Check Point Software Technologies Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 10 speakers on the call.

Operator

The meeting,

Speaker 1

Head of Investor Relations and joining me today are Founder and CEO, Gil Schwed and our Chief Financial Officer, Roy Gillan. 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 checkpoint.com. 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's representatives may make forward looking statements within the meaning of the Securities and Exchange Act of the early 1900s. These statements involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward looking statements.

Speaker 1

Factors that could cause actual results to differ materially include, but are not limited to, those discussed in 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 except where required by law. In our press release, which has been posted on our website, we present GAAP and non GAAP results, along with a reconciliation of such results, as well as reasons for our presentation of non GAAP information. If you have any questions after the call, please feel free to contact Investor Relations by email at gipcheckpoint.com. Now, I'd like to turn the call over to Gil Schwett.

Speaker 2

You're on mute.

Speaker 3

To be here today with both, I think, very good results that we have and some exciting news. Before I move to Roi and let him share a little bit about the financial results, let me speak a little bit about the exciting or the big news that we have today and that's the appointment of Nadav to our CEO, will be effective December. And we've concluded a very thorough search, looked at candidate around the world, met a lot of very good people, very experienced people, and I think that we found the perfect candidate and I'm really excited about it because I know Check Point for me it's like a child and passing that responsibility to somebody else. I really need to find the perfect person. And I think that we found the perfect person.

Speaker 3

For those who don't know Nadav, he became the last 10 years established teammate and what he did was much more than being like an incubator or a VC for startups. He really established himself as a key leader to in the cyber space. He's probably the most well known amongst seesaws around the world, built a huge community of seesaws that consult with him, that work with him, that he's able to work with and I think it's a huge asset. He has a lot of vision, experience in cyber, establishing over 17 cyber companies. So definitely knows all the different aspects of cyber and how we can grow and where we should look for and work with all the industry players at any level.

Speaker 3

And he has a lot of experience, both in the public space and not in the public space. Again, I've been working with I know Nadav for many years. I've been working with him and spent many, many dozens of hours in the past few months. And there is no better choice. I'm very honored that he decided to join Check Point.

Speaker 3

I feel that we can work together, and he can lead Checkpoint to a next phase of success, growth, innovation. And I think I'm very excited to work with him, and I think that my management team should be thrilled to have such a leader. So that's the big news of today. And with that, we can switch to Roy to go through the financials, which actually are also pretty good. And then I'll give another business update, and I think you'll see that we have some very exciting and good news today.

Speaker 2

Thank you, Peter. Yes, thank you, Gil. One moment, I'll share my screen. So as Gil mentioned, first of all, thank you everyone for joining the call. As Gil mentioned, we had a very good quarter.

Speaker 2

We'll start with the revenues. Revenues and EPS, revenues grew by 7% to $627,000,000 $5,000,000 above the midpoint of our projection. Our EPS grew by 8% to $2.17 non GAAP EPS and $0.02 above the midpoint of our projections. Moving forward to the deferred revenues and billings. So deferred revenues grew by 2% to $1,880,000,000 while our short term deferred revenues grew by 3% to $1,342,000,000 Our calculated billing grew by 10% double digit growth to $620,000,000 while our current calculated billings grew by 7% to $622,000,000 I think this quarter we did see we mentioned it a few times also in the previous quarters, we did see very strong billing that came first of all from strong performance in our business.

Speaker 2

And second, the Infinity. Infinity, we do see a lot of we did see a lot of utilization of allowances from Infinity business. We do see more bookings from Infinity and that also drive the growth that we see in the bidding. In terms of product and subscription revenues, we are in double digit growth, 10% growth, higher than we had in the last few years. Again, we can see the turnaround that we've seen since the end of 2023 and we hope that would show a continuing and consistent growth of double digit growth in the next few quarters.

Speaker 2

In terms of Infinity, I mentioned Infinity. Infinity is doing great, yet another great quarter, both in terms of bookings and in terms of revenues, strong double digit revenues growth. In terms of booking, Gil will discuss it later in this slide, but we had very nice 8 figure deals in Infinity. So again, very strong performance from the Infinity. In terms of revenues by GEOs, so we can see here the distribution, it's important to say that in terms of new business annualized booking, not revenues, new business annualized booking, all the deals grew by double digit.

Speaker 2

So that's very important to say. In terms of revenues, it usually come few quarters later. It translates into revenues. But again, we did see another quarter with double digit growth in new business and in that booking. In terms of P and L, another strong operating performance.

Speaker 2

Our gross profit was $557,000,000 89% margin. Our operating expenses increased by 11%. That was mainly driven by additional by Parameter 81 acquisition that we had last year. And remind you, we did the acquisition of Parameter 81 in Q3. So there was in this quarter, we had additional expenses that are not included last year in Q2.

