Check Point Software Technologies Ltd.

All right, here we go. Greetings. My name is Kip Meinzer, Global Head of Investor Relations for Check Point Software. I'd like to welcome everyone to our third quarter 2021 financial results video conference. At this time, all participants are in listen-only mode during the formal presentation, which will be followed by a question and answer session. Joining me remotely today on the call are Gil Schwed, founder and CEO, along with our CFO and COO, Tal Payne. As a reminder, the video conference is live on our website and is recorded for replay. To access the live conference and replay information, please visit the company's website at checkpoint.com. For your convenience, the replay will be available on our site. If you'd like to reach us after the call, please contact Investor Relations by mail at kip at checkpoint.com. During the course of this presentation, checkpoints representatives may make certain forward-looking statements. These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 include but are not limited to statements related to checkpoints, expectations regarding business, financial performance, and customers, the introduction of new products and programs, and success of those products and programs, the environment for security threats and trends in the market, our strategy, focus areas, demand for our solutions, the impact of COVID-19 on our business, including our supply chain, product development, and sales and marketing efforts, and then on our financial condition and results of operations, the impact of COVID-19 on customers, suppliers, business partners, and the macroeconomic environment as a whole, our acquisition of Avanon, the growth of markets in which we operate, and our businesses and financial outlook, including our guidance for Q4 2021. Because these statements pertain to future events, they are subject to risks and uncertainties. Actual results could differ materially from checkpoints' current expectations and beliefs. Factors that could cause or contribute to such differences are contained in checkpoints' earnings release issued on October 28, 2021, which is available on our website, and other factors and risks, including those discussed in checkpoints' latest annual report on Form 20F, which is on file with the SEC. TechPoint assumes no obligation to update information concerning its expectations or beliefs 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 reconciliation of such results, well as the reasons for our presentation of non-GAAP information. Now, I'd like to turn the call over to Tal Payne for a review of our financial results.

Thank you very much, Keith. Good morning and good afternoon to everyone joining us on the call today. I'll just remind you all that before I go into the numbers, the GAAP financial results include stock-based compensation charges, amortization of acquired intangible assets and acquisition-related expenses, as well as the related tax effects. Keep in mind that as applicable, non-GAAP information is presented excluding these items. And here we go. Let's start. So it's the first quarter, actually, that I prepare financial slides. I hope you like it, but if you have any comments, I'll be open to hear any comments and things we can improve. So here we go. Revenues, it was a good quarter. You can see it in the numbers we published. Revenues and EPS, both are above our guidance. Revenues reached $534 million, $7 million above the midpoint of our guidance. And earning per share surpassed the top end of our guidance, reaching $1.65. So it's one cent above the top end of the guidance. Looking at our revenues, billings, and deferred revenues, revenues increased by 5% to $534 million versus 4% last year. Billing, $517 million. We calculated the billing, the implied booking, the way you do it. So it's the gap, the change in the deferred revenues plus the revenues, increase of 9% year over year. Last year in the same quarter, the increase in the billing was around 6%. So that's accelerated. Nice to see that. And the Fed revenues reached 1,456,000,000, which is 154 million growth, which is 12% increase year over year. Looking at the security subscription, we can see clearly that the acceleration and the success in the revenues increased is relating, continues to be related to the acceleration in the security subscription. We had a very nice quarter here. We can see again, year over year, last year the growth was 10%. This year, subscription reached, this quarter, subscription reached $190 million, reflecting about 36% of our revenues and growing in 13% year over