Check Point Software Technologies Ltd.

Welcome to the Check Point Software 2023 First Quarter Financial Results video conference. I'm Kip E. Meinzer, Global Head of Investor Relations, and it's my pleasure to be here today. Our founder and CEO, Gil Schwed, and acting CFO, Roy Golan 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. During this presentation, Checkpoint'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 future 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 in 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-19 pandemic. These forward-looking statements are also subject to risks and certainties, including those more fully described in our filings with the Securities and Exchange Commission, including our annual report on Form 20F. 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 kip.checkpoint.com. Now I'd like to turn the call over to Roy Galan for a review of our financial statements.

Thank you, Kip. And thank you for everyone for joining the call. Let me just share the presentation. Yes, so I'm excited to be with you to present our results for the first quarter of 2023. Our revenues this quarter reached $566 million, which is $1 million above the midpoint of our projections. 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 enriched our projection and delivered 15% growth in our earnings to $1.80. Now let's dive to the detail of the view of the quarter. As I mentioned, the revenue increased by 4% to $566 million. Our deferred revenues was halved by 8% to $1,797,000,000. Our shortened deferred revenues were up 2% by 8%. Our calculated billing reached $485 million, a decline of 3% year over year. Let me remind you that our billing is affected by duration, payment terms, and in this kind of market uncertainty, we saw this quarter fewer customers willing to pay upfront for multi-year deals, which resulted in shorter billing duration. If we are looking on our current Calculate billing, it was actually up 2% year-over-year. Our product revenues declined by 7% year-over-year. This was as a 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 of projects. If we're looking on the security subscription, we had a very strong quarter with 13% growth year-over-year and reached $228 million. This double-digit growth was driven by our cloud guard and our money email businesses that were both at 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 and accelerate its way to our revenues and reach the growth of over 140% in revenues. 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 GEOs. 45% of our revenues came from EMEA. 43% of our revenues came from Americas, while 12% of our revenues came from Asia Pacific. And let's dive now to the P&L highlights for the quarter. Our gross profit was increased by 5% to $502 million, which represents a gross margin of 89%, which is higher than 88% that we had last year. Those store margin are impressive, considering we still see pricing increases by many vendors. We see an improvement in the supply chain environment that was very challenging last year, and we hope to see this trend continue in the remaining of 2023. Our operating expenses were increased by 11%. This was mainly as a result of our continuing investment in our workforce, cloud infrastructures, and in-person marketing activities, including our CPX event that took place this quarter. So we reached a very strong operating income of $238 million. That was 42% of operating margin this quarter. Our financial income this quarter reached $19 million as we invest in higher interest rates over time. And we expect that this income will increase in the next few quarters by a million or two every quarter. Our non-GAAP tax rate for this quarter was around 15%, mainly due to indexation and updating tax provision because of several tax assessments we have worldwide. Our non-GAAP net income increased to $218 million, 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 gap net income was $184 million or $1.52 per diluted shell. If we're moving to our cash flow and cash position, so our cash balances as of the end of the quarter were $3.6 billion. Our operating cash flow was strong at $386 million this quarter. During the quarter, we continued our buyback program and purchased 2.6 million shares for $325 million at an average price of $127 per share. In the past 12 months, we acquired in total, we purchased in total $1.3 billion of shares. So if we summarize our financial results, so we had a double-digit growth in subscription revenues driven by our Harmony, Eman, and CrowdGuard products. Our recurring revenues give the key milestone 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. Now I'll turn the call over to Gil.

