U.S. markets open in 9 hours 16 minutes
  • S&P Futures

    -1.00 (-0.02%)
  • Dow Futures

    -33.00 (-0.10%)
  • Nasdaq Futures

    -0.75 (-0.01%)
  • Russell 2000 Futures

    -1.90 (-0.11%)
  • Crude Oil

    -0.65 (-0.73%)
  • Gold

    -10.30 (-0.56%)
  • Silver

    -0.24 (-1.13%)

    -0.0013 (-0.13%)
  • 10-Yr Bond

    +0.1100 (+2.41%)
  • Vix

    +0.09 (+0.51%)

    -0.0015 (-0.12%)

    +0.0120 (+0.01%)
  • Bitcoin USD

    -515.31 (-1.83%)
  • CMC Crypto 200

    -13.52 (-2.24%)
  • FTSE 100

    -97.36 (-1.28%)
  • Nikkei 225

    -455.13 (-1.43%)

Check Point Software Technologies Ltd. (NASDAQ:CHKP) Q1 2023 Earnings Call Transcript

Check Point Software Technologies Ltd. (NASDAQ:CHKP) Q1 2023 Earnings Call Transcript May 1, 2023

Check Point Software Technologies Ltd. beats earnings expectations. Reported EPS is $1.8, expectations were $1.74.

Kip Meintzer: during the formal presentation, all participants are in listen-only mode and this will be followed by a question-and-answer session. During this presentation, Check Point's representatives may make certain forward-looking statements. Within the -- forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. Forward-looking statements generally relate to future events or our future financial or operating performance. Forward-looking statements include, but are not limited to, statements related to our expectations regarding our product solutions, expectations related to cyber security and other threats. Our expectations and beliefs regarding these matters may not materialize, and actual results or events in the future are subject to risks and uncertainties that could cause actual results or events to differ materially from those projected.

These risks include our ability to continue developing platform capabilities and solutions, customer acceptance, purchase of our existing solutions and new solutions, the market for IT security continuing to develop competition from other products and services, general market, political economic and business conditions, including as a result of the impact of COVID-19 pandemic. These forward-looking statements are also subject to risks and uncertainties, including those more fully described in our filings with the Securities and Exchange Commission, including our annual report on Form 20-F. The forward-looking statement in this management presentation are based on information available to Check Point as of the date hereof and Check Point disclaims any obligation to update any forward-looking statements except as required by law.

In our press release, which has been posted on our website, we present GAAP and non-GAAP results along with a reconciliation of such results and the reasons for our presentation of non-GAAP information. If you have any questions after the call, please contact Investor Relations at kip@checkpoint.com. Now I'd like to turn the call over to Roei Golan for a review of our financial statements.

Roei Golan: Thank you, Kip, and thank you for everyone to joining the call. Let me just share the presentation. Yes. So I'm excited to be with you to present our results for the first quarter of 2023. Our revenues this quarter reached $566 million, which is 1 million above the midpoint of our projections. Our earnings per share were $1.80, surpassed our endpoint of our projection and $0.07 above the midpoint of our projections. So despite the market uncertainty and the tough macro environment, we delivered 4% growth based on our projections and reached our projection and delivered 15% growth in our earnings to $1.80. Now let's dive to the detailed review of the quarter. As I mentioned, the revenue increased by 4% to $566 million.

Our deferred revenues was up by 8% to $1,797 million. Our short-term deferred revenues were up too by 8%. Our calculated billings reached $485 million, a decline of 3% year-over-year. Let me remind you that our billing is affected by duration, payment terms, and in this kind of market uncertainty, we saw this quarter fewer customers willing to pay upfront for multiyear deal, which resulted in shorter billing duration. If we are looking on our current calculated billing, it was actually up 2% year-over-year. Our product revenues declined by 7% year-over-year. This was the result of the market uncertainty that resulted in extended sales cycles and in deferral of projects, mainly refresh project in the Quantum Appliances and we see more cautious spending by customers that around refresh projects and deferral of projects.

