Check Point Software Technologies Ltd

NASDAQ:CHKP

Earnings Call Transcript 2021-Q1

[Kip Meintzer, Investor Relations]

Greetings. My name is Kip Meintzer, Global Head of Investor Relations for Check Point Software. I’d like to welcome everyone to the first quarter 2021 financial results video conference.

At this time, all participants are in a listen-only mode during the formal presentation, which will be followed by a question and answer session. Joining me remotely today on the call are Gil Shwed, Founder and CEO, along with our CFO and COO, Tal Payne.

As a reminder, the video conference call is live on our website and recorded for replay. To access the live conference and replay information, please visit the company’s website at checkpoint.com. For your convenience, the replay will be available on our website. If you’d like to reach us after the call, please contact Investor Relations by email at [e-mail].

Before we begin with management’s presentation, I’d like to highlight the following. During the course of this presentation, Check Point’s representatives may make certain forward-looking statements. These forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities and Exchange Act of 1934 include but are not limited to statements related to Check Point’s expectations regarding business, financial performance and customers, the introduction of new products and programs and the success of those products and programs, the environment for security threats and trends in the market, our strategy and focus areas, demand for our solutions, the impact of COVID-19 on our business, including on our product development and sales and marketing efforts and our financial condition and results of operations, the impact of COVID-19 on our customers, suppliers, business partners, and the macroeconomic environment as a whole, and our business and financial outlook, including our guidance for Q2 2021.

Because these statements pertain to future events, they are subject to risks and uncertainties. Actual results could differ materially from Check Point’s current expectations and beliefs. Factors that could cause or contribute to such differences are contained in Check Point’s earnings press release issued on April 26, 2021, which is available on our website, and other factors and risks, including those discussed in Check Point’s annual report on Form 20-F which is on file with the SEC. Check Point assumes no obligation to update information concerning its expectations or beliefs, 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, as well as the reasons for the presentation of non-GAAP information.

Now I’d like to turn the call over to Tal Payne for a review of our financial results.

[Tal Payne, Chief Financial Officer, Chief Operating Officer]

Right, thank you Kip. Good morning and good afternoon for everyone joining us on the call today. I’m pleased to begin the review of our first quarter results.

Revenues for the quarter increased by 4% to $508 million, and our non-GAAP EPS grew by 9% to $1.54. Both revenues and EPS are in the upper part of our guidance.

Before proceeding further into the numbers, let me remind you that our GAAP financial results include stock-based compensation charges, amortization of acquired intangible assets and acquisition-related expenses, as well as the related tax effect. Keep in mind that as applicable, non-GAAP information is presented excluding these items.

Now let’s take a look at the financial highlights. Revenues for the quarter reached $508 million, $8 million above the midpoint of our guidance. Product and security subscription revenues were $287 million, a 7% increase year-over-year. Our security subscription revenues continue to be the driver of the growth with strong 12% increase year-over-year, up from 10% before, reaching $177 million. Our software update and maintenance revenue increased to $221 million, representing 2%, up from 1%.

In January, we announced three main pillars: Quantum, the most complete network security solution; Harmony, driving highest level of security for the remote workforce; and CloudGuard family, which provides cloud-native security to prevent threats and manage posture across all cloud workloads in multi-cloud environments. Our CloudGuard family continues to show great results with high double-digit growth. As customers move to more holistic solutions with subscription-based pricing like Infinity, CloudGuard and Harmony, more of the business is allocated to subscription and support and less to the product portion.

Deferred revenues as of March 31, 2021 reached $1.458 billion, a growth of $109 million or 8% over March 31, 2020. For all of you that calculate the implied booking, the implied booking was 8%.

Revenue distribution by geography for the quarter was as follows: 44% of revenues came from Americas, 43% of revenues came from Europe, Middle East and Africa region, and 13% came from Asia-Pacific.

Our non-GAAP operating margin was healthy at 49%. The margin was higher as a result of our higher level of revenues on the one hand and as some expenses remain low due to COVID continued effect worldwide on the other hand.

Our financial income for the quarter was $13 million, reflecting the reduction in the portfolio yield as a result of the interest rate drop in the U.S. last year as we guided. Effective non-tax rate for this quarter was 18%, in line with our expectation which was 17% to 18%. We had some indexation effect this quarter versus the quarter last year.

GAAP net income for the quarter was $183 million or $1.33 per diluted share. Non-GAAP net income was $211 million or $1.54 per diluted share, an increase of 9% year-over-year and towards the high end of our guidance. The accelerated growth is related to the growth in the revenues and the continued reduction in our diluted outstanding shares.

Moving to our cash flow, our cash balance for the quarter increased to $4.1 billion. Operating cash flow for the quarter increased by 4% to $375 million with a strong collection from customers. During the quarter, we continued our buyback program and purchased 2.7 million shares for $325 million at an average price of $120 per share.

Now let’s turn the call over for Gil.

[Gil Shwed, Chief Executive Officer]

Thank you Tal, and hello to everyone. I’m pleased to have you. This time we’re going to have a slightly different format than usual. We are moving along to the 21st century, so instead of just talking about our written comments, I want to share with you a presentation and the focus this time won’t be just general comments about the quarter, but we will share a little bit more about our strategy, the Infinity 2021 that Check Point is carrying. There’s a lot of slides here that we share with our customers and partners, so let me jump right in and go ahead with that. Hope it will work well for the first time on an investor call.

