffered and we all know people that got murdered in this terror attack. Over the past 3 weeks, our employees proved that despite the siren reserve military draft to Few people around 5 percent of our entire headcount. We can continue to operate as planned uninterrupted. Over the last 3 weeks, We've been able to launch products, complete acquisitions, and of course, continue and support our customers' partners Exactly as planned. All of that is due to the fact that we are much more accommodated to work in a hybrid manner Our operations are all around the world and mainly due to our employees and their commitment to customers and partners.

Speaker 1

I want to thank all our employees for their resilience And for all our customers, partners and you in the investment community because I did receive plenty of support, Plenty of emails and calls from people that are standing behind us and are supporting us at this time. I really, really appreciate it. I really want to thank you. And with that, I think we can turn to business and try to continue with business plans. So, Rohit, the floor is yours.

Speaker 2

Thank you, Gil, and thank you for everyone for joining the call today. I'm excited to be with you and begin the review of the Q3 for 2023. We had another strong profitable quarter with 17% growth in EPS, both double digit growth in net income and EPS In the net income for the Q2 in a row, in the EPS for the Q1 in a row, very strong results. In terms of revenues, revenues reached 596 Schwed, dollars 9,000,000 above the midpoint of our projection, while our EPS, as mentioned, reached $2.07 at the top end of our projections. Let's go now to the numbers.

Speaker 2

So deferred revenues grew by 4% to $1,709,000,000 Our current deferred revenues, actually the short term deferred revenue grew by 6% to $1,246,000,000 Our calculated billing reached $531,000,000 while our current calculated billing, the short term calculated billing reached $535,000,000 Important to note that the calculated billing includes $8,000,000 related to the acquisition of Perimeter 81. Same as in the previous quarter, due to high interest rate environment, we saw fewer customers that are willing to pay upfront for multi year deals, which was already in shorter billing duration year over year. In addition, the Infinity is becoming more and more significant to our business and the billing terms in these deals are More flexible, some of them on a monthly basis, some of them on a quarterly basis. So that also affect our duration. It is important to note We saw many positive indicators this quarter and we saw that it's something that we are monitoring the annualized booking actually grew year over year and our IPO grew by mid single digiti, Rovil.

Speaker 2

So I think in general, we saw very positive indicator Q3 and we see a positive momentum also going to Q4. Okay. So, Altice Securities and Exchange and Revenues grew by 15%, actually The highest growth that we had since 2017, this growth was driven by strong demand for our Harmony products family and mainly for Harmony human security. We keep seeing a very strong demand for the Harmony products and that's bringing this growth. On the product side, we still see delays in executing research projects.

Speaker 2

That's resulting in decline of product revenues by 14% year over year. It is important to know that we did see strong and healthy renewal business as our customer continue to benefit from our security and support. We do see stronger pipeline for Q4 that include also refresh project that were postponed for prior quarters. So we hope that we going to see the positive turnaround in Q4. In terms of Infinity, so Infinity had another great quarter, continued to flow Schwed.

Speaker 2

In the Q3, the revenues from Infinity exceeded the 10% of the total revenue And we can see more and more customers adopting our platform, which answering their needs under one umbrella of product and services. As for the revenues by geography, so 46% of revenue came from EMEA, 43% of revenues came from the Americas, while the remaining 11% Kane from Asia Pacific. Now let's move to the P and L. So our gross profit increased for $7,000,000 to $534,000,000 representing a gross margin of 19% compared to 88% margin last year. This is a result of significant improvement in our supply chain this year, which had been challenging in 2022.

Speaker 2

Our operating expenses increased by 9% This increase is mainly as a result of our continued investment in our workforce, cloud infrastructure, marketing and travel costs. In total, our non GAAP operating income continues to be strong at $269,000,000 or 45% margin, same as we had last year, Very strong profitability. Financial income this quarter reached $18,000,000 as we keep investing in a higher interest rate over time. Our non GAAP tax rate for this quarter was around 15%, mainly due to indexation and updating tax provisions because of several tax assessments we had worldwide. Our non GAAP net income increased to $242,000,000 or $2.07 per diluted share reaching the top end of our projection and 17% growth year over year.

Speaker 2

Our GAAP net income was $205,000,000 or $1.75 per diluted share, 19% growth year over year. Moving to our cash flow and cash position. So our cash balances for as of the end of the quarter was $3,000,000,000 Our operating cash flow was strong at $222,000,000 this quarter and it includes $22,000,000 Founder rollback in connection with our an acquisition that we did this quarter. Excluding this effect, our cash flow grew by 2% year over year to $244,000,000 During the quarter, we acquired Palimethirty 1 and Atmoset for a total net cash amount of $477,000,000 We also continued our buyback program and purchased 2,500,000 shares for $325,000,000 at an average price of $131 Now to summarize our financial disclosure, very strong subscription revenues with 15% growth, IZGOLD since 2017, continued strong adoption of our Infinity platform. And while we see refreshed projects that have experienced delay, We see very strong and healthy renewal business and again strong profitability with 17% growth in EPS.

Speaker 2

And now I'll turn the call over to Gil.

Speaker 1

Hi, everyone. Once again, nice to see you all. Pleasure to be here. I'd like to shed some more light about technology and the business and what we've seen during the week's quarter. First, if we start with Some of the highlights and the things you've already heard from Roi.