year. The growth was attributed to three factors. One, continued double-digit growth in Harmonic. Second, double-digit growth in CloudGuard. Both are the new pillars that we announced in the beginning of last year. And Infinity continued to be very strong with a strong adoption of the Infinity solution. I'm reminding you it's either adopting two pillars or three pillars in the financial model. And we can see an increase. Last year, the growth was very nice as well. It was 81%. This year, triple-digit. This quarter, reaching 172% and becoming a nice... Nice number, which already starts to affect the growth index in the subscription, hence the 13% growth year over year. If I move to revenues by geographies, 44% in EMEA, 44% in Americas, and 12% in APAC. So we can see double-digit growth, both in EMEA and APAC year over year. A bit highlights in the P&L. I'll go through some of the line items as usual. Gross profits continue to be strong, reaching $474 million with 80% margin. If we see compared to the sequential quarter, same percentage, 89%. Compared to last year, small reduction. We continue to invest in two items. One is, of course, the investment in the cloud infrastructure, as we see the growth in our revenues in the business and the services of the cloud, also the investment in our cloud infrastructure. And secondly, as you're aware, there's some supply chain constraints in the markets in general. We deliver on time to all of our customers with slightly higher costs relating to some items. So that's part of the effect that we have here. And even smaller effect is the start consolidation of Avanon in our numbers. Small numbers in material, but included here as well. Operating expenses. So let's start with the main item that we talked about. If you recall, we said we plan to invest in our headcount and to increase our investment sales marketing and R&D. This quarter, we added over 250 employees. So we start to see us ramping up onto the plan. It's still not fully there, which means we still have a growth there, which we're very excited about. And you see some of it already in the P&L. You see the increase in the cost. And second, and that's why you see Even higher in the R&D is because the dollar weakened against many currencies, but also the shekel year over year. Our R&D mainly in Israel, the effect of the change in the currencies is about $5 million this quarter. If we look at the profits, strong profitability continues. We have, although the effect of the increase in the headcount and the weakness of the dollar, still operating income $261 million, 49% operating margin. and 41% net income margin. You can see the gap between the operating margin and the net income relating to what we discussed for many times, financial income. As our cash balances rotate and the interest rate moves down, the yield on the portfolio is reducing. We talked about a reduction quarterly of about 1 to 1.5 million. This quarter, it's reduced slightly less than 1 million, standing on 9 million. We expect that to continue, of course. Our income taxes, similar to the sequential quarter with 19%. Year over year, a slight increase relating to the fact that we have provisions in our taxes. Provisions are linked to the index. And we see in some countries, including Israel, index moving up, resulting in an increase in the tax rate. I'll just relate to Q4. Q4 is in line with our expectation. If you recall, every Q4, if everything goes as usual and there's no things that I can't predict, then we have lapse of statute of limitation in Q4. Therefore, the taxes are expected to be around 0%. Of course, it can be slightly higher, slightly lower, but that's the indication as of now. Our cash flow position continues to be strong. Cash balance is $3.8 billion. This quarter, we acquired Avanam. Havana net cash effect was $234 million, $220 million you can see in the investment activity, and about $14 million is included in the operating activity. Our operating cash flow, $251 million, very strong, strong collection. We saw around 56 days. If I eliminate the Havana acquisition, it's an increase of 4%, which is in line with our expectations. We continue to buy back shares. This quarter we acquired 2.6 million shares, 2.64 million shares in an average price of 123 in a total amount of 324. We ran out of the previous program. That's why we approved in August a new share repurchase program. Same amount, expansion of $2 billion, up to $325 million and a quarter with the same rules. So all in all, a really nice quarter. And at this stage, I will move it for Gil for his business highlights. Thank you.

