Check Point Software Technologies Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2023

There are 17 speakers on the call.

Operator

This meeting is being recorded. It's my pleasure to be here today. Our Founder and CEO and acting our Founder and CEO, Gil Shwed and Acting CFO, Roy Galan are joining me remotely. 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 formal presentation, all participants are in listen only mode and this will be followed by a question and answer session.

Operator

During this presentation, Check Point's representatives may make certain forward looking statements within the forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. Forward looking statements generally relate to events or our future financial or operating performance. Forward looking statements include, but are not limited to, statements related to our expectations regarding our product solutions, expectations related to cybersecurity and other threats. Our expectations and beliefs regarding these matters may not materialize and actual results or events in the future are subject to risks and uncertainties that could cause actual results or events to differ materially from those projected. These risks include our ability to continue developing platform capabilities and solutions, Customer Acceptance, purchase of our existing solutions and new solutions, the market for IT, security continuing to develop, competition from other products and services, general market, political, economic and business conditions, including as a result of the impact of COVID-nineteen pandemic.

Operator

These forward looking statements are also subject to written certifies, including those more fully described in our filings with the Securities and Exchange Commission, including our annual report on Form 20 F. The forward looking statements in this management presentation are based on information available to Check Point as of the date hereof and Check Point disclaims any obligation to update any forward looking statements except as required by law. In our press release, which has been posted on our website, we present GAAP and non GAAP results, along with a reconciliation of such results and the reasons for our presentation of non GAAP information. If you have any questions after the call, please Contact, Investor Relations at kipp@checkpoint.com. Now I'd like to turn the call over to Roy Gillan for a review of our financial statements.

Speaker 1

Thank you, Keith, and thank you for everyone to join the call. Let me just share the presentation. Yes. So I'm excited to be with you to present our results for the Q1 of 2023. Our revenues this quarter reached $566,000,000 which is $1,000,000 above the midpoint of our projections.

Speaker 1

Our earnings per share were $1.80 surpassed our endpoint of our projection and $0.07 above the midpoint of our projections. So despite the market uncertainty and the tough macro environment, we delivered 4% growth based on our projection and reached our projection and delivered 15% growth in our earnings to $1.80 Now let's dive to the detailed review of the quarter. As I mentioned, our revenue increased by 4% to $566,000,000 Our deferred revenues was up by 8% to $1,797,000,000 Our short term deferred revenues were up 2% by 8%. Our calculated billing reached $485,000,000 a decline of 3% year over year. Let me remind you that our billing is affected by duration, payment terms.

Speaker 1

And in this kind of market uncertainty we saw this quarter, 2% year over year. Our product revenues declined by 7% year over year. This was the result of the market uncertainty that resulted in extended sales cycles and in deferral of projects mainly refresh projects in the quantum appliances, and we see more cautious spending by customers around refresh projects and deferral projects. If we're looking on the security subscription, we had a very strong quarter with 13% growth year over year and reached $228,000,000 This double digit growth was driven by our CloudGuard and Harmony Email businesses that were both had a strong double digit growth both in revenues and both in new business bookings. Also, we see that we had a great quarter with Infinity to continue to flow in an accelerated way to our revenues and released a growth of over 140 percent year over year revenues.

Speaker 1

We see that we reached a key milestone of 80% of recurring revenue out of our total revenue, actually 81% of our revenues are recurring revenues, which are the subscription revenues plus the support and maintenance revenues. And out of the 81% recurring revenue, 50% of them are subscription based. And we see a consistent growth of our subscription and our recurring revenues over the last few years. Now let's look at the revenue by Jios. 45% of our revenues came from EMEA, 43% of our revenues came from Americas, while 12% of our revenues came from Asia Pacific.

Speaker 1

And let's And now to the P and L highlights for the quarter. Our gross profit was increased by 5% to $502,000,000 CFO. We see an improvement in the supply chain environment that was very challenging last year, And we hope to see this trend continuing in the remaining of 2023. Our operating expenses were increased by 11%. This was mainly as a result of our continued investment in our workforce, cloud infrastructures and in person marketing activities, including our CPX event that took place this quarter.

Speaker 1

So We reached a very strong operating income of $238,000,000 that was 42% of margin operating margin this quarter. Our financial income this quarter reached $19,000,000 as we invest in higher interest rates over time, and we expect that this income will increase in the last in the next few quarters by $1,000,000 or $2,000,000 every quarter. Our non GAAP tax rate for this quarter was around 15%, mainly due to indexation and update in tax provision Because of several tax assessments we have worldwide, our non GAAP net income increased to $218,000,000 7% growth year over year and $1.80 EPS of $1.80 which represents 50% double digit of 50% growth year over year, very strong results. Our GAAP net income was $184,000,000 or $1.52 per diluted share. If we're moving to our cash flow and cash position, so our cash balances as of the end of the quarter were $3,600,000,000 Our operating cash flow was strong at $386,000,000 this quarter.

