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.
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
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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.
In several spaces, the biggest one was — is Perimeter 81 for the Quantum SASE. And again I’ll explain that in a second. It’s a $3.4 billion market which is very adjacent and very complementary to our customer base and I think it’s a must for us to play and be strong in that market. And in addition to that, we’ve extended our technology with a small acquisition of Atmosec, a small Israeli startup that will let us provide better technologies for the SaaS security market. Providing a better technology to secure applications that are being run from the cloud. And last and not least, if you remember, at the beginning of the year we launched our Infinity Global Services, an organization that aims to complete a set of services that customers can get from Check Point.
It basically augment the capabilities that each customer has. Infinity Global Services has today more than 30 different services it provides for higher — around 400 security consultant. It’s a pretty big organization, and what we’ve done now is, added to it few additional services. The main one is actually manage firewall service, it plays very well into our installed base and that’s with acquisition of [indiscernible] we completed just a week and half ago. So this is another addition, important addition to our market space. And again, we’ve done all of that in a very short period of time and continue to work even during these days. And so let me jump right in and speak a little bit about the challenge of the SASE, what is SASE. So SASE means Secure Access Service Edge and that’s actually a big name to the new types of connectivity that enterprises need these days.
So if you’re trying to understand what does that mean. For example, if in the past an enterprise was mainly a remote user and data center or corporate — or a few corporate offices, today and enterprise network is far more than, it has — SaaS application, application that are delivered from the cloud. It has cloud applications which are delivered from a private or public cloud. It has many, many branch offices. Talking about what we call SD-WAN branch office security and branch office traffic optimization. We need to secure the access of the remote users, not just when we access the data center, but also when they access the Internet, when they access the cloud application. And these don’t go through the traditional enterprise gateways. So the connectivity becomes a little bit more challenging or a little bit more complicated because, obviously, each element of that has another layer of connectivity and another element of security.
One approach to doing that is running a big part of it from the cloud and managed solutions today, by the way, what they do is, tunnel all the user traffic. Today, when we speak about SASE, it’s mainly about taking remote user traffic and tunneling it through a cloud service, which opens that communication, inspect it and secure it. And we’ve been trying and we’ve been active in this space for long time, but I think now we’ve made a very important step with the acquisition of Perimeter 81 to build the industry best, what we call a game changing architecture solution that addresses all the elements, not just the remote user and not just the branch office [indiscernible]. But addressing all the elements of SASE connectivity in one suite. I think where we’ve started by launching the Quantum SASE last — the week of actually October 8th.
And we will continue in building the architecture [indiscernible] the most complete SASE solutions. So, let me describe what it is and what are the benefits. For example, if we speak about current solution, they tunnel all the traffic through the clouds. So on one hand, you want to get more security, on the other hand, by tunneling it through the cloud is slowing down and mainly jeopardize the privacy, because you take all your communication which you want to keep private and secure, and open it in a single entity that all the customers in the world share. So basically, you’re taking a huge risk to the privacy of the communication. What we do with Quantum SASE. First, we provide twice as fast internet security, because we are operating in what we call the hybrid manner, with own device and cloud network protection.
Again, it’s controlled through the cloud. But most of — in most cases we cannot — we don’t actually need to go through opening and jeopardizing the privacy, but we can do it from the user device and get a much faster and much more secure connectivity. Second is the consolidation. Despite the challenge, and today, if you look at the industry, the customers are using, if they want to get a full SASE architecture or full connectivity architecture they need to run four different solution usually from three plus vendors. In some cases, much more. What we want to do is create a full mesh integrated connectivity from one vendor, one ability to manage it, one ability to deploy and get the highest level of zero trust security which actually works.
Zero trust means that we made security far more granular, far more transaction to transduction or user to application grain solution — security, so making security at a higher level. And last but not least is optimizing the communication. When we speak about branch office communication and that’s the sector that’s called SD-WAN. And SD-WAN, not just by optimizing traffic but by getting the proper level of security. And I think we are going to integrate it. We’ve launched our SD-WAN technology at the beginning of the year. And we will make it a very important part of our entire SASE architecture as part of that solution. So overall, I think we do have a game changer, with which we will be able to connect the data center gateway, our Quantum gateways, our Quantum firewalls with the branch office, with the cloud, with the end users, with the remote access and make both internet access and data access everywhere at the highest level of security and the highest level of performance, I think we really have a game changer here.