If we're looking on the security subscription, we had a very strong quarter with 13% growth year-over-year and reached $228 million. This double-digit growth was driven by our CloudGuard and Harmony E-mail businesses that were both had a strong double-digit growth, both in revenues and both in new business bookings. Also, we see that we had a great quarter with Infinity to continue -- and continue to flow in an accelerated way to our revenues and reached a growth of over 140% year-over-year in revenues. We see that we reached a key milestone of 80% of recurring revenues out of our total revenue. Actually, 81% of our revenues are recurring revenues, which are the subscription revenues plus the support and maintenance revenues. And out of the 81% recurring revenue, 50% of them are subscription based.

And we see a consistent growth of our subscription and our recurring revenues over the last few years. Now let's look at the revenue by deals. A 45% of our revenues came from EMEA, 43% of our revenues came from Americas, while 12% of our revenues came from Asia Pacific. And let's dive now to the P&L highlights for the quarter. Our gross profit was increased by 5% to $502 million, which represents a gross margin of 89%, which is higher than 88% that we had last year. Those total margins are impressive considering we still see pricing increase by many vendors. We see an improvement in the supply chain environment that was very challenging last year and we hope to see this trend continue in the remaining of 2023. Our operating expenses were increased by 11%.

This was mainly as a result of our continuing investments in our workforce, cloud infrastructures and in-person marketing activities, including our CPX event that took place this quarter. So we reached a very strong operating income of $238 million. That was 42% of margin -- operating margin this quarter. Our financial income this quarter reached $19 million as we invest in higher interest rates over time. And we expect that this income will increase in the last in the next few quarters by one million or two every quarter. Our non-GAAP tax rates for this quarter was around 15%, mainly due to indexation and update in tax provisions because of several tax assessments we have worldwide. Our non-GAAP net income increased to $218 million, 7% growth year-over-year and $1.80 -- EPS of $1.80, which represents 50% -- double digit or 50% growth year-over-year, very strong results.

Our GAAP net income was $184 million or $1.52 per diluted share. If I'm moving to our cash flow and cash position, so our cash balances as of the end of the quarter or of the quarter were $3.6 billion. Our operating cash flow was strong at $386 million this quarter. During the quarter, we continued our buyback program and purchased 2.6 million shares for $325 million at an average price of $127 per share. In the past 12 months, we acquired in total -- we purchased in total $1.3 billion of shares. So if we summarize our financial results. So we had a double-digit growth in subscription revenues driven by our Harmony E-mail and CloudGuard products. Our recurring revenues -- is the key milestone of 80% of more than -- 80% of our total revenues, the macro environment resulted in extended sales cycle that resulted in a decline in our product revenues and we finished a very strong profitability of 15% growth in EPS.

Now I'll turn the call over to Gil.

Meeting Room, Colleagues, Business
Meeting Room, Colleagues, Business

Photo by Rodeo Project Management Software on Unsplash

Gil Shwed: Thank you, Kip. Thank you, Roei. That was a very good update on the financial side. On the business side, I'd like to reiterate some of the messages and give some more color to the technology to the trend that we see. As you know, the need for cyber security remains high. The level -- the number of attacks keeps growing. The sophistication of attacks keeps growing and with that, what we are doing. But just to reiterate a little bit about some of the quarterly highlights that we see. So first, I'm very, very proud of the financial results. Our revenues were above the midpoint. 15% EPS growth is actually exceptional and we had a very healthy business in the renewal, which shows that our customers are loyal and care about that.

Having said that, we are still operating in a challenging economy. We still we saw the effect of that economy on our business with extended sale cycles project being postponed. And I think Roei also shared the decline in the new deals with product sales, still with a double-digit growth in CloudGuard and Harmony E-mail, 140% growth in Infinity revenues, 13% growth in all the security subscription. And again, I'm very proud that we now reached over 80% of recurring revenues. This is all driven by many, many important initiatives and many technologies that we are delivering this quarter and every quarter. Let me give you some highlights for the things we launched in the first quarter. First and foremost is the Infinity Global Services. Second is getting into the new market of Security Operation Center, SOC with Horizon XDR/XPR.