Speaker 2

So that was the main and of course, additional investment that we've done mainly around sales and marketing. In the end, the net income grew by 4% to $246,000,000 while our EPS grew by 8%, non GAAP EPS to $2.17 On July 11, we announced the expansion of our of $2,000,000,000 to our buyback program We were up to $325,000,000 a quarter. So again, we are keep doing the buyback. We expanded the buyback. So again, something that we feel very positive about it.

Speaker 2

In terms of cash flow, our cash flow grew by 5%, our operating cash flow grew by 5% to $200,000,000 As I mentioned, the buyback, we did another buyback of $325,000,000 buyback of our shares. And our cash balances, cash, marketable securities and deposits amounted to approximately $3,100,000,000 To summarize before I move I will move to Gil, very strong financial results, revenues and EPS above the midpoint of our projection. Our Our quarterly revenues accelerated, maybe double digit drop in product and subscription revenues and another quarter with strong Infinity business and ARMON E Mail, another strong performance by Harmony Email that's becoming more and more significant to our business and a store of strong profitability with growth both in EPS and in operating cash flow. Gil, your turn?

Speaker 3

Thank you, Rui. And once again, I'm happy to be back again. Let me go some of repeat some of the highlights that we shared. So in terms of the business, great results, revenues and EPS in the upper end of our projection, double digit growth in products and subscription revenues, strong double digit growth in Infinity, which is all good. I'll show you a little later in the presentation, we had some very large 8 figure deals.

Speaker 3

We had some very large Infinity deals. We've continued to see a strong performance of our e mail sector and the new Quantum Force set of gateways, which is a core of our business also started to show some good signs and take off of the new models that we had, what we call Force. So let's start and review some of these news. 1st, look at logos that embrace the Infinity platform from Check Point. This is not all the logos that we had this quarter, but it just show you a tip of the iceberg of how Infinity wins in different sectors.

Speaker 3

And what you can see here is the different geos, Spark from New Zealand, New Zealand largest telecom provider, NASDAQ, don't need to introduce NASDAQ to be formed from the U. S, Cathay Pacific and other airlines that buys into the Infinity platform and sees the value and PPT, worthless pension provider from Europe, a less known name maybe, but also very important and shows that Infinity can add value in every sector in every category. But it is not even the largest deal of the quarter. Actually this year, big quarter, we had some very, very large deals, 3 of them together are $130,000,000 in bookings. Here, we're talking about total contract value, which is multi year deals, but still the commitment that we are showing to customers and the commitment that our customers are showing to us with free deals that are combined $130,000,000 is amazing.

Speaker 3

These are not the Global 500 companies, 2 out of 3 are actually Global 50 Companies. And again, they like the value, they like the security and show their long term commitment to work with us to continue to us. And in all these deals, they've extended their installed base, they acquired more products and got to use more of the Checkpoint Technologies. So we are very, very proud with those deals, especially as they came this quarter. Another sector that we are seeing a lot of success is in the public sector.

Speaker 3

And the public sector is every government agency and there's huge amount of them around the world. This quarter alone, we had 92 government agencies in 32 countries getting more and more of the Check Point platform, and you can see it goes from Australia to Asia to Middle East, Africa, many in Europe and then going left into South America, Central America and North America. I think this is a very good sector. That's a sector, by the way, that requires a lot of effort to win. We need to prove the superiority of our technology.

Speaker 3

In many cases, it's also very competitive on other business terms, and I think winning that makes us very proud. So it shows the potential in different spaces that we have. Moving a little bit to the technology side, and I think we said that the big focus of what everybody is doing in the world, but definitely what we're doing is around AI. And AI everywhere delivers security and simplicity. So this is showing some of the AI innovations that we had.

Speaker 3

AI Infinity Copilot doesn't even appear here as new because we launched it at the first quarter in our CPX conferences, but it's still very new. How AI can assist security admins to manage their Checkpoint Infinity infrastructure. ThreatCloud AI, we have 4 new threat prevention engines over 50 by now. The CloudGuard family, new AI powered engine to fully automate web application firewalls, again, another growth sector for us and a new one. And last but not least, this year hasn't come out yet, which is really new and will come out in the coming weeks, is a new product called Gen AI Protect, when we will actually show customers what AI products their users are using.

Speaker 3

It's actually pretty amazing because there's hundreds of AI products that an organization that employees of an enterprise organization can use and are using and we can show that control what people can do from the organization and especially which content can be exported because one of the major issues with using Gen AI is just using different tools, but also which information are we exporting from the organization to the AI. So organization will be able to set policies of using AI applications. So this is also something very, very positive. It's coming. And again, this is not the end.

Speaker 3

We will come every quarter with new AI innovation to transform cybersecurity into the AI generation. So if I need to summarize, I think we had strong quarter. I'm very thrilled with the announcement on the Dab, the new CEO, we will start in December. So we have few more months to continue. And I think Nadav will get every week, we'll get more familiar with Checkpoint, so we can start his leadership and his CEO role here with the knowledge and the energy that's needed.

