Check Point Software Technologies Ltd. (NASDAQ:CHKP) Q1 2024 Earnings Call Transcript

Check Point Software Technologies Ltd. (NASDAQ:CHKP) Q1 2024 Earnings Call Transcript April 25, 2024

Check Point Software Technologies Ltd. beats earnings expectations. Reported EPS is $2.04, expectations were $2.01. Check Point Software Technologies Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Kip Meintzer: Greetings and welcome to the Check Point Software 2024 First Quarter Financial Results Video Conference. I am Kip E. Meintzer, Global Head of Investor Relations. And joining me today are Founder and CEO, Gil Shwed; and our Chief Financial Officer, Roei Golan. Before we begin, I’d like to remind everyone that this conference call 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&A session. During this presentation, Check Point’s representatives may make forward-looking statements within the meaning of the Securities 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.

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. 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. If you have any questions after the call, please feel free to contact Investor Relations by e-mail at kip@checkpoint.com. Now, I’d like to turn the call over to Roei Golan.

Roei Golan: Thank you, Kip, and great to see you here with us. One moment, I’ll show my screen. Let me know if you can see that. Can you see my screen?

Kip Meintzer: We can.

Roei Golan: Okay. Great. So thank you, Kip. I’m excited to be with you. Actually, we started very strong. We finished the quarter of Q1 with EPS of $2.04, a 13% increased year-over-year and net income of $235 million, represent 8% increase year-over-year. Also, our revenues were above the mid-point of our projection. They actually grew by 6% to $599 million, $6 million above the mid-point of our projection, while the EPS, as mentioned, grew by 13% and was $0.04 above the mid-point of our projections. So let’s move to the revenues and deferred revenues and billings. So as indicated on the revenue side, we grew by 6%. The deferred revenues grew by 2% to $1,826 million, while our current deferred revenue short-term deferred revenues grew by 2%, also to $1,347 million.

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Q&A Session

Our calculated billing reached $570 million, which represents 7% growth year-over-year, while our short and calculated billing reached $532 million, a 3% growth year-over-year. Our remaining performance obligation reached almost $2.2 billion with 6% growth year-over-year. And that growth was driven by strong demand for product this quarter in the first quarter with double-digit growth in total new business annualized bookings and we show you also in the next few slides the reflection. So the revenues growth of the 6% was driven mainly by subscription revenues, another strong quarter for the subscription revenue that grew by 15% to $263 million that is mainly driven by strong performance of our Infinity, Infinity consolidated platform, and Harmony E-mail.

Both of them contributed significantly to this growth. In terms of as mentioned, the new business acceleration, the annualized new business booking growth is something that we showed you last quarter also. We did see the turnaround in Q4. We show we presented to you that we grew double-digits in Q1. We — so we saw the new business book annualized booking grew double-digits again in accelerated way higher growth than in Q4. So I think that’s — again that’s because of healthy and strong demand to our product during the quarter. In terms of Infinity, Infinity revenues grew by double-digit revenue growth and becoming more and more significant to our business. From revenues perspective, it’s already exceeded 13%, 1-3, 13% of our revenues. And in terms of annualized booking it’s even higher.

So we expect that the revenues that this portion from the revenues will go — will be bigger in the next few quarters. As we move to the global revenue distribution, so we can see here that the EMEA 46% of our revenues came from EMEA, 42% of the revenues came from Americas, while the remaining 12% came from APAC. Important to note that the revenues grew in all geographies. We did see an increase in all geographies and also in the new business growth that I mentioned in the previous slide. We did see this growth in all geographies with important to note, it was led by EMEA with very strong new business growth in EMEA. Now, let’s move to the P&L this quarter. So our gross profit grew by 7% to $536 million, represent 90% gross margin compared to 89% gross margin last year.

Our total operating expenses increased by 8% to $284 million. This was mainly as a result of our continued investments in our workforce. I remind you that we did the three acquisition last year. So that’s we have the full three acquisition here in the operating expenses. We keep investing in the cloud infrastructure and of course, the sales and marketing. So all of that drove the growth, the 8% growth increase in the operating expenses. And we finished with operating income of $252 million, a 6% growth, which represent 42% operating margin, similar to last year. Now, let’s move to the net income. So net income grew by 8% to $235 million. We can see here that the financial income we did see an increase in the financial income with the results of higher interest rates in the market and similar tax expenses and tax rates.

And we finished with EPS of $2.04, a 13% growth year-over-year. Moving to our cash flow and cash position. So we finished the quarter with more than $3 billion in cash marketable security and short-term deposits. We purchased during the quarter $325 million of share in an average price of $159 per share. Our operating cash flow was strong with $361 million. To summarize our financials, so revenues and EPS reached the top end of our projection. We did see acceleration in our quarterly revenues mainly came drove from the subscription that came from Infinity and Harmony E-mail performance. We do see strong acceleration in our new business annualized booking, another quarter with double-digit annualized new business booking and with strong profitability — maintaining strong profitability, a 6% operating income growth, 8% net income growth, and double-digit growth in EPS 13% growth.