Let’s start with forward-looking statement you heard from Kip, so we don’t need to go through that, so I’ll speak a little bit about--three, four slides about business highlights, and the main focus here will be about the Infinity strategy and the Check Point strategy around that.

So results, I think you’ve all heard from Tal. I’m actually quite pleased that we are continuing to execute on our plans, increase the EPS by 9%, increase revenue by 4% [indiscernible] you’ll see it later in the presentation, and achieved a lot in our strategic areas.

On the financial side, again the numbers you heard from Tal - $22 million more in revenues, 12% [indiscernible] in EPS, and $109 million increase in deferred revenues, so we did increase our installed base and our contract long term and short term.

A little bit about news from Check Point. Over the past few years, we started the transformation in our sales force, reenergizing a bit. We have amazing people and we want to reenergize and move the sales force to a much more productive and higher growth mode. Around two years ago, we started with APAC with [indiscernible], who’s now with us for almost two years, and actually the last few quarters the results in APAC were amazing, this quarter specifically were very good. About six months ago, we had [indiscernible] joining us to run Europe. I think it’s too early to say how it will work, but the initial signs are very good, and again we had a very decent quarter in Europe. Just today, we have Jeff joining us to run the Americas, he will join whenever he wakes up in the west coast, and that will be his first day today and we are looking forward for accelerated growth in America. I think we have plenty of potential in the Americas market.

We also had in the first quarter our conferences. Every year, we start with employee and customer and partner conference. This year was no exception, even though we did hold all these conferences in a virtual way, in a very different way. I won’t share much about the employees and so on, but you can see here the results about the partners and customers. We’ve much more than doubled the attendance of customers and partners, and that’s a great achievement. We got amazing reviews from all the participants about the conference, about the ability to participate, so at least the virtual model here generated some positive results for us and moving forward, we will have to find, like everything else, the right balance between the hybrid model, between physical and virtual conferences, so this is a very good one. By the way, the biggest increase was customers from the U.S., which is, as I think I mentioned, the highest potential for us moving forward.

So that’s a little bit about some of the highlights of the first quarter, but let me share more about our strategy for 2021. Again, I won’t do the full presentation that we share with customers and partners - that takes a little bit longer, so I’ll jump right in without much background.

But just to start, we started 2020 with an amazing architecture in 2021 with the Infinity architecture. This is really, I think, the most comprehensive set of security technologies that any company has with unified architecture that combines all the elements together, and if you look what it means, it’s over 80 different products and technologies in all areas of the network, the cloud, the users and access. Our goal is to make that simpler, more accessible, more consolidated, and elevate the level of security, so we decided to focus Infinity 2021 on an architecture and three pillars, which are far much simpler and will elevate the level of security.

So the three pillars, and I think Tal already shared first, is Quantum, our network security architecture, and later in the presentation I’ll talk--I’ll show two or three slides on every one of the pillars, Quantum to secure the networks, CloudGuard to secure the cloud, and the new one which we launched in the CPX in February right after earnings call for Q4 is Harmony, and that’s something new that focuses about securing user access, which is especially important in today’s hybrid work model. These three pillars, Quantum, CloudGuard and Harmony are based on--are using the Infinity Vision shared management infrastructure. We have a lot of tools for stock management XDR and a lot of other advanced security tools, and they’re all based on the threat cloud, the single infrastructure that collects, analyzes and makes security decisions in real time and shares them for real time threat prevention across all attack vectors and across all products and technologies. I think that’s the uniqueness of the Check Point architecture.

So the architecture now looks much, much simpler, and let me dive right in and speak a little bit about the different elements and what’s new in each one of them for 2021.

So Quantum, Quantum is our core business securing the network. It’s far more than these appliance gateways versus the SMB product family. There’s the perimeter gateways, there’s the data center gateways. There is I think what’s unique to Check Point in winning a lot of mind share in the marketplace and actually a lot of growth is the hyper scaling technology, the Maestro technology. We have tons if IoT technologies that we’ve introduced over the last two years and we are introducing more and more to handle IoT devices and to make the network secure from the malware that they can catch, all of that powered by our unified management and all of that contains more than 60 threat prevention engines that provides the highest level of network security.

That’s the overview of the quantum family. What’s changed in Q1 in the Quantum family? So first, we launched a new family called Quantum Spark - that’s our SMB security family based on a few existing products, but extending that actually a little bit higher to the broadest and the biggest market segments in terms of dollars on the branch office and SMB, and again that’s a great place to be. We’ve modeled it to deliver 2 gigabits per second, I think the highest in the segment. Very easy to use, very intuitive, set up in a minute or a few minutes, on-the-go management including mobile app that can give anyone the alerts and the management capabilities. Quantum Spark has been a great addition to our family. We are updating the management platform for the network security, the Quantum Smart 1, new set of management appliances that can manage double the number of gateways, almost double the amount of flow processing, the latest version.

Last but not least, I talked about Maestro. Maestro actually takes a cluster of gateways, any size, and makes them behave like one virtual gateway, actually bringing a lot of benefits. That means that they can all behave as one but provide resiliency, provide high reliability, provide elasticity. If you need more bandwidth, you don’t need to buy a new system, you just plug in on the go another one and you get more capacity. In Maestro, we introduced a new model which pretty much doubles the capacity of the Maestro gateways to 3.2 terabits per second - the previous model high end was 1.5 terabits, now it’s up to 3.2 terabits per second. I think it’s probably the highest performance, and again that can scale any security operation to the hyper scaling that Maestro provides, so I think we’ve had very nice additions just in the first quarter to Quantum.