Speaker 1

I think on the financial side, we had good financial results, exceeded Our projections on the top end of the revenues, even beyond that on the EPS, we did experience strong renewals And we did see a lot of positive indicators of change, change that I think will mark higher growth with the economy and with all the efforts The check when people do around all the the entire world. And on the technology and the other activities that we've done this quarter, First, I think we've talked a lot about the acquisition of Perimeter 81, new industry, more than 3,000 new customers. Getting into the SaaS industry, I think the name is here several times on the slide and during in the next few slides I will explain what is SaaS and why it's important And why is it such a big deal and I think a big opportunity for our business. But on top of it, we've launched several other products, Schwed. Especially during October, the Horizon Playblocks and several others.

Speaker 1

And I think we remained very, very active. So let me start and drill down a little bit about some of the business Schwed. So first and foremost is market expansion And our acquisitions that we've executed in the last actually 60 days. In the last actually 60 days, we've Acquired 3 companies making it 20 total count for Check Point Acquisitions in several spaces. The biggest one was and is Quant is Perimeter 81 for the Quantum SASE and again, I'll explain what it is in a second.

Speaker 1

It's a 3.4 $1,000,000,000 market, which is very adjacent and very complementary to our customer base. And I think it's a must for us to play and be strong in that market. In addition to that, we've expanded our technology with a small acquisition of Atmosec, a small Israeli startup that will let us provide better technologies for the SaaS security market, Providing better technology to secure applications that are being run from the cloud. And last and not least, if you remember at the beginning of the year, We launched our Infinity Global Services, an organization that aims to complete the set of services That customer can get from Check Point and basically augment the capabilities that each customer has. Infinity Global Services has today more than 30 different services.

Speaker 1

It provides around 400 secondurity consultants. It's a pretty big organization. And what we've done now is added to it few Additional services. The main one is actually managed firewall service. It plays very well into our installed base and that's with the acquisition of RMSource, We've completed just a week and a half ago.

Speaker 1

So this is another addition, important addition to our market space. And again, we've done all of In a very short period of time and continue to that even during these days. So let me jump right in and speak a little bit about The challenge of SASE, what is SASE? So SASE means Secure Access Service Edge and that's actually A big name to the new types of connectivity that enterprises need these days. So if you're trying to understand what does that mean, For example, if in the past an enterprise was mainly remote users and a data center or a corporate or a few corporate offices, Today, an enterprise network is far more than that.

Speaker 1

It has SaaS application, application that are delivered from the cloud. It has cloud applications that are delivered from a private or public cloud. It has many, many branch offices, Talking about what we call SD WAN, branch office security and branch office traffic optimization. We need to secure the access of the remote users, not just When we access the data center, but also when we access the internet, when we access the cloud application. And these don't go through the traditional enterprise gateways.

Speaker 1

So the connectivity becomes a little bit more challenging or a little bit more complicated because obviously each element of that adds another layer of connectivity and a large element of security. One approach to doing that is running a big part of it from the cloud and many solutions today, by the way, what they do is Tunnel all the user traffic. Today, when we speak about SaaS, it's mainly about taking remote user traffic and tunneling it through a cloud service that opens that communication, inspects it, and secures it. We've been trying and we've been active in this space for a long Schwed. I think now we made a very important step with the acquisition of Perimeter NT1 to build the industry best, what we call a game changing Architecture solution that addresses all the elements, not just the remote user and not just the branch office like any other vendor, But addressing all the elements of SASE connectivity in one suite, I think we're we've started by launching the Quantum SASE Last week of actually October 8.

Speaker 1

And we will continue in building that architecture into making the The most complete SASE solution. So let me describe what it is and what are the benefits. For example, if we speak about current solution, They channel all the traffic through the cloud. So on one hand, you want to get more security. On the other hand, by tunneling it through the cloud, you slow it down and mainly Jeopardize the privacy because you take all your communication that you want to keep private and secure and open it in a single entity That all the customers in the world share.

Speaker 1

So basically, we're taking a huge risk to the privacy of the communication. What we do with Quantum SASE, first, we provide twice as fast Internet security because we are operating in what we call the hybrid manner With on device and cloud network protection, again it's controlled from the cloud, but in most cases we don't actually need to go through opening and Jeopardizing the privacy, but we can do it from the user device and get a much faster and much more secure connectivity. 2nd, it's the consolidation. I've described the challenge and today if you look at the industry, customers are using, if they want to get a Full SaaS architecture, full connectivity architecture, we need around 4 different solutions, usually from 3 Plus vendors, in some cases much more. What we want to do is create a full mesh integrated Schwed.

Speaker 1

From 1 vendor, one ability to manage it, one ability to deploy and get the highest level of 0 trust Security that actually works. 0 Trust means that we make security far more granular, far more Transaction to transaction or user to application grain security, so making security at a higher level. And last but not least is optimizing the communication when we speak about branch office communication and that's the sector that's called SD WAN. And SD WAN not just by optimizing traffic, but by getting the proper level of security. And I think we are going to integrate it.