Hi, everyone. Pleased to have you all on our call today. And I'd like to start by giving a little bit of the business update. I'd focus about the state of cybersecurity and how do we fit into that framework. So I think, as we probably all know, the threat landscape has never been greater. I mean, it's really, really the attack surface has expanded. We are seeing surge in large-scale Gen 5 attack. I don't know if you remember, but almost four years ago, we formed this – category of fifth-generation Gen 5 attacks. Back then, these attacks were fairly rare, and most attacks were from previous generations. This year, 2021, we're seeing the Gen 5 attacks are actually taking over, and you can see here a few examples, like the Sunburst Solar Wind, the Colonial Pipeline, the Kaseya, and many, many other attacks that we're seeing on an ongoing basis, sophisticated, multivector, polymorphic Zero-day attacks that are very, very high to identify and block. And that's the challenge of our industry, to actually stop these attacks and keep them out of our environments. I think what we see is the reason that we're seeing such a surge in attacks and especially sophisticated is multiple reasons, but I'll just point out the three main ones here. One is the fact that the employees are everywhere. And that means that areas, first, our attack surface has expanded. It now includes our home computer, our daughter's wife home computer, and many, many places that before weren't connected to the corporate network. And second, that many things on the corporate side have opened that were never opened before. Our manufacturing floor, our trading floor, our development environment. Many of these environments were closed. either completely isolated from the network or had very rare connection to the internet. And now they are widely connected. Add to that the cloud, which is open and they relies on multiple applications from multiple vendors, both our own, but also application of additional vendors, the hybrid data center, which means that there is more and more connections between application and each connection like that is a vulnerability point. And we see the explosion of, or, very high risk profile that hackers are exploiting. Challenge our industry, the existing solution in many cases fail to address that in the proper level. And there's multiple reasons too. First, no focus on prevention. If you look Huge part of our industry is focusing on detection, finding out that you've been breached and that's too late, and remediation. Again, too late, too expensive, expensive not dollar-wise, expensive in the damage and the time and what's going on to the organization. Resilience. Many, many security solutions. Again, there is hundreds of maybe more than 1,000 security vendors. Typical enterprise would find itself between 12 to 55 security solution. That's unmanageable, unbelievable in terms of managing that complexity. And worse than all of that, it doesn't add level security. This solution... work separately, they don't work in conjunction with one another to block the attack. So something may be found by one solution, but may arrive on a different vector that's not protected with some other technology that could have prevented it. So we really need something different. And that's what we are doing with Checkpoint, with our Infinity architecture, securing the cloud, securing the network, securing user and access, CloudGuard, Quantum, and Harmony, the brain that consolidates it all, not just the complete management, but our threat cloud that makes sure that all of these solutions work together and and really address the critical attack vectors in a way that no other security architecture today in the marketplace can address. That's not easy to deliver that. That's not, requires a lot of effort. It's not just a supermarket of solutions. They actually need to work together. They actually need to be tightly architected. And that's a challenge that took up on ourselves. And I think we're delivering on that very, very well. I think you can see some recognition, and we get more and more industry analyst recognition. You can find a lot on our website. You can find them on our press releases. But here is an example of the G2 analysis. one that actually takes view of the product from multiple angle. And this is a great testimony to the strength of our architecture. We appear on six different leadership breed, this leader in V6 category. cloud data, mobile, email security, endpoint protection, firewall and cloud workload. This is chosen by users. So this is based not just on theoretical discussion. This is based on actual users use and the users use as leaders in all these categories. And you can even see some of the quotes, best cloud protection, endpoint secured, network more secured, checkpoint firewall security is priceless. All are quotes from the last few months. So this is, I think, a good testimony to the fact that finally we see recognition that this architecture works and being recognized as something that delivers the solution. We have an amazing list of customers with our Infinity architecture and with all our stack of solutions. And maybe I'll just show you a few examples of that because I think Tal already mentioned that, and that's one of the areas that I want to focus on today is on Infinity. But our Infinity architecture and Infinity sales, and Infinity sales, just to explain what it is, is customers that have multi-year deal with us that capture more multiple pillars from our architecture. So these customers make us their strategic security vendor, and we make them a very important strategic customer when we support them and take care of them in a very, very nice way. Usually, it's Infinity deals first. are not simple deals of buying products but they are allowing the customer a very wide access to a big portion of our portfolio again the broadest is for all the portfolio some infinity deals have a only a tour two of the pillars and not three of the pillars that we have but this is a And they vary by