Remember that last year, last Q2 introduced a whole new set of Quantum appliances that I think resulted in pretty good results so far, and actually customers are pretty happy with them and see a lot of performance with them, so I think we’re pretty pleased about that.

A few just reminder highlights about what is the Quantum family doing in the marketplace. We are 21 years in the leadership quadrant of the Gartner Magic Quadrant for network firewalls. I think that’s a big achievement, keeping the leadership for so many years, and I think we’ll keep going. Over the years, more than 60% of the Global 2000 have purchased Quantum appliances, so again that’s also, I think, on one hand was potential for the ones who didn’t buy and there is plenty of potential for the ones who did buy to expand do more with them. But I think it has a huge footprint and a huge impact on the world, and if you look at almost every sector, the majority, in some cases 90% of the leading companies are using the Check Point Quantum family of products.

That’s for Quantum, and that’s our core business. Let’s speak a little bit about the Harmony family, and that’s the newest one.

Here, let’s say we’re actually connecting to a need which emerged now in the pandemic era. We are seeing that more and more employees are working from mobile devices, are working from their non-corporate devices, from PCs, personal computers, not the company provided computers, and at the same time people work from the office and the access now is not to a single data center like it used to be in the past. The access needs to occur to cloud applications, to SaaS applications, to web applications, to the data center, even things that we didn’t do before like remote desktop access because we now work on our development or trading or any other environment from home and so on, and we need to secure all these connections and that’s a pretty big mess. If you look at the set of technologies the company needs, it’s a lot of technologies - technology for remote connectivity from all VPNs to new SaaS-based connections, technologies for device [indiscernible] to verify with our home computers are working well, technologies of course to secure the mobile and the end point devices from the next generation AV to the traditional ones, and so on and so forth.

This is becoming quite complicated, and if you look at what the company needs to achieve that, it’s a combination of a few dozen technologies that don’t always work together, and that’s the revolution that Harmony provides. One family provides all of that, all users from everywhere to everywhere with the highest level of security, one solution for the hybrid world. If two years ago you asked [indiscernible] on their priority and end user security was quite low on the priority list, it did become the number one priority now with the pandemic that we’ve seen and likely to stay that with the hybrid work model we will face, and by the way with the level of sophistication of attacks that we are seeing in recent months.

That’s Harmony, combining at least six different categories of products. I don’t think that anyone can deliver that because this is, again, dozens of different technologies that I think no one else has those technologies except for Check Point. We’ve built them, we invested in them over two decades, and we are now, I think it’s ready for prime time as a unified platform that will roll into the market gradually. So that’s Harmony.

You can see some of the market recognition Harmony is already receiving - AV-TEST top product in corporate end point security, IDC already [indiscernible] leader in mobile threat management. By the way, across our competitors, we are the only one that also has anything to do with mobile, and we have the best mobile device security suite here.

Last but not least, from last week this is something we are very proud of, the [indiscernible] in depth security analysis. We came very, very high on the list with 100% detection. I think that we have the best prevention capabilities here and I think that’s something we should all be proud of, way ahead of our competitors, many of the new emerging ones and almost all the traditional competitors in this category.

Last but not least, let me run quickly - CloudGuard. CloudGuard is all about securing the cloud, and the cloud again is a pretty big creature. It includes the private cloud, it includes things like workload and containers, it includes of course the Google cloud, Azure cloud, and of course the AWS cloud. We have one platform that can secure all the cloud, provides highest level of security, connected all the levels, doing everything from fixing the cloud and ensuring that you don’t make configuration errors with cloud security [indiscernible] management, which I think we have the best protecting workload, for example server-less, I think we are way ahead of everything else, network threat prevention in the cloud. Everything that has to do with the cloud, I think we are evolving this platform, but I think we already have the broadest platform for cloud security.

This quarter, what we’ve added in the CloudGuard family is what we call the CloudGuard upsec [ph], which is sort of but again very, very advanced, next generation WAF, or Web Application Firewall, but this time it’s not just protecting the web servers, which are important by themselves, but the interconnections between cloud applications, the different APIs that work on the web and connect them. It’s using a new, what we call contextual AI architecture, which means that customers can put it in prevent mode. Again, it sounds obvious, but most of these technologies in the marketplace are not working in prevent mode, they’re working in detection only, which is--you know, our religion is everything needs to be prevention. Very quick deployment, you can measure it in hours instead of months, and as you can see, I think we are starting to see the results even though this is very, very new.

A few highlights about our cloud that’s not just the CloudGuard upsec, but our CloudGuard family in general. This quarter, we had a 50% increase in ARR compared to a year ago, and we had very, very good internal foundation for the CloudGuard family. I think we have one of the largest installed bases for the CloudGuard family, over 4,000 customers protect their cloud with CloudGuard and one in five of the Global 2000 is already a CloudGuard customer, so we’re very proud of that achievement. We have plenty of potential here to grow, but I think we have one of the most advanced and most successful cloud security businesses today in the marketplace.

