Check Point Software Technologies Ltd

NASDAQ:CHKP

Earnings Call Transcript 2020-Q2

[Kip Meintzer, Investor Relations]

--be followed by a question and answer session. Joining me remotely on the call today are Gil Shwed, Founder and CEO, along with our CFO and COO, Tal Payne.

As a reminder, the video conference is live on our website. Please visit the company’s website at checkpoint.com. For your convenience, the replay will be available through August 1. 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 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. 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 July 22, 2020, which is available on our website, and other factors and risks, including these discussed in Check Point’s annual report on Form 20-F for the year ended December 31, 2019, which is on file with the Securities and Exchange Commission. 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 information.

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

Hi everyone. Okay, thank you Kip. Good morning and good afternoon to everyone joining us on the call today. I hope you and your families are safe during these times.

Through this crisis, our top priority remains our employees’ health and safety around the globe, serving our customers and ensuring business continuity. The resiliency and flexibility of our employees has been amazing, and we are proud of our transition to this new reality.

We are pleased with our second quarter performance and our financial results, which were ahead of earlier expectations against the backdrop of the challenging COVID-19 environment. Revenues for the quarter increased by 4% year-over-year to $506 million, and our non-GAAP EPS grew by 15% to $1.58.

Before I proceed 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 effects. Keep in mind that as applicable, non-GAAP information is presented excluding these items.

Now let’s take a look at the financial highlights for the quarter. Product and security subscription revenues were $287 million, a 6% increase year-over-year. Our subscription revenues continue to be strong with 10% growth year-over-year, reaching $164 million. Software update and maintenance revenues increased to $219 million.

During the quarter, we have seen strength in our strategic areas. Our cloud solutions, both cloud SaaS and IaaS, had strong results and continued to have high double-digit growth. Our work-from-home related solutions, Mobile Access and Sandblast Agent, which is the complete advanced Check Point security solution, continue to see strong demand with over 300% and 19% growth respectively.

In the beginning of the quarter, we launched the vast majority of our Quantum appliance series. We have seen a healthy transition of over 50% this quarter.

This quarter, we had strength in financial services, healthcare, and technology verticals with significant increase in transactions over $1 million. [Indiscernible] increased this quarter driven by the larger deals, currency effect in certain locations, and COVID-19. Deferred revenues as of June 30, 2020 reached $1.338 billion, a growth of $52 million or 4% year-over-year.

In Q2, while all geographies were impacted by COVID-19, we were pleased with sales execution in these times. The growth was led by EMEA and APAC. Revenue distribution by geographies in the quarter was as follows: 46% of revenues came from the Americas, 42% of revenues came from Europe, Middle East and Africa region, and the remaining 12% came from Asia-Pacific.

We delivered strong non-GAAP operating margin of 50%. This margin is significantly higher than the sequential quarter as a result of the strong revenue execution and the operating expenses decline. The operating expense savings relates mainly to employees moving to work-from-home, the lower travel and entertainment, and the transition to virtual events versus in-person ones. Those expenses are expected to return gradually as more countries are returning to somewhat normalized business practices like travel, face-to-face meetings, and partial return to office work.

Our financial income this quarter was $19 million. Interest rates in the U.S. sharply dropped during the quarter. As a result, the newly purchased marketable security yield is around half a percent, while previous yields were above 2%. In addition, as a result of the interest rate decline, we see many bonds being prepaid ahead of the scheduled maturity date. The full effect this quarter was a gain of $2 million from prepaid and sold bonds, offset by a reduction of $2 million in interest income. Going forward as more bonds mature, prepay or sold, interest income will continue to reduce.

Next quarter, financial income is expected to be around $14 million to $15 million and continue to drop in about $1 million to $2 million a quarter. Actual results obviously depend on future prepayment and sales of the bond, which is impossible to predict at this point in time.

Effective tax rates for this quarter were 17%, in line with our expectations. Government income was $196 million or $1.38 per diluted share. Non-GAAP net income was $225 million or $1.58 per diluted share, an increase of 15% from the second quarter last year. The growth is related to the higher net income on the one hand and the reduction in our diluted outstanding shares.

This quarter, our outstanding shares were 142.6 million, lower than planned. As share price decreased during the quarter, we were able to buy more shares in our repurchase program and fewer options added to the outstanding shares. Going forward, we expect the diluted outstanding number of shares to be around 142 million in Q3 and 140 million in Q4 as share price increased in the last few weeks.