Speaker 3

Q2, above the midpoint of projection, Infinity continues strength and some of our largest dealers are not even Infinity, some of them are just using our gateway, using our network security, the $130,000,000 of deals that I mentioned, double digit growth in product and subscription, which is a very positive trend and continued new and innovative technologies in Quantum, in AI, in Harmony, in the CloudGuard continue that trend. So I think we are very thrilled with what's happened so far. A little bit about projections for the next quarter. So our projection remains within the range that we said in the beginning of the year. So far, the first half was slightly even on the high side of what we expected.

Speaker 3

I truly hope that the second half will be even better. This time we're starting the projection a little bit early in the quarter, so we had limited data about the quarter pipeline and so on. But still the projections are pretty healthy within the ranges. Revenues are expected to be between $615,000,000 to $650,000,000 EPS between $2.19 $2.29 GAAP EPS is expected to be $0.43 less. And again, full year projection remain unchanged.

Speaker 3

We are definitely within the range, maybe slightly towards the upper half after 2 quarters that were slightly better than expected. So thank you very much for listening, and we'll be very happy to hear your questions and answer them.

Speaker 1

All right, ladies and gentlemen. First up for the Q and A is going to be Joseph Gallo from Jefferies with Shaul Eyal from TD Cowen to follow.

Speaker 4

Awesome. Thanks guys and thanks for the question. Gil, congrats on finding a new CEO and the next guardian of your child. Can you just talk us through why a little bit more why Nadav is the right man for the job? Obviously, this timeline was on the quicker side, so he must have checked

Speaker 1

a lot of boxes. Where do you expect to sell to be

Speaker 4

the same as yours? And then where do you expect the biggest changes, particularly on the go to market side? Thanks.

Speaker 3

Okay. So first, Nadav and me are very, very different personalities. Nadav, I think, is much more outbound, has amazing charisma, is an amazing leader. And I think that will complement very, very much what I can do and Roy An can help, and he can take it checkpoint to exactly where we need. I don't know how familiar you are or everybody on this call, not just you personally with Nadav, but when we meet today with CISOs in the industry, every single CISO knows Nadav, mentions Nadav and building that connection in the last few years is an amazing achievement, which is something I follow for the last 5, 6 years and Nadav has done a tremendous job on that.

Speaker 3

I think Nadav knows how to both communicate will know how to communicate extremely well outside, specifically with our target audience, the CISOs and the C levels in different organization. I think you will know very well how to motivate our internal team. He has also a very good track record with that working and motivating people inside. And I think, again, he's very different than me and that's exactly what I was looking for. I was looking for something to complement and augment the skill that Check Point already has and the skill that I have, and I think I found the perfect person for that.

Speaker 4

Great to hear. Thank you.

Speaker 1

All right. Next up, Xiaoyu Yao followed by Adam Tindle from Raymond James.

Speaker 5

Thank you so much. Good afternoon, James. Congrats on results. Gil, product revenue came better than expected. The overall picture seems to be improving.

Speaker 5

Do you see Check Point as regaining share in the network security arena? Or is it coming from different market categories? And maybe just a word about those 3 8 digit wins, are these displacements or reasonable opportunities? Thank you. So I'll try to answer.

Speaker 5

So first, I think again, I

Speaker 3

think it's early to say that we're gaining a lot of share, but at least in the last few quarters when I watched our results versus competitors, it seems that we have growth stability to growth in the core network security and some of our key competitors had a decline there in the last few quarters. I'm talking about new business, new deals, new gateway. Subscriptions are stable and growing and enjoying what we did in the past. So I think from that perspective, it's a positive one. It's still the tip of the iceberg because I think we can win a lot of market share in network security.

Speaker 3

And I think there's plenty of potential in that core market. If we're talking about the large deals that I mentioned, if it's a displacement, it's not displacement, it's existing customers, but in few of them, I do believe that we are taking shares. Customers that have been dual vendors and shifted big share from other vendors to us. So it's a deal that we've been working on for a long time and they represent the commitment. It's not really and it's not just easy or not easy.

Speaker 3

It's not just simple renewal deals. It deals with a lot of expansion and again, in many cases displacement of some competitive products.

Speaker 5

Thank you.

Speaker 1

All right. Next up is Adam Tynendall followed by Tomer Zilverman, BofA. Okay, thanks. Good morning, Gil. Congrats on your results.

Speaker 1

I wanted to ask a little bit more about recent industry events and CrowdStrike and the headlines, obviously. You've been in the industry a long time. I wonder if you might provide any reflections on this event. And then separately, there's a view that this may cause freezing of spending. I know you mentioned when

Speaker 2

you were giving your guidance, it's

Speaker 1

a little bit early for you to be recording, but any expectations or evidence of that freezing that you've built into the guidance? Thank you.

Speaker 3

I don't have too much insight if this will cause change in behavior. I think the need for industry in the last few months is escalating level of risk, just to be super clear. And I think when actually you look at the challenge, first what happened with Crowd updates, couldn't happen to a non cyber vendor with some automatic updates. Now there is a big by the way, when I look at it both as a customer and as a vendor, there is a big challenge there because in the past some organization were very careful not to let automatic update and to check automatic updates, which in many cases can prevent this type of damage. On the other hand, these days, you see the level and the timeliness of security threats and you realize why you need automatic updates, why there is a new there is dozens of new CVs every month, critical CVs.