All together, these create the new Infinity architecture - Quantum, CloudGuard, Infinity Vision the foundation for advanced security analysis and management, and the threat cloud in the middle. That’s the Infinity 2021. We are big believers in that, but before I go to the summary and finish, I want to challenge myself and maybe the marketplace in terms of is there another way. We need--let’s remember, we need to secure this new world when people are everywhere, data is everywhere, digital transformation to the cloud is there. We need to fight the cyber pandemic, and in the last few months we’ve seen emergence in what we call Gen-5 security attacks. If you remember, we’ve been speaking about the fifth generation of cyber attacks for almost two years, and it’s now a reality, not a reality that happens once a year, a reality that happens every week a new Gen-5 sophisticated attack that threatens our fundamentals of the network.

So what’s the way to secure against that? Is there another way beyond Infinity? If you’re a customer and you can try and build your own security stack, I have a simplified version here, but this is how it will look like. You need to choose the different network vendors, network firewalls, advanced threat prevention, IoT and OT, and several more categories, and maybe even two platforms to manage. Cloud security, plenty of alternatives, how to secure workloads, how to secure applications on the cloud, how to secure the cloud infrastructure, how to do the cloud posture management. You need to select the right vendor. Then on the users and access end point security, mobile security, remote access and SASE security, and you need to take all these elements and start connecting them, and guess what? It doesn’t work. They don’t connect well. It’s not just the work of getting these solutions is very, very hard and the deployment is complicated, but they don’t work together.

What you’ll end up, if I compare it to my analogy here, is which car should I buy? You’ll buy a lot of nice, cool cars, but what you’ll end up is a big, big traffic jam. They will all--each one will go to a different direction and you won’t necessarily achieve the level of security that you wanted [indiscernible]. This is the analogy of building your own stack.

What it will be like to build it with the new Infinity 2021, I think the analogy is much better. Quantum, CloudGuard, Harmony, I believe it’s like three super cars, each one of them excels in its category. They all drive together, they all drive the highway, and they will take us to the security of the future of what we need. This is the difference between Infinity and building your own.

So to summarize, I believe that we started the year with a strong first quarter, with good financial results, revenues and EPS towards the high end of our range. Good momentum in Europe, excellent results in Asia, and not less important double-digit growth CloudGuard, Harmony, and even more on the total Infinity platform.

At the same time, we’re in the new world. There are new opportunities, and I believe that we have the right platform to build the best security for the future of the marketplace and secure all your organization and every organization around the world with Harmony, CloudGuard and Quantum. I think that there is plenty of potential ahead of us, there is plenty for us to do, and I think we will continue to lead with the highest level of security as being found in every--almost every industry benchmark [indiscernible].

Thank you very much, and actually want to open it for your Q&A, but before I open to Q&A, it’s actually also a good time to speak about our projection for the second quarter.

You know my regular caveats for, like the stock-based sharing. You know my regular caveats about projections and forecasts - very challenging, there is always a high level of uncertainty, results can be better, results can be worse. But still, we are doing our best to collect information that we have around the market and our forecast for the second quarter, with that being said.

Revenues are expected to be in the range of $510 million to $535 million and non-GAAP EPS in the range of $1.50 to $1.60, so again $510 million to $535 million for the revenues and $1.50 to $1.60 for second quarter EPS. GAAP EPS is expected to be approximately $0.22 lower than that.

So with that in mind, I hope you’ve learned something from the presentation, and I hope you like our vision. I know that it works, and I’d love to open the call for your Q&A, for your questions. Thank you.

[Kip Meintzer, Investor Relations]

Thank you Gil.

Before we begin the Q&A session, due to time constraints and in consideration of other participants, please limit yourselves to one question and one question only. If you have any difficulties, just type that question into the chat.

Today we’re going to start with Matthew Hedberg with RBC, followed on by Gregg Moskowitz of Mizuho. Go ahead, Matthew.

Mr. Hedberg, un-mute yourself.

All right, let’s move onto Gregg Moskowitz from Mizuho.

[Gregg Moskowitz, Mizuho]

Hey, thanks Kip. Hi everybody.

So Gil, you mentioned that 60% of the Global 2000 have bought Quantum, but my question is how significantly do you think that you cross-sell CloudGuard and/or Harmony into your enterprise installed base, because if you can do that, clearly it could drive expansion rates quite a bit higher.

[Gil Shwed, Chief Executive Officer]

I think there is opportunities on both sides, and yes, I think we can leverage it. We’ve actually, by the way, divided now some of our installed base into three categories, what we think are developed accounts which are buying their fair share but almost all of them can buy some of the new technologies, the Harmony and the CloudGuard. What we call development accounts, that’s accounts that purchased Check Point product and are good customers, but there is plenty of potential in all three pillars, and what we call prospects, and these are accounts that are either very small ones or non-accounts at this moment, and we can develop them.

I think the potential is there. I think we need to invest a lot in getting higher in the organization and getting to the CSOs. I think the CSO loves to hear our story. In my experience, almost every CSO likes Check Point and likes to hear about our story. We need to develop a lot of our own [indiscernible] discipline in going to that and not being--you know, doing a good job with the people that we already work with at the network level and not expanding, so the potential is there, and by the way, we are seeing more and more in that. We’ve actually seen very good growth in the Infinity platform when we sell customers not just individual products but the entire platform.

Generally speaking, the Infinity customers are showing a high level of satisfaction. They like the fact that they can buy more pillars and we’re building more and more Infinity programs to address them and let customers expand.

[Gregg Moskowitz, Mizuho]

That’s helpful, thank you.

[Kip Meintzer, Investor Relations]

Our next question is with Patrick Colville. Patrick?

