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spk03: All right. Good morning, everybody. Thank you for joining us. My name is Hamza Farawal. I'm a U.S. software analyst at Morgan Stanley. And with me, I had the pleasure of hosting the team for Check Point. We have Rui Golan, chief financial officer, and Kip Meinzer, global head of IR. And before I begin, just a brief programming note. For important disclosures, please see the Morgan Stanley Research Disclosures website at www.morganstanley.com. MorganStanley.com slash research disclosures. Kip, I think you had your own program.
spk00: Let's see if I can cover the safe harbor just as fast. During the course of this presentation, we may make forward-looking statements that are covered under the Securities and Exchange Acts of the early 1900s. As with all forward-looking statements, they have risks and uncertainties. And if you'd like an expansive list of those risks and uncertainties, look at our latest press release or the 20F. And with that, I'll throw it back to Hamza, and away we go.
spk03: All right. Well, Rui, thank you so much for joining us, especially joining us from Tel Aviv, just given everything that's going on. Our hearts and our support is with you and your team. Thank you. Maybe I'll start off high level. Checkpoint has obviously been a pioneer in the cybersecurity space. traditionally network security. You've done a lot of things over the last several years around transforming into a broader portfolio. Can you talk a little bit about that, where you are in that progression and some of the core pillars of growth drivers outside of the network security?
spk04: Yeah, sure. So first of all, thank you, Hamza, for having us here. I think that, again, we invested in the last few years. We did a lot of investment in order to expand our offering that we won't be, again, checkpointed. We found it as a network security file vendor. And I think in the last few years, we invested a lot in there. If it's organically or non-organically for acquisition that we've done, to make sure that we have much more broader portfolio that we can offer to our customer who understand the demand. It's not only network security today. We have cloud security, we have SASE, we have email security. So I think a lot of investment was done in the last few years to make sure that we have the best offering and the most broader offering. And that's why we also can today have all of this offering under one umbrella, the Infinity platform, that all of this product can be manage under one umbrella, something that I don't think that any other in the market have today. So that's positioned us in a very, I would say, good way for the next, I mean, long term with all this portfolio. And hopefully we'll see also a higher growth with this kind of offering in the next few years.
spk03: Got it, got it. So, I mean, obviously cybersecurity has been a relatively more resilient subsector within IT, but there's a lot of budget pressure, a lot of demand for consolidation. Can you talk a little bit about what you're hearing from customers around the consolidation front and what you're doing from a go-to-market or conversation standpoint to have customers consolidate on Check Point? Sure. Yeah.
spk04: So we hear more and more customer that if it's a prospect or if it's existing customer that want to move to want to consolidate their vendors today into one. One vendor, security vendor, for two reasons, I think. Two main reasons. One, it's very tough today for a CISO to manage too many vendors. I mean, in the end, think about a CISO today in an enterprise that needs now to manage 10 different vendors in 10 different platforms, which is very complicated. And to have this one platform that you can manage everything under one platform, that's, I think, something that we understand today, that most of our customers and most of the market today is willing to do that. And the second thing, which is also very important, is from a financial perspective. When you are consolidating vendors, usually you are saving money. When you are taking 10 vendors, you're probably going to pay them much more than what you're going to pay for one vendor to do all this 10 offering for you in one platform. So I think there's two main reasons. We're looking also on some reports that I've seen in the last few weeks that I got based on surveys of CISOs that have been done. The majority of the CISOs are going to include consolidation. I think that's the trend today, and I think we are positioned very well to benefit from that.
spk03: Yeah, one of the things you're driving that consolidation is through Infinity. Can you talk a little bit about the Infinity sort of platform and how that addresses the need for consolidation and how that part of the business is doing for Checkpoint?