Speaker 1

We've launched our SD WAN Technology at the beginning of the year and we will make it a very important part of our entire SASE architecture as part of its solution. So overall, I think we do have a game changer with which we will be able to connect the data center gateway or Quantum Gateways or Quantum Firewalls with the branch office, with the cloud, with the end users, with the remote access And make both Internet access and data access everywhere at the highest level of security and the highest level of performance. I think we really have a game changer here. So that's about the Quantum SASE. And let me switch to that to a different technology that we launched last week, and that's The Horizon Playblocks.

Speaker 1

I think that Horizon Playblocks can be a real game changer. Maybe I should use the game changer, maybe a breakthrough technology here that really may take security to the next level. And I think you've heard me speak even at the beginning since the beginning of the year about the 3 C's of security solutions that are comprehensive, consolidated and collaborative. And I think the element is if we get so many security technologies and they actually don't work together, actually even worse, some of them even within the same domain Don't work together. Let me give you an example.

Speaker 1

Let's say that we spot some entity or someone that's scanning our network that is doing what's Called technically port scanning to our network. So our gateway will stop the port scan or not will stop the accessing different ports And the user will keep trying to do the port scan and then they might even find there's some application that's open and they might find the vulnerability in that application And get inside the network. We actually might even do it from a different location. With PlayBlox, even within the gateway security, we can see somebody is doing a port scan. Let's put that entity in the penalty box and let's not have them even the chance to access even places that they're That are allowed access because maybe they are trying to exploit some vulnerabilities.

Speaker 1

Now you can do it on the same gateway. You can do it in all the gateways in the company. Again, we've spotted one entity trying to get into our network. Let's not get them in. And then you can do it with multiple products, not just with the network security, But he's also doing it across products.

Speaker 1

So for example, if we're seeing, suspicious activity by one of the endpoints in the company, We block access to that endpoint by all the gateways and by all the other security means. So that That endpoint cannot compromise any other places in the network. And again, the list goes on and that's what we call in Playblocks The story blocks that could take scenarios and turn them into automatic, simple, out of the box Playbooks that can work and can turn security to be collaborative. I believe that this is a breakthrough. Our solutions today in the 3 that talk about later in a slightly different category, super complicated, requires a huge investment, requires Years of training and building different scenarios and don't always address the issues.

Speaker 1

What we are being able to do here is a real break In taking that idea of collaborative security, of automated security and make it super simple and super effective. And you see a customer quote from One of the early customers were choosing that technology that says the level of security that I get here was previously unattainable. I'm very proud of that technology. That's the first step, and that's going to be included with all the Check Point gateways and all the Check Point product. And again, incorporate many other third party products into vet game and in the future even more.

Speaker 1

So I think it's a very, very good start to a breakthrough technology. We've talked again, there's many, many more technologies that we launched, mainly, by the way, in the last 3 weeks. And I think Roy already described the success that we have with Infinity, and Infinity becoming not just an important part of our strategy, but bigger part of our business. And you can see here a few examples of wins with Infinity. 1 is in Asia, a financial and insurance services company, full Infinity architecture with Quantum, CloudGuard, Harmony, single management solution and facilitated all the security consolidation.

Speaker 1

Another one is Woodward and Aerospace Manufacturing In the Americas, again, we are using here both the SASE, which is very nice to see the deployment with our quantum gateways. They get the scalability. They like the ease of deployment that were really, really differentiators because that's a very important part when you do security in the large scale. And they Are utilizing our Infinity Global Services for optimizing the security policy and delivering better security. And last one in these examples and again you can imagine that we have many many examples of different customer wins and customer scenarios that we sorted out To get to this list is a very important customer for us.

Speaker 1

The US DLA, the Defense Logistic Agency, that's Kind of the procurement army of the US Department of Defense, America's federal government using both the Quantum and our CloudGuard, so gateway and cloud. And like the flexibility and the ability to deploy more and more technology with the Infinity agreement with Waveside. So these are a few important and interesting wins, there's many, many more. Another avenue of the business He's the technology leadership and how it's being recognized by analysts. You can see here, and I won't go through the list, some of The awards and some of the mentions that we got in different analysts mentioned Frost and Sullivan, Giga Ohm, Forrester, Gartner and several more that I didn't include here versus I think about more than 10.

Speaker 1

Just here on this slide, Most of them, 7 or 8 are just from the last quarter, shows the leadership on that. Again, I don't remember even how many years in the Gartner Magic Quadrant for Network Firewalls. But everything we are stepping more and more, even in new areas like The horizon for the security consolidation, the harmony for the user security, for the CloudGuard, we're making more and more progress and winning more and More wins into the leader quadrant or the center of the circle that we have or the leadership of the wave In terms of the leadership of our technology, I think it's something we should be very proud and we should all understand that we're able to lead in many different markets and especially consolidate Last and not least here, we were also recognized by a few publications, the Forbes 20 23 world best employers. Very proud to be here the 4, 3 year in a row, I think to be the leading company in our industry. Thank you for our employees for choosing us and for voting for us.

Speaker 1

These are, by the way, both 2 services that are unaided. We don't know how we are being managed. We don't contribute to them. So this is independent studies. And the second one, for the first time, we were surprised to CS on the Newsweek world's most trustworthy companies, again, leading in the industry.