Speaker 3

CVs is the new threats that are discovered in critical software, all types of software. And by the way, if you look at the number of threats that are being identified growing and the hackers are learning how to exploit them very, very quickly and that's why you need automatic updates because you don't want to live weeks months when you have known vulnerabilities that the entire world knows about it and you are vulnerable. And that's why automatic updates are important. So there is a clear challenge in the industry. I hope everyone will learn the lesson how to, on one hand, do more automatic updates, on the other hand, make sure that the quality of these automatic updates doesn't cause such damage and strategies.

Speaker 3

And I think we're all humble in our industry and we're learning from it. That's what we need to do.

Speaker 1

All right. Next up is Tomer Silverman from BofA, followed by Dan Ives from Wedbush.

Speaker 6

Hey guys, thank you for the question. I'm on for Tali Ani today. Just wanted to ask, you talked previously about the opportunity for new business bookings to support, I think, revenue acceleration and maybe reach the top end of your guidance. Can you talk about any updated thoughts around that from last quarter trends?

Speaker 1

So I'll take it.

Speaker 2

So I think we mentioned that also this quarter, we did see strong new business bookings. We did see double digit growth, same as we mentioned also in the last two quarters. This is the turnaround that we talked about from Q4. And also this was a strong performance. We did see the strength in the new business and that in the end will should translate into growth in revenues.

Speaker 2

Again, it needs to be consistent. It should be more than 2 or 3 quarters. But in the end, if you're going to be able to sustain this double digit growth in your business, this will translate it into higher revenues growth.

Speaker 6

And maybe just to double click on that since you said you need to see a couple of consistent quarters of that. Does that mean that we should consider the back half to be more in line? Are you seeing less opportunity now than you saw maybe last quarter in terms of reaching the higher end of the guidance, Cole?

Speaker 2

No. I mean, we're still positive also on the second half of I mean, we are still positive about the second half of the year, very positive about the second half. We see the pipeline. Gil mentioned that it's still too early for the Q3 because we announced these earnings a bit earlier than usual, but still the pipeline looks healthy, looks good and mainly for even for the Q4, it even looks healthy, it even looks better. So I think we feel positive about the second half of the year.

Speaker 2

Hopefully, we'll be able to show to be in the upper end of the guidance, but again, too early to say.

Speaker 3

And I would say I would just add to that, I'm super positive about the second half. Q3 is always kind of a sleepy quarter and you kind of look and say what's going on because everybody is on vacation and everybody is afraid that the customers will be on vacation and even the deals that we win won't book. At the end, by the way, all clue freeze end up pretty well because at the end, the world continues to move. If I look at the indicators that they have for full year by our sales force, I think we're mostly very positive, higher level of engagement, higher level of pipelines and so on. So I mean, I think over the last year and a half, our commercial organization and RUPAL did a very good job establishing better cadence and better process and better measures.

Speaker 3

And as far as I see this process at the macro level, it's improved significantly.

Speaker 6

Great. Thank you so much.

Speaker 1

All right. Thanks. Well, it looks like Dan Ives is

Speaker 2

on a TV show, so he's not going to

Speaker 1

be making it in today, but we have Gabriela Borges from Goldman Sachs followed by Rob Owen.

Operator

Hey, good evening. I'll follow-up on the macro question from earlier. Gilenroy, I'm trying to reconcile some of the positive company specific comments that you're making about pipeline. With your comments from last quarter on overall budgets still being generally tight and under pressure, How should we think about from a macro standpoint, if 1H on a macro level has come in a little bit under pressure, and again, a broader comment, not a checkpoint comment, Could we actually be setting up for a stronger than usual budget flush in Q2 in the Q3, second half of the year? Thank you.

Speaker 3

First, again, I'm always saying predicting the future is always there is a big risk and big unknown in that and that's an art I don't know. We've seen years when like every year we see a budget flush towards year end, maybe in my career except 1 year, that was I think towards the end of 2022. And that's the only time I didn't see a budget flush in December. I do hope that this year will be a very good year. It started with when actually the entire industry was under pressure and budgets were tight, when we've actually seen pretty big growth the 1st 2 quarters.

Speaker 3

I just want to be super clear. The rest of the industry reported about pressures. We saw these pressures in 2023. In 2024, we started by getting out of these pressures. I do hope that, therefore, that the indicator that we are seeing will mark a good second half.

Speaker 3

But that's not even the macro, that's the short term 1 or 2 quarters. The bigger trend in our industry, every customer that we meet with, whether it's the not just the CISO, which obviously cares about cyber, but the CIOs, the CEOs, every company, we all believe that more cybersecurity is needed. We also believe that where it's starting to go without challenges, how we can make the products collaborate, how we can create things that are less vendors, more unified architectures, how do we fight the future threats. There is a lot of challenges in our industry. I do think that we are super well positioned to fulfill the needs of the customers and to take advantage of these trends.

