Check Point Software Technologies Ltd. (NASDAQ:CHKP) Q3 2023 Earnings Call Transcript

Check Point Software Technologies Ltd. (NASDAQ:CHKP) Q3 2023 Earnings Call Transcript October 30, 2023

Check Point Software Technologies Ltd. beats earnings expectations. Reported EPS is $2.07, expectations were $2.02.

Operator: [Starts Abruptly] 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 the presentation, Check Point representatives may make forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933 and Section 21 of the Securities and Exchange Act of 1934. These statements involve risk 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 may 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 the reconciliation of such results, as well as the reasons for presentation of non-GAAP information. If you have any questions after the call, please feel free to contact Invest Relations by email at kip@checkpoint.com. Now I’d like to turn the call over to Gil Shwed.

A software developer creating a stunning user interface for a digital infrastructure platform.

Gil Shwed: Hi everyone, good morning and glad to see all of you here. Before I turn it into Roei to go through the financial, I want to make a short statement. I think as you all know, Israel gone through a very terrible terror attack three weeks ago. And first and foremost, our hearts go to all the people that are suffering from the situation and all the people that lost their loved ones in this situation. And unfortunately, here in Israel and around us, there are many of them. We all know people that have suffered and we all know people that got murdered in this terror attack. Over the past three weeks our employees proved that despite the Siren reserve military draft of few people around 5% of our entire headcount. We can continue to operate as planned uninterrupted.

Over the last three weeks, we’ve been able to launch products, complete acquisitions, and of course, continue and support our customers partners exactly as planned. All of that is due to the fact that we’re much more accommodated to work in a hybrid manner with our operations all around the world, and mainly due to our employees and their commitment to customers and partners. I want to thank all our employees for their resilience and for all our customers, partners and you in the investment community, because I did receive plenty of support, plenty of emails and calls from people that are standing behind us and are supporting us at this time. I really, really appreciate it. I really want to thank you. And with that, I think we can turn to business and try to continue with business plans.

So, Roei, the floor is yours.

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Q&A Session

Roei Golan: Thank you, Gil. And thank you for everyone for joining the call today. I’m excited to be with you and begin the review of the third quarter for 2023. We had another strong profitable quarter with 17% growth in EPS, both double digit growth in net income and EPS. In the net income for the second quarter in a row, in the EPS for the third quarter in a row, very strong results. In terms of revenues, the revenues reached $596 million, $9 million above the midpoint of our projection, while our EPS, as mentioned, reached $2.07 at the top end of our projection. Let’s go now to the numbers. So deferred revenues grew by 4% to $1.709 billion. Our current deferred revenues, actually the short-term deferred revenue, grew by 6% to $1.246 billion.

Our calculated billing reached $531 million, while our current calculated billing, the short term calculated billing reached $535 million. Important to note that the calculated billing includes $8 million related to the acquisition of Perimeter 81. Same as in the previous quarter, due to high interest rate environment, we saw fewer customers willing to pay upfront for multi-year deals, which was already in shorter billing duration year-over-year. In addition, the infinity is becoming more and more significant to our business and the billing terms in these deals are more flexible. Some of them are on a monthly basis, some of them on a quarterly basis. So that also affects our duration. It is important to note that we saw many positive indicators this quarter.

We saw that it’s something that we are monitoring, the annualized booking actually grew year-over-year. And our RPO grew by mid-single digital year-over-year. So I think in general, we saw very positive indicator Q3, and we see a positive momentum also going to Q4. Okay. So our security subscriptions revenues grew by 15%, actually the highest growth that we had since 2017. This growth was driven by strong demand for Harmony product family and mainly for Harmony E-mail Security, we keep seeing a very strong demand for the Harmony products and that’s doing this growth. And on the product side, we still see delays in executing refresh project — projects, that resulting in decline of product revenues by 14% year-over-year. It is important to note that we did see strong renewal — strong and healthy renewal business as our customers continue to benefit from our security and support.

We do see stronger pipeline for Q4 — for Q4 that include also refresh project that was postponed for prior quarters. So we hope that we are going to see the positive turnaround in Q4. In terms of Infinity, so Infinity had another great quarter, continue to flow in accelerated the way to the revenues with a strong double digit growth year-over-year. In the third quarter, the revenues from Infinity exceeded the 10% of the total revenue. And we can see more and more customers are adopting our platform which answering their needs and their one umbrella of products and services. As for the revenues by geography, so 46% of revenue came from EMEA, 43% of revenues came from the Americas, while the remaining 11% came from Asia Pacific. Now let’s move to the P&L.

So our gross profit increased from $507 million to $534 million, representing a gross margin of 90% compared to 88% margin last year. This is due to significant improvement in our suppliers — supply chain this year, which had been challenging in 2022. Our operating expenses increased by 9% and this increase is mainly as a result of our continued investment in our workforce, cloud infrastructure, marketing and travel costs. In total, our non-GAAP operating income continues to be strong at $269 million or 45% margin, same as we had last year. Very strong profitability. Financial income this quarter reached $18 million as we keep investing in higher interest rate overtime. Our non-GAAP tax rate for this quarter was around 15%, mainly due to indexation and update in tax provision because of several tax assessment we had worldwide.

Our non-GAAP net income increased to $242 million or $2.07 per diluted share, reaching the top end of our position and 17% growth year-over-year. Our GAAP net income was $205 million or $1.75 per diluted share, 19% growth year-over-year. Moving to our cash flow and cash position. So our cash balances as of the end of the quarter was $3 billion. Our operating cash flow was strong in $222 million this quarter and it includes $22 million founder rollback in connection with an acquisition that we did this quarter. Excluding this effect, our cash flow grew by 2% year-over-year to $244 million. During the quarter, we acquired Perimeter 81 and Atmosec for total cash amount of $477 million. We also continued our buyback program and purchased 2.5 million shares for $325 million at an average price of $131.

Now to summarize our financial disclosure, very strong subscription revenues of 15% growth, highest growth since 2017, continued strong adoption of our Infinity platform. And while we see refresh projects that have experienced delay, we see very strong and healthy renewal business. And again, strong profitability with 17% growth in EPS. And now, I turn the call over to Gil.

Gil Shwed: Hi, everyone. Once again, nice to see you all. I’m pleased to be here. I’d like to shed some more light about technology and the business and what we’ve seen during this quarter. First, if we start with some of the highlights and the things you’ve already heard from Roei. I think on the financial side, we had good financial results, exceeded our projections on the top end of the revenues, even beyond that on the EPS. We did experience strong renewals and we did see a lot of positive indicators of change, but I think we will mark higher growth with the economy and with all the efforts that the Check Point people do around all — the entire world. And on the technology and the other activities that we’ve done this quarter.

First, I think we’ve talked a lot [Technical Difficulty] getting into the SASE industry, I think the name is here several times on the slide. And during — in the next few slides, I will explain what is SASE and why it’s important and why is it such a big deal and I think a big opportunity for our business. But on top of it, we’ve launched several other products, especially during October, the Horizon Playblocks and several others, and I think we remain very, very active. So, let me start and drill down a little bit about some of the business activities that we’ve conducted during the last quarter. So, first and foremost is market expansion and our acquisitions that we’ve executed there. In the last actually 60 days, in the last actually 60 days we’ve acquired three companies, making it 20 total count for Check Point acquisitions.