Check Point Software Technologies Ltd. (CHKP) Earnings Call Transcript

Good morning, everyone. My name is Brian Essex. I'm JPMorgan's security software analyst. And with me today, I have Roei Golan, the CFO of Check Point Software; and Kip E. Meintzer, Global Head of Investor Relations. Maybe Kip, I think you have some prepared remarks for us before we get started with some Q&A.

Thank you, Brian. During the course of the presentation, there may be forward-looking statements made by the participants here. As with all forward-looking statements are covered by the Securities and Exchange Acts of the early 1900s, about when [ Rob Floris ] was born. As with any forward-looking statements, there are risks and uncertainties that are associated with these remarks, and if you would like a full list of the risks and uncertainties, please check out our latest earnings release or our 20-F filed with the SEC. And as with all forward-looking statements, there's only a duty to update where required by law. And with that, I'll throw it back to Brian, and we can proceed.

Great. Thanks, Kip. Roei, maybe to start, could you offer maybe just a quick recap of the first quarter? What were the key takeaways you'd like people to know and we can kick it off from there.

Yes, sure. So I think Q1, what we've seen in Q1, I think it was a continuation of the -- I would say, nice demand that we've seen, that we started to see in the end of 2023. I think we did see some kind -- after a very challenging beginning for 2023. We started to see a change in the environment in the second half of the year, mainly in Q4. And Q1, continued this momentum, and we did see a very nice demand for our products. I think we mainly saw -- first of all, I think the appliances, the appliances -- we announced new appliances during Q1. So we did see very nice demand for that. Although our revenues were down, actually, our bookings were up. I mean the appliances booking were up year-over-year in Q1, double digit year-over-year bookings. So you don't see it yet in the revenues because a significant part of it is Infinity. So it takes time to -- so it's a -- I mean there is some kind of a lag between the bookings and the revenues in Infinity deals. And also for the other products, I mean, the Harmony e-mail continue to see very strong -- We continue to see very strong demand in the Harmony e-mail. But that's something that we've seen since we acquired Avanan, back then in 2021 with this momentum is continuing, and it's even getting bigger and bigger. And Infinity, our Infinity -- our consolidated platform, I think that's our main advantage today in the market. And that -- we see the feedback that we are getting from our customers, from the partners that really like that. And I think that's to drove the good result that we had in Q1, and hopefully, we'll see it also in the next few quarters in this year.

Got it. And then before I go any further, I'll leave some time at the end for questions from the audience in case anyone has any. So maybe to touch on one of those points you talked about strength in Appliances. How do you think about the -- I guess, the overall deceleration that others are seeing in the market after some pretty heavy spending over the past few years and through the pandemic, do you see any kind of like pressure in your space or maybe even a benefit because of some of those like global appliance spend deceleration trends?

So what I can say based on what we see from our field and based on my discussion with the field, based on what we've seen for partners and customers, we did see -- we do see some kind of a change, maybe it's also driven by our newer appliances. I think what happened in 2023, we did see a lot of -- it actually started already in Q4 2022 and it's -- and we saw it in the majority of 2023. We did see a lot of delays in refresh projects. So some of these delays in -- then it's existing customers that renew their business with us. So they just postpone their refresh project due to budget constraints. And we're starting to see -- we started to see in Q4 and mainly in Q1 and hopefully, in the remaining of the year, we started to see this project being executed. So I think that's something that hopefully will help us also in 2024. So again, based on what we've seen in the last 2 quarters, we do see a change in the demand, for appliances. And hopefully, it's something that will -- I mean, again, also the pipeline that we're seeing for the remaining of the year seems -- looks good for the appliances. But again, pipeline is only pipeline until it's been converted to business. It's -- we need to be cautious here. But again, based on what we've seen so far, it looks -- the environment looks better in the last 2 quarters than what we've seen in the beginning of 2023.

Excellent. And how are we now that we're kind of halfway through the quarter? Budgets and spending still consistent with Q1? And is there any, I guess, change by region or by vertical that are worth calling out?

So I think, first of all, in -- I remind you that more than 50% of our business and almost in every quarter has been closed in the last 2-weeks of the quarter. So it's -- again, the quarter starts well. I mean the Q2 starts well -- I mean -- but it's only -- we are only half of the quarter. And again, as I mentioned, most of the business has been closed in the end of the quarter. The pipeline looks good, but again, it's pipeline. And in terms of regions, I think that we do see a very nice demand, very strong demand in EMEA, mainly in Central Europe, we did see very nice demand in Q1. We actually grew -- I think it was the best quarter of EMEA in the last few years in Q1. And Q2, the pipeline looks good also for Q2. So EMEA is I think is the strongest region what we've seen so far. In terms of -- that's in general. I mean America loos good, but still not, I think the EMEA is the main area where we see the growth.

Okay. Maybe can we switch to some of the growth initiatives that you have and particularly with regard to Infinity, CloudGuard, Harmony, how are you investing in those platforms? And where are you seeing traction with those segments?