[Patrick Colville, Deutsche Bank]

Hey, thank you so much for taking the time to answer my question.

The one I have here is around, I guess, the go-to-market. You’ve got these three new pillars - Quantum, Harmony and CloudGuard. How are the sales team incentivized to sell these products? Is there a change versus the previous motion of selling them individually? Any color there would be great.

[Gil Shwed, Chief Executive Officer]

The fact that we’ve consolidated them around these three pillars gives us a lot of ability to manage it better. Each one of them--I mean, the Harmony and the CloudGuard, they’re what we call an overlay sales force that supports the sales team, that provides the technical expertise, so getting into new technologies becomes a little bit easier for the sales force. The existing sales force has very clear measurements about what’s their target in each pillar, what we need to do. I think the main issue is really our own education and our own openness about being out there and being not aggressive, being assertive enough in expanding our presence with existing customers and with new customers. I think it’s there, and we are seeing now in some areas, in some sense people have already cut the cord and they’re doing great, and many, many others have the potential to learn how to do that.

[Tal Payne, Chief Financial Officer, Chief Operating Officer]

And Patrick, to your question, of course what Gil said is important, but of course also the commission plan is aligned with these incentives to sell more the new dollars, the new customers, the new cloud and so on. It’s aligned also with the compensation plan around.

[Patrick Colville, Deutsche Bank]

So just a clarification, did you say there’s an overlay sales team for--did you say that? Is that correct?

[Gil Shwed, Chief Executive Officer]

Yes, for CloudGuard and for Harmony. And again, now that we’ve combined a lot of technologies, it makes things very, very focused. It’s not now an overlay for a specific technology or an expert, but the overlays are organized according to these pillars.

[Kip Meintzer, Investor Relations]

Thanks Patrick.

Our next question is with Jonathan Ho, followed by Fatima Boolani and Keith Weiss. Go Jonathan.

[Jonathan Ho, William Blair]

Hi, good morning. I just wanted to get a sense of what you think maybe Jeff can bring to the Americas market that could re-accelerate the growth there, and what changes did Thorsten [ph] make in Europe that maybe had a similar impact in EMEA in the past couple of quarters? Thank you.

[Gil Shwed, Chief Executive Officer]

First, I wouldn’t like to share all our tactics and secrets inside, so I’ll briefly touch on that. I think Jeff brings--I mean, Jeff is a very good fit because he’s more than just leading sales forces. He dealt with many, many other professions, and I would say he’s more--a little bit more sophisticated than the typical sales lead because he comes from a different background. He came from [indiscernible] where he built the cloud overlay and the cloud business, so I think if we look to focus on the cloud, he definitely brings the expertise and the understanding about penetrating new markets, understanding the cloud and having all the contacts and the relationship, whether it’s the cloud customers or the cloud partners, so I think that has a huge value to this team.

A little bit about Thorsten - as I said, I think we are very enthusiastic about what we see in Europe, but I think one and a half quarters is still too early to judge, so I don’t want to be carried away. But I think Thorsten gave us a lot of good insight for somebody that comes from the outside. A lot of it is the focus that our people should pay to focus on new business. A lot of times, a big, huge part of our business is renewal business, renewal of support contracts, renewal of the advanced security subscription contract, and the sales people are doing a great job serving their customers, which is obviously very, very important.

I think Thorsten brought a lot of the thought that it’s really, really important to of course keep your customers happy, but focus about with new business. Now the way we look at that in many cases for the sales guys, how many--it’s not just what’s your total pipeline and your total bill size, it’s what’s the--how many new opportunities do you have. New, by the way, is with existing customers and with new customers equally, but still new is not just renewing the old contract or expanding it by a little bit, but about providing more security and doing more for the customer and winning new projects. I think that’s the big focus that we have right now.

I think when people start to focus on that and internalize that, they’re focused on the right thing because if we take good care of the customers, the renewals will happen. It’s not--the focus should be on how do we expand.

[Kip Meintzer, Investor Relations]

Thank you Jonathan. Our next question is from Fatima Boolani, followed by Keith Weiss and Saket Kalia.

[Fatima Boolani, UBS]

Good morning, thank you for taking the questions.

Tal, this one’s for you. I want to focus on the deferred revenue specifically, and just a two-part question. Can you talk to us about some of the drivers and factors behind the acceleration and the long term mix this quarter, and to the extent there was anything unique or one-time in nature?

Also, maybe bigger picture in terms of the deferred revenue mix, especially as you see the Infinity business build, very quickly can you share with us the mix of the deferred revenue today between subscription revenue or blade revenue versus traditional maintenance? That detail would be very helpful, thank you.

[Tal Payne, Chief Financial Officer, Chief Operating Officer]

Well the first one is easy - if long term increases because we get more long term contracts, then you can invoice, so it really depends--and that’s why always when people ask we why we don’t provide billing, I say because of that, you can’t really predict that, so it really depends many times on customer budgets. Sometimes they want to pay the whole three years in advance if they make a long term contract, so you invoice for it and then you will see it in deferred revenues. Sometimes it’s a three-year contract but paid annually, so you will see only the first year in the short term, which means that this quarter specifically you had some that also wanted to pay in advance, and therefore you see it in the long term because we have to invoice, so you see it in the long term. It doesn’t mean that the total is different, so I think when you look at the big picture, it’s still reflecting it’s in line with what you expect.