Speaker 1

During the quarter, we continued our buyback program and purchased 2,600,000 shares of $325,000,000 at an average price of $127 per share. In the past 12 months, CFO, we acquired in total we purchased in total $1,300,000,000 of shares. So if we summarize our financial results, so we had a double digit growth in subscription revenues, driven by Harmony Email and CloudGuard products. Our recurring revenues give the key milestone of 80% of more than 80% of our total revenues. The macro environment resulted in extended sales cycle that resulted in a decline in our product revenues, and we finished a very strong profitability of 15% growth in EPS.

Speaker 1

Now I'll turn the call over to Gil.

Speaker 2

Thank you, Keith. Thank you, Rohit. That was a very good Update on the financial side. On the business side, I'd like to reiterate some of the messages and give some more color to the technology, to the trends that we see. As you know, the need for cybersecurity remains high.

Speaker 2

The level the number of attacks keeps growing, the sophistication of attacks keep growing, and we vet What we are doing. But just to reiterate a little bit about some of the quarterly highlights that we see. So first, I'm very, very proud of the CFO. Financial results, our revenues were above the midpoint, 15% EPS growth is actually exceptional And we had a very healthy business in the renewal, which shows that our customers are loyal and care about that. Having said that, we are still operating in a challenging economy.

Speaker 2

We still we saw the effect of that economy on our business with extended sales cycles, Projects being postponed, and I think Roy also shared the decline in new deals with product sales. Still with that, double digit growth in CloudGuard and Harmony Email, 140% growth in Infinity revenues, 13% growth in all the security subscription. And again, I'm very proud that we now reached over 80% of recurring revenues. This is all driven by many, many important initiatives and many technologies that we are delivering this quarter and every quarter. Let me give you some highlights for the things we launched in the Q1.

Speaker 2

1st and foremost is the Infinity Global Services. 2nd is getting into the new market of CFO, Security Operations Center, SOC, with Verizon XDR XPR, and I'll dive into each and every one of them. And last but not least is the CFO. The expansion that we did in the cloud with cloud native application protection, again each and every one of them addresses an important market in CFO. So let me start with CFO.

Speaker 2

The new Infinity Global Services, I think we all know that customer wants to have better security, more security. We all know that there's a huge CFO. Skills shortage in the market for cybersecurity. Our partners, our customers all have a lot of CFO. And the idea here with introducing our Infinity Global Services CFO is to augment the needs of our customers and partners.

Speaker 2

When they want to run fast and get the best security and get the full CFO. Deployment, whatever stage they need, they will always miss something. It can be on the security assessment side. It can be CFO. Certifications and things like that, and it can be in the full operation and response to incidents and managed security services.

Speaker 2

We are here to help CFO. So we're taking many, many services that we have, adding to them a whole new set of services based on the needs that our customers have And coming to our customer with a simple value proposition, we are here to help you to augment that. I believe that this is serving a very important market. The CFO. Security services market is a $75,000,000,000 market.

Speaker 2

We're not going to be a giant player here, but we are going to participate in this market and help our customers accelerate their value realization from the security technology. So last CFO. We introduced Infinity Global Services and we look forward to expand our capabilities and show results in the next few years. Next is, I think I've talked about the new family for Horizon. This is another important market.

Speaker 2

Today, it's a CFO. Sub $1,000,000,000 market expected to grow to almost $3,000,000,000 market in 5 years. And our approach here, XDR, XPR, it's CFO. So XPR is extensive prevention and response to all type of security events. Our approach here is Very different because we turn things into automatic prevention very, very quickly.

Speaker 2

AI driven and again focused on the prevention first approach. We include the network, we include the endpoint, we include the email, we include the checkpoint architecture, but we also connect today to many, many third party CFO tools that are available in the infrastructure from Microsoft, from other vendors, all part of CFO. The system we already know how to include. And I think through that system in the last few months since we introduced it, we are seeing on a weekly basis new incidents that we CFO. So I think you see some of the analysts take quotes here From ESG, Dave Gruber from ESG.

Speaker 2

The integrated approach here is unique. We can drive change across the broader CFO. I think it's a very, very good start to us. It gives access to the CSO, access to the security operations center And for our customers, tremendous value that we derive from this family and from the rest of the Check Point technologies that they have. Last and not least is the expansion of the CloudGuard family with Synap or CloudGuard native application protection platform.

Speaker 2

Here we are combining 6 different technologies into one solution. And when you look at the market for cloud security, It's a multibillion dollar market, not a giant one, but a big one. But it's spread around many, many different technologies. Some of the stars in this market, they are speaking mainly about posture management, something we do for more than 5 years. Others are talking about workload protection, other in the development cycle, CFO.

Speaker 2

The DevOp, the pipeline or source security and there's many, many sub segments. And when the customer is getting into that, They simply need too many technologies to get all of that work together. And I think with the Checkpoint, CloudGuard, Synap, we are combining all these elements into CFO. That gets more context, more actionable security, smarter prevention and again, Turning some of these things are prevention all the time like the web application protection and the cloud network security, some of them like the posture management, Turn configuration, incident analysis, things like that into very quick prevention by changing CFO. So this is good.