Speaker 3

But no doubt in everybody minds that cybersecurity remains a high priority. And even when times when people are speaking about challenges in IT, cyber remains the only area that people invest in. Thank you.

Speaker 1

All right. Up next is Rob Owens followed by his twin brother, Hamzah Fodderwala.

Speaker 5

Thanks, Kipp, and good afternoon, guys. I was hoping maybe you could touch on Primograding 1. I know that Roy touched on it from an OpEx perspective and driving some of the incremental costs year over year.

Speaker 3

But what about from

Speaker 5

a revenue perspective? Where is it relative to your expectations? How additive was it to the quarter? And what are you seeing competitively on that front? Thanks.

Speaker 3

So I think this is a very important area for us for now and for the future. I think in terms of business, it continues to operate and deliver results. But our main focus is actually integrated into our main platform. Unlike, for example, our e mail business, which can be sold as a complete separate product or add on product separate from the network security. So customers do get the benefits of the collaboration and the better security engine and so on, but the buyer and the products are not the same.

Speaker 3

The entire SASE solutions needs to be tightly integrated into the same network security platform and most of our efforts today are about integrating them. As far as I understand, all these R and D efforts are on plan. We plan to demonstrate to be ready to show this super integrated platform that I believe no other vendor has of integrated network security, remote access security, network security from the cloud, the network security in a hybrid mode and on prem, all working together. I think it's on plan and the R and D teams are doing their

Speaker 4

job. All right.

Speaker 2

Next up,

Speaker 1

followed by Brad Zelnick.

Speaker 7

All right. Thank you, Kipp, for the intro. And Gil, congrats on appointing the new CEO and for the strong results. I think if we step back a little bit, it does seem like there's a lot of things that are reflected in Check Point. You just had double digit billings growth.

Speaker 7

The channel feedback has been more positive lately, you've launched a number of new products and now you've appointed Nadav as the next CEO who has many people know is very well venture community has had a lot of successful exits recently with Talendig and others and likely helps Check Point a lot on the M and A front. So my question really is when you talk to Nada about Check Point over the next 5 years and you said he is very different from you in terms of style. Are we thinking more of a radical transformation or building on the existing strategy that you've been executing for the last year or so?

Speaker 3

First, I think it's too early to say. Sid Mehta will join, he will learn, he will provide his experience. I think we've already spent a lot of time together. So I think we will have bigger changes and hopefully I'm pushing for bigger changes. But I do think that Check Point built an amazing foundation and we should use that foundation.

Speaker 3

That's the strength that we have. We have loyal customers that loves us for many years. We have quality products that people love. So it's not that we need to take it to a different direction. We need to strengthen the things that work and augment them with additional things.

Speaker 3

So, Nadav has these ideas, I have these my ideas. So far, these ideas actually coincide quite well. So, we are so I think we are and again, coincide means that some of them we already committed in Checkpoint and we are doing them. And some of them we still need think about them and analyze them. And I think it's too early to say which direction we will choose.

Speaker 3

But I think we will do more and I think in every respect, in innovation, in go to market, in M and A, I think I'm looking to energize and do more in Check Point. Thank you.

Speaker 1

All right. Next up, we have Brad Zelnick followed by Roger Boyd.

Speaker 4

Great. Thank you. Congrats guys on all the success. I don't know for Gil or Roy, it's good to see the continued investments in sales and marketing and the results clearly paying off. How should we think about where we are in the go to market investment cycle?

Speaker 4

And can you give us some color on sales versus marketing, maybe direct versus indirect? And if anything structurally is changing in terms of channel rebates or anything else that ultimately ends up on that line? Thank you.

Speaker 3

Roy, you can try.

Speaker 2

Yes. So on the sales and marketing investing, so we keep investing. I think we keep buying salespeople. We actually grow our sales force in the last few quarters. Again, not in the same pace that we've done a year ago or 2 years ago, but we're investing a lot on that.

Speaker 2

We're going to continue in the end. We see massive volatility on the sales growth because as we talked a few quarters ago, we mentioned that we had many new sales force that joined us 12 months ago, 9 months ago, and it takes time to be productive. And we see this productivity now in the last two quarters or in talking about this quarter, we do see the productivity the much better productivity that's from the sell through. In terms of indirect to direct, again, we continue to invest significantly also in marketing. In direct marketing, we was part of the plan to invest more in marketing.

Speaker 2

And so that's definitely also we see the investment there and hopefully we see also the accelerated growth coming from that. And that's again, we see the results and we hope hopefully we'll see the results also in the next few quarters. Gil, you want to add something or?

Speaker 3

I think we hear good feedback from the channel partners about the new channel program. And again, some of it, I don't think it's just a financial parameter. I think it's the relationship. I think it's the flexibility. I think it's tackling the joint challenge that we have, which is providing better security to more customers.