So that’s about the Quantum SASE. And let me switch towards different technology that we launched last week. And that’s the Horizon Playblocks. I think that Horizon Playblocks can be a real game changer. Maybe I should use the game changer, maybe a breakthrough technology here that really may take security to the next slide. And I think you’ve heard me speak even at the beginning — since the beginning of the year, about the three Cs of security solutions that are comprehensive, consolidated and collaborative. And I think the element is — if we could get so many security technologies and they actually don’t work together, actually even worse. Some of them even within the same domain don’t work together. Let me give you an example, let’s say, that we spot some entity or someone that’s scanning our network by doing what’s called technically ports scanning, to our network.
So our gateway will stop the port scanner [indiscernible] stop they accessing different ports. And the user will keep trying to do the port scan and then they might even find there is some application that’s open. And they might find the vulnerability in that application and get inside the network. We actually might even do it from a different location. With Playblocks, even within the gateway security, we can see somebody is doing a port scan. Let’s put that entity in the penalty box and let’s not have them even the chance to access even places that we’re — with our allowed access, because maybe they are trying to exploit the vulnerability. Now you can do it on the same gateway, you can do it in all the gateways in the company. Again, we spotted one entity trying to get into our network, let’s not get them in.
And then you can do it with multiple products, not just with the network security, but it’s also doing it across products. So for example, if we are seeing suspicious activity by one of the endpoints in the company, we block access to that endpoint by all the gateways and by all the other security means. So that endpoint cannot compromise any other places in the network. And again, the list goes on and that’s what we call in Playblocks the storybooks where we take scenarios and turn them into automatic simple out of the box playbooks that can work and can turn security to be collaborative. I believe that this is a breakthrough. Other solutions today in the industry that talking about later in a slightly different category, super complicated requires, a huge investment required, years of training and the building different scenarios and don’t always address the issues.
What we are being able to do here is a real breakthrough in taking that idea of collaborative security or automated security and make it super simple and super effective. And you see a customer quote from one of the early customers, they’re choosing their technology versus the level of security that they get here was previously unattainable. So I’m very proud of the technology, that’s the first step and that’s going to be included. With all the Check Point gateways and all the Check Point product. And again, incorporates many other third party products into that game and in the future even more. So I think it’s a very, very good start through breakthrough technology. And we started — again there is many, many more technologies that we launched, mainly by the way in the last three weeks.
And I think Roei already described the success that we have with Infinity. And Infinity becoming not just an important part of our strategy, but bigger part of our business. And you can see here a few examples of wins with Infinity. One is in Asia, a financial and insurance services company, full Infinity architecture with Quantum CloudGuard, Harmony, single management solution and facilitated all the security consolidation. Number one is Woodward, an aerospace manufacturing in the Americas. Again, they using here both the SASE which is very nice to see the deployment with our Quantum Gateways, they get the scalability, we like the ease of deployment, but we’re really, really differentiators, because that’s a very important part will be the security in the large scale and they are utilizing our Infinity Global Services for optimizing the security policy and delivering better security.
And last one in these examples. And again, you can imagine that we have many, many examples of different customer wins and customers scenarios that we sorted out. To get to this list is a very important customer for us. The US DLA, the Defense Logistic Agency, that’s kind of the procurement army of the US Department of Defense. American Federal Government using both the Quantum and our CloudGuard, so gateway and cloud. And like the flexibility and the ability to deploy more and more technology with the Infinity agreement that we’ve signed. So these are few important and interesting wins, there is many, many more. And our revenue of the business is the technology leadership and how it’s being recognized by analysts. You can see here, and I won’t go through the list, some of the awards and some of the mentions that we got in different analyst mentioned Frost and Sullivan, Giggle Forster, Gartner and several more, but I didn’t include here was, I think, about more than 10.
Just here on this slide. Most of them, seven or eight are just from the last quarter shows the leadership on that. Again, I don’t remember even how many years in the Gartner Magic Quadrant for Network Firewalls. I think the — but everything we are stepping more and more, even in new areas like the Horizon for the security consolidation, the Harmony for the user security for the CloudGuard. We’re making more and more progress and winning more and more wins into the leader quadrant, or the center of the circle that we have or the leadership of the ways — in terms of the leadership of our technology. I think it’s something we should be very proud and we should all understand that we’re able to lead in many different markets and especially consolidate them.