spk04: So I think today the Infinity gives the – first of all, from a – From a managing perspective, it gives the possibility to a CISO to manage all his security, all the company's security, under the Infinity Portal. We have today, for example, a customer can enter the Infinity Portal. In the Infinity Portal, he can see all his security under one portal. He can manage everything there. So that's something that is very important. I think that's one thing that is important. Second, the flexibility. I think today with most of our Infinity customers, the deals are not like are more customized. They are very flexible. There is a lot of flexibility around the deals. We give the flexibility to the customer to utilize whatever he needs, and he doesn't need to commit in the beginning if he wants now to use it for Harmony email or to endpoint or even to network security. We give them the flexibility to decide during the agreement, during the term of the agreement, whenever they want to. I think that's the most important part here because You know, you're starting the year, you're doing your assessment, and sometimes there are changes. So this infinity, and when you're in the beginning, when you're engaging with us in infinity, then usually you will commit to a certain amount of money. But the certain amount of money, you have the flexibility to do with that whatever you want. So I think that's very important for someone that still is not certain about what they're going to need in the next three years. That's, I think, something that is very also we see it very important for our customers is flexibility.
spk03: Maybe switching gears from a macro perspective, one of the things Gil mentioned on the last earnings call was yes, there's been macro pressure over the last 18 months, but It's bottomed as of Q2, I think was the comment. And the pipeline and the bookings trend seem to be improving. Can you talk a little bit more about that? What gives you confidence that we've come out of the bottom and hit an inflection point?
spk04: So I think that we've seen, I would say, the first half of the year was a bit more, I would say, challenging in terms of the macro. We've seen it also on the numbers. And we started to see in the end of Q2 something that we started to see in the Americas, and in Q3 we started to see this also, by the way, in Europe. We started to see kind of a, I would say, slightly positive turnaround. We see more, we still see experiencing, we still see the delays, the project delays with the refresh around the refresh firewalls, appliances, but we do see more and more deals that are being closed, less than what we, I mean, again, still experiencing delay, but we do see some kind of Again, slightly optimistic turnaround. And again, that's why Guy mentioned that he believed that Q3, again, although you didn't see it in the product revenues line item, the product revenues line item, I think, was even... I think the decline there was even tougher than what we've seen in Q2. But I think that was the bottom. I mean, we really believed it was the bottom because I think we already... Some of the business that came in in Q3 that was not recognized as revenues, but you will see it in the future. And I think that Q4, we already provided the guidance, we would still expect a decline in our product revenues, but we're seeing a very positive turnaround. So I would say that, and hopefully next year we'll see the same momentum. But that's... But again, need to be cautious here because, again, every time, you know, macro can change. We just see now what's going on with the geopolitical. We have it close to our place. So every time it can be changed. But today, I mean, we're feeling slightly optimistic about this change in the business.
spk03: Yeah, and certainly there's a lot of reasons to be optimistic in cybersecurity. Obviously, ransomware attacks are up significantly this year. You have new regulations in the U.S. around the SEC disclosure requirement. Customers right now are thinking about their budgets for 2024. From your perspective, from the customers you talk to or from talking to your team, how are they thinking about budgets for 2024? Are we seeing stability? Are we seeing maybe perhaps a bit of a reacceleration trend?
spk04: what are the conversations like so tomorrow so again based on we were doing a lot i made a we're doing a lot of discussion with ourselves executives i mean it looks like we are slightly optimistic about based on their discussion with the customer for next year They're slightly optimistic. Again, as you mentioned, the regulation is something that's going to affect significantly, I mean, I think, the market. It's going to be effective, I think, from two weeks from now. And I think the liability that it puts on the CISOs, on the boards, on the company itself now, that every cybersecurity incident needs to be assessed and might be even published to the... SEC, maybe it needs to be filed to the SEC. So I think all this stuff is something that's going to put more pressure and probably going to, I would say, boost the spending on the security. There are a lot. I mean, all these factors on what we're talking about 2024, it's also based on the fact that the market expects a decline in the interest rates. And every change in this expectation can drive total different behavior in the market and from our customers. But based on the current situation, we are feeling slightly optimistic about 2024.