Speaker 2

And by the way, I hope it helps us drive some of the cloud revenues that we've seen increasing last quarter. All of these elements plays into the what we discussed last quarter, the Free Sea strategy that we talked about how do we make security comprehensive, consolidated and collaborative. And I think it's not enough to come up with a bunch of security CFO. It's not enough to come with a lot of different elements. We really need to make the whole architecture work together.

Speaker 2

And I'm putting a lot of emphasis on the collaborative element of Veth strategy, making all the different elements of the CFO. But also if you look at the other 2 Cs, I think no one has a more comprehensive architecture than Check Point and no one has an architecture that's Truly consolidate and when you can get into 1 unified portal management to automate to do the same CFO. Security management operation from one single management console. And I think this is reflected in some of the wins that CFO. We've experienced in last quarter, of course, we are doing thousands of deals every quarter, so it's hard to pick the leading ones.

Speaker 2

But we You picked here a few examples that show all the different elements, the Infinity, the Harmony, the CloudGuard. For example, here is an airline that got our security assessment. We've got in with our services, delivered A quick security assessment despite this vendor using 12 different vendors, they don't have the skills to manage. They don't have the personnel manage all these different vendors and we weren't getting the highest score. They decided that the approach of using a platform, Consolidating many solution is the right approach.

Speaker 2

We did a very fair process and I'm very clearly glad to see that they standardize on Infinity. It's a new customer to us And we are very proud on that. Another one is a giant media company, one of the most complex CFO. Cloud environments that we've seen thousands of cloud accounts, different cloud platforms using different cloud security solutions in the environment. And again, they found it almost impossible to manage, not addressing all the needs.

Speaker 2

And the new cloud project CFO. We went in, we went live in less than a month and showed them how we can really elevate the level of CFO consolidates so many elements and all of that is just the beginning of the very strong roadmap and vision that we liked about what Check Point does. Last example is about our Harmony email, something that's actually a fast selling solution that we have now. In this case, we're talking about a giant telco suffered 2 embarrassing incidents which resulted in emails that got through Their security defenses, they used multiple solutions from multiple vendors and both solutions failed to improve, failed to address the issues and show them that next time this attack won't happen. We got in, showed them within days that CFO.

Speaker 2

We can immediately that we can block this attack, but even more important that we can scale our solution and provide in the solution to a very large environment. Usually, by the way, our eMOL business started with midsized kind of customers. And here, we show them that within few weeks, we were able to scale to 1,000 tens of 1,000. And finally, we won the contract with over 100,000 CFO. Mailboxes on Harmony email, worked, real world production and protecting that customer that failed to achieve the same thing with our solution.

Speaker 2

So these are just demonstrating some of the successes that we have in different areas of the cybersecurity. So to summarize, this quarter, we had very good results despite the economic slowdown, which affected us and what we see in the marketplace. Very glad to see the double digit growth, the 13% growth in CFO. The 15% growth in EPS, which is exceptional. And I think we're demonstrating the values that we're talking about CFO.

Speaker 2

Providing the best securities with the FreeSeas strategy, with the new launches of the Infinity Global Services, the new Horizon family with XDR, XPR and with the smarter cloud prevention was part of our strategy. So I think that summarizes a pretty good quarter. Before I get to your question, I'd like to share our projections. So I'll start with the projections for the year. These are unchanged, so we are just including Veth's slide.

Speaker 2

As a reminder, it's the exact same slide that we showed last quarters, revenues for the years are expected to be between $2,340,000,000 to $2,000,000,000 $510,000,000 despite the economy, despite the challenges, we are we believe that we can still be in that range. Non GAAP EPS, same thing, ranges between $7.70 to $8.30 non GAAP EPS is expected to be approximately $1.22 less, again, same slide that we showed last quarter. And I'm going to share the range for the Q2, which we haven't shared before. And this again, within the same landscape here, revenues are expected to be between $570,000,000 to $605,000,000 and non GAAP EPS is expected to be between $1.85 to $1.95 pretty healthy EPS. And GAAP EPS is CFO is expected to be approximately $0.31 less.

Speaker 2

This is the update for the quarter for the projections. I'll be very happy to open the call for your questions. Thank you.

Operator

Thank you, Gil. As a reminder, please ask one question and one question only. And hopefully, we can come back around and go through everybody once again. Starting today is going to be Shaul Eyal as our first up with a question followed by Keith Bachman from BMO. All right, Kjell?

Speaker 3

Keith, Good afternoon, everybody. Good to see Gil that you're keeping fiscal 2023 guidance intact. I had a question on the product decline.

Speaker 2

How much

Speaker 3

of that was attributed to Infinity actually showing a very solid performance.

Speaker 2

The product decline obviously doesn't come from Infinity, which actually showed very good CFO. When customers are buying more of our architecture, more comprehensive solutions and showing that it's coming from mainly from refresh CFO projects that are being delayed. As I mentioned, since I think Q4, since November, we see a very big change in the industries when and again, I think you've seen it In many other companies' results, you've seen it in the decline in PC shipments in the Q1. We've seen it in results of other companies in the industry. And it's part of our business as well.