So some quarters it can be affected by a large deal. There wasn’t a huge deal here, it was a few deals that were healthy and good, and also being invoiced - that’s all.

Your second question about the mix, actually in the annual report we provide the split between the product support and subscription, the deferred revenues, so in general I will say I don’t expect a major change this quarter, it’s very similar. On the bigger picture, I would say we see subscription growing of course faster, product is quite small because typically a majority of it is recognized in the same quarter except for things that depend on other items, and therefore you wait, but the majority of it is the subscription. The support is typically in line with what you see in the revenues, so the acceleration that you see is typically in the subscription.

[Fatima Boolani, UBS]

Very helpful, thank you Tal.

[Kip Meintzer, Investor Relations]

Thanks Fatima.

Our next question is coming from Keith Weiss, followed by Saket Kalia and Rob Owens.

[Keith Weiss, Morgan Stanley]

Excellent, thank you guys for taking the question.

I wanted to talk about the breadth of the product portfolio. You guys have a really nice breadth of solutions, and some of the numbers being presented at that CloudGuard - 50%-plus AR growth is very striking. Any chance we could get a breakout of the relative sizing of these businesses, of Quantum, Harmony versus CloudGuard, of kind of how they fit within the overall portfolio, number one?

Number two, maybe you could talk a little bit about the up-sell potential into the base. How far into the base have we gotten with some of the newer stuff, like CloudGuard and Harmony, and what’s the opportunity on a go-forward basis to get existing customers to take on more of this portfolio? Thank you.

[Gil Shwed, Chief Executive Officer]

I’ll start from the second part, and Tal maybe will expand a little bit more on the financial side.

I think the potential is definitely there. I think customers love it and there’s a lot of value. It’s not just the value of being a customer of one company, it’s the fact that things connect. I think that’s what we have to sometimes educate the customers about the fact that having different silos in cyber security usually means systems that are not just more complicated but systems that don’t provide a high enough level of security. Now if I’ve got a system that analyzes that you’ve got an infected file, the job of security now is not just to block that file--by the way, pretty much all of our competitors, if you receive an infected file by email, which is the number one vector, you will receive the file and later on you’ll find that you’ve been infected. Our job is block it, which we do, which is unique, and then make sure that this file doesn’t grow and doesn’t exist on any of the other vectors, so you can’t download it from the web. If it exists on any end point, we recognize that, because we found it and we can deal with it everywhere. So yes, the potential is there to sell it to more customers.

We do have several thousand, I’ve quoted over 4,000 customers for example for CloudGuard, and most of these have been Quantum customers before. [Indiscernible] so the entrance sometimes is from also the other direction, that we get new customers with CloudGuard or Harmony and then they adopt our Quantum family, but most of it is our installed base that’s being opened up to learn more about the Check Point vision here.

Numbers - Tal, do you want to give some color on that?

[Tal Payne, Chief Financial Officer, Chief Operating Officer]

I think I will say first, I want to refresh your dress code. I think there’s a change from people working at home. For Keith, it’s no good for you!

[Keith Weiss, Morgan Stanley]

I have the Gil Shwed t-shirt on, though. It’s the official black t-shirt of Check Point conference calls.

[Tal Payne, Chief Financial Officer, Chief Operating Officer]

Yes, okay. I will say the following - the potential is huge, because Gil, I don’t want to provide additional information to what you show on the slide, but when Gil was referring to out of the Global 2000 in the cloud, I think you said one out of five, so it shows one out of five already purchased from us that solution. There’s a huge potential because on the one hand, it’s very early days both in Harmony and the cloud. I will even say in Quantum, if you look at the Sandblast, which has advanced threat protection, even that didn’t pass the 50%, so the potential to up-sell is massive in all of these pillars, both in the Quantum, in the Cloud and in the Harmony. All of them need it, and Infinity gives them, I’ll say, the best tools to do it. How quick it will happen? It’s really up to us and the execution of the field, so the potential is very large there.

[Keith Weiss, Morgan Stanley]

Thank you so much, guys.

[Kip Meintzer, Investor Relations]

Thank you, Grizzly Adams. Our next caller is Saket Kalia, followed by Rob Owens and Gray Powell.

[Saket Kalia, Barclays]

Okay, great. Can you hear me okay, Kip?

[Kip Meintzer, Investor Relations]

Yes, we can.

[Saket Kalia, Barclays]

Okay, excellent. All right, thanks folks for taking my question here. I’ll just keep it to one housekeeping question.

Gil or Tal, thanks for the Q2 guide. Apologies if I missed it, but did we mention anything about the full year guide, and are there any assumptions about the full year that have changed from the last time that you provided that?

[Tal Payne, Chief Financial Officer, Chief Operating Officer]

As far as I’m concerned no, it stays the same. If you remember when we talked in the beginning of the year about the margin, that we said about the fact that we expect the world to come out of COVID, in Q1 it’s still [indiscernible] so it was slightly better as a result of that but nothing dramatic, because we already embedded in the plan [indiscernible]. When you think year-over-year from the next quarter, last year is fully under COVID, therefore in the next quarter we expect to be in line with the margins that we did indicate, which is we’re returning to out of COVID over time, while the comparable has a full effect of COVID saving in the expenses, so we’re pretty much in line, and you can see those in our guidance for next quarter.

[Saket Kalia, Barclays]

Got it. Very helpful, Tal. Thanks.