Our cash balances as of June 30 were $3.96 billion. Operating cash flow this quarter was very strong, reaching $252 million, representing an 8% increase year-over-year. The increase is attributed to strong collections, lower expense levels due to COVID-19, and the hedge on our balance sheet.

Consistent with the macroeconomic trends, we see some increase in customers’ requests for billing or payment concessions. We are committed to helping our customers to navigate this pandemic and use our financial strength to aid in their success.

As a reminder, we hedge our balance sheet against currency fluctuations. Hedge affects our cash flow with minimal effect on our P&L, as intended. During the quarter, the dollar weakened against the Israel shekel, resulting in a hedge income of $9 million in the cash flow versus $3 million last year. Again, no material effect on the P&L. Our operating cash flow net of tax and hedge increased by 6%.

We had $46 million unrealized gain on our marketable securities during the quarter. The gain was a result of lower spreads and the reduction in the U.S. interest rates. In February, we approved an expansion of our buyback program for an additional $2 billion and up to $325 million per quarter. During the quarter, we purchased 3.1 million shares for $325 million, which is the cap, at an average price of $106 per share.

Now let’s turn the call over to Gil for his comments.

[Gil Shwed, Chief Executive Officer]

Thank you Tal, and hello to everyone joining us today. It is great to see you all on Zoom for the first time, moving to the new era of technology and to the new era of business.

I would like to begin by wishing you all good health and prosperity during these unprecedented times. Q2 was probably the most unusual quarter we could ever imagine.

Let’s start with what we achieved during the quarter. Results were very good. Our revenues were higher than planned thanks to the good execution by our sales teams. Earnings and EPS were much higher than anticipated, 15% increase from last year, but this was mainly due to the very low level of travel expenses that occurred during the corona crisis. Overall, results were very good, but it only starts there.

We continued to expand and strengthen our Infinity platform. Infinity provides the highest level of security across the entire landscape of network, cloud, mobile data center, and IoT. During the quarter, we refreshed the majority of our Infinity portfolio. We began in April with the introduction of the Quantum appliances. These appliances span the entire range of security gateways and now incorporate the highest level of security with better performance. Add to that our hyperscan solutions that provide unmatched scalability and redundancy, and we believe they are the best network security solutions in the industry.

Transition by our customers to the Quantum family is underway and working according to plan. During the quarter, most of our appliances were already from the new family.

In June, we launched our expanded Cloud Guard family of products. The new Cloud Guard is the most comprehensive cloud security suite. Cloud Guard enables organizations to take full advantage of multi-cloud environments, enabling cloud threat prevention, cloud posture management, and zero trust access to cloud resources. In Q2, we added support for cloud workload. Specifically, we introduced the best technology for serverless protection.

Serverless--and let me expand what it is, serverless is a new computing model that allows running code on demand. We found that the security of this code is quite challenging. The code is usually built with multiple components with, in many cases, show high level of vulnerability. Securing it is also a challenge given that you cannot secure the underlying platform, such as server or network on which it runs, therefore it requires a new paradigm for security, which we now provide.

During the past few months, we saw an increase risk and higher number of attacks on critical infrastructure. Needless to say how important it is to secure these environments, we introduced a new and unique member to our appliance family - strange name, the 1570R, which I like to call the Mini Monster. This small device has been designed to provide everything that is required to secure industrial [indiscernible]. It can sustain severe working conditions and being installed in critical environments easily.

In July, we continued the expansion of the Infinity family with a new sub-family called Infinity SOC. SOC stands for securities operations center. Infinity SOC provides our customers with the tools that are used by Check Point research to identify, analyze and prevent sophisticated attacks inside and outside the organization.

Last but not least, we introduced last week the Infinity extension for IoT protection, which his built to prevent IoT security incidents in almost every IoT environment, from smart office, smart building, medical, industrial, and critical infrastructure environments.

You can see that during the quarter, we refreshed a big portion of our Infinity portfolio, Quantum and Cloud Guard for network and cloud, we developed and launched new additions with the Infinity SOC and IoT, and we continued to work at full force.

We managed to land some very nice deals, met more customers and expanded our customer reach to more C-levels, conducted new forms of marketing events, all of that while not leaving the house and not taking flights for almost four months now.

Before I dive in and continue, I’d like to once again thank the commitment of everyone that makes this possible. Our partners went out of their way to keep things working. Our employees have shown a level of work commitment and creativity to support our partners and customers during these times. I’m sure that this is part of what keeps the world afloat, but it is not a trivial task.