Speaker 2

That's why I'm so proud in the results that we've achieved because despite the fact that customers are holding back on refresh projects, are trying to tighten up our budgets. Our results are excellent. The renewal rates that we have And the recurring business that we have is very healthy and but again, I can't do without sharing the concern that we have about the tightening

Operator

CFO. All right. Next CFO will be Keith Bachman from BMO, followed by Patrick Colville of Scotiabank.

Speaker 4

Hi, Gil. Thanks very much. It's Keith Bachman from BMO. I wanted to ask a question about why do things get CFO. What's the driver of improvement?

Speaker 4

And what I mean by that, let's break it into, you commented that billings growth net of duration changes was, call it, 2%. What's the catalyst in terms of a product CS acceptance driver that gets that to mid single digits or even higher. And if you could B comment, CFO. Do you envision billings being a positive or a negative number during the course of calendar year 'twenty three? Thank you.

Speaker 2

I can let Troy maybe speak a little bit more about the technicalities of the billing and so on. But in terms of the business trend, which I think is the most important, there are several elements That I think can improve and can cause us to get into much higher growth. First, again, it's the economy, and that's not up to us. CFO. But what we can do, there's plenty we can do.

Speaker 2

First, I think the new products that we have, everything from Horizon, Harmony, CloudGuard and the full Infinity architecture can drive accelerated growth. 2nd is our engagement with customers. There is so much CFO. We are meeting with so many CISOs, with Chief Information Security Officers. They love Checkpoint.

Speaker 2

They like our brand and they don't know the full Checkpoint story. They don't know how much value we can provide to them. And I believe that we can do so much more by engaging more with customers and covering more the market. So if I take all these elements, I'm actually I think that we have plenty to do to drive more business. I think we're doing that.

Speaker 2

I think it takes time until we will see the results. And I think, again, we can't remember we can't forget the economy, but also adds either a tailwind or a headwind. Right now, it's very strong headwind, unfortunately.

Operator

All right. Our next step is Patrick Colville, followed by Tomer Zilverman Taliani of BofA.

Speaker 5

Thank you so much, Kipp. So last week at RSA Conference, CNAP was the talk of the town. So it was really exciting to see the launch this morning, CloudGuard CNAP, which You called out a combined 6 technologies into one solution. I guess my question is, of those 6 technologies, What's new here? Is it just kind of rebranding and bundling?

Speaker 5

Or is there new product launch alongside this announcement? And then I guess kind of the second part of the question is, do you expect CloudGuard, CNAP to be To allow Check Point to land new customers or do you think it's mostly going to be kind of cross sell into the existing base? Thank you.

Speaker 1

So I

Speaker 2

think there are several things that are new in the CloudGuard Synap. The pipeline store security is new. The entitlement management is more new. There's a lot of new capabilities and new technology and AI technology that drives the posture management into much more focused CFO. The results and security, I mean, again, when you analyze the cloud infrastructure Any infrastructure, you see thousands of different issues.

Speaker 2

The point here is to take the important ones, highlight them and fix them. And I think our new technology with the SINAAP launch is part of that. In the workload protection, we had several new technologies in the last few months And that's also helping. So clearly, we have a lot new in that package. And last and not least, I don't think it's the newest technology, but it's a very important one.

Speaker 2

It's the web application protection that protects all the connection between application. This technology has proven to be one of the best technologies to provide prevention. All the latest CFO. We've logged for Shell, Web for Shell, all these latest vulnerabilities that existed in the CFO. Checkpoint was the only vendor that blocked them on 0 day.

Speaker 2

There was a recent by one of the A recent survey by one of the actually, VISTI is in the security marketplace. We tested, I think around 20 different web application security solution and sales that were all vulnerable with attack, except one, which was Checkpoint. They basically said our industry can deal with it except Checkpoint. So I mean, combining all of that, there is a lot new here and There is a lot that I think the offer of combined all of them brings plenty of value to customers because I think No customer can take all these technologies and apply to multi cloud environment in an effective manner.

Speaker 5

Thank you, Kiel. Thank you, Kiel.

Operator

All right, next up is TalianyTomar Zild. Taliany is here, all right. CEO, followed by Gray Powell from BTIG. Sorry to hear about your brother, Tom.

Speaker 6

CFO. Thank you. Life is life moves on, unfortunately. I have a question on kind of the correlation between historical orders and supply constraints and what we're seeing now with products. And I'm trying to understand if you can take us through the history of you had some all the companies that you didn't provided the data, but all the companies had some CFO elevated orders in the past that were not they were not able to ship because of supply constraints.

Speaker 6

So as we go into this year, CFO. We were we thought that the product revenues of all companies will be safe for a quarter or 2 because now there are deliveries of supplies. So the question is, as we see today the product declines despite some store comp orders or backlog of orders, Is it going to get worse the next few quarters because of the environment, because you're running out of kind of backlog of historical orders? Or are we seeing now a reflection of the environment?