And now, I’ll turn the call over to Gil. We can’t hear you, Gil.

Gil Shwed: Hello guys, unmuted myself, sorry. So good morning, everyone, and thank you, Roei, for the presentation. And now that I’m unmuted, I hope you see the presentation. Ready to go for the business update, I’ll start with a quick recap of what Roei already shared with you. I think we had a pretty good quarter in the first quarter. Great results, revenue, EPS top of the projection, double-digit subscription growth continues to be, recurring revenue, which I think is an important factor because I think we’re moving more and more of our business to be an annuity model, represents now 83% of total revenues, so again, another good indicator. Overall, I think we are putting huge focus on what we call new business activity. And new business activity includes everything from signing up new logos and new customers to new refresh cycles, expansion, upsell, everything for the existing customers and we had double-digit new business growth, which I think is very, very important that our customers are growing with us, are refreshing with us, are becoming up to-date, and are getting the best security.

Part of that is the overall Infinity platform, new customers, some major public sector wins, and I think Infinity just to be through the rest of the presentation. We use the terminology for several things. It’s our overall architecture, our overall platform, which I think is very important, but it’s also specific kind of what we call Infinity deals or Infinity contracts. And these are deals that customers are usually doing for long-term that’s including big parts of the platform and not just one product. So all of these are growing and growing very, very nicely. And last but not least, one of the key drivers of our business remains our security gateways, the network in the center of everything. And this quarter, we did the major refresh of our entire product line, the Quantum Force, that’s the new name of the new line of appliances.

I’ll talk more about that. But that should be important and significant for the Check Point customers and gaining more value from what we do. So just if we look at customers that have been with us, you can — sorry, switch to quickly. So you see many new customers on our platform, all geographies, Europe, Asia, U.S. And a very important area is the public sector. We booked 19 new government agencies in 40 countries just in the first quarter. And that’s also a very nice, some are very small, some are huge, some are multimillion dollar deals for many years. So again, all industries, manufacturing, telcos, infrastructure, energy, so on, very, very important. In the first quarter, we also held our CPX Conference. I think some of you attended of that with the first sell-side analyst track that we had in Las Vegas.

And that’s important because that’s where we gather together our field employees, our partners, our customers, and share all our news for the year. So we did all our product launches. These are three conferences, one in Asia, one in Europe, and the last one was in Las Vegas in the U.S. We had overall over 18,000 participants both physical and virtual, almost half and half. So that was great. For the first time, we returned to full force physical conference, tons of energy. I think everything was very, very well received, and I think you see it here. We get the highest scores ever on this conference. We measure the performance of the conference on every aspect. And this year we got the highest score in Check Point history. So we’re very happy about that.

And I think it indicates something also for the enthusiasm of the customers and partners for the new launches and the relevancy and the importance of the value that Check Point provides to their security. And one of the key messages was our Infinity platform, or Check Point as a platform company. Now, I know that many people in the industry speak today about the platform. Everybody speaks today as the platform, and it looks like it’s part of the wave. But I think it’s very important to understand. We launched the Infinity architecture, the Infinity platform in 2018, six years ago or five and some years ago. And since then, we’re building it. We’re building it to be a very, very unique platform, a platform that’s now AI-powered more than 50 security engines that are delivered from the cloud and contain AI technology.

That’s part of overall — of over 80 different security engine that analyze and prevent all types of attacks. And one of the major values here is our free fees being a consolidated platform where you can manage everything together, comprehensive one, addressing all the key attack vectors. And the one that we are putting a lot of emphasis this year being the strongest and the real platform, not the architecture, but a true architecture, a collaborative platform. And that’s where I put a lot of our focus in 2024, making sure that all the technologies and products work together to elevate the level of security. So this is not just information sharing between different aspects of the security infrastructure. This is also proactive action. So if we see somebody poking around our network scanning it, we can take that attacker and block it all over on the network, on the cloud, and on many other places.

If we identify an infected endpoint, we can quarantine that endpoint through the network and make sure we stop the damage, contain them, contain the risk, and stop the attack. And that’s the only platform where I think we truly do that and do it in a very, very effective manner. So this is again, a true platform when all the elements are orchestrated work together in a collaborative manner. And I think the value of collaboration is going to pay off with the highest level of security. So that’s a big focus that we put in the conference. Another important element is, as I mentioned, our new product launches. And these are the three key product that we launched, the AI Copilot that likes to manage security with the natural language, again, simplifying many management tasks, and once again elevates the level of security because things that people didn’t do before because they took too much time, because they were too complicated, they can do now in a matter of seconds with AI technology.