And I'll dive into each and every one of them. And last and not least is the expansion that we did in the cloud with Cloud Native Application Protection. Again each and every one of them addresses an important market in the security landscape and all presented pretty good results for the quarter. So let me start with the new Infinity Global Services. I think we all know that customer wants to have better security, more security. We all know that there's a huge skill shortage in the market for cyber security. Our partners, our customers all have a lot of expertise in cyber security, but none of them have everything included. And the idea here with introducing our Infinity Global Services is to augment the needs of our customers and partners.

When they want to run fast and get the best security and get the full deployment, whatever stage they need, they will always miss something. It can be on the security assessment side, it can be in how to optimize the security environment. It can be in a training and certifications and things like that. And it can be in the full operation and response to incidents and managed security services. We are here to help them. So we're taking many, many services that we have, adding to them a whole new set of services based on the needs that our customers have and coming to our customer with a simple value proposition. We are here to help you to augment that. I believe that this is serving a very important market. The security services market is a $75 billion market.

We're not going to be a giant player here, but we are going to participate in this market and help our customers accelerate their value realization from the security technology. So last quarter we introduced Infinity Global Services and we look forward to expand our capabilities and show results in the next few years. Next is I think I've talked about the new family for Horizon. This is another important market today. It's a sub $1 billion market expected to grow to almost $3 billion market in five years. And our approach here XDR/XPR is meaning how do you collect information from multiple sources and out of them get additional security value. Now most XDR products today, they actually called EDR endpoint detection and response focused about detection, focused about endpoint.

What we're talking about, XDR and XPR is extensive prevention and response to all types of security events. Our approach here is very different because we turn things into automatic prevention very, very quickly. AI driven and again focused on the Prevention First approach. We include the network, we include the endpoint, we include the email, we include the checkpoint architecture. But we also connect today to many, many third-party tools that are available in the infrastructure from Microsoft, from other vendors. All part of the system we already know how to include. And I think through that system in the last few months since we introduced it, we are seeing on a weekly basis new incidents that we find in our customers environment and immediately turn that into prevention.

So I think you see some of the analyst quotes here from ESG, Dave Gruber from ESG. The integrated approach here is unique. We can drive change across the broader security industry. I think it's a very, very good start to us. It gives access to the CISO, access to the Security Operations Center, and for our customer, it's tremendous value that they derive from this family and from the rest of the Check Point Technologies that they have. Last not least is the expansion of the CloudGuard family with CNAPP or CloudGuard Native Application Protection Platform. Here we are combining six different technologies into one solution. And when you look at the market for cloud security, it's a multi-billion dollar market, not a giant one, but a big one. And but it's spread around many, many different technologies.

Some of the stars in this market, they are speaking mainly about posture management, something we do for more than five years. Others are talking about workload protection, other in the development cycle, the DevOps, the pipeline or source security. And there's many, many sub segments. And when the customer is getting into that, they simply need too many technologies to get all of that to work together. And I think with the Check Point, CloudGuard, CNAPP, we are combining all these elements into one family that get more context, more actionable security, smarter prevention. And again, turning some of these things are prevention all the time like the web application protection and the cloud network security. Some of them like the posture management turn configuration, incident analysis, things like that into very quick prevention by changing configuration and by putting the right information in front of the security operations.

So this is good. And by the way, I hope it helped us drive some of the cloud revenues that we've seen increasing last quarter. All of these elements play into the -- what we discussed last quarter, the 3C strategy that we talked about. How do we make security comprehensive, consolidated and collaborative. And I think it's not enough to come up with a bunch of security technologies. It's not enough to come with a lot of different elements. We really need to make the whole architecture work together. And I'm putting a lot of emphasis on the collaborative element of that strategy, making all the different elements of the security work together. But also, if you look at the other 2Cs, I think no one has a more comprehensive architecture with Check Point, and no one has an architecture that's truly consolidate and when you can get into one unified portal management to automate to do the same security management operation from one single management console.