Last but not least here, we were also recognized by few publications, the Forbes 2023 World’s Best Employers. Very proud to be here. The fourth year in a row seems to be the leading company in our industry. Thank you for our employees for choosing us and for voting for us. These are by the way, both to service that are unaided. We don’t know how we are being managed. We don’t contribute to that. So, this is independent studies. And the second one, for the first time we were surprised to see us or not the Newsweek World’s Most Trustworthy Companies, again, leading in the industry. So customers and partners and many people trust the Check Point brand and I think that’s a very, very important thing, especially when you speak about a brand that’s important for cyber security.
So we just completed kind of a spectrum of technology and innovation, users and wins, analyst that recognize that and our employees in general public which recognize the potential and the leadership of the Check Point brand. So to summarize my part, I think we had pretty good quarter. Very good financial results, strong profitability with 17% EPS growth, 15% growth in subscription, highest growth since 2017. I think we have game changing innovation, free acquisition, the Quantum SASE, Horoizon Playblocks for collaborative security. And I think, like we mentioned, we are seeing a lot of signs for positive change. If you remember last November, we started with — and I think what we’ve seen is a major slowdown in our industry. I think it continued throughout the first and second quarter.
And I think now in the third quarter, I’m seeing some good signs of turnaround. I think part of it is the economy and the industry and parts of it is the action of our people in Check Point and especially our people in the field that are working very hard and I think we’re starting to see that and I’m very, very positive about the signs for the future that we’ll get out of it. So before I open the call for a question-and-answer, maybe it’s the right time to speak about our projections for the fourth quarter. So in general, our projections, I’m actually first, very positive. I think Roei shared the positive signs that we’ve seen and we see more positive sign in our internal indicators that you can see on the external numbers. We have decent and healthy pipeline and projections by our field.
So with that, I think we can move to that. I think in terms of revenues, we expect revenues to be in the range of $636 million to $686 million, it’s a wide range, because I think there is a lot of possibilities. Our field actually is even more positive and more optimistic than I do. I know and you know my regular prior caveats, that projecting the future is very challenging, there is a very high level of uncertainty and results can be better or worse. So I think there are some good signs, but it can be better. On the EPS side, I think we are expecting very healthy EPS between $2.35 to $2.55. GAAP EPS is expected to be approximately $0.32 less. And I think, overall, these projections play very much well into the ranges that we provided in the beginning of the year.
So the next slide will show you how it plays into the ranges that we get in the beginning of the year. In the beginning our regional range for revenues was between $2.34 billion to $2.51 billion in revenues. You can see with the fourth quarter now, the range is narrow. I mean, we have three quarters behind us already. And I think you’ll see it’s right in the middle. Well, I’m actually — it’s pretty good to see that, especially as we had a year that wasn’t easy first two or three quarters. Non-GAAP EPS is — we are actually even revising the range here and taking the range up. So the original rate was $7.70 to $8.30, the new range is already start at $8.20 and goes up all the way to $8.40. So, this is already expected to be at the top end and maybe even over the original range that we provided.
I think these are very good projection. I think we show a lot of, I think, positivity on our side, with a little bit cautious on the revenue side, which I think is always a good thing to do. So overall, I think that we had very good results. I think we’re having decent projections and I would be very happy to hear your questions and comments about our business. Thank you very much and let’s open the call to your question.
A – Kip Meintzer: As always, during question-and-answer period, please limit your questions to one so we can get to everybody. Today, we’re going to start off with Gabriela Borges from Goldman Sachs, followed by Adam Borg of Stifel.
Gabriela Borges: Good evening. And thank you. And our thoughts are with you and all of the Check Point employees on the ground in Israel. I wanted to ask a little bit about your 2024 planning assumptions as you think through what next year could look like. Maybe Gil, share with us some of the positive indicators that you mentioned in your prepared remarks that are leading you to perhaps think through — help us think through what the implications are from the positive indicators through to billings growth. In other words, when do you think we’ll see a more material inflection in billings growth? Thank you.
Gil Shwed: So I think — first, thank you for that. And it’s too early. We still don’t have the 2024 projections. We’re just starting to work on the 2024 plans, but we already have some thoughts about that and I would say there’s three factors that contribute to that. One is the technology and the new area that we are in is one. Second is our customer engagement and the level of activity that we have in the field. And the third one is the market itself, which is a little bit beyond our controls. So from the — and I think this year, we really — we did — our field did an amazing job in increasing the engagement that we do with customers, we’ve pretty much doubled our engagement rates with our customers, both with the existing customers and even more so with the prospect.