spk03: Yeah, obviously CFOs like yourself have had a lot of, I would say, power in the last couple of years around budgets, just given the macro pressures. Given some of these new regulations, particularly around the SEC, and now cybersecurity is becoming a really critical part of risk management at the board level, is that influencing CFOs to perhaps –
spk04: your focus more on cyber security as they think about you know allocating budget for next year so i'm looking on on on a or on me for example as a cfo of checkpoint even i have today i mean it's it's it's it's going to be part of the commitment to now to to report to the board to the audit committee to the committee that will be responsible to so the cyber security to report i mean to be compliant with this regulation so i want i wouldn't take any chances as a cfo to do any heroes here. I mean, there is a regulation that we need to... We must be compliant with the SEC, with the new regulation, and we must be able... As a CFO, I need to make sure that we have controls in place and we have what's needed in order to make sure that we'll be able to comply with this regulation. So I'm sure any other CFO of a public company is in the same position today. I mean, in the end, if someone, just think about from a finance perspective, if a company will have a cyber incident that won't be reported, it's going to affect, it's going to have an implication, and the auditors will have probably going to include a material weakness in their financial statements. So that's something that affects all the deals, and it affects the reputation of the company. So I don't think that any CFO would like to be in this kind of position anymore. So we'll be much more cautious with all due respect to that. I think also today everyone is very cautious with what's related to cybersecurity, but now with the regulation, with this regulation, I think it's even more... to put even more focus on that.
spk03: Maybe shifting back to Check Point product portfolio. So you obviously have a much more diversified portfolio today than you did several years ago. The network security of the firewall business obviously is still a big part of it. We saw really strong demand on the firewall, particularly the hardware side. in 2021 2022 and now it's clear that we're entering a digestion period where do you think we are in the hardware refresh cycle um do you think we're sort of nearing the bottom there um and what do you think that means for product revenue growth going forward
spk04: So it's tough to say. I would say that, again, I would expect that this cycle, I mean, as you mentioned, 2021 and 2022 was also very strong years for the product refresh. So I think in 2023 from the other one was a very weak year for refresh. I expect that, again, we're going to see start of this refresh cycle start sometime in 2024. On our end, if I'm looking on checkpoints, so we believe that, again, we are more optimistic about the product next year. Again, I think that we did see a lot of delays this year, but in the end, we did see a very strong renewal rate from our customers. So these customers are with us. It's just a matter of delaying the refresh, so they're going to end, and we start to see some of these delays being executed and completed this quarter. So I think we feel more optimistic about Dexneo on the product, and again, it's another thing that we need to take that might also affect these delays that customers... Again, it's also only our assumption that the customer knows the checkpoint, launching a new product, family of product, every four to five years. And last launch we had sometime in the end of 2019. So it makes us to believe that some of this behavior is mainly because of they expect a new launch of product sometime in the next quarter or two. So I think all these factors probably, hopefully, will benefit us significantly.
spk03: Got it. That's an important point. So you were seeing four to five-year replacement cycles on the firewall side, on the hardware side, and the last product that you had launched in 2019. Do you think that there's a risk that four to five years could potentially elongate because of the supply chain issues, which may have led to some early ordering, right? If I can't get an appliance, let's say, in six or 12 months, perhaps there was some pull forward of demand. Yeah.
spk04: There might be, but I don't expect it. I mean, I don't think it's a huge factor. I don't think it's... Okay.
spk03: Let's shift gears a little bit to the SASE solution. So you recently made an acquisition, Perimeter 81, which gives you these new SSE security service edge capabilities. Can you talk a little bit about that? What's been the interest from customers, and how do you feel like you're positioned in that market relative to Zscaler, Palo Alto Networks, etc.? ?