So we invest in all -- I mean, we expanded significantly. I mean, we expanded significantly our budget, R&D budget in the last few years, mainly focusing on this product -- I mean, the Harmony and the Cloud, Infinity is the platform, but we did a lot of investment in the last few years, if it's organically or inorganically for investment, for acquisition such as Perimeter 81 to make sure that we have the best platform in the market, the consolidated platform in the market. So I think, again, we keep investing there. I think we have well positioned much better today with our Infinity, Infinity offering with the Harmony that we have today after the acquisition of Perimeter 81. And the cloud business, which is -- also invested a lot there, again, I think we can grow faster there. But again, in terms of the product, I think that we have today, a much better product that once used to have a few years ago.

Yes, I'd definitely say on the cloud side, it's more on our execution. The product is phenomenal, and we've actually done some retooling on the management side of the cloud. So hopefully, we're going to see some benefits from that going forward.

Great. And I thought you guys did a really good job at CPX, by the way. It was a great access to senior management, and I had a chance to catch up with Francisco, particularly after we had you organized meetings. And he was talking about a few different programs that you guys are focused on with the channel, specifically bonus program for logo displacement and improved rebate program, those kind of things seem to be resonating with partners we spoke with on the floor. Also a streamlined effort to help partners understand how they make money. I know you've had recently -- you've historically had a meet in the channel sales motion, but what are you seeing on the partner side of the business? Are you starting to see that pay off? And what do you look at to kind of basically understand how those efforts are being recognized by your channel partners?

So as you mentioned, I think we did a lot of changes since Francisco joined us I think a year ago. We think Francisco did a lot of research and did a lot of changes to make sure that we'll be -- we'll have -- we'll be much more competitive in the market on the partner side. So I think we also launched -- we also -- we announced a new partner program, I think, in Q1, a new partner program that's mainly focusing on simplification. We want that our partners will have -- will be for them easy to register for a deal to do business with us, to make sure they understand exactly what they're getting, what's the margin that they are getting. So I think the simplification was our focus. And second, of course, all the incentives that you mentioned, I think, bringing new logos, rebates for selling new businesses. So I think we're doing a lot of -- investor a lot there. It's still too early to say if it's -- I mean, based on my discussion, what we -- based on our discussion with the field, the partners are much more -- like this new program and the new incentives. But it's too early to say the effect of that because we just launched it in Q1. So I don't want to say that it's successful or because it's -- we're going to need a few more quarters before going to tell you if it was a successful launch or not.

And if I can expand on that just a little bit. I think it also helps that the partners see what it's like to have a real platform, right? It's not a marchitecture, it's something that actually works, provides protection and prevention in the marketplace. So as they're going out there and they're meeting with executives and stuff and trying to sell to their customers, they actually have something that's real, that works, whether it be AI, from the standpoint of having a single copilot or actually having the AI incorporated it into the platform. And that's what allows us to have the success rates we have from a protection and prevention standpoint. And as we talked about earlier, you've seen what it's like when people don't pay attention to building out their product, they have CVEs that are pretty ridiculous. So you don't find that at Check Point. And I think the partners are starting to recognize what it's like to have a quality product rather than just plain marchitecture.

Got it. And then maybe keeping on the sales side, when we caught up with Gil in Las Vegas, he noted lower levels of sales attrition and better sales productivity. Are these trends still intact? And what are some of the efforts that you might be doing to maintain a healthy level of sales force retention and lower turnover rates?

So first of all, I think it's still true today. I mean, we see low attrition. We see that our productivity of our sales people, I would say around or not specifically in certain regions, we see better productivity because I think, again, we added a lot of people in the beginning of -- in the end of 2022, beginning of 2023. Usually it takes time between 9 and even 12-months to be productive in our business, in our market. So I think we do see improvement in the productivity, it's for engagement, more engagement. I think Gil mentioned it in one of the earnings calls in the beginning of the year that we are focusing on more engagement with our existing customers with the prospect. We see significant improvement in that. It usually takes time between the engagement that really being converted to opportunities and to business, but we see a significant improvement there. So I think the productivity is much better. In terms of attrition, we're doing a lot. Again, we have our incentive plans for our sales people. We are doing -- we're working together closely with them with the sales people -- I mean, with the sales leader to make sure we have attractive compensation plans. So I think in order to, first of all, to maintain the good ones, I mean, not -- in the end, we want to maintain the best top performers. So I think, again, and right now, the attrition is still low. I think it's not only -- I mean, we need to be honest with ourselves. It's not only us. It's also in the market. I mean the market is, I think, right now, it's still -- we still see, I think, the effect of the market. And therefore, we see still I think, in general, in the market low attrition rate, in combine, yes.

And how are hiring trends right now? Are you hiring to a certain growth rate? Or how are you managing like particularly on the sales side, hiring talent?

So hiring, I think we are more -- I think in specific areas where we need to have more coverage, for example, EMEA, we mentioned that EMEA, we do see very nice demand there in the last few quarters, very nice growth. So we're hiring in specific areas where we do see more demand there, that we need more coverage, that we have more potential. On the Harmony e-mail, for example, we expanded significantly our sales people there, the team that's supporting the field of the E-mail because the demand is growing and the business is growing and we need more people to make sure that we can -- that we are be able to serve and to sell more Harmony e-mail. So I think we are hiring specifically in certain areas. It's not like we did 2 years ago that we said we're going to expand 25% of online sellers. We did it, by the way, in the last 2 years. But now it's more focused on specifically where we believe there is more potential to go faster.