Talking about customer wins, we had some nice customers wins this quarter. We continue to see strength in our regular segments such as financial services, but the surprise is the success we’ve seen from other customer segments. We had some major deals in the healthcare, government, technology, transportation, communication, and even hospitality. Landing seven and eight-digit deals during this period in this sector is clearly not trivial.

Overall, we’ve seen a healthy increase in large deals this quarter. We’ve also seen some correlation between the coronavirus and the business in various geographies. For example, in the first quarter we saw some weakness in Europe as they struggled with corona in March. This quarter, we’ve seen Europe showing some recovery signs as large parts of Europe have been able to deal with the pandemic effectively and get back to a more normalized business towards the second half of the quarter. Overall, Europe had a very good quarter.

Cyber activity similarly has also shown some links to corona. We’ve seen attacks that are taking advantage of the situation and are adapting to the environment in different countries. When the corona started, we saw a huge increase in malicious websites that are imitating health-related websites. When governments started to provide financial aid packages, there was dangerous activity focused on stealing that money. We’ve seen when people are trying to find work, we’re seeing a lot of CVs that become--that are malicious and are very, very dangerous types of malware. In general, our research team is focused on exposing and helping to prevent these attacks.

Customers all over the world need to adapt to the new environment. The attack surfaces and customer exposure is now much bigger and broader than it used to be. The work-from-home environment creates a huge risk - there are more entry points, hundreds or thousand times more remote uncontrolled sessions, unmanaged computers that are accessing the network, and in many cases are also accessing critical systems that were not accessible before.

Many of these external users are not secured. A recent survey we did showed that close to 40% of people working from home are doing so from computers that lack basic security controls.

There are more voices that are calling to take action and get ready for a cyber pandemic that will come. Now that we’re all much more aware of the implication of the pandemic, we have to realize that a cyber pandemic can expand much faster than a biological one. A single patient can infect not two patients in a matter of days but hundreds of additional computers in a matter of minutes or seconds. Part of our job and opportunity now is to elevate the level of readiness of the world to address a cyber pandemic.

Our researchers have been featured in almost every publication and media outlet with some major findings. I can give many examples, but in the interests of time, I’ll just focus on our largest findings this quarter. Published last week by Microsoft, the new vulnerability our researchers have exposed is code named SIGRed. It was rated 10 out of 10 in terms of its criticality and security exposure by Microsoft, which called it wormable, meaning that it can behave like a worm and expand from one computer to another. Almost every enterprise is exposed to SIGRed, which attacks the DNS Window servers and is accessible from the outside, not just from the inside.

In my career, I haven’t seen many vulnerabilities like this one. I urge you to check with your IT teams to make sure they’ve taken the steps to patch and block this attack vector. It is critical. The good news is that our gateways can block this attack, and we have provided some easy instructions on how to stop this exposure without major upgrades.

Now switching back from technology and cyber to business, our business environment remains quite active. The number of challenges and opportunities in the cyber world remains high. We have a strong focus on increasing our sales performance and sales productivity. I believe that the past few quarters, while being the opposite of business as usual, demonstrated we are making good progress in our sales execution.

Looking forward, most of the assumptions we talked about last quarter regarding the business model in corona times remain valid. While the second quarter has proven to be a good one, the level of uncertainty isn’t going down. We see high levels of volatility and uncertainty. Countries in Europe and Asia are opening up but are far from being business as usual. Some countries started to see a second wave of the virus, some are still in the midst of the first wave. Summer in Europe has proven challenging, and in the U.S. the situation is far from normal.

I also believe that the economic situation around us is bound to affect our business at one point or another. There are some factors that can drive increased business activity in cyber, such as the increased dependence on the network, the increasing cyber security risk, shifts to cloud and more, but there are also factors that can be quite negative, such as the overall economy and the fact that the unemployment and reduction of personal spend around the world will translate to different levels of business activity. Most important, the corona pandemic has showed us that the rate of change and the assumptions we make can change overnight.

Just like the previous quarter, I’ll refrain from giving a range for the third quarter or for the year. I will remind you that a big part of our revenues is coming from annuity revenues, and most of that is already in for the quarter. Our pipeline for the quarter remains healthy but the situation remains very fragile.