Thank you, Kip. Thank you, Roiv. That was a very good presentation. 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 trend that we see. As you know, the need for cybersecurity remains high. 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 financial results. Our revenues were above the midpoints. 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. We saw the effect of that economy on our business. We've extended sales cycles, project being postponed. And I 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 first quarter. First and foremost is the Infinity Global Services. Second is getting into the new market of Security Operations Center SOC with Horizon XDR, XPR, and I'll dive into each and every one of them. And last and not least is 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 the security landscape and all presented pretty good results for the quarter. So let me start with 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 skills shortage in the market for cybersecurity. Our partners, our customers all have a lot of expertise in cybersecurity, but none of them have everything included. And the idea here with introducing our Infinity Global Services is to augment the needs of our customers and partners. When they want to run fast and get the best security and get the full deployment, whatever stage they need, they will always miss something. It can be on the security assessment side. It can be in how to optimize their security environment. It can be in a training process. certifications and things like that. And it can be in the full operation and response to incidents and managed security services. We are here to help them. 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 security services market is a $75 billion market. 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 quarter 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. Today it's a sub $1 billion market expected to grow to almost $3 billion market in five years. And our approach here, XDR, XPR, it's meaning how do you collect information from multiple sources and out of them get additional security value. Now, most XDR products today, they're actually called EDR endpoint detection and response focused about detection, focused about endpoint. What we're talking about XDR and also XPR is extensive detection prevention and response to all types of security events. Our approach here is very different because we turn things into automatic prevention very, very quickly. 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 platforms tools that are available in the infrastructure from Microsoft, from other vendors, all part of the system we already know how to include. And I think through that system in the last few months since we introduced it, we're seeing on a weekly basis, new incidents that we find in our customer's environment and immediately turn that into prevention. So I think you see some of the analyst quotes here from ESG, Dave Gruber from ESG, The integrated approach here is unique. We can drive change across the broader security industry. I think it's a very, very good start to us. It gives access to the CISO, access to the security operations center. And for our customer, it's tremendous value that they derive from this family and from the rest of the checkpoint technologies that they have. Last and not least is the expansion of the CloudGuard family. We've seen up our CloudGuard native application protection platform. Here we are combining six different technologies into one solution. And when you look at the market for cloud security, it's a multi-billion dollar market, not a giant one, but a big one. but he spread them around many, many different technologies. Some of the stars in this market today are speaking mainly about posture management, something we do for more than five years. Others are talking about workload protection, other in the development cycle, the DevOps, 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 Check Point Cloud Guard seen up, we are combining all these elements into one framework family that get 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 configuration and by putting the right information in front of the security operations. So this is good. And by the way, I hope it helped 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 C strategy that we've 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 technologies. It's not enough to come with a lot of different elements. We really need to make the whole architecture work together. And I'm putting a lot of emphasis on the collaborative element of that strategy, making all the different elements of the security work together. But also if you look at the other two Cs, I think no one has a more comprehensive architecture than Check Point and no one has an architecture that's truly consolidated when you can get into one unified portal management to automate, to do the same security management operation from one single management console. And I think this is reflected in some of the wins that we've experienced in the last quarter. Of course, we are doing thousands of deals every quarter, so it's hard to pick the leading ones, but we picked here a few examples that show all the different elements, the Infinity, the Harmony, the Cloud Guard, For example, here is an airline that got our security assessment. We 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 to 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. We did a very fair process and I'm very 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 companies. One of the most complex 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. And the new cloud project that they have drove this consolidation. We went in, we went live in less than a month and showed them how we can really elevate the level of security, consolidate 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 two embarrassing incidents that resulted in emails that got through their security defenses. They used multiple solutions from multiple vendors and both solutions fail to improve, fail to address the issues and show them that next time this attack won't happen. We got in, showed them within days that we can immediately, that we can block this attack, but even more important, that we can scale our solution and provide a solution The solution to a very large environment. Usually, by the way, our email business started with mid-sized kind of customers. And here we showed them that within a few weeks, we were able to scale to thousands and tens of thousands. And finally, we won the contract with over 100,000 mailboxes on Harmony email worked. real world production and protecting that customer that failed to achieve the same thing with our solution. 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 that we see in the marketplace. Very glad to see the double-digit growth, the 13% growth in subscription revenues, the 15% growth in EPS, which is exceptional. And I think we're demonstrating the values that we're talking about of providing the best securities with the FreeSys strategy, with the new launches of the Infinity Global services, the new Horizon family with XDR, XPR, and with the smarter cloud prevention that's 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. We are just including that slide as a reminder. It's the exact same slide that we showed last quarter's revenues for the years are expected to be between two point three, four billion dollars to two point seven. $2 billion, $510 million. Despite the economy, despite the challenges, 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 second quarter, which we haven't shared before. And this, again, within the same landscape here, revenues are expected to be between $570 to $605 million. And non-GAAP EPS is expected to be between $1.85 to $1.95, pretty healthy EPS. And GAAP EPS is expected to be approximately 31 cents less. This is the update for the quarter, for the projections. I'll be very happy to open the call for your questions. Thank you.