And there’s still plenty that we can do, we still can reach many more prospects for example and we still can do more in the qualitative side of the engagement, but we’ve made a real evolution and I think there is plenty of credit with our people on the ground in the different countries in the field that’s done this year. So now all three things when you engage with the customer that you haven’t met for a long time, when you start the conversation, it takes between, I would say, it depends on the situation. I would say between six to even 18 months until its fruitful. The reason I’m saying that, because usually the field will say I’m already engaged with the customers that have the current opportunities. Getting me to meet with somebody new, it’s usually the one that’s knocking on our door and doesn’t have the current opportunity.
So these are a little bit longer term customers. I think that we will see the results from where — and I think we’ve seen a bigger evolution in this engagement in the second and third quarter. So that means that we can be optimistic about some of these engagements turn into deals and pipeline in next year. We already see the correlation. I mean, the more meetings, the more engagement with customers, the bigger the pipeline with that customers. It’s a very direct correlation. So I think that’s one sign and that’s about our activity. Second, in technology, we have much more and we’ve seen with some of our new technologies are sticking and are working well. I think we will see a lot of demand for SASE solution, it’s a healthy market with high growth.
So I expect. we’re — again, we’re just in the first few weeks in that market, so I don’t have indicators that are too strong, but I’m very optimistic on their. For example, on the email side of things that we’ve got into like two years ago. I think a year and a half ago, we already see a very healthy, not just pipeline, we see very good results and very high growth. So, I hope that we can repeat that success with the SASE industry. Same thing with our overall vision, our overall architecture, which I think is the most important and that’s the Infinity umbrella. And I think with Infinity, we’re seeing very nice growth. And again, it of course ties to, are we engaging with high enough people in the organization. Are we [indiscernible] into our vision.
The answer is, yes. The more qualitative engagement we have with the customer, the more likely they are to choose us as an architectural solution with Infinity architecture. So if I’m talking about these two, I think that we have a good pipeline of technologies. A lot of innovation and turnaround in the engagement that we have. The first element, which is the market itself, and especially our large market for Firewall Gateways. And the market has went all the way to the bottom, I think, in the second quarter which was the bottom. And in the third quarter started showing signs of improvement. If that improvement is changing and if we combine it with the other two, we have reasons to be optimistic. If customers are going to keep tight on refreshing, and by the way, the fact that they don’t refresh is, we wanted to refresh our installed base and buy more, but that means that we stick to us and they’ll have a solution, and they just pay the renewal fee, doesn’t generate enough growth.
But in general, the rates that we have of renewal are very high and we have a good renewal business. So that means that customers like our products and they keep working for them. And so if that will change that would be a big change. And I hope and this is a little bit beyond our control. It’s a long answer, but I think we’ve covered many —
Gabriela Borges: Thank you for the detail.
Kip Meintzer: All right. Next up we have Adam Borg from Stifel followed by Brad Zelnick of Deutsche Bank.
Adam Borg: Awesome. Thanks guys for taking the question. And again, I’ll echo my thoughts for [indiscernible] and your families. Maybe just for Gil on Perimeter 81, obviously, great to see your entry deeper into SASE with it. And I was hoping you can talk a little bit more about kind of the near-term integration priorities from a sales and marketing in R&D perspective. And how we should think about the CapEx impact as you look to [indiscernible] I’m assuming over time? Thanks so much.
Gil Shwed: I think in terms of the integration, we built them in Check Point a module that we call Rockets that we kind of let these businesses and one end to keep their little bit of their independence, their vision, their integration of activities. On the other end, work with the Check Point both R&D and sales and marketing organization to drive things more forward and move fast and integrate. I think Quantum SASE is going to be very tightly integrated into Check Point, because it’s a network solution. And in many cases, it’s integrated with our gateways and integrated with our projects and sales force. So, it’s not necessarily different buyers within the organization, it’s similar buyers. I think that’s the synergy and that’s extremely positive.
We already see a high level of interest in the field. People are super positive and super optimistic about that. And it will take us some time to build all the bridges, but we are working very hard. I mean, the only — there is kind of two caveats, on one hand, we want to create one product suite, integrate all the Check Point security technologies into the Perimeter 81 offering, connect the Perimeter 81 management with Check Point. So we have a very strong roadmap of what we want to develop. On the other hand, it’s been growing very nicely on its own, and we don’t want to disrupt that. So — and I think by the way, with the Harmony E-mail, that’s been a similar acquisition, we built the right bridges. For the first six months kind of most of the growth was driven by their pipeline.