Speaker 1

So customers and partners and many people Trust the Check Point brand and I think that's a very, very important thing, especially when you speak about a brand that's important for cyber So this is just a complete kind of spectrum of technology and innovation, Users and wins, analysts that recognize that and our employees and general public Let's recognize the potential and the leadership of the Check Point brand. So to summarize my part, I think we had a pretty good quarter, very good financial results, strong profitability with 17% EPS growth, 15% growth in subscription, highest growth since 2017. I think we have game changing innovation, free acquisition, the Quantum SASE Horizon Playblocks for collaborative security. And I think like Rory mentioned, we are seeing a lot of signs for positive change. If you remember, last November, we Started with I think what we've seen is a major slowdown in our industry.

Speaker 1

I think it continued throughout the first and second quarter. And I think Now in the Q3, I'm seeing some good signs of turnaround. I think part of it is the economy and the industry, And parts of it is the action of our people in Check Point, especially our people in the field that are working very hard. And I think we're starting to see that and I'm very, very positive about the signs for the future that we'll get out of that. So before I open the call for a question and answer, maybe it's the right time we've had to speak about our projections for the Q4.

Speaker 1

So in general our projections, I'm actually first very positive. I think Ruiz shared the positive signs that we've seen. We see more positive And our internal indicators, when you can see on the external numbers, We have decent and healthy pipeline and projections by our field. So with that, I think we can move to that. I think in terms of revenues, we expect revenues to be in the range of $636,000,000 to $686,000,000 It's a wide range because I think there's a lot of Schwed.

Speaker 1

Our field actually is even more positive and more optimistic than I do. You know my regular caveat with projecting the future is very challenging. There is a very high level of uncertainty and results can be better or worse. So I think there are Some good signs that it can be better. On the EPS side, I think we're expecting very healthy EPS Between $2.35 to $2.55 GAAP EPS is expected to be approximately $0.32 less.

Speaker 1

And I think overall these projections play very much well into the ranges that we provided in the beginning of the year. So the next slide will show you How it plays into the ranges that we get in the beginning of the year. In the beginning, our original range for revenues was between $2,340,000,000 to $2,510,000,000 In revenues, you can see with the Q4 now, the range has narrowed. I mean, we have 3 quarters behind us already. And I think you see it's right in the middle.

Speaker 1

So I'm actually it's pretty good to see that, especially as we had a year that wasn't easy the first 2 or 3 quarters. Non GAAP EPS is we are actually even revising the range here and taking the range up. So if the original rate was $7.70 to $8.30 the new range is already Starts at $8.20 and goes up all the way to $8.40 So this is already expected to be At the top end and maybe even over the original range that we provided. I think these are Very good projection. I think they show a lot of I think positivity on our side.

Speaker 1

We're a little bit cautious On the revenue side, which I think is always a good thing to do. So overall, I think that we had very good results. I think we're having decent projections and I would be very happy Here are your questions and comments about our business. Thank you very much. And let's open the call to your questions.

Operator

As always, during the question and answer period, please limit your questions to 1 so we can get through everybody. Today we're going to start off with Gabriela Borges from Goldman Sachs followed by Adam Borg of Stifel.

Speaker 3

Good evening. Thank you. And our thoughts are with you and all of the Check Point employees on the ground in Israel. I wanted to ask a little bit about your 2024 planning assumptions as you think through what next year could look like. Maybe Gil share with us some of the positive indicators that you mentioned in your prepared remarks that are leading you to perhaps Help us think through what the implications are from the positive indicators through to billings growth?

Speaker 3

In other words, when do you think we'll see a more material inflection in billings growth? Thank you.

Speaker 1

So I think first, thank you for that and it's too early. We still don't have the 2024 projections. We're just starting to work on the 2020 For plans, but we already have some thoughts about that. And I would say there's 3 factors that contribute to that. 1 is the technology and the new areas that we are in and so on.

Speaker 1

2nd is our customer engagement and the level of activity that we have in the field. And the third one is the market itself, which is a little bit beyond our control. So from the and I think this year, we really did our field did an amazing job In increasing the engagement that we do with customers, we've pretty much doubled our engagement rates with our customers, both with Existing customers and even more so with prospects. And there's still plenty that we can do. We still can reach many more prospects, for example, And we still can do more in the qualitative side of the engagement, but we've made a real revolution and I think there's a plenty of credit that our People on the ground in the different countries in the field have done this year.

Speaker 1

So now all of these things, when you engage with the customer that you haven't met for a long time, when you start the conversation, it Takes between, I would say, depends on the situation, I would say between 6 to even 18 months until it's Fruitful. And the reason I'm saying that because usually the field will say, I'm already engaged with the customers that have the current opportunity. Getting me to meet with somebody new, it's usually the one that's Not knocking on our door and doesn't have the current opportunity, so these are a little bit longer term customers. I think that we will see the results From there, and I think we've seen a big revolution in this engagement in the second and third quarter. So that means that we can be optimistic about some of this engagement turn into Deals and pipeline in next year.

Speaker 1

We already see the correlation. I mean, the more meetings, the more engagement with the customers, the bigger the pipeline with that customer. It's a very direct correlation. So I think that's one sign and that's about our activity. 2nd, in technology we have much more and we've Seeing that some of our new technologies are sticking and are working well.