Speaker 2

I believe I can again, I don't know if you want to add, but I believe that we've been able to ship products all the quarters. I mean, it's not that we had a huge backlog that we can fulfill. Last Q1, by the way, we had one of the strongest quarters that we had in terms of driving new business. So they compare This quarter to last Q1 is a tough one, but still I think the comparable is fair. We are seeing a real change in the business environment.

Speaker 2

I want to be very clear on that. It's the Q2. It's not the Q1 that we see that. And And again, I don't think that we have any overhang in product supply. Unlike other vendors, we were able to supply pretty much all the orders that our customer CFO expected us to ship every quarter.

Speaker 2

We paid the price for that in previous years. We've extended costs that we've worked really, really hard to secure components for our manufacturing of appliances and so on, which is actually helping us a little bit now on the margin side, but Not on the revenues or the shipment side.

Operator

Yes. Thank you.

Speaker 2

Rui, anything you want to add on that?

Speaker 1

Yes, yes. I think it's Definitely right. We didn't have any I mean, we didn't have any significant issues last year in terms of delivering on time. Again, as Gil mentioned, it was mainly affected our costs. We had increased cost, but in general, we delivered on time and it's mainly the effect of the environment that we did.

Speaker 1

The numbers that you see now, it's mainly defer to what we've seen in the environment in Q and A in the Q1 what we've seen in the environment in the Q1.

Operator

Thanks. For those of you that are new to the call, the call has been the call list has been predetermined. You'll be called in the order that it's brought up. Next up is Gray Powell from BTIG followed by Joshua Tilton from Wolfe Research.

Speaker 7

All right, great. Thanks for taking the questions. Is it possible to parse out how much of the billings weakness in Q1 was related to CFO, uncertainty in the banking sector around things like SPB and just dynamics that are maybe more temporary in nature versus the general slowdown in refresh activity that we saw back in November? And then anything that you can say in April trends would be really helpful. Thanks.

Speaker 2

So, Anthony, do

Speaker 1

you want me to start? I think in terms of quantifying it, CFO. We cannot it's not something that we can quantify. We saw it I mean, we saw it broadly, I mean, in terms of refresh projects that are being postponed, not specifically in certain industry. So I don't see it's not something that, again, in terms of something that we can quantify in dollars.

Speaker 1

And as for your second what was the second question that you had?

Speaker 7

Just anything on April that in terms of recovery in April trends, in terms of deals that they have slipped and closed or just anything on April that you could say?

Speaker 2

1st, we usually don't provide first, I think it's too early in the quarter to say where we are. But Again, when we are getting ready for this call, we do collect all the information about for the projections, about our pipeline, about the trends in the market CFO. Our salespeople are generally actually positive on the second quarter. They have an increased Pipeline, I think if I want to be very, very honest, I would say that Roy and me are a little bit more cautious because of what we saw. Again, that's the usual trend.

Speaker 2

Salespeople tend to be optimistic. Finance people tend to be, I don't want to say pessimistic, but realistic. And I think that we are realistic in our projection, and I think our salespeople are a little bit more positive than us CFO? In the range which they provide.

Speaker 7

Understood. I appreciate the candor there. Thanks.

Operator

All right, next up is Joshua Tilton followed by Brad Zelnick from Deutsche Bank.

Speaker 8

CFO. I just want to clarify quickly, did the macro impact that you saw in 4Q actually get worse in 1Q? And then could you just remind us what exactly is baked into that full year guidance that you reiterated today in terms of your expectations for the macro environment for the rest of the year?

Speaker 2

So I think from Q4 to Q1, the situation became a little bit worse in what in the internal trends that we've seen. But But I think also we had a very tough compare because Q1 last year was an exceptional quarter. I think in terms of the internal metrics that we have, Q1 of 2022 was the exceptional quarter that I don't think we've saw in a decade. So the compare is tough. I think for the full year, there's really no change.

Speaker 2

I mean, when we did the forecast for the year, we were a little bit more optimistic in terms of preparing the plan for the year than we are now. But I think we're still in the range and we still hope to deliver on that. And there's a lot of expectation for improvement in the second half that would put us in the upper end of CFO. But there's also risks involved, so we have to remember that.

Operator

Thanks, guys. Thanks, Josh. Next up is Brad Zelnick followed by Ray McDonough.

Speaker 4

Great. Thanks so much for taking the question. Gil, I've always appreciated the vision that you have within cybersecurity. Any thoughts on the impact of generative AI on the space and in particular, how it might be used by both good and bad actors? Thanks.

Speaker 2

Absolutely. That's a subject that we are very busy with. I think AI in general is something which we've been investing in the last few years. And generative AI that's CFO. In the market now for like 5 months, I think he's really creating a change in everything in technology.

Speaker 2

I'm not sure if it's going to be a real change, revolution in technology or not, but I believe in it. I think it has the potential to be One of the biggest revolution that we saw. We are in the kind of in the middle of the change, so too early to say. Now it has an effect. It has a big effect CFO.