Six months later, we’re already reporting that huge part of our pipeline has already driven and brought to them by the Check Point salespeople and by the Check Point channels. So, I hope we will see here even faster transition because unlike email this is even more central to our technology. And in terms of CapEx, I don’t know if we have any —
Roei Golan: In terms of CapEx [indiscernible]. I mean, we expect to invest in CapEx related to Perimeter 81 few million dollars a year or something, it’s not significant in terms of —
Adam Borg: Great. Thanks so much.
Kip Meintzer: All right. Next up is Brad Zelnick from Deutsche Bank, followed by Tal Liani of BofA.
Brad Zelnick: Great. Thanks so much for taking my question and best wishes to all the good people of Israel. Gil, I don’t recall Check Point having a significant US Federal business, but we saw the DLA deal that you highlighted, which I think was a $6 million deal, which is — which is really great win. Can you remind us, is there a broader opportunity that you’re going after in US Federal? And is this also may be a reason why we don’t necessarily see all of the success that you’re having in billings, because we all know that the US Federal customer doesn’t necessarily pay multi years in advance. Thank you.
Gil Shwed: I don’t know [indiscernible] Roei can answer about the billing and so on. I think the opportunity on the US federal government is usual, even though the US federal government is a very, very — is kind of — it’s a tough customer, especially for foreign companies. And foreign not just Israelis, it’s even Canadian companies. It’s very hard to penetrate, very few are not in American. I think the fact that we have a good success there and hopefully it’s a good sign moving forward, the opportunity is huge. I mean, the opportunity in the federal market is almost untapped. We are making good progress on our government business in the US, especially the local government and again the opportunity there. It is also very big and I think we still have plenty of potential and we are doing a lot of different things.
The good news, again, we have many industries and many sectors that are still — again, we are active in all of them. We have presence in all of them, but we are — but in some cases, like US federal, we’re too small. And Roei does it have much effect on —
Roei Golan: Yes, on the federal side, it doesn’t — I mean it doesn’t have any effect on billing. I would had about the billing as well, because I will assume that we get the questions on that. So, again, on the billing side, the timing and the duration really affect the billing. I can give you as an example, is something that they — it wasn’t in — I didn’t mention it in the script, but for example, we have the large mega deals that was expected to be closed this quarter and was due to certain administrative delays was closed two days after and that’s something like that affect the billing, it’s the timing of billing, it’s a classic timing of billing. And these kinds of things affect the billing. I understand that you are covering the bidding and it’s important — important measure for you to understand the business, but we can say that.
Again, we saw this quarter in positive indicators. As I mentioned, the booking went up year-over-year. We see a very positive indicator for the pipeline for Q4. Again, we need to be cautious, it’s still on the pipeline and not converted into business, but we see many positive indicators. And it’s —
Brad Zelnick: Thanks for the color.
Kip Meintzer: All right. Next up is Tal Liani of BofA, followed by Joseph Gallo of Jefferies.
Q – Tal Liani: Hey. Good morning, guys. Two questions. Gil, at the end of the day you are only growing 3%, and we talked about it — like last year, you talked about Infinity and you talked about the year before about other products, but it’s very evident that it’s hard for the company to translate technology superiority into higher growth versus competition. And the question is, what other parts, do you need to invest in go to market, marketing, whatever it is, what other parts you need to go to and what are the challenges that you have in order to translate your technology into better growth here? The second question is kind of related, not related. Subscription, very nice growth, 15%, what are the trends in the non-subscription, it’s down about 4%. So what is their substitution or what are the other trends that we see in non-subscription? Thanks.
Gil Shwed: So first, you’re absolutely right, we need to do better, we should do better. I by the way believe that we were on the same — in market trajectory that we’ve been a year ago. I think our results today would have been double digit growth. I think we faced double digit decline in the core market of buying new gateway, delay in — what we call delay in refresh in a nice way. And I think we’ve shown it in our slides. And despite that, we’ve seen growth. And the growth comes from — both from customers sticking with us and doing the renewals, both from the fact that we’ve been able to transition big part of the business from product purchased to subscription. And also from some of the — some of it just comes from the Infinity deal with our multi architecture, both user cloud and other elements of the security elements.
