Check Point Software Technologies Ltd.

This meeting is being recorded.

Second quarter 2022 financial results video conference call. At this time, all participants are in a listen only mode during the formal presentation, which will be followed by a question and answer session. Joining me remotely today 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 website. If you'd like to reach us after the call, please contact Investor Relations by email at kip.checkpoint.com. During this presentation, Check Point's 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 our products and solutions, expectations regarding customer adoption of our products and solutions, expectations related to cybersecurity and other threats, expectations regarding our Q3 2022 projections, our 2022 initiatives, the market for IT security, competition from other products and services, supply chain, general market, political, economic, and business conditions, including the impact of the COVID-19 pandemic. These forward-looking statements are also subject to other risks and uncertainties, including those more fully described in our filings with the Securities Exchange Commission, including our annual report on Form 20F filed with the SEC. The forward-looking statements in the 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, as 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, Kip. Good morning and good afternoon to everyone joining us on the call. I will start with a review of the second quarter and right at the back you can see that we had an excellent quarter, both revenues and earnings per share. We're at the high end of our projections, $571 million revenues, which is 11 million above the midpoint of our projections. Earning per share, $1.64, which is also at the high end of our guidance, and 4 cents above the midpoint of our projections. Before I proceed further into the numbers, let me remind you that our GAAP financial results include stock-based compensation charges, amortization of acquired and tangible assets and acquisition-related expenses, as well as the related tax effects. Keep in mind, as applicable, NANGAP information is presented excluding these items. Now let's take a dive into the numbers, and I will start first with the revenues, which were quite nice this quarter. I will start from the total revenues. Revenues for the quarter accelerated. reaching $571 million, which is a 9% increase, an increase from the $526 million. It's basically more than double the growth rate compared to last year, Q2, which was around 4%. I know you will ask me about the billing, so let's hit it as we start. Billing in the quarter reached $571 million, which is a 6% increase. I want to remind you that the billing for us is affected significantly by the deal timing, duration, and the payment terms. Hence, it can fluctuate between quarter to quarter, specifically when we have mega deals. Mega deals is $20 million, $30 million, $40 million deals. In Q2 last year, if you recall and go through the script back then, we said specifically we had quite a few multi-year mega deals, which were billed in advance. So mega deal can happen, but can be billed over time or once a year in a split payment. Last year, we had a few large deals which were billed actually in advance, which created the dip in the billing right now, but no effect on the run rate and on the growth rate in general, which you can see very clearly in the P&L. Deferred revenues, It's somewhat including that, because if you compare the deferred revenues, if deals came instead of in Q2, in Q4, or got advanced a bit, then it will be part of the deferred revenues. So you can see deferred revenues is healthy at $1,666,000,000, which is an increase of $194,000,000 or 13% growth year over year. So that's to cover the subject of the revenues. If you go to the split in the revenues, First, let's start with the two line items together called product and subscription revenues. Together it's a double digit growth, 13% growth year over year, reaching $343 million. It's a double digit growth in these two lines together for two quarters in a row. So it's nice to see it stabilizing on a double digit and hopefully it's planned to continue. So it's a great milestone for us. Even more than that, for the first time in many, many quarters, probably maybe 10 years, we had a really strong product and license revenues. I remind you that last quarter, when you asked me about the billing, I told you that some of it is product that had delayed delivery, infinity, where we wait for customers to pull, or just delivery of two, three weeks after the order. It can happen every quarter. It also happened this quarter. We have quite a lot of that as well in this quarter. So there's also slightly affecting the billing, but you can start it already, seen it translating into the P&L and we see 12% growth in our appliances. It came from like last quarter when we talked about it, also from SMB, mid, large appliances. Maestro was very strong, which is the switches that enable us hyperscale network. We see Infinity customers also starting to use their product allowance as they implement the security solution in their organization. So it's very nice quarter for the product reaching double digit for the first time in a long time. If we look at the subscription, it was double digit for a while and it continues to be nice with 14% growth in the subscription, reaching $210 million, an increase from the 12% last year or the $184 million last year. The growth continues to be driven by all the All the items growing, Quantum, CloudGuard, Harmony, but