Speaker 2

And I don't think that we can even comprehend the effect of a change. We've shown already in December, our researchers showed how you CFO. Generative AI to write attack code, which again have access to all the code CFO Repositories, it can take hold from them and without being a security expert, write sophisticated malware. If you're talking about phishing attack, which are fairly common actually, actually email and phishing attacks are the number one Entry points of attacks into organization, which plays into our Armani email. But when you look into them, when you look at most phishing emails, You see that we don't have the perfect English or the perfect other language.

Speaker 2

And you can spot that with generative AI, it becomes seconds to write A very convincing phishing email. You can link that email to a code that, let's say, collects customer information, collects personal information. Again, this call can be written by the generative AI. And you don't have to be a real expert. You actually get all the instruction from the generative AI how to create This kind of call, so this is pretty scary about access to malicious things.

Speaker 2

Equally on our side, there's plenty of usage that we can get from generative AI. And we are investing a lot in AI. We just had I can tell first, I mean, just to be clear, we are on AI for many, many years. And last year, we've introduced 12 new FRET Cloud Engines that are based on AI. By now, our FRET Cloud, which is the kind of brain of our central system, 70 something threat engines, 42 of them are AI based.

Speaker 2

So AI is pretty big in what we do. But just for the Q1, based on this AI revolution, we did the hackathon, for example, within Check Point And let different teams here see what they can do with generative AI. And I was very positively CFO. Surprised with the level of innovation. I'm participating in these accathons for years, seeing the innovation.

Speaker 2

It's the first time that like they presented 10 CFO. Finalist project and all the 10 I said we can use them now, like good technology. It's not like, okay, doesn't belong here, maybe not at the right quality. Almost all 10 were something I said, why aren't we using it now? Some were more internal, but 7 or 8 out of the 10 were CFO, things we can actually incorporate into our products, and I think we will incorporate most of them.

Speaker 2

So generative AI has the potential to change our markets as well.

Speaker 1

Thanks, Gil.

Operator

All right. Next up is Ray followed by Max Gambrell from Goldman Sachs.

Speaker 9

Great. Thanks for taking the question. Gil, maybe for you, how would you characterize the level of discounting you're seeing industry wide? And how do you think about pricing concessions in this environment? And along with that, how much of an impact is the increase in financing costs that customers have to bear Having on deal activity at this point, would you characterize it as material?

Speaker 9

And has it become more apparent in recent months?

Speaker 2

I don't think it changed materially. We are operating in a tough environment, not in tough, but we are in a competitive environment and sometimes customers CFO. I don't know, Roy, did we have an increase in discount the last quarter? I didn't see something big, but I think it was relatively consistent, Roy?

Speaker 1

Relatively consistently, a bit higher discount because we also raised our prices this quarter. So in the end, we had a bit higher discounts, but is pretty consistent with what we've seen in the past few quarters.

Speaker 2

And again, I think the one thing I'm very encouraged with is the healthy renewal business CFO. We've seen in this past quarter, customers are renewing, which means that, A, they are using the technology. 2nd, they are they like it. And that's actually a very, very good sign. I'm hearing from other colleagues, not necessarily in the cyber industry, but in CFO.

Speaker 2

Other industries that for them, the renewal business was always a source for growth and expansion, especially CFO. And suddenly this business is also under pressure. So far we haven't seen again, it's tough. People ask for discounts. People want that, but it CFO relatively healthy in the samples that I've seen.

Speaker 2

I can't even say that I've seen a consistent drive for more discounts. Actually, some deals were even lower discounts this year in the few, but I've spotted.

Operator

Thank

Speaker 1

you.

Speaker 2

All

Operator

right. Next up, Max, followed by Saket Kalia of Barclays.

Speaker 10

Yes. Thanks for taking my question. I wanted to ask on sales force productivity, given that you CFO, especially towards the end of the year. How are some of the changes that you made to your go to market organization last year playing out this year? And Do you still plan to grow your sales headcount by double digits in 2023?

Speaker 2

So sales productivity remains I mean, our targets for the CFO. Salespeople remains healthy and remains similar. We are not planning to grow the sales CFO. For significantly this year, given the economy and given the fact that we want to digest and we want to make the people which we hire productive, I do believe that our sales force can be far more productive. Engage more with customers, we can do more.

Speaker 2

So I think that we can do more with the people that we have. On the same time, I think because we are cautious, because we are not overspending, because I think we watch everything, We have the freedom and the flexibility to add people whenever we see it makes sense. So I'm I mean, it's the same message that you're hearing from me, but our sales force here is from me. If you have opportunities to add people, if you see that if you'll add certain people in certain segments, certain countries, certain places that add value, I'll be happy to add them because we can.

Operator

All right. Next up is Saket Kalia, followed by Jonathan Ho.

Speaker 4

Okay, great. Hey, thanks and good morning, everyone. Roy, maybe for you. I was wondering if you could just talk a little bit about the impact that ITP CFO is having on billings. And I know that we don't guide to billings, but even qualitatively, Can you just touch on how you're sort of thinking about billings through the rest of this year as you sort of balance ITP, a higher mix of ITP, CFO.