size. Most, by the way, Infinity deals, some are for large customers, some are for small customers. They usually become large and strategic deals. So here are a few examples. Again, it's a small, small sample from some deals that we won this quarter. And you can see all GEOs, all industries, U.S. oil, health care services, medical devices. oil and gas, telcos, utilities, insurance. And you can see here, most of these deals are pretty large with companies that are multi-billion dollar companies, Fortune 500, tens of thousands of employees. Even though I must tell you, we have a lot of very good deals of infinity of companies with hundreds of employees. And, again, even if you have two or three or five or 700 employees, when you sign up to Infinity, it becomes a strategic deal for both sides. Maybe I'll give you one example here for one win that we had with Infinity this quarter. And this is a large manufacturer, more than 60,000 employees, operates in 160 countries, a seven-digit deal when they actually wanted to consolidate multiple elements and mainly to connect the network, the data center, and the cloud. So their two pillars are the quantum and cloud guard. And this was deal like many others, but especially this one was highly competitive with some of our top competitors claiming that we have better performance and try to prove that that's a way to enter the account. The company has hired the third party to evaluate the products in the lab. And we're very, very glad that we came up on top in terms of performance. And, of course, the customer likes the superior management and their ability to scale it almost indefinitely with our Maestro solution that allows a kind of cloud-like architecture in the data center. And, again, here it's important because we also need to connect it to the real cloud. Now, these are very typical reasons why we win, but it's always good to see them. in large, sophisticated customers. So this is a good example of an infinity win and typical one that we have and hopefully will continue to grow the pipeline of such deal. Let's switch gears a little bit to the Harmony family. And this quarter, I wanted to focus on the Harmony because we've expanded it, because we've done a lot of it. Paul already stated that we've seen a nice double-digit growth in Harmony. Like Infinity, many different customers, different industries, different case studies, and you can see here some really nice examples. Semiconductor manufacturer, 75,000 employees, water purification, 40,000 users, software company, which was a competitive replacement, healthcare services company, a company which has a lot of patients in the government institution with more than 90,000 endpoints, now using Check Point Harmony. Once again, I want to give you one simple example of the customer win case. This one is a very interesting one. This customer was using security on the endpoint from multiple vendors, Good reputable vendors, by the way, and not niche players, good, nice, reputable vendors. And on July 3rd, they were attacked by ransomware. And we had a good relationship there and they contacted us immediately and we got our incident response unit, by the way, which is second to none, really high quality incident response team that we have in Check Point. They got in the same day. and started investigating the case, found out what's happened, find out the type of rent somewhere, and so on. The next day, the customer has already requested to see what the checkpoint product could have done better for them, and they've seen a demo and a trial of our Harmony Suite product, And two weeks later, or less than two weeks later, we already, 10 days later, we already won the deal and replaced multiple vendors with a solution that's superior, that works better. Then the threat intelligence, threat hunting, the real-time blocking, the real-time alerts work together and deliver better security to this customer with 40,000 employees. This is pretty impressive and pretty big. But I think the big news this quarter was that we expanded the Harmony family and we really extended it with stronger cloud email offering. So I want to maybe explain a little bit the opportunity here and what we're doing in the field of cloud email security. The cloud email security today is about $800 million. Gartner are expecting that it will grow by 150% to almost $2 billion in the next few years. And I think the big change here is that enterprises are moving a lot of their email to the cloud. Some of it is because all the regular benefits of the cloud and the general shift. Some of it is a strong push from Microsoft. to move the exchange installations to Office 365 installations on the cloud. So this is a very dominant power in the marketplace. And the challenge is that the conventional email security solution don't really fit the cloud email. For example, they require you to reroute all your email to their what's called MTA, email transfer agent. When in the cloud, you're already enjoying the fact that the cloud, the email arrives directly to the cloud provider. So there's no need to reroute it. And many, many other things that are issues with the existing solution, not to mention the technological challenge that they don't address all the different phishing, zero-day files, suspicious links that are contained in email. That's also a challenge. So both the security... And the delivery are challenges for email security. Now, usually I would say this is a big market with big players, so it would be hard to enter it. I think we have a unique opportunity here because of the shift in the market to cloud solutions. Now, one important thing to remember that the vast majority of cyber attacks start with some form of email. Again, it can be a phishing email that somebody gives their credentials by mistake and that used to break into the company. It can be an email with links that go to malicious sites, or it can be just attachments. And this is the worst part. can be documents with unknown vulnerabilities, documents with known vulnerabilities. Some