Speaker 1

I think we will see a lot of demand for SASE solution. It's a healthy market With high growth, so I expect it's we're again, we're just in the 1st few weeks in that market. So I don't have Indicators that are too strong, but I'm very optimistic. On their for example, on the email side of things that we've got into like 2 years ago, I think, a year and a half ago, we already see a very healthy, not just pipeline, we see very good results and very high growth. So I hope that we will I repeat that success with the SaaS industry.

Speaker 1

Same thing with our overall vision, our overall architecture, Which I think is the most important and that's the Infinity umbrella. And I think with Infinity we're seeing very nice growth. And again, it course, ties to are we engaging with high enough people in the organization? Are we do they buy into our vision? The answer is yes.

Speaker 1

The more qualitative engagement The customer, the more likely they are to choose us as an architectural solution with the Infinity architecture. So if I'm talking about these 2, I think that we have a good pipeline of technologies, a lot of innovation and Turnaround in the engagement that we have. The 3rd element, which is the market itself, and especially our large market for firewall gateways, The market has went all the way to the bottom, I think, in the Q2, which was the bottom, And in the Q3 started showing signs of improvement. If that improvement is changing and if we combine it with the other 2, we have reasons to be optimistic. If customers are going to keep tight on refreshing, and by the way, the fact that we don't refresh is, I mean, we want them to refresh their installed base and buy more, but that means that they stick to us and they love our solution and they just pay the renewal fee.

Speaker 1

Doesn't generate enough growth, but In general, the rates that we have of renewal are very high and we have a good renewal business. So that means that customers like our product and they keep working for them. So if that will change, that will be a big change. And I hope this is a little bit beyond our control. It's a long answer, but I think we've covered many things.

Speaker 3

Thank you for the detail.

Operator

All right. Next up, we have Adam Borg from Stifel, followed by Brad Zelnick of Deutsche

Speaker 4

Bank. Awesome. Thanks, guys, for taking the question. And again, I'll echo my thoughts for for prayers for you and your families. Maybe just for Gil on Permit 81.

Speaker 4

Obviously, Great to see your entry deeper into Sassy. With it, I was hoping you could talk a little bit more about kind of the the near term integration priorities From a sales and marketing and R and D perspective and how we should think about the CapEx impact as you as you look to build that pops, I'm assuming, over time. Thanks so much.

Speaker 1

I think in terms of the integration we built them in Checkpoint, a model that we call Rockets that we kind of let These businesses on one hand keep their little bit of their independence, their vision, their integration of Activities on the other hand work with the Check Point, both R and D and sales and marketing organization to drive things more forward and move fast and integrated. I think Quantum SASE is going to be very tightly integrated into Check Point because it's a network solution And in many cases, it's integrated with our gateways and integrated with our project and Salesforce. So it's not Necessarily different buyers within the organization, it's similar buyers. I think that's the synergy and that's extremely positive. We already see a high level of interest in the field.

Speaker 1

People are super positive and super optimistic about that. And it will take us some time to build all the bridges, But we're working very hard. I mean, the only there is kind of 2 caveats. On one hand, we want to create one product suite, integrate all the Check Point security technologies into the Perimeter 81 offering, Connect the Perimeter 81 Management with Check Point. So we have a very strong roadmap of what we want to develop.

Speaker 1

On the other hand, it's It's been growing very nicely on its own and we don't want to disrupt that. So, and I think by the way, with the Harmony email That's been a similar acquisition. We've built the right bridges. For the 1st 6 months, kind of most of the growth was driven by their pipeline. 6 months later, we're already reporting that huge part of her pipeline is already driven and brought to them by the Check Point salespeople and by the Check Point channels.

Speaker 1

So I hope we will see here even a faster transition because unlike email this is even more central to our technology. And in terms of CapEx, I don't know if we have any No.

Speaker 2

So in terms of CapEx, not something. I mean, we expect to invest in CapEx related to Permit ATM, Few $1,000,000 a year on something, it's not significant in terms of that.

Speaker 4

Great. Thanks so much.

Operator

All right. Next up is Brad Zelnick from Deutsche Bank followed by Tal Liani of BofA.

Speaker 5

Great. Thanks so much for taking my question and best wishes to all the good people of Israel. Gil, I don't recall Check Point having a significant U. S. Federal business, but We saw the DLA deal that you highlighted, which I think was a $6,000,000 deal, which is a really great win.

Speaker 5

Can you remind us, Is there a broader opportunity that you're going after in US Federal? And is this also maybe a reason why we don't necessarily see all of the success that you're having in billings? Because We all know that the U. S. Federal customer doesn't necessarily pay multi years in advance.

Speaker 5

Thank you.

Speaker 1

I don't know if it has a vet or he can answer about the billing and so on. I think the opportunity on the It's huge, even though the US Federal Government is a very, very, is a kind of, it's a tough customer, especially for foreign companies. In foreign, not Just Israel, it's even Canadian companies. It's very hard to penetrate, if you're not an American. I think the fact that we have a good success there, hopefully it's a good sign moving The opportunity is huge.

Speaker 1

I mean, the opportunity in the federal market is almost untapped. We are making good progress on other government business in the US, Especially the local governments and again the opportunity there is also very big and I think we still have plenty of potential and we are doing A lot of different things. The good news again, we have many industries and many sectors that are still again, we are active in all of them. We have Presence in all of them, but we are but in some cases, like US Federal, we're too small. And Roy, does it have much Schwede.