Speaker 3

If we do that right, I think the opportunity is huge.

Speaker 4

Thank you.

Speaker 1

All right. Next up is Roger Boyd followed by Saket Kalia.

Speaker 8

Thanks, Kip. Gil, the partners we're talking to are suggesting that SaaS interest is starting to tick up again. And as you get closer to being able to sell the full single vendor SaaS SSE product. I'd love to just come back to Sassy for a second and get your comments on the pipeline you're building, the confidence you have in selling that into the installed base and just any update you can on when you see that starting to contribute? Thanks.

Speaker 3

So we hear similar feedback. Sassy remains a very interesting area. I think customers at the end will need a unified platform. They don't want 5 network security platform, 1 for remote employees, 1 for site to site, 1 cloud access, 1 for data centers, they will want 1. I don't think that there is any other vendor that can supply 1.

Speaker 3

We are working on it. We've acquired the right technologies and we're investing in making it 1. We do make progress in selling Sassy standalone, but the main kind of thing that we need to achieve is that integrated platform and I hope it will be reach it faster than some people expect.

Speaker 1

All right. Next up is Saket Kalia followed by Joel P. Fishbein Jr.

Speaker 4

Okay, great. Hey, guys. Thanks for taking my question here and echo my congrats on bringing Nadav on board. Roy, maybe my question is for you. Can we just talk about what percentage of billings is coming from Infinity?

Speaker 4

And congrats by the way in those 3 very sizable deals. Can you talk about maybe how much of the $130,000,000 in TCV impacted billings as well in the quarter?

Speaker 2

Yes. So I'll start with the second question. So in terms of the TCV, so one of these deals actually the 3rd largest one will affect the billing because it was upfront billing, multi year billing. The other ones didn't affect significantly because again it was upfront 1 year upfront. So it's not something it's again something regularly.

Speaker 2

In terms of your next question about the Infinity billing, it's tough to quantify it. I would say that again, the Infinity becoming more and more significant for us, for the business. We mentioned last quarter about 15% of our business is in terms of bookings and revenue sorry, in terms of revenues, Infinity actually in bookings is much more than that. So again, the thing with Infinity, there is lumpiness and some fluctuation in the billing because it really depends on the payment terms, the billing terms. So again, this can also depend on sometime on the customer needs and when he needs the product to utilize the allowance that they're buying, so that they committed for.

Speaker 2

So I think this quarter we did see very strong demand for the Infinity, also in terms of utilization of the allowances that they had. So I think that also affected the billing. But I think again, in the end, the billing grew beside I mean, the billing grew because of the strong performance this quarter.

Speaker 4

Congrats. Thanks, guys.

Speaker 5

All right. Joel P. Fishbein, Jr. Followed by John DiFucci. Thanks for taking the question.

Speaker 5

Gil, for you, you mentioned a lot of new AI initiatives and security. Obviously, it's been a pretty hot topic. What I'm curious to know is, is this driving incremental revenue or do you think that this is just gaining your competitive differentiation from a product perspective?

Speaker 3

I think right now it's competitive differentiation. It's not yet at a revenue stage. Again, Infinity Copilot, for example, it's already used by hundreds of customers, but I don't think that it even have any revenue impact by now. If we look 3, 5 years from now, I think that we can drive a lot of value and generate more revenue based on that value.

Speaker 5

Thank you.

Speaker 1

All right. Next up is John DiFucci followed by Ben Bolen.

Speaker 4

Thanks, Kipp. Kipp. And well, Gil, it's nice to be back covering you. I remember your vision for Infinity more than 5 years ago, and the world didn't seem like it was ready for it then. And I'm not even sure that Checkpoint was really ready to provide it, though the vision was there.

Speaker 4

And now it's even sort of been copied by some of your peers out there. I guess on because you're hearing Roy has mentioned Infinity several times and the strength and you have too. Is the market now ready? Is it time for sort of an inflection point in this or should we continue to think that this is still going to take further years for customers to evolve and just continue to grind forward towards this vision?

Speaker 3

It's a very good question. I hope that we are more ready now than we were before, and I hope that customers are more ready now than they were before. I definitely think that the world needs it. I mean, you do hear from every seesaw that on one hand, I want the best security, on the other hand, I do want to consolidate vendors, for example. I do see that from security then, the fact that you have 15 or even 50 different security technologies, they don't collaborate.

Speaker 3

You don't it's not only that you don't get the full value from the technologies you acquired, you create the same hole. Blocking a malware from getting you an email doesn't mean that you cannot download it when it sends to your Gmail, for example, because one is email security and one is web download security. And another one is security to your mobile device and another one is another vector when a file can get into the company. So I think the value that we are providing with our platform, the collaboration, the consolidation is very, very important for customers at all sizes, by the way. For the mid size and small one, they can't afford multiple systems.