And I think this is reflected in some of the wins that we've experienced in the last quarter. Of course, we are doing thousands of deals every quarter. So it's hard to pick the leading one, but we picked here. A few examples that show all the different elements, the Infinity, the Harmony, the CloudGuard, for example, here is an airline that got our security assessment. We've got in with our services delivered a quick security assessment despite this vendor using 12 different vendors. They don't have the skills to manage. They don't have the personnel to manage all these different vendors. And they weren't getting the highest score. They decided that the approach of using a platform consolidating many solutions is the right approach. We did a very fair process and I'm very glad to see that they standardize on Infinity.

It's a new customer to us and we are very proud of that. Another one is giant media companies, one of the most complex cloud environments that we've seen thousands of cloud accounts, different cloud platforms, using different cloud security solutions in the environment. And again, they found it almost impossible to manage, not addressing all the needs and the new cloud projects that we have drove with consolidation, we went in, we went live in less than a month and showed them how we can really elevate the level of security, consolidate so many elements, and all of that is just the beginning of the very strong road map and vision that we liked about what Check Point does. Last example is about our Harmony E-mail, something that's actually a fast-selling solution that we have now.

In this case, we are talking about a giant telco suffered two embarrassing incidents that resulted in e-mails that got through their security defenses. They used multiple solutions from multiple vendors and both solutions fail to improve, fail to address the issues and show them that next time this attack won't happen. We got in, showed them within days that we can immediately that we can block this attack, but even more important, that we can scale our solution and provide the solution to a very large environment, usually, by the way, our email business started with midsized kind of customers. And here, we showed them that within a few weeks, we were able to scale to thousands and tens of thousands. And finally, we won the contract with over 100,000 mailboxes on Harmony E-mail, worked, real-world production and protecting that customer that failed to achieve the same thing with our solution.

So these are just demonstrating some of the successes that we have in different areas of the cyber security. So to summarize, this quarter, we had very good results despite the economic slowdown, which affected us and what we see in the marketplace. Very glad to see the double-digit growth, the 13% growth in subscription revenues, the 15% growth in EPS, which is exceptional. And I think we're demonstrating the values that we are talking about of providing the best securities with the 3C strategy with the new launches of the Infinity Global Services, the new Horizon family with XDR/XPR and with the smarter cloud prevention as part of our strategy. So I think that summarizes a pretty good quarter. Before I get to your question, I'd like to share our projections.

So I'll start with the projections for the year. These are unchanged. We are just including that slide. As a reminder, it's the exact same slide that we showed last quarter. Revenues for the year are expected to be between $2.34 billion to $2.510 billion. Despite the economy, despite the challenges, we are -- we believe that we can still be in that range. Non-GAAP EPS, same thing. Ranges between $7.70 to $8.30. Non-GAAP EPS is expected to be approximately $1.22 less. Again, same slide that we showed last quarter. And I'm going to share the range for the second quarter, which we haven't shared before. And this, again, within the same landscape here, revenues are expected to be between $570 million to $605 million. And non-GAAP EPS is expected to be between $1.85 to $1.95, pretty healthy EPS and GAAP EPS is expected to be approximately $0.31 less.

So this is the update for the quarter, for the projections, and be very happy to open the call for your questions. Thank you.


Shaul Eyal: Good afternoon, everybody. Good to see, Gil, that you're keeping fiscal '23 guidance intact. I had a question on the product decline. How much of that was attributed to Infinity actually showing a very solid performance.

See also 25 Largest VC Backed Companies In The US in 2023 and 10 Best Confectionery, Cookie and Snack Stocks to Buy.

To continue reading the Q&A session, please click here.