And some of it comes from the new technology like email and few others that are gaining traction. But a relatively still small, but they are gaining traction. So that’s how we offset there. Again, if you just look to beat on the neutral basis of just selling gateways, it wouldn’t been — it wouldn’t even been 3%. Now, again, I’m not happy with that percent. I think we should do much, much higher. I think we’ve made investment last year, for example, we are at a lot of certainty, we can still hire more. I think this year, my focus internally was on customer engagement, making sure that our people actually go and meet with their customers and prosper — prospect. I think, I already mentioned that we have the great progress there, doubling the rate which is not trivial.
And much more activity by the field. Next step, by the way is two-fold, one is to elevate the level of quality, making sure that we reach the right people, that we go grow broader in the organization and so on. And second, I think we’re seeing the translation of that. Again you would go to the customer, doesn’t always come resolve, sure we’ll give you the next order, say, well, if we had the project, we would come to you, but what we’d like to happen is once this project comes and I would say, every enterprise will have a project within a year, then we will have a very much higher chance of winning that project because they are there, because we know that we’re projecting, unfortunately and again I would meet our shortcomings. That’s the feedback I get when I meet with CIO’s and CSO, they all tell me we know Check Point is a leader, Check Point is a very good brand for us.
We knew Check Point many years ago when we started our career and we love your story, that’s the main thing that they tell me, we love what you’re — the architecture and the vision. That’s the positive side, the negative side, depending on how come we didn’t hear for you for so many years. And that’s what I want to fix, because if we sell all these good things that we have good technology, very good brand recognition. That we have a good story today then what we need to fix is making sure that we know that, we know that is because we need to be in front of it. And I think, by the way, as I said, we have the people, we have the bandwidth, we just need to execute on that. And I think we’re making progress there. I truly hope that it will bear fruit.
Kip Meintzer: All right. Next up is Joseph Gallo from Jefferies, followed by Saket Kalia from Barclays.
Joseph Gall: Hey, guys. Thanks for the question. Congrats on another quarter of double digit EPS growth. You’ve started talked about top line drivers and product drivers as we think about putting 2024. How should we think about leverage in the face of these investments and the M&A integration and then what if any impact does FX has as we look out over the next 12 months? Thanks.
Gil Shwed: Roei, why don’t you start.
Gil Shwed: On their FX side. So I would say that on the next 12 months, of course, we’re going to benefit probably from the shekel. I knew that we usually hedge our currencies between three to four quarters ahead. So some of it already hedged for next year, but some of it will be hedged. I mean, in the second half of the year will be hedged — will be hedged in the next quarter or two. So there will be a benefit next year on the FX. Again, it’s still early to say to quantify that, but there will be a benefit. As for this quarter, we also — again, because this quarter was already hedged a year ago, three quarters ago. So we — so the benefit was less than the FX cost that you see today, which is approximately around — we benefited around 1.7 — between $5 million to $6 million of FX benefit this year compared to last year.
Gil Shwed: What was the second part of the question? Q – Joseph Gall It just — you talked a lot about drivers and trying to drive growth higher. But how should we think about the leverage your investment needed to drive that or the M&A integration cost?
Gil Shwed: I think we need investment, and we keep investing, but we also need to see more leverage from the investments we’ve already made. We are today many, many people that working driving new technologies. And again we need to see more results of it. We’ve been building and I think I’d like to see us seeing the fruits of all these efforts. Again, we are going to keep investing, but I think the main thing for me is seeing the investments which we already made — make bear fruit. And then we can invest more in the areas that we’ve — that we’ve been working with.
Joseph Gall: Thank you.
Kip Meintzer: All right. Next up is Saket Kalia from Barclays, followed by Hamza Fodderwala from Morgan Stanley.
Saket Kalia: Okay. Great. Hey. Good morning, everyone. Same here by the way, thoughts to everyone on the Check Point team. Roei, maybe for you. Maybe just broader, can we talk about the M&A impact here on the model, both in terms of annualized revenue and just annualized margin impact as we start to incorporate these deals into our model for next year. And maybe just a quick clarification. I think you said that there was a large deal that signed two days after the end of the quarter. I mean, can you give us a sense for kind of what billings would have been, had that deals had closed on time?