Speaker 3

For the large one, it's a big savings and not only that, it's additional security. So each customer can see it from different perspective. How far are we in the world in that? I think we're still in the single digit of customers that actually standardize on fewer number of vendors. And I think the potential is for that to be 10x bigger or more, a big percentage of customers will standardize on more consolidated architectures.

Speaker 4

Thank you, Gil. And by the way, I really like the combination of you and Adab, because I know him too. So good

Speaker 5

luck. Thank you.

Speaker 1

All right, guys. We have Ben Bollin followed by Andrew Nowinski.

Speaker 4

Thanks, Tim. Good afternoon, everyone. I was hoping you could share any perspective you have on new logo momentum in particular and how any changes that you've made to direct and partner incentives this year may be influencing that pipeline through year end into 2025?

Speaker 3

Rui, do you have any data?

Speaker 2

Yes. So in terms of new logo, we had a good quarter. In terms of new logo, continuing the trend that we had also in the Q1. Actually, our business from new logo grew nicely this quarter compared to last year. And we see very nice traction in America with very nice new logos, mainly on the government side.

Speaker 2

So I think, again, a very good quarter in terms of new logo. In terms of the program for channels, so we are we started already from, I think, the second half of last year. We have a special program for partners for bringing new logos. And together with the new partner program that we launched, that gives them even more incentives to bring new logos. So I think the incentive become even more attractive.

Speaker 2

And we see right now, I mean, again, based on the last two quarters, we do see a very positive momentum from new logos. Again, we think that we should bring much more new logos in terms of quantity and value, but still we do see very nice improvement compared to the first half of last year.

Speaker 3

Thank you. I will join there, Ruiz, and say that I think we're seeing some good trends. I've been by doing reviews for all our different countries around the world and different areas and see what's their plan. I think they all understand the importance of winning more new logos. They are doing a good job and we can do so much more.

Speaker 3

So I'm actually I like these calls because I see that people understand, put it as a priority, and I think we all realize that we can do more.

Speaker 1

All right. Our next caller is Andrew Nowinski followed by Joshua Tilton.

Speaker 4

Okay. Good afternoon, everyone. So thank you for taking the question. Congrats on a nice quarter. You had a lot of positive improvements this quarter, highlighted by the large deal activity, I think.

Speaker 4

But I wanted to ask about your EBIT and your free cash flow because both had pretty lackluster growth this quarter. So I'm just wondering how you're expecting EBIT and free cash flow growth over the next 1 to 2 years as you turn the company over to a new CEO?

Speaker 2

So I can comment about this year about 2024. And again, I think that the EBITDA and the free cash flow, we don't provide any actually, we don't provide any guidance for EBIT and free cash flow. But I can tell you that we discussed when we gave you the guidance in the beginning of this, that was on I mean, the numbers are on plan in terms of operating margin and in terms of EBIT. We mentioned that it will be between the area between 42% to 43% in 2024 because of the acquisition that we had and the investment that we are doing around the integration of Parameter 81 and we discussed it in the last we had some discussions about the product. So there is a lot of investment around it.

Speaker 2

So we knew that 2024 would see more investment that will cause the margin to be in this area. In terms of free cash flow, it's really on the billing. This quarter, we our operating cash flow grew by 5%, free cash flow up in 4%. So and again, this quarter, we see that the billings came by 10%. So hopefully, if we can keep the trend in the billings on the growth of the billings, the free cash flow will grow.

Speaker 2

So it depends on the billing and as long as we see the growth in the billing also the free cash flow will go right. And then for the next 2 years, early to say about 2025. Again, I think we have a very healthy operating margin, very healthy EBIT margin. So we'll discuss probably 2025 next quarter and the next two quarters.

Speaker 1

Thank you. All right. Next up is Joshua Tilton followed by Greg Moskowitz.

Speaker 4

Hey, guys. Thank you for taking my question. I kind of want to go back to Hamzah's question, I thought it was very important, but maybe ask it a little bit more directly. Nadav is clearly a sales guy. He comes from a VC that just sold a bunch of portfolio companies to one of your competitors.

Speaker 4

Do investors need to expect or should they prepare for a big investment in sales force or maybe any changes to guide how you guys think about M and A over the next few years?

Speaker 3

First, it's a very good question. I think I will let Nadav join, learn, understand and develop better plans. I think he's not just a sales guy. He's definitely a strategist. He knows how to work with large teams.

Speaker 3

He knows how to encourage people to innovation. And these, I think, is the real CEO material from being very rounded in his skills and what he did. Remember, he wasn't just VC the last 10 years, he had a much longer career. And even in the VC career, he's got much more involved in some portfolio companies in helping them and building them than just investing. I do feel that I'm, by the way, a big believer in sales and marketing.

Speaker 3

I do think that our industry, it doesn't always work that way, but at least according to my book, investment in sales and sales and marketing should have a very good ROI. I mean, an enterprise salesperson should generate $1,000,000 to $2,000,000 in business. So if you look at the calculation, even if it takes a year to ramp up, in the enterprise space, it should have a very positive ROI where if we can hire and if we should hire more people, as an example. And the biggest investment is hiring. So again, I can't comment about our future plans for 2025, 2026.