Speaker 2

From the federal side, it doesn't have any effect on billing. I would head about the billings because I would assume that I will get questions on that. So Again, on the billing side, the timing and the duration really affect the billing. I can give you as an example, something that I didn't mention it in the script, but For example, we had a large mega deal that was expected to be closed this quarter and was due to certain administrative delays, was closed 2 days after. That's something like that affect the billing.

Speaker 2

It's the timing of billing. It's a classic timing of billing. These kind of things affect the billing. I understand that you are covering the billing and it's important, probably Both the metric for you to understand the business, but we could say that again, we saw this quarter very positive indicators. As I mentioned, the booking went up year over year.

Speaker 2

We see very positive indicator for the pipeline for Q4. Again, we need to be cautious. It's still only pipeline and Not converted yet to business, but we see many positive indicators

Speaker 5

Thanks for the color.

Operator

All right. Next up is Talianni of BofA, followed by Joseph Gallo of Jefferies.

Speaker 6

Hey, good morning, guys. Two questions. Gil, at the end of the day, you're only growing 3%. And we talked about it like last year, you talked about Infinity and you talked about the year before about other products. But It's very evident that it's hard for the company to translate technology superiority into higher growth versus competition.

Speaker 6

And the question is, what other parts do you need to invest in, go to market, marketing, whatever it is, what other parts do you need to go to, and what are the challenges that you have in order Translate your technology into better growth rate. The second question is kind of related, not related. Subscription, very nice growth, 15%. What are the trends in the non subscription? It's down about 4%.

Speaker 6

So what is their substitution or what are the other trends that we see in non subscription? Thanks.

Speaker 1

So first, you're absolutely right. We need to do better, we should do better. I, by the way, believe that If we were on the same big market trajectory that we've been a year ago, I think our results today would have been double digit growth. I think we've faced A double digit decline in the core market of buying new gateways, delaying what we call delaying refresh in a nice way and I think we've shown it in our slide. And Fight that we've seen growth.

Speaker 1

And the growth comes from both from customers sticking with us and doing the renewals, Both from the fact that we've been able to transition big part of the business from product purchase to subscription And also from some of them, some of it comes from the Infinity deal with our multi architecture, both user cloud and other elements of the Schwed. Security elements, and some of it comes from the new technology like email and few others that are gaining traction, but relatively still small, But they're gaining traction. So that's how we offset that. Again, if you just looked at it on a neutral basis of just selling gateways, It wouldn't have been that it wouldn't even been 3%. Now again, I'm not happy with that percent.

Speaker 1

I think we should aim much, much higher. I think We've made investment last year, for example, we hired a lot of sales people. We can still hire more. I think this year, my focus internally was on customer engagement, making Sure that our people actually go and meet with their customers and prospects. I think I already mentioned that we had the great progress there, doubling the rates, which is not trivial, And much more activity by the field.

Speaker 1

Next step, by the way, is 2 fold. 1 is to elevate the level of quality, making sure that we Reach the right people that we go broader in the organization and so on. And second, I think is seeing the translation of that. Again, you engage with the customer. It doesn't always come with, oh, sure, we give you the next order.

Speaker 1

And say, well, if we had the project, we would come to you. But what we'd like to have happen Once this project comes, and I would say every enterprise will have a project within a year, then we will have a very much higher chance of winning that project because they are there, We know that we're present. Unfortunately, and again I would admit our shortcomings, that's the feedback I get from when I meet with CIOs and CISO, they all tell me, We know Check Point is a leader. Check Point is a very good brand for us. We knew Check Point many years ago when we started our career.

Speaker 1

And we love your story. That's the main thing that they tell me. We love what your what the architecture and the vision. That's the positive side. The negative And how come we didn't hear from you for so many years?

Speaker 1

And that's what I want to fix because if they say all these good things that we have good technology, good brand recognition, If we have a good story today, then what we need to fix is making sure that they know it. And they know it because we need to be in front of them. And I think by the way, as I said, we have the people, we have the bandwidth, we just need to execute on that and I think we're making progress there. I truly hope that it will bear fruit.

Operator

All right. Next up is Joseph Gallo from Jefferies, followed by Saket Kalia from Barclays.

Speaker 7

Hey, guys. Thanks for the question. Congrats on another quarter of double digit EPS Growth. You've talked a ton about top line drivers and product drivers as we think about 2024. How should we think about leverage in the face of these investments And then what, if any, impact does FX have as we look out over the next 12 months?

Speaker 7

Thanks.

Speaker 1

Why don't you start?

Speaker 2

On the FX side, so I would say that on the next 12 months, of course, we're going to benefit probably from the shekels. I remind you that we usually edge our currencies Between 3 to 4 quarters ahead. So some of it already hedged for next year, but some of it will be hedged. I mean, the second half of the year will be hedged We'll be hedging the next quarter or 2. So there will be a benefit next year from the FX.

Speaker 2

Again, it's still early to say to quantify that, but there will be a benefit. As for this quarter, we also again because this quarter was already hedged a year ago or 3 quarters ago, So the benefit was less than what the FX currency that you see today, which is approximately around we benefit around 1 point, I would say between $5,000,000 to $6,000,000 of FX benefit this year compared to last year.