[Kip Meintzer, Investor Relations]

Thanks Saket. Our next caller is Rob Owens, followed by Gray Powell and Ben Bollin.

[Rob Owens, Piper Sandler]

Thanks Kip, and good afternoon guys. In and around Infinity 2021, just wanted to get your thoughts around marketing spend and whether you would lean into this with incremental programs, MDF or anything the like, and then Tal, you kind of answered it before, but relative to a reopening, how are you thinking about spend and timing?

[Gil Shwed, Chief Executive Officer]

So first, we are trying to be as aggressive as we can in marketing. We’re also trying to be smart, because the most important thing is to touch customers and get their attention, not just to get--. Now, there is a lot of nice achievement in terms of our marketing, for example you’ve seen the reach of our virtual conferences. We had a great increase in participants, and that’s again after--you remember, last Q2 or Q3, we were all locked at home, people didn’t have--I mean, the only way to connect to the world was participate in some conferences - that’s past. Now, when we get people to attend the conference, that means that they are really interested and it’s important, and we love the fact that more customers are now participating in our virtual CPX, for example.

There is a lot of other achievements that we haven’t--but we will continue to maintain C-level followers, which is by the way--again, it’s a great way to create community that we need to expand, and it’s going very well in getting to C-levels. We’ve really, really improved our--it’s actually not just we improved, it’s the level of interest that customers have in our technology. If you go to Google, we are now on the first or even position zero, in many cases, on most of the keywords that you search. Search for cloud security, we’re number one on the search. Search for cyber attacks, we are also, I think--I believe it’s changing all the time, position zero on cyber attacks. Zero is even before the first search, it’s explanation of the term, so we are getting the mind share. Again, look at many of these cyber attacks - cloud security, network security, end point security. We are number one or number zero in Google in almost all these Google searches, so I think that drives more traffic to our site.

I think we are making a lot of progress on almost everything. The SEO part, which I must say, by the way, I’m very proud of, because that means that the Quantum we provide to the world is being recognized.

[Tal Payne, Chief Financial Officer, Chief Operating Officer]

And maybe I will just add that I think the main--remember, a majority of our expenses are really in the headcount or in our people. There, we’d like to see an accelerated growth in the headcount. We want more people, so we’re working on that. To your question, Rob, more people, more expenses. It’s part of our plan and guide, but that’s what we’re aiming for, that’s the main one. More marketing - of course, if it’s good, we would love to, but the main focus is headcount-headcount-headcount now, and also when you relate to the return to normal, T&E is very hard to know how it will return, because I think many people realize they can be very productive also without the flight. So much will return, 20%, 50%, 70%, it’s a bit early to say. My intuition is it won’t grow all the way back to 100%. Will it be 50 or 60 or 70? I really don’t know. We would need to go out, like the rest of the world, and see what is needed and what’s best to serve our customers and employees.

[Rob Owens, Piper Sandler]

All right, thank you.

[Kip Meintzer, Investor Relations]

Thanks Rob. Our next question is coming from Gray Powell, followed by Ben Bollin and Brian Essex.

[Gray Powell, BTIG]

Hey great, thanks. Can you hear me okay?

[Kip Meintzer, Investor Relations]

Yes.

[Gray Powell, BTIG]

Cool. Yes, so I guess how should we think about the mix of product revenue and subscription trends within the context of guidance this year? I think you hit on this in the prepared remarks, but is there anything going on, like a shift towards Infinity or bundled offerings, that could impact that mix and cause product revenue to be recognized more ratably?

[Tal Payne, Chief Financial Officer, Chief Operating Officer]

So I’d say it’s really in line with what I said in the script. It’s a great question. It’s something that we’re dealing with for the last few years. As the rest of the world, when more and more people are moving into subscription models, I think, Infinity is full subscription although it provides product and support and subscription in it. It’s full subscription in terms of the pricing model. The same with Harmony, the same with Cloud. If somebody buys just the appliance, then it’s a product, so of course the product line for the last few years is under pressure, it’s not surprising. It can have shifts. You can see some quarters it’s better than the others, but in general we always look at the total. As I keep saying, look at the total growth. Subscription takes longer to get into the P&L, but it’s over time you see it also in the profit and loss report. You see the subscription picked up this quarter, which is nice to see. I think it was 10%, moving up to 12%. We also had a pick-up with support coming a lot from the professional service, which more customers also need as they implement more robust solutions.

My intuition, I can’t guarantee it, but I first recommend look at the total picture and not only on the product spend alone, because product can be plus-2% or minus-3% or--anyway, depends how bundled it is. They more bundled they want, the more pressure it will put on the product line.

[Gray Powell, BTIG]

Understood. Okay, thank you very much.

[Kip Meintzer, Investor Relations]

Thanks Gray. Our next question is coming from Ben Bollin, followed by Brian Essex and Sterling Auty, which will most likely be our last question for the day. Go ahead, Ben.

[Ben Bollin, Cleveland Research]

Good morning, good afternoon. Thanks for taking the question.

It’s fairly specific, but I’m interested if you’ve seen or you’re thinking about component availability concerns for your appliances. Did you have free availability throughout the quarter, or are you anticipating any tightness as you look forward? That’s it.

[Tal Payne, Chief Financial Officer, Chief Operating Officer]

So actually, since COVID started you have that, meaning every quarter it’s something else that has an allocation issue. We dealt with all of them very well. Also, the recent one, we’re dealing very well. I hope it won’t develop to be bigger, but we are so far in line with our planning and [indiscernible].