of them existing solution are successful in blocking like regular known viruses with existing solution are fine with finding. Some of them are almost, are not dealt properly, I'll say delicately. with the existing solution. For example, most solutions in the marketplace today, even if they have technology to detect zero day or doing sandboxing to messages and they analyze files in the cloud, they still pass the email. So you as a recipient receives an email, open the attachment, you don't know that you've been infected, It can be two minutes later, it can be half an hour later, it can be a day later, somebody gets an alert that says, you've been infected, and that's too late. And the fact that someone had a technology that could have detected the attack, again, too late, the damage is already gone. And I think that's fairly challenging in terms of addressing email threats in today's marketplace. We've decided that it's an important market. We've been offering a solution for that space for, let's say, the last two or three years, partly with partnership, partly homegrown. And this quarter, we decided to really expand upon this opportunity and acquired Avanon. Avanon has been the company we've been partnering before, so we know them quite well. They are the fastest-growing cloud email security vendor, so this is a very, very important thing. And they actually enjoy very nice data, 5,000 customers, not trivial in our marketplace. two and a half million protected users, number one on peer insights. So people really love our solution. It's really simple, five minutes to set up. And 30% more attacks are prevented with the Avanade solution. So we decided that this is a great opportunity to expand our market presence, to expand our space and go strong into this changing market. Some of the unique capabilities that we have here, first, this is born to cloud. It doesn't require you to reroute your email traffic. API-based, so it plugs in directly to the cloud solution. What I mentioned about preventing, we are prevention first. No email should pass our solution without either being cleaned or analyzed before it reaches the user. And we have the unique technology for a threat extraction that cleans up the suspicious attachment. Avalon technology has been amazing on phishing. The checkpoint technology is very good about analyzing the files. So the combination delivers even stronger results. Remember the 30%, Avanon claimed before being acquired. So now together, I think that we have even better catch rate. And I think together we can deliver a solution that's very, very needed in the industry and open up a very interesting market for us. So all in all, I think we've expanded the harmony into the cloud email. By the way, we also have the solution for the other revenues on email. So the Infinity architecture does address all the major attack vectors, unlike some of our big competitors here. It's a great expansion opportunity, and I think marks a very important acquisition opportunity Moving to our last part, summary. So I just want to summarize what Tal said, what I've said. I think we've completed a pretty good quarter. Revenues at the top half of our guidance, increased growth rates, and again, reflected in many different places in the new pillars of security. in the growth in subscription and the increased billing rate. So we're seeing some very good progress and very good signs. EPS exceeded our guidance, our range, even though we heavily invested in the company. And I think we will still see the results of some of these investments, some we may have seen already this quarter. Our Infinity architecture is gaining momentum, and again, we see it also in the growth rates on CloudGuard, Harmony, and the triple-digit growth in Infinity. And I think the expansion in the cloud email security marks an important opportunity for us, which I hope will deliver the results. So that kind of summarizes Q3. I think it was a good quarter for us. I want to thank you for joining us today. And actually, before we jump into the Q&A, one more thing. I want to share with you our projections for the fourth quarter and the update or the increase of the projections for the full year. So let's look into that. Fourth quarter, we expect revenues in the range of $560 million to $605 million. EPS is expected to be between $2.02 to $2.22, a lot of twos, so $2.02 to $2.22. Gap EPS is expected to be approximately $0.26 less. I always say that, so I'll repeat that. Projecting future results is very challenging. There is a lot of unknown. There is a high level of uncertainties. There is a lot of potential upside, but also a lot of risks that can materialize. So I think we need to always remember that. And there's nothing, there's not much changed in this quarter compared to others. You do have to take in this account that we are now facing a very unusual situation, both with the corona and also with a lot of supply chain issues. So we hope so far we weren't affected by the supply chain or we were affected by your supply chain. We were able to mitigate that and supply all our products to our customers on a very timely manner without that affecting our quarterly results. There's always a risk that it will change. We, of course, are getting ready to continue and supply that. But, you know, there's always risks that are hard to predict or predict. may or easy to predict, depending on how we look at it. Having said that, again, we still expect a very healthy and a good Q4. For the year itself, following three quarters, then I think we've exceeded our guidance, at least the midpoints of our guidance. We are actually uplifting a little bit the full year projections. So revenues are expected to be between $2 billion, 127 million, to 2 billion, 172 million. EPS is expected to be between $6.81 to $7.01. GAP EPS is expected to be approximately $0.94 less. So this kind of summarizes our projection. And with that, I'll be very happy to listen to your questions and hopefully provide some good answers to that. So thank you very much.