Speaker 1

What was the second part of the question?

Speaker 7

Just, you talked a lot about drivers and trying to drive growth higher, but how should we think about the leverage or investment needed to drive that or the M and A integration costs?

Speaker 1

So I think we need investment and we keep investing, but we also need to see more leverage from the investment we already made. We had today Many, many people that work in driving new technologies and again we need to see more results of it, we've been building and I think I'd like to see us Seeing the fruits of all these efforts, again, we are going to keep investing, but I think the main thing for me is Seeing the investments that we already made, make bear fruit, and then we can invest more in the areas that we've been working well.

Speaker 2

Thank you.

Operator

All right. Next up is Saket Kalia from Barclays, followed by Hamzah Fodderwala from Morgan Stanley.

Speaker 8

Okay, great. Hey, good morning, everyone. Same here, by the way. Thoughts to everyone on the Check Point team. Roy, maybe for you, maybe just broader, can we talk about the M and A impact Here on the model, both in terms of annualized revenue and just annualized margin impact.

Speaker 8

As we start to incorporate these deals into our model for next year and maybe just a quick clarification. I think you said that there was a large deal that signed 2 days after the end of the quarter. I mean, can you give us a sense for kind of what billings would have been had that deal had closed on time?

Speaker 2

Okay. So as for your first question on the M and A, so I think we mentioned when we announced on perimeter 81, we mentioned Approximately, they are on the mid-20s. So that's something that when we acquired them, that was the annual recurring revenues that Peri Mettler Ahead, the other acquisition doesn't have any significant effect. I mean, I'm talking about the Agnostic one, which didn't have any significant revenue And the one that we just recently announced, I think, in the beginning or in the middle of October also will have a few minutes of dollar effect, not significant effect on our Total revenues. So that's from the top line.

Speaker 2

And again, in terms of perimeter, I mentioned that Yeah, it's a startup that's still I mean, right now it's losing money. I mean, hopefully, again, in the long term, I mean, the The aim is to be profitable. They're going to be profitable. But again, in the next I would say that for the in the short term, it will be dilutive to our margins. So that's how you should think about it.

Speaker 2

What was your next the second one that you had on

Speaker 8

Yes, the large deal that closed 2 days after that impact of billings.

Speaker 2

So the last year is approximately 2 points, approximately 2 points on our billings in Q3.

Speaker 8

Very helpful. Thank you.

Operator

All right. Next up is Hamzah Fodderwala from Morgan Stanley, followed by Patrick Colville from Scotiabank.

Speaker 9

Thank you for taking my question. And I'd also like to offer my support to you and all your families. I'm sorry We couldn't be there in person this year as well. So I wanted to ask a question about sort of the product refresh. And I think this was hit on earlier, but in a different way.

Speaker 9

I think if we look at your historical product cadence, it suggests there should be, I think, new hardware coming out Possibly early next year. What is your what are you seeing in terms of demand and sort of interest around that? And to what extent Are customers sweating their assets in anticipation of new appliances that may be coming up, Checkpoint? It's

Speaker 1

a good question. I wish I knew the answer. I think we are again, we are getting very good indicators about the price performance and about our Products like every time we are always looking to refresh and renew, but I don't see I don't know if there is a built in expectation in the market or not And I obviously can't speak about the timing of new solution. By the way, last week we did announce a small new appliance, But we didn't mention it here, but it's actually for ruggedized environment, for mission critical application and so on. It's a small market, small submarket, but we have a very good offering.

Operator

Our next question is from Patrick Colville from Scotiabank followed by Joshua Dilton from Wolfe Research.

Speaker 10

Thank you so much for taking my question. Echoing the other analysts thoughts with you and your family. I want to ask a clarification question, and then it's a proper question. The clarification is, did you say that You thought 2Q was the bottom in terms of product demand and 3Q you saw signs of improvement? And then I guess the other question I want to ask is Why Prumers81?

Speaker 10

Because in our field work, that traction was kind of really strong in the SMB space and maybe lower mid market, but not really the enterprise. And Check Point as a business has had excellent success in the enterprise. So why that asset?

Speaker 1

Okay. So first, you are correct about what we said about the market and Q2 being the bottom and Q3 seeing some turnaround and improvement in demand for firewall gateways. So that's correct. About why Perimeter 81, Not only because the traction that we have, but because of the technology. I think they have a differentiated technology, very hybrid model of doing some work in the cloud and some work At the client side, I think is a very good one in terms of the it's the right architecture.

Speaker 1

I believe in that. And what we also Found that in many cases, and again, we looked at many companies in the SaaS space. I can tell you that in the past we've almost Completed 2 acquisitions in that space and somehow during the due diligence, we decided to back off. And the main reason that we've seen some companies that have nice numbers and so on, but the main challenge that we had with them that some of them didn't have An offering that's a simple but straightforward to set up, and that's critical. If you want to go big on the market, You can't be in a solution.