the double digit is driven by CloudGuard and Harmony. Both of them considered new pillars for us from the last year or two. Our Harmony email security continues to deliver great results. I'm reminding you that we acquired some of the email came from an acquisition in September last year, which will be annualized in September. So we see nice growth in both of them, both cloud and in Harmony. All in all, it's about 37% of our revenues, the subscription now. So it's becoming quite a large engine for us in the revenue growth and creation. If I'm going to revenues by geographies, so what you can see here, the percentages are the same like last year. So you see 44% in EMEA, 44% of our revenues coming from Americas and 12% from APAC. If you calculate year over year, you will see the revenues grew across all geographies in quite a similar rate. So quite healthy business all across our regions. So that's also pretty nice and stable. I'll move to the profitability. So, of course, you hear it from many, many companies, us included. Revenues we discussed, gross profits moved up from $470 million to $501 million. strong gross margins. So we continue to have strong with 88%. It's a tick down. We actually pay a significant deal. We talked about it the last two quarters in a row. I actually expect it to continue for the rest of the year, which is part of the pressure on the margin, but it's okay. It's the temporary increase in the cost relating to either putting our hands on raw material on the open market or expediting shipment because you need to get it early to the production line. These are a strong margin taking into account these higher material costs and also shipping costs. Hopefully this temporary phenomena will go back to normal towards in 2020 soon. It's too early to say, but it looks like for the second half of the year, it's still here. We see the raw material coming in. This raw material that we produce now is going to be part of the cost in the next two quarters. So great results taking into account the massive pressures that all the companies are seeing in the raw material market. Operating expenses, very similar to last quarter. We see operating expenses increasing faster than the revenues in 18%. This is in line with our plan from the beginning of the year. I'll just remind you, our plan was we're going to continue to increase our workforce, mainly in sales and R&D. We continue the elevated investment in our rockets, which is mainly CloudGuard and Harmony. So in line with the plan, we increased our workforce year over year in a double digit, both in sales and in R&D. In sales, we still have some recruiting to continue. The year-over-year operating expenses increased mainly as a result of that fact, the compensation. Of course, return to travel and face-to-face interaction, some cloud expenses, and the acquisition that we had last year of Avanon and Spectral this year. So that's also part of those expenses. And that was not part of the original guidance. Therefore, us meeting the EPS after these acquisitions as well, it just shows the strength of the results. If I'm moving to the below the operating income, so we can see here operating margin is higher than we planned. It's actually 44%. We planned it slightly below because we're still in the recruiting process. We still haven't finished. Financial income, we started, you don't see it here because Q2 versus Q2 is 10 million, but if you compare to Q1, the sequential quarter, you will see it's an increase. As our portfolio is being released, we invested in higher interest rate and we start to see an increase there. On the other hand, on the taxes, tax provision are getting indexed. And since, as you know, the index is quite high, the inflation, which is the indexation, is quite higher than nobody planned for it. It's part of our tax expenses. That's why you see it moving up to 19%. They deducted each other, therefore the net effect was minimal this quarter. And the total net income is $209 million, earning per share $1.64, which is four cents above the midpoint of our guidance. So quite good earning per share and operating income. If I'm moving to our cash position and cash flow, I will start with the cash balances. So our cash balances as of the end of the quarter was $3.7 billion. Our operating cash flow this quarter was $212 million. I'm reminding you that we hedge our balance sheet against currency fluctuation in order to minimize the effect on the PNL. So as you do balance sheet hedge, It's minimizing effect on the P&L and protects our P&L, and also this quarter it happened. But the fluctuations you see in the cash flow. This quarter the fluctuation in the cash flow was significant. It was about $47 million, the hedge cash expense, versus $6 million income in Q2 last year. Operating cash flow excluding the effect of the hedge and taxes is an increase of 2%, so quite a healthy cash flow with continued strong collection from our customers and expenses in line with the growth of our headcount and expenses in the P&M. During the quarter, we also continue our buyback. You can see here $325 million share repurchase continue. We purchased 2.6 million shares. for $325 million, an average price of $127 per share. So that's the cash position. So if I summarize, we had strong results, revenues, and EPS in the high end of our projection, with accelerated revenue growth, double-digit growth in product, double-digit growth in subscription, and we continue to be focused on the top line while maintaining a very strong profitability. And now I will turn over the call to Gil for his insightful comments.