spk04: Yes, so we closed the acquisition of Perimeter sometime in the end of, I think it's September this year. I think we understand that today, the offer before we acquired the Perimeter, we understood that our offering today is not competitive enough in the market, so therefore we look for something, for a better product that will be able to compete in this high-growing market. I think that today... With this launch of Quantum SASE, which is driven from the position of Perimeter 81, together with the integration of our security capabilities in Check Point, I think after this integration will be completed sometime in the second half of 2024, probably sometime around Q4, I think we'll have one of the best products in the market on the SASE. Yeah, but it doesn't mean that today we don't sell the quantum SASE. The quantum SASE today is already being sold to usually, I mean, mainly to SMBs and SMB market, which we have a very high, large install base also there. And since the launch that we've done in mid-October, we do see very positive traction there. Very nice pipeline that already built from this for this product. And We're hearing a very positive feedback from our customers that are already trying this new product. And I think that the main advantage here is that we have a product that is easy to deploy. I think that we are talking about less than one hour, usually, deployment of this product. And second, that we have... I think that compared to our competitors, we have doubled the speed. I mean, the speed of the Internet is doubled than what the competitors have today. So I think this name, too, without hurting the security, by the way. I mean, we are still... We won't have any... I mean, we are still... It's very important for us to deliver the best security. But I think that the fact that we can still... It's not helping the speed of the Internet. I think it's very important, and that's why we see a very positive traction from our customer that already is starting to use this product.
spk03: One of the pillars of a SASE solution has been the network of POPs, point of presence locations. I think on the last earnings call, I was a little confused. It sounded like with the new SSE solution, you weren't expecting to make a lot of investments in those pop locations. Can you talk a little bit about that? How many point of presence locations does Check Point and Perimeter 81 have, and what is the investment there that's needed?
spk04: So we already have today more than 40 pops. I mean, more than 40 pops in America and in Europe mainly. So we already have a pretty significant number of pops. And it's not that we are not going to invest. We're going to open more pops around the world where it's needed. Just in terms of, again, if you're looking in terms of investment compared to... to our numbers, it's not significant. I think we talked about a couple of millions of dollars every year, or even between, I would say, $3 to $5 million CapEx investments. It really depends also on the expansion worldwide, because in the end, it also depends on that. But it's not, again, to invest $3 to $5 million. I don't think it's significant for us. I think it's worth it, and it's something that we are... We're going to keep investing in it. Again, if the business will grow even faster, so probably we're going to open more POPs around the world. So it really depends also on that. But it's a different model than what... I mean, that's why also we like the model here. I mean, it's a model that's mainly based on these POPs and not... It's kind of a hybrid also with the cloud, but it's mainly on the POPs. So I think... Investment will keep investing, but it also depends on... But I don't think it's going to be significant investments if you're looking on total checkpoint numbers.
spk03: Maybe one more question and open up to the audience. One of the areas of your portfolio that I think... maybe goes under the radar a little bit, is your email security product within Harmony, and you made an acquisition of Avanon in 2021. We've seen a significant increase in phishing attacks since the launch of ChatGPT. Now hackers can write sophisticated phishing emails much faster than they did before. What's been the demand for that product, and can you help us give any sort of rough size of how big that email security business is?
spk04: So first of all, the demand for this product is consistently very strong since we acquired Havanan, and it's even getting, I mean, Just to give you, I'm not going to give the numbers, but I can tell you that we more than tripled our business since we acquired, and it's becoming more and more significant, mainly to our subscription line items. I mean, the subscription line items include this Harmony email, and it's becoming, every quarter, the portion of the email security is becoming more significant to the total subscription business. and we expect it to continue to go very fast, much faster than what we see, for example, the email security market is going, because we are taking market share there. I mean, we see that we are taking market share. I think we forced to launch their report, I think, in the second quarter, and I think Harmony email, our offering of the Harmony email is leader today based on this report. So I think... We'll keep saying a very positive traction from Harmony ML also for next year. It's both by the way, SMB when we acquired Avanon, it was mainly SMB business. But since we acquired them, many large enterprise in the US, in Europe took this, and we're talking about hundreds of thousands of users that are taking, took this solution. So I'm very positive about that, and we hope that this growth will continue with us, this strong growth also next year in Yemen. Any questions from the audience?
spk03: We have one right here. Yeah.
spk01: Thank you. Can you please walk us through the M&A process, the integration? How do you manage to cross-sell afterward? How do you manage to integrate properly that you don't have any cannibalization within the M&A process? How do you find the dealers? What are you looking for, et cetera?