Speaker 1

Again, you look at all these startups, many of them or almost all of them lose plenty of money. Now the question, if you can really make money, and if can make money because it can scale. Because you can take that and to sell it to 10 times more customers without increasing the effort. If Every customer if every customer win means huge efforts, huge installations, very slow to deploy, Then you can scale it and getting it to the Check Point installed base, getting it to a 100,000 customer installed base means that the solution have to be simple, straightforward And scalable. And by the way, that in many cases, when you take SMB technologies that has to be like that, because otherwise You can support them and you can't install them.

Speaker 1

And add to them all the enterprise capabilities that we have in Check Point, then you can get a true winner. And I think we have a very, very good, by the way, experience with that with the acquisition of the email security that we have. We also took an SMB product and now our largest installation are kind of in the 100,000 seats. So we took a solution from 200 seats and We are now making very nice progress scaling it up. So again, we've checked that on the due diligence.

Speaker 1

We know what's our limitations. We know what we need to scale And so on, but we believe it's doable.

Speaker 10

Terrific. Thank you, Gil. Thank you, Kit.

Speaker 1

Keep you on mute. Keep you on mute.

Speaker 11

Can you guys hear me?

Operator

Thanks. Thanks. Thanks, Gil. Joshua Tilton is our next, followed by Fatima Boolani as our last question of the day. Thank you.

Speaker 11

All right. Great, guys. Thanks for squeezing me in. And I will just say my thoughts and prayers are with not only You and the team, but both everyone in Israel. I just want to sneak 2 quick ones in.

Speaker 11

My first is just What is your guys' current expectation around a 4Q budget flush and do you feel like you need to see 1 in order to kind of hit out the numbers that you laid out for us? And then my second question is, do you guys view the Perimeter 80 1 acquisition as a way to kind of fill a hole That's sort of been left behind by weaker firewall appliances. Or do your customers kind of still view SASE as an incremental purchase to firewalls with the expectation being that just firewall demand will come back at some point.

Speaker 1

So let's start. First, I do hope to see budget flush in the Q4. It usually happens. I think the only year that it didn't happen in my experience was last year. And when you look at our growth model, it doesn't assume high growth, huge growth in products in Q4.

Speaker 1

So we kind of don't assume But there will be a big budget flush. If there will be a huge one that we didn't anticipate, I think it will all be an upside for us. But again, every year except 2022, I believe in my career, we've seen a budget flush in the end of the year. Last year was the exception. 2nd part was about the perimeter 81.

Speaker 1

I don't think it fills a hole. It fills a big hole that we didn't have because we weren't active in that space. I don't I don't think that in the enterprise space where like 90 some percent of our sales are, people are going to shift to tunnel traffic Through the cloud. We will keep their data centers, they will do that. But there's plenty of opportunity.

Speaker 1

When we see a change, when things can happen is on the branch side. Branches are important part and there's, you know, when you take a company with 300 branches or 20,000 branches, then an architecture like what we have with Sassy can work very well. I think we're incorporating branch offices, Schwed. Our appliances with SD WAN and some will have PureSASE is also a good architecture for a network. I think in terms of remote user access, it's a good solution.

Speaker 1

So I think most of it augment what we do. They are directly in our industry. I can paint it as a different industry. It's not a different one. It's the connectivity.

Speaker 1

I think 80, 90% of that is not a replacement for Our products, but it's an addition. Maybe 10% or 20% was an overlap between some products, but most of it is not an overlap from a dollar standpoint.

Speaker 11

Super helpful. Thank you, guys.

Operator

Alright. And last up, welcome back, miss Fatima Boolani.

Speaker 12

Thank you very much, Kip. And Gil and to your entire team, just sending my thoughts and prayers in this very difficult, tumultuous time. I wanted to ask Arroy a question regarding the security subscription segment. So the 15%, the acceleration we saw this quarter, I wanted to get your thoughts on where that potentially could trend up towards over the next couple of quarters. And if you can help us with some very specific pieces on, you know, are you seeing very strong expansion activity into other product pillars?

Speaker 12

Are you finding that is really making a more meaningful impact in driving the acceleration there? So, Any thoughts around where that 15% could go in the next quarter in the near term and medium term and some of the key components that you expect Are going to drive that acceleration.

Speaker 2

So first of all, again, we hope we will see the acceleration of this growth. I remind you that We also bought Parameter 81 that hopefully will also help us with accelerating this growth in the subscription because the revenues from The Quantum SaaS will be part of this line, I mean, we'll be included in this line item. In terms of where from where the growth is, so I would say again, Hopefully, it would be higher than the 15% that we see, but again, it really depends on the execution. On where we see today, The drive for the 50% growth is mainly coming, I mean, it's coming first of all from the email security. It's becoming more and more significant for our business.

Speaker 2

It's growing in a strong double digit growth, very strong double digit growth and it's We don't disclose the numbers, but becoming more and more significant to the subscription revenues. And also it's driven by Expansion maybe around under the Infinity platform that come where customers are expanding and getting more services from us. So All this stuff together with the growth in the cloud guard that also grew double digit in revenues. This quarter, all of this came Bought us to this 15% growth, and hopefully, it will be even higher in the next few quarters, but it's still too early Susie.

Operator

All right. And with that, we'll conclude for the day. Thank you guys for joining us. And we look forward to speaking with you after the call and throughout the quarter.

Speaker 1

Thank you very much. Appreciate that. Thank you.

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Earnings Conference Call
General Dynamics Q3 2023
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