Roei Golan: Okay. So as for your first question on the M&A. So, I think we mentioned when we announced on Perimeter 81, we mentioned approximately [indiscernible] on the mid 20s. But that’s something that — but when we acquire, then that was the annual recurring that the Perimeter had. The other acquisition doesn’t have any significant effect. I mean, I’m talking Atmosec one, didn’t have any significant revenue that. And the one that we just — we recently-announced I think in the beginning — in the middle of October, also will have a few millions of dollar effect, not significant effect on our total revenues. So that’s on the topline — on the topline. And again in terms of Perimeter, I mentioned the — it start up to speed.
I mean, right now it’s losing money. I mean hopefully, again, in the long-term, I mean, the aim is to be profitable, they are going to be positive. But again in the next — I would say for the — in the short-term, it will be dilutive to our margins. So that’s how you should think about it. What was your next — the second one that you had? On the —
Saket Kalia: Yes, the large deal, you’ve had a large deal that closed two days after the impact of billings.
Roei Golan: So the last deal is approximately two points. Approximately two points on our billings [indiscernible].
Saket Kalia: Very helpful. Thank you.
Kip Meintzer: All right. Next up is Hamza Fodderwala from Morgan Stanley, followed by Patrick Colville from Scotiabank.
Hamza Fodderwala: Thank you for taking my question. And I’d also like to offer my support to you and all your families. I’m sorry, we couldn’t be there in person this year as well. So, I wanted to ask a question about sort of the product refresh and I think this was earlier, but maybe in a different way. I think if we look at your historical product cadence, it suggests there should be — I think new hardware coming out, possibly early next year. What is your — what are you seeing in terms of demand and sort of interest around that? And to what extent our customer’s sweating their assets in anticipation of a new appliances that may be coming up from Check Point?
Gil Shwed: It’s a good question. I wish I knew the answer. I think we are — again, we are getting very good indicators about the price performance and about on products. Like every time, we are always looking to refresh and renew, but I don’t see — I don’t know if there is a built in expectation in the market or not. And don’t obviously can’t speak about the timing of new solution. By the way, last week we did announce a small newer clients, but we didn’t mention it here. Actually for ruggedized environment, for mission critical applications and so on, it’s a small market, small sub market, but we have a very good offering. So we did come up with a new one already last week.
Hamza Fodderwala: Thank you.
Kip Meintzer: Our next question is from Patrick Colville from Scotia Bank, followed by Joshua Tilton from Wolfe Research.
Patrick Colville: Thank you so much for taking my question. Echoing as a analyst, our thoughts are with your family. Just wanted to ask a clarification question. And then there is a proper question. The clarification is, did you say that you thought 2Q was the bottom in terms of product demand and 3Q, you saw signs of improvement. And then I guess the other question I want to ask is, why Perimeter 81, because in our field work that traction was kind of really strong in the SMB space and maybe lower mid-market but not ready to enterprise and Check Point’s as a business has had excellent success in the enterprise. So why that assets?
Gil Shwed: Okay. So first, you’re correct about what we said about the market and Q2 being the bottom and Q3 seeing some turnaround and improvement in demand for firewall gateway. So that’s correct. About why Perimeter 81, not only because the traction that we have, but because of the technology. I think they have a differentiated technology, they are a hybrid model of doing some work in the cloud and some work at the client side. I think is a very good one in terms of the right architecture, I believe in that. And then what we also found that in many cases — and again, we looked at many companies in the SASE space. I can tell you that in the past, we’ve almost completed two acquisition in that space and somehow during the due diligence we decided to back off.
And the main reason, but we’ve seen some companies that have nice numbers and so on, but the main challenge that we had with them that some of them didn’t have, an offering that’s simple but straightforward to setup. That’s critical. If you want to go big on the market, you can’t be in a solution. Again, if you look at all these startups, many of them or almost all of them lose plenty of money. Now the question is, if you can really make money. And if you can make money is because it can scale, because you can take that and to sell it to 10 times more customers without decreasing the [indiscernible]. Every customer — if every customer win means huge efforts, huge installations, very slow to deploy. Then you can scale it and getting it to the Check Point’s installed base, getting into a 100,000 customer installed base means that the solution has to be simple, straightforward and scalable.
And by the way, that in many cases when you take SMB technologies that have to be like that because otherwise you can’t support them and you can’t install them and add to them all the enterprise capabilities that we have in Check Point then you can get it [indiscernible] And I think we have a very, very good, by the way experience with the acquisition of the Email security that we have. We also took an SMB product and our largest installation archive of in 100,000 seats. So we took a solution from 200 systems and we are now making very nice progress, scaling it up. So again we’ve check that on the due diligence, we know what’s our limitations, we know what we need to scale and so on, but we believe it’s doable.