By the way, there can be some increase in pricing, but nothing that will be very apparent to you. For some components, prices are moving up as a result of allocation. It’s all around the markets.

[Kip Meintzer, Investor Relations]

All right, thanks Ben. Our next question is coming from Brian Essex. Hey Brian.

[Brian Essex, Goldman Sachs]

Hey Kip, thank you. Gil, just a first question for you, and then I have a follow-up. You mentioned that you wanted to move your sales force into a more proactive high growth mode. If you take a step back, what are your expectations for high growth mode, so to speak, and what might that translate to for revenue growth as you consider where some of the core maintenance and potential appliance revenue may track over the next few years, versus some of the newer initiatives that you have driving subscription growth? If you had to set a range, like I would like Check Point to be this level of growth, that’s my goal, how would you frame that?

[Gil Shwed, Chief Executive Officer]

So first, the market will change over the next few years, and we want to grow at least with the industry and maybe faster. But this year, I’ll share with you some internal--I hope Tal won’t be mad at me, but we have a very clear goal for our sales people. They need to grow the new business that they generate by 20% - that’s the overarching target. Again, there may be a few variances depending on the sales person, but that’s the overall goal for every sales person.

Now again, it depends on the mix, and over the years if the new business is growing by 20%, it will follow the rest--the subscription will eventually follow that. And the new business, by the way, is everything - it includes the new subscription, new support, new products, new everything. But the focus is grow the new business by 20% for the entire sales force, and I think--I don’t know what will be the target for 2022 or 2023, that depends on markets, but in the case of this year, that’s the target.

[Brian Essex, Goldman Sachs]

Great, that’s super helpful. Maybe just a follow-up, you obviously have some fantastic domain expertise around threat intelligence and research, and we’re seeing some of your peers kind of work towards maybe establishing a practice around that, monetizing that. How do you think about potentially enhancing the monetization of that threat intelligence and domain expertise in the future?

[Gil Shwed, Chief Executive Officer]

First, it’s an excellent point and I think we’ve started thinking about it long ago. We actually, by the way, did a few projects or are doing a few projects on that level which are kind of more boutique projects, like say I’ll give you an example, looking at the company app store when they have applications and analyzing all these applications with our dedicated tools. There’s actually several projects which we are doing in that domain. I can’t reveal to whom.

We have a very good incident response team that exists for many, many years, and again has a lot of work these days with all the new supply chain attacks. I think we have amazing tools to provide that. Still, most of our research today is around finding the things that are common to the world. You see we have almost 100 publications from our incident response team over the last year. We found some unbelievable vulnerabilities, like last summer there was, and we found since then many more, but one that got a 10 out of 10 score was the Microsoft Exchange--or not Exchange, sorry, the active directory one that showed how you can get into the DNS server, the WinDNS server and get into active directory.

I think this is an interesting area for us, but I think keeping that not just as for higher but keeping the research, the openness is also very important aspect which we intend to keep.

[Brian Essex, Goldman Sachs]

Helpful, thank you.

[Kip Meintzer, Investor Relations]

Thanks Brian. Our last question is going to come from Sterling Auty from JP Morgan. Hey Sterling.

[Sterling Auty, JP Morgan]

Hey guys, thanks. Appreciate it.

The changes that are taking place here in North America, you mentioned Mr. Waters’ first day, but I think there may have been one or two other changes as well. I’m just wondering how much disruption did that cause to the quarter, looking at the results in the Americas, and how do you anticipate trying to minimize any disruption as you go through kind of this sales transition in North America?

[Gil Shwed, Chief Executive Officer]

First, I think overall, if I just say-again, I don’t want to provide too much inside data, but I think in general what we’ve seen is with the level of attrition in Check Point in general, it’s quite stable. There was a decline in attrition second and third quarter last year due to corona, but the market pretty much got back to the old mode and the usual mode. I think we have some people that we don’t like to lose that are excellent people, but remember our industry is very hot, companies are raising tons of money, and many people are looking for the opportunity whether it’s in another large company, and in many cases in some hot start-up when they have a dream about being part of the next unicorn.

Some of it is unwanted, undesired, and some of it is desired because there are people that--again, we have a lot of very, very good people, so I don’t easily let go anyone. But some people, it is time to refresh and take a new look, a new view of the world, even for people that contributed very well to Check Point.

So I think overall, we have a good level of change, and I think initially I will expect more change because we need that change, but long term we definitely want to keep our good people, and I think we do bring some good new leadership that will bring new ways of managing and thinking and so on.

[Sterling Auty, JP Morgan]

Thank you.

[Kip Meintzer, Investor Relations]

Thank you guys. Thank you for all of you joining us today. Later we’ll have the presentation posted on the website for any of you that would like to download it and review it further. Other than that, we look forward to seeing you during the quarter at the conferences, and look forward to next quarter’s earnings call. Thank you, guys.

[Tal Payne, Chief Financial Officer, Chief Operating Officer]

Yes, and I’d appreciate if you have any feedback on the presentation, we will appreciate to get it and to get better.

[Gil Shwed, Chief Executive Officer]

On the format, on the call, we’d love to hear your feedback as well. Thank you.

[Kip Meintzer, Investor Relations]

Thank you. Bye bye.

[Tal Payne, Chief Financial Officer, Chief Operating Officer]

Have a nice day.