Speaker 4

Obviously, duration changes within the industry. Any thoughts that you could have on billings for the year would be helpful.

Speaker 1

Yes. Thanks for the question, Saket. So I think in general, again, Infinity most of the Infinity deals are not being built upfront. Most of them, we have a specific payment terms, usually it's annual payment terms not paid upfront. So the duration of the bidding for Infinity deals usually not more than 1 year.

Speaker 1

So that's something that, again, we see very strong Infinity environment I mean, we see very strong implementation of our Infinity platform, and we see CFO. It's growing in all regions. But in terms of billing, it can fluctuate because, again, it's specifically based CFO on the payment terms for each deal. In terms of billing as in general, so again, we've seen this behavior in the last two quarters that we see customers that less intend to repay upfront for multiyear deals. Again, in this kind of market environment that we have higher interest rates, so it's CFO.

Speaker 1

We see and we understand. So but again, still see healthy, healthy billing, annual billings, healthy renewals, as Gil mentioned, LTE billing in terms of all of the growth pillars, mainly around the cloud business and the Harmony Email business. So Again, in terms of billing, it's tough to me to say how it will affect in the end, how it will impact the annual billing for 2023 because we just finished the Q1, but that's how we see it.

Speaker 4

Very helpful. Thanks, guys.

Operator

Next up is Jonathan Ho from William Blair, followed by Joel P. Fishbein Jr. From Truist.

Speaker 11

Fantastic. Can you maybe help us understand the impact from some of the deal postponements and delays that you talked about on the quarter, if there's a way to quantify that. And perhaps relative to the guidance, like why not sort of take the opportunity to take a CFO. What's maybe giving you the confidence to support that? Thank you.

Speaker 2

First, I think you see some of the impact in the product revenues, and that's I think we were Very straightforward about that. That's the impact of the changes that we've seen And especially, again, it's refreshing what we call new deals, the new business that we have in the business. About the forecast, Right now, we're basing our projection based on our sales forecast, based on our pipeline and so on. And they still seem to support the projection for the year. I definitely don't again, I definitely don't want to Lower guidance just so that we can show better numbers in the future.

Speaker 2

I think we have to be very responsible here. So as I said, the range that we have is CFO. There is a good potential that will be on the upper hand. There is a risk that we want. We have to take it into consideration.

Speaker 2

I think we are CFO, kind of very realistic about the range that we provide. And I don't want to lower a range unless I'm sure that I'm not going to hit CFO. And I think, by the way, I mean, what will happen in the second half? Guys, I think we don't know. I mean, right, over the last I will I don't want to grow over all my experience, but just if we look at the last 2 or 3 years, there's been ups and downs that nobody could have predicted in the last 2 or 3 years, including the last quarter and a half that were pretty dramatic in my mind and whether that will take CFO.

Speaker 2

A quarter to whether it will stabilize, take a quarter to go back to modest growth or take 2 quarters to get to high growth, I have no clue. It's really something that's very hard to predict at this point.

Operator

Thank you. All right, our next caller is Joel P. Fishbein followed by Greg Moskowitz.

Speaker 12

Thanks for taking my question. And Gil, Just curious, we have $3,600,000,000 in cash on the balance sheet. You generate a lot of cash. Wanted to ask you, I know you've been buying back a lot of stock. If there's been any CFO, what the environment looks like on the M and A side, would love to get your input for that.

Speaker 12

Thanks.

Speaker 2

So first, absolutely, we have more appetite to doing M and A. We are looking at additional deals. I think I'm Kind of cautiously optimistic about that because I see that companies' valuation become a little bit more realistic. More companies understand that they need to partner with someone because the market consolidation will happen in this part just like we're seeing in the market change from CFO. Unlimited supply of money to profitability, which is, again, part of the economy rules.

Speaker 2

It's bound to happen. I think Consolidation in the industry that's so fragmented like cybersecurity will happen too. At this point, I think it's still Hard to see that happening. Some of the let's I'll give you a few examples, not without specific companies, but some of the companies, the valuation went down, are still not profitable. So it's hard to justify that.

Speaker 2

I mean and but as I saying, I mean, I felt cautiously

Speaker 1

CFO.

Operator

Next up is Gregg Moskowitz, followed by Shebly Sarafy.

Speaker 13

Okay. Thank you for taking the question. So Gil, We've spoken a lot about the macro on this call, but since this is the lowest product revenue growth that we've seen from Check Point since mid-twenty 18, I just wanted to ask, would you attribute the weakness entirely to macro or were there any execution areas that may have also contributed to some degree? Thanks.

Speaker 2

I want to be I don't want to sound arrogant here. I think we can do so much better in Check Point and we have so much potential with our sales force. But what we've seen now is completely the result of the economy. I think our sales force is performing better, is doing better on every parameter that I'm looking into. Again, I can think that they can do so much more.

Speaker 2

I mean, I don't think that we are at 100% productivity. I think we can get much more productivity from our sales force, but our sales force is improving. In the last year, we hired a lot of good people. Actually, in the last 6 months, the level of attrition went drastically down and so on. We did hire some new people in the second half of twenty twenty two.