Patrick Colville: Terrific. Thank you, Gil. Thank you, Kip.
Gil Shwed: Kip, you’re on-mute.
Kip Meintzer: Can you guys hear me? Thanks. Thanks, Gil. Joshua Titlon on next, followed by Fatima Boolani as our last question of the day. Thank you.
Joshua Tilton: All right. Great, guys. Thanks for squeezing me in. And I will just say my thoughts and prayers are with not only you and the team but with everyone in Israel. I just want to sneak two quick ones in. My first is just what is your guys’ current expectation around a 4Q budget flush and do you feel like you need to see one in order to kind of hit out the numbers that you laid out for us? And then my second question is, do you guys view the Perimeter 81 acquisition as a way to kind of fill a hole that’s sort of been left behind by weaker firewall appliances or do your customers kind of still view SASE as an incremental purchase to firewalls with the expectation being just firewall demand will come back at some point.
Gil Shwed: So let’s start. First, I do hope to see budget flush in the fourth quarter, which usually happen. I think the only year that didn’t happened in my experience was last year. And when you look at our growth model, it doesn’t assume high growth, huge growth in product in Q4. So we kind of don’t assume that there will be a big budget flush. If there will be a huge one that we didn’t anticipate. I think it will all be upside for us. But again, every year except 2022, I believe, in my career, we’ve seen a budget flush at the end of the year, last year was the exception. And second part was about the Perimeter 81. I don’t think it fills a hole, it fills a big hole which we didn’t have because we weren’t active in that space.
I don’t think that in the enterprise space where like 90 some percent of our sales are, people are going to shift to [indiscernible] traffic through the cloud. We will keep their data centers, they will — they will do that but with plenty of opportunity. When we see a change when things going to happen is on the branch side. Branches are important part and there’s, when you take a company with 300 branches or 20,000 branches, then an architecture like what we have with SASE can work very well. I think we incorporating branch offices, but some will have our appliance with SD-WAN and some were pure SASE is also a good architecture for network. I think in terms of remote user access, it’s a good solutions. So, I think most of it augment what we do, they are directly in our industry.
And I can paint it just a different industry, it’s not different one, it’s the connectivity. I think 80%, 90% of that is not a replacement for our products, but it’s an addition, maybe 10% or 20% was an overlap between some products, but most of it is not an overlap from a dollar standpoint.
Joshua Tilton: Super helpful. Thank you, guys.
Kip Meintzer: All right. And last up, welcome back Ms. Fatima Boolani.
Fatima Boolani: Thank you very much, Kip. And Gil and to your entire team just sending my thoughts and prayers in this very difficult tumultuous times. I wanted to ask Roei a question regarding the Security Subscription segment. So the 15% acceleration we saw this quarter. I wanted to get your thoughts on where that potentially could trend up towards over the next couple of quarters. And if you can help us with some very specific pieces on, are you seeing very strong expansion activity into other product pillars? Are you finding that is really making more meaningful impact in driving the acceleration there? So, any thoughts around where that 15% could go in the next quarter in the near-term and medium-term and some of the key components that you expect are going to drive that acceleration.
Roei Golan: So, first of all , Again, we hope we will see the accelerate –I mean, acceleration of this growth. And again, I remind you that we also Perimeter 81 that awkwardly also help us with the accelerating this growth and the subscription because the revenues from the Quantum SASE will be part of this line, I mean, we will be including this in this line item. In terms [indiscernible] I would say, again in there — hopefully, it will be higher than the 15%, that we see. But again, it’s really depends on the execution. And where we see it today, I mean, the drive for 15% growth is mainly coming. I mean, it’s coming first of all, from the Email security. It’s becoming more and more significant for our business, it’s growing and it’s strong double digit growth, very strong double digit core.
It’s — we don’t disclose the numbers, but becoming more and more significant to the subscription revenues. And also it’s driven by expansion maybe under the Infinity platform that come customers are expanding , they are getting more services from us. So all this stuff together with the growth in the cloud also grew double digit in revenues this quarter. All of these came — brought us to this 15% growth and hopefully we will be even higher in the next few quarters. But it’s — it’s still too early to say.
Kip Meintzer: All right. And with that, we’ll conclude for the day. Thank you guys for joining us and we look forward to speaking with you after the call and throughout the quarter.
Gil Shwed: Thank you very much. I appreciate that. Thank you.
Operator: Good bye.