Speaker 3

I can tell you that we want to make Check Point better than it was, not the other way around. But if we can grow faster, I think we will that's the number one priority that we all have.

Speaker 4

Super helpful and congrats on the appointment.

Speaker 1

All right. Next up is Gregg Moskowitz, followed by Ty Kidron.

Speaker 9

All right. Well, congratulations on the results and for adding Nadav as well. Roy, you mentioned that you saw a lot of Infinity utilization of allowances this quarter. Were many of these allowances expiring or was there some other reason why you saw more of this activity in the Q2? And then also what are your expectations on the pace of utilization going forward?

Speaker 9

Thanks.

Speaker 2

So in terms of that, some of them, it's Infinity agreement that are expiring maybe next quarter, some of them not related, it's really on the demand that the customer need. I can tell you that the majority of them, Infantigates, are form agreements that will find in Q1. So it's not something that's expiring. In terms of how it should look in the next few quarters, again, the number the amount of allowances, the amount of Infinity business is growing every quarter. So in the end, mathematically, it should grow every quarter.

Speaker 2

But again, it really depends. We cannot control it. It really depends on the customer and on each needs. And sometimes they decide not to utilize in specific quarter and sometimes we see more significant utilization in certain quarters. So again, it's better, I think, the benefit of the Infinity that the customer likes.

Speaker 2

They have to have the flexibility to utilize monadolimisi.

Speaker 3

But just to augment what Rui is saying, which is actually very positive, if most of the spending is customers repurchased in Q1 and started utilizing or utilizing more in Q2, that's the best thing to do. Customers buy because they need it, don't buy because they have excess budget, they don't buy because they like how nice we are. They buy because this fulfill the real needs and that's the end, the aim of what we do and that's the best proof to a quality of the business.

Speaker 9

Very helpful. Thank you, guys.

Speaker 1

All right. Next up is Ty Kidron followed by Peter Levine, if we can get a quick one in, Ty.

Speaker 4

All right. Thanks, Kipp. Appreciate it. Maybe a question on the firewall business. Roy, can you give us what was the growth of the firewall business on

Speaker 7

a year over year basis?

Speaker 4

How do we think about the progression of Quantum Force within that portfolio? And maybe Gil, you can talk about the pricing in firewalls. I mean, Paolo has a refresh as well if it's firewall. Any changes there on the pricing environment will be greatly appreciated.

Speaker 2

Yes. So in terms of the firewall, we did see we mentioned that we launched the Quantum Force in the beginning of actually in the end of 2023 and beginning of 2024. We do see very nice demand for the Quantum Force. I think we do see the total for the product revenue, which is mainly coming from the appliances, mainly coming from the firewall appliances. We do see growth, again, only 1%, but in terms of bookings, the booking grew higher than the 1% that we see in revenues.

Speaker 2

Again, because some of them are coming through Infinity, some of the bookings for the firewall are coming through Infinity and you don't see it in the revenues yet. Sometimes it comes after, as I mentioned in the previous question we had, sometimes it can come a quarter after, sometimes it can come 2 or 3 quarters afterwards. But in general, when we're looking on the bookings for the 1st two quarters, we do see significant improvement in the demand for appliances. Again, I would say that's something that we that's even more than what we expected because of the launch of the Quantum 4. I can also add that in terms of the pricing, we didn't see any significant pressure on the pricing.

Speaker 2

I mean, when you're looking on the on the average selling price of our appliances, no significant change. I mean, I can talk only about the Q2, nothing significant that we've seen, similar discounts range, nothing that I can comment that I see any significant change today, again as of today on the price.

Speaker 3

And the pricing used to be competitive and is still competitive. It's not an easy pricing environment. Appreciate

Speaker 1

it. All right. Our last question, if you can make it quick, is Peter Levine. Great. Thanks guys for squeezing me in.

Speaker 4

So maybe just to piggyback off the last one. I don't know if you can kind of give us some color, but your thoughts into hitting double digit growth next year and obviously any conviction around we're getting closer to more of a massive kind of refresh cycle that you're seeing from your conversations, your pipeline, because I know that is part of the equation to hitting that double digit number for next year? Thanks guys.

Speaker 3

I think we're doing a lot of things to get there, and I think we're doing for quite some time and the indicators are positive. I think the new change in our leadership is definitely going to help and augment that. It will give people more energy and a lot more customer focus and so on. So that's a positive. And I think if the economy will go in the same direction, I think we will have a very good we can have a very good year next year.

Speaker 3

If all these things will happen, that's a good question. I'm positive and I'm optimistic about that.

Speaker 1

All right. We'd like to thank you all for joining us today. We appreciate it. We'll see you during the quarter without a doubt. And we'll meet here in probably a little over 3 months or so once again.

Speaker 1

All right, have a great day. Thank you. Bye. Thank you. Thank you very much.

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Earnings Conference Call
Check Point Software Technologies Q2 2024
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