Speaker 2

Think if you remember, when we went into 2022, I came in with pretty aggressive hiring targets for the sales force. Some hired them in the first half of the year, some only got to vet hiring in the second half of the year. But still, I mean, our sales force, I think, is not the source of the challenge. The source of the data challenge is clearly the economy. Thanks, Gil.

Operator

Thanks, Greg. Next up is Shebly Sarafy, followed by Dan Ives from Wedbush.

Speaker 14

Thank you. Any vertical callouts, Especially in the financial services vertical and the technology vertical?

Speaker 2

No, I think the trends in the marketplace CFO. We had some challenges in the financial sector. We had some big wins in the financial sectors. Same with the technology sector, which CFO. The financial sector is maybe our largest sector.

Speaker 2

And again, I think that's what we've seen in terms of the trends in the marketplace are Pretty universal, I must say. Roy, anything you want to add to that?

Speaker 7

I think

Speaker 1

not in specific vector industry, vertical industry. I think we've seen CFO broadly in everything, I mean, in everything, not specifically, we didn't see it in finance or something other or some other industries.

Operator

All right. It looks like Dan Ives is on CNBC or some other place. So we're going to move forward with Ervin Liu, followed by Michael Turits.

Speaker 15

Hi, thanks for the question. Perhaps another one on macro. So I wanted to better understand the thought process behind some of your customers delaying project refreshes. CFO, are some of these longer sales cycles the result of lower than expected IT spending budgets broadly or if there was a specific targeting of moderating CFO Cybersecurity Spending, just following a few years of accelerated spend there.

Speaker 2

From what I can say, it's the general trend in the industry and nothing about cyber. When I speak to people, everybody, and I'm saying everybody from CFOs, CFO. CEOs, CISOs, they all say that cyber is still a great source for investment. It's still very much needed. CFO.

Speaker 2

When you see the attack landscape, there is definitely you see the reasons for that. So nobody is thinking that the cybersecurity spending should go down. So I believe that what I see is the general trend From friends that I have in the industry, in other areas of IT, the situation in other segments is much worse actually Rene

Operator

Cyber. Our next caller is Michael Turits, followed by Ittai Kidron, who will be our last call for the day.

Speaker 16

Hey, Gil and Roy and Kipp. Just wanted to come back to the sales force growth, which I think Gil, you just said Not significant growth, I think you'd said for this year, I think you'd said double digit growth previously. So is there a James there, are you pulling back on your expectations? And if so, what does that mean in terms of some of the things you're trying to achieve from a go to market perspective and to get that greater sales engagement you're talking about?

Speaker 2

I think we've invested a lot in the sales force last year. We want to see it pays off. We wanted to CFO. We want to see that it's being digestible. If we see that as I said, when we see an area that we believe that we can hire more people to increase CFO.

Speaker 2

Customer coverage or productivity will not be shy to do that. We have the resources To do that, I think our sales engagement can be much higher. I think we are not meeting enough seesaws. I CFO. We can convey better our story at the higher levels in the organization.

Speaker 2

I think we can engage our customers in multiple ways. We see good examples of it every day. When we are meeting with customers and say, well, I know Check Point, I've been working with you for 20 years. I didn't know that you have such An amazing platform today. I didn't know that you have this architecture.

Speaker 2

I should consider you for other projects. So I think we should we can do so much more even with the people that we have today, and we have good people.

Operator

All right. Thank you, Michael. Next up, Ittai.

Speaker 14

Thanks and thanks for the time, Gil. I guess I had A question about the productivity that you just talked about. You've tried for quite some time to improve productivity. So what is it do you think that you're not doing internally to get the productivity up. Why is it so hard?

Speaker 14

What are things that you're trying that are not working? CFO. What is the process to fix the things that are not working right?

Speaker 2

First, we are doing and we are improving, and I'm glad to see that. And CFO. Again, we have a lot of new people in the sales force, in the management ranks and in all the different strengths that we are doing. I think the main thing is how the sales force is being structured. It's being It's a very distributed organization that over the years grew in an environment that's not very structured, that's been a pool mode, that's being how to provide the best technology, how to best serve our customers.

Speaker 2

And I think we can instill far more discipline in Being more aggressive, going to more outbound, going to more customers, fighting for the customers or for the Or for getting to the people that don't know us, not just for the people who know us. And I think creating that environment, creating that change CFO in 3,000 people distributed organization that doesn't have the discipline is challenging. By the way, in some cases, that may be the good thing in our sales CFO. We have very good people that know how to work with customers to keep the customers happy, to keep the customers loyal, CFO. But know the technology, but some of it can be changed and can be improved.

Speaker 14

Thank you.

Operator

Thank you guys all for joining us today. That's going to conclude our call. We'll look forward to seeing you guys throughout the quarter and the best to everybody. Thank you, guys. Bye bye.

Speaker 2

Thank you very much. Bye bye. Thank you.

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Earnings Conference Call
Check Point Software Technologies Q1 2023
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