Got it. And then maybe back on the product side of the business, you announced, what, like 10 new quantum engines at CPX. So we have a new product cycle there. And I think even in Vegas, you guys announced that you're seeing some good early traction. Is that still the case? And what is the timeline? I know you -- when you launch a new product, there's testing that has to occur on the customer side of the business. When can we start to see any evidence of a quantum driven refresh cycle in the marketplace in your view?

So I think, first of all, we launched it in Q1, although we did some, I would say, quite launch for the high-end product in the end of Q4. So we do see very nice demand for the new appliances. I think the price performance is much more attractive than what we -- I mean, first of all, in the market and what we had with the previous family of products. So I think the customer really likes that. And we -- it's also a -- we brought some new logos through this selling of new products, new appliances. So I think again, it's much more competitive today in the market. I think the -- I would say, the significant effect will come probably in the second half of the year because usually, it takes mainly for enterprise to do -- some of these enterprises and sellers needs to do their internal certification. They need to test the product before they can use it and they can use it in the environment. So that usually takes -- it can take between a month or even 3 months or 4 months. So I believe because we launched it just in February, I think January, February [ 2020 ], I think the main benefit will start to see -- It's not that we are not selling it today, but I think the main effect will be in the second half of the year.

Got it. And then one of your peers is -- there have been a number of different opinions on what the normalized growth rate of that, primarily firewall industry would be once things stabilize, I think one of your peers talking about 0% to 5% annually on a normalized basis. Do you agree with this number? And what is your view in terms of normalized growth? And also how Check Point might be able to grow faster than an overall industry normalized rate?

I would say it's tough for me to say. I mean, I think that we can grow faster than that. Again, it really depends on gaining market share. I mean, I think that we need to gain more market share. I mean, that's something -- if we're going to gain more market share. So it's in the firewall market, I mean, the network security market, in the firewall. So we can go faster than the -- I mean the 5% that our competitor mentioned. So we need to -- I mean, we need to aim to bring more new logos to grow faster. And if we want to achieve this double-digit growth that we discussed it many times before, when we -- that's what we want to be there. So we need to grow faster than 5% on the product side. We need to be more close to the 10% in order to grow double-digit growth. I mean we need to be now in the single digit to 10% or the low teens to be able to grow the double-digit growth in our revenues in our total revenue. So I think with the new product that we have today with the SASE, the new SASE product, I think the combination together can -- we are positioned much better to gain market share and to go faster.

That's a great segue. I wanted to ask you about SASE. And you recently, as you mentioned, acquired Perimeter 81. I think the last time we spoke, you were still in the integration process. How is that progressing? And any expectations in terms of timing when you'd be in the market with like full end-to-end SASE, including perimeter 81?

Yes. So actually, we just had a meeting before I came in, we had the meeting on the disintegration project. So I have some updates. So I think again, in the end, still plan by the end of the year to close it. We are investing a lot there. We're expanding the R&D team. And in order to make sure that everything will be available -- Again, I'm talking about the main feature. I mean all the time, you need to add feature, new features, but I'm talking about the -- the main thing that we need in order to make sure that -- in order to sell this to our -- the majority of our installed base, which is large enterprise. So I think the plan is still by the end of 2024 to finish the integration, to complete the intimation to offer the SASE TO all our installed base in service and, of course, to the prospects, but we'll be able to offer it to any size of enterprise, not only to SMBs or mid-sized businesses. We want to -- I mean, we'll be able to offer it to enterprise and large enterprise.

And what is the strategy behind SASE? I mean there's a ton of competitors. That was one thing we took away from RSA as companies like focused on SASE, whether it's Palo or Fortinet, Cisco, Netskope, Cato, list goes on, Zscaler Secure Service Edge. Now they've got this little appliance, like -- what is your kind of differentiator in the market and you're kind of late to that market, how are you going to take share as a number of different vendors are kind of like already focused on it?

So do you want to start...

One thing, late to a market, I think, is relative. So when you look at this market, I always look back to when FireEye got killed. FireEye had between 8,000 and 10,000 customers when it became extinct. When you look at this market today, there might be 15,000 to 20,000 installs of SASE out there and that's all different forms of SASE, right, from SSE to a full-blown SD-WAN with the whole 9 yards. So that's not -- that's just the early adopters. When you look at it in the marketplace, we have well over 100,000 customers. You have other competitors like Palo who's got 80,000, Fortinet, that's got 300,000-some. So when you look at somebody like a Zscaler and Netskope and all these guys, they just got the early adopters. They got the very early start. So there -- this is green shoots ahead, and it's much easier to sell into your installed base, obviously. So that's a big advantage. And that's the advantage we had when it comes to sandboxing, all of the primary platform guys did because it's much easier to buy from your already existing vendor than it is to go out and take somebody else, I'll let...