A new technology for securing cloud applications, SaaS, don’t confuse that with SASE. That’s the technology for remote access that we went into the market with in the acquisition we did in Q3. The SaaS is a different one also based on some acquired technology from last year and new technologies and the products that will come later in the year that actually protects your SaaS applications on the cloud. Again, part of the platform, part of everything. And last but not least, and I mentioned that is our Quantum Force gateways. This is very, very important because that drives a big part of our business. So if we see that the previous generation of Quantum appliances and you can see here the new line of appliances, amazing line, you can see the performance ranges here between 2x and 3x performance optimized for AI, mentioned the over 50 AI engines and with the highest threat prevention ratio in the industry 99.8 based on the MyCom results.

So we are very proud of that and I think that should give us a lot of power to go to the market with new customers to upgrade and refresh the existing customers and again start, it takes time for customers to evaluate the new hardware and the new software. But I think it’s a very big promise for the rest of the year. Last but not least, I mentioned the Infinity AI Copilot and you can see a simple demo here. We are trying to get a simple managerial task. Emily can’t access the SAP server. Why can’t you do that? Again in the past, it was a long process, analyzing logs, analyzing things. Here it’s super simple. You ask the question. It tell you Emily actually attempted to do better with the rule with blocking here, it ask you do you want to add her and change the rule base so she can actually access the server?

You say yes, policy being installed, boom, it’s done. These tasks when you do them with our product, if you’re an expert admin, it takes you few minutes. If you’re not expert, it can take you much longer. If you’re doing it with a competitive product, it can take you many, many even hours to analyze the situation, to find the right place. Especially for large enterprises that have hundreds of thousands of rules and they need to diagnose the situation and so on. And again, our AI Copilot is not limited just for these managerial tasks. It can do everything from asking are we protecting against the latest threat. And again it will go and pull the latest threats from the right databases, check the configuration of all the security installation and will tell you, yes, you’re protected or no.

Click here to get updated. I believe by the way, that AI will play a major role in the world in general. But in our industry, it can make some big revolutions and what we’re doing now is just the first step. We will see much more. So just before we finish, speaking of AI, a major partnership we announced in the AI space is about securing the AI cloud infrastructure. As I’m sure you all know, and you all follow some of the biggest investment in our world today are building AI server farms in the cloud that delivers all this wonderful value of AI. These are based primarily on NVIDIA chipsets. And what we announced last month was the first AI infrastructure firewall, which means that we can now embed the Check Point firewall to protect the AI servers in the cloud on the AI chipset from NVIDIA.

We launched this partnership based on work that we’re doing for many years, several years with NVIDIA, even before the AI generation. But based on that, we have a lot of our software that can ride on the NVIDIA chipset. Later in the year, we will make it available, and I hope that which will present a very interesting market opportunity and very, very important, because right now, much of the AI infrastructure that’s up there in the cloud remains exposed to the open Internet and its level of protection is far from being sufficient from where we want to be. So I think this represents another business opportunity and there is many, many more around the transformation to AI. So to summarize my presentation and Q1, we had the strong start to 2024.

The Infinity platform investments are delivering returns with different products with e-mail growing, with many other products growing, with the sales of the Infinity agreements for a sophisticated, comprehensive security architecture for customers growing quite fast, which is a great potential for the future, but already generating 13% of our business revenues. EPS at the top of our projection, subscription growth, new business growth. So both on the quantitative, on the qualitative measures, I think we’ve done pretty well to start the year and we’re looking forward for the next few quarters. And hopefully, we keep that good start for the year. And before I finish and open it for your questions, maybe speak a little bit about our projections for the second quarter.

Sorry, the projection disappeared. No, they didn’t disappear. They will be right here. So projections are generally in line with what we’ve talked at the first quarter and the beginning of the year. Revenues are going to be between $607 million to $637 million. Earnings per share is expected to be between $2.10 to $2.20. GAAP EPS approximately $0.44 less than that, I think this is kind of where we’ve been very consistent with where we started and I hope that we will going to have a good remainder for the year. So thank you very much and I’ll be very happy to open the call for your questions.

A – Kip Meintzer: All right. As always, please remember one question during your period. First up is going to be Joseph Gallo, Jefferies, followed by Tal Liani of BofA.

Joseph Gallo: Awesome. Thanks for the question. I wanted to start at high level. How would you characterize the business environment in 1Q? And then what’s embedded in guidance? I’m not sure if I saw a calendar 2024 guidance. And then given your convos with customers, how are they viewing their cyber budgets? What areas are being prioritized? Any sense of fatigue seen by others? I know you called out strength in EMEA. Is the U.S. budget lagging relatively? Thanks.

Gil Shwed: So that was a very comprehensive question. I’ll try to answer it. First, we had a good quarter, so I think I’ve already conveyed that. In terms of the environment around us, it was kind of mixed. I’m not as positive as I’ve seen from our results. On one hand, the security marketplace remains healthy, so I don’t have any, I mean, I think that’s going to be good and going for several years, but I don’t think that customers started opening big budgets like we’ve been before. They are keeping relatively tight on some of their budgets, especially for some of the areas that we are in. Our industry remains very competitive. And I think that, again, while we haven’t seen much of that in the first quarter, I do anticipate we’ll see more competitive pressure moving forward.