spk04: Yeah, so thank you. So Checkpoint has, we have an M&A team that is running by our VP of M&A that is running all this... 100% his job is to find the potential targets for checkpoint. I can give you an example as perimeter. Perimeter, we know we looked for a solution in the SASE market. We know that our offering is not good enough today, what we built in-house. what we developed in our Harmony Connect. We sold it for a few millions of dollars, but we understood that it's not strong enough to compete in the market. And we looked for a long time, I would say for a year, we looked for a potential target to enter this market. And I think we have been... And so the Perimeter 81 is the best technology that we found. I think great technology, great people. Great offering. And post the deal, I think that the integration it takes, I mean, there are multiple layers of integration. First is the integration with our product from the development side to make sure that everything is integrated if it's to our Infinity platform, if it's to our security in Check Point. So I think the integration, this is one end. It's something that the R&D people are working on that. and hopefully will be completed sometime in the second half of 2024 and expected to be completed in the second half of 2024. From the other end, we have the sales and marketing approach and integration with the sales and marketing workforce and with our channels. I think what's our strength and what's our benefit is that we can take this product as Perimeter 81 product and just distribute it for our channels without having to our existing customers for our existing channels. And that's our strength, I think. That's usually how we're doing. I mean, that's what we did with Avanon when we acquired Avanon two years ago. Most of the business, most of the growth came, of course, it came also from new logos, but most of the growth came from existing customers that expanded their business with us and took our money. Same thing here. I think that the potential here, only with existing install base of Checkpoint, I'm not talking even about new logos, which, of course, it's huge potential outside, but even with existing install base of Checkpoint, the potential is huge just to distribute these products through our channels. So that's, in general, what's our... But again, we hope that we'll have the same success or even better than what we had with Avanon with Perimeter, but it's still too early to say.
spk02: Thank you. Could you talk about capital allocation and any plans or projects you have with the cash that you have on the balance sheet?
spk03: I wasn't... The question was around cap allocation. I think you have $3.5 billion of cash on the balance sheet.
spk04: So I think we, in the last few years, we are very aggressive with the buyback. We're doing a buyback, I think, every year of $1.3 billion. It's something that we are continuing to do. And by the way, exploring every few quarters, we are exploring if we want to do some changes in our capital allocation. Right now, I think that the buyback is the best approach to use our capital. In terms of the cash, again, we have the option. We have $3 billion in cash today after the acquisition of Perimeter 81. We are exploring all the time M&A possibilities. I think that the valuation today in the private market is becoming more and more realistic. I think that the multiples, again, I think that they will go even higher. I expect it will go even down further, but I think the valuation is a bit more realistic, and we have the opportunity with this $3 billion in our cash to explore, and whenever they will have an interesting opportunity that will fit the best checkpoint, we'll do whatever it needs with this $3 billion. I think that's the benefit that we have with this amount of cash.
spk03: Any other questions? Maybe I'll end it here. You know, just a question on growth versus profitability. You know, Check Point has some of the highest margins in the cybersecurity and just software space. You know, how are you thinking about, you know, on the one hand, you've made a lot of investment over the last couple of years. You know, you have the acquisition of Perimeter 81 in the SASE space. There's also, I think, some FX benefits with the Shekel weakening versus the U.S. dollar. How are you thinking about growth versus profitability? Is the priority growth or perhaps looking to... I think the priority is both.
spk04: I think, first of all, we want to go faster. I think we want to go faster than the 4% that will go this year. And we invest a lot in order to go faster. And I think, again, I think that if we go faster, also our margins will stay in this level even better. So I don't think that, again, we keep investing. I mean, I don't see us in the short term going. I don't think that we're going to need to invest now in other markets. a five points in order to invest more in order to go to to drive more growth i think that we already invest a lot in repositioned very well again when i'm saying investing a lot of sorts of forward position they were just a lot uh... to to be to position also have to go past the next day and then long-term wise and even if we'd be able to improve in our margins so uh... for this quote i mean we are not there It's both. I mean, the priority is both, to be both to keep our strong profitability and go faster. So that's, I think, there is no... Okay.
spk03: All right, we'll end it right there. Rui, Kip, thank you so much for your time. Thank you, everyone, for joining us. Thank you.
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