On the expense side, this quarter we had much lower travel expenses that drove profits and earnings. Travel is not expected to resume its previous levels soon, but Europe is starting to open up and expenses will increase. Also, we are learning how to utilize some of this budget in other activities that can drive business, such as marketing and investment in future projects and infrastructure.

I’d like once again to thank you for joining this Zoom session today and thank all our customers, partners, employees and new investors and analysts that are making the impossible happen and helping us deliver our vision of living in a connected and safe world.

Now we will turn the call over to Kip for your thoughtful questions. Thank you very much, everyone.

[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.

Our first question today will be coming from Sterling Auty at JP Morgan, followed by Saket Kalia from Barclays.

[Sterling Auty, JP Morgan]

All right, thanks Kip. Thanks everyone. I really appreciate you doing the call in this format. I think it’s very helpful.

My question really is centered around probably the obvious, which is any sense of how much of the strength and demand in the quarter was actually driven directly by COVID and perhaps might not be as sustainable, so things like capacity expansion for remote access, versus drivers that might actually be more sustainable, as you mentioned the annuity revenue or other factors?

[Gil Shwed, Chief Executive Officer]

I’m not sure that I have good data for that, even though I can say that in general, there wasn’t--last quarter I could have mentioned a few projects that were very much an immediate increase to capacity. Again, maybe not a huge effect, but they were still there. This quarter, I think the projects were projects that are needed. Again, some of them may have been affected by corona. By the way, some of them may have been affected negatively, for example one of the largest deals that we did this quarter, and it is an amazing deal which we are very proud of in the healthcare sector, was under a lot of pressure because this entity’s offering, like the healthcare industry in many parts of the world, specifically this was in the U.S., suffering from major pressure on their spend level. Through the Infinity model, through many of that, we were able to tailor a deal that’s very good for them and also very good for us, or pretty good for us - I won’t say very good for us. Actually, I can say that if it wasn’t for corona, the deal might have been even bigger, for us at least.

So I think overall what we are seeing is a reasonable, healthy demand. I think demand shouldn’t stop, but again with corona, you can never know because, as I said, so far--I must say again, you’re the experts in this, but I haven’t seen the impact of the general economy, the unemployment, the consumer spending still on our business sector. Again, I don’t know about other business sectors, but at least on the technology sector, from everything I hear, people try to remain to behave almost like it’s business as usual, and unfortunately it’s not fully business as usual now.

[Sterling Auty, JP Morgan]

Got it. Thank you.

[Kip Meintzer, Investor Relations]

Our next question is coming from Saket Kalia at Barclays, followed by Walter Pritchard at Citibank.

[Saket Kalia, Barclays]

Okay, great. Hey, thanks for taking my question here. Can you hear me okay, by the way, Kip?

[Kip Meintzer, Investor Relations]

Yes.

[Saket Kalia, Barclays]

Okay, excellent. I echo my thanks for holding the call in this format.

Gil, maybe for you, it seems like a lot of early success with the Quantum family, I think it was mentioned about 50% transitioned to that new family in really just the first quarter of availability. Do you feel like it’s the Sandblast Agent that’s differentiating the family versus prior ones, or is it something with the hardware that you feel is driving that early success?

[Gil Shwed, Chief Executive Officer]

I think it’s both. I mean, generally speaking, I don’t understand why not all the customers are moving to the new family, because generally speaking you get better cost performance from day one and at least with me, if there is a new model, I would never buy the old one, I would always the new one. It provides, again, everything from 30% to 100% or 200% more performance for the same dollars. It also includes the additional security with the [indiscernible] that’s built into every appliance, so for me it’s a no-brainer that people are moving.

So I would ask the opposite question - why people are not always moving to the newer family, and I think in many cases customers have issued certification bids that are already out and things that are preventing them from jumping ahead to the new model. The fact that we know one quarter, the majority of sales are already from the new family, I think means that we did all the things right this time. The performance is right, the security level is right, the prices are reasonable and so on, and I think that’s a good sign. I hope that things will remain that way.

[Saket Kalia, Barclays]

Got it, thank you.

[Kip Meintzer, Investor Relations]

Walter Pritchard from Citi is next, followed by Shaul Eyal of Oppenheimer. Go ahead, Walter.

[Walter Pritchard, Citibank]

Thanks. Tal, a question for you. You gave some growth rates on the various cloud products. I’m wondering when you might be in a position to give us a sense as to the percentage of revenue exposure there, and how important is that segment of the business growing and becoming meaningful to your overall revenue growth rate accelerating?

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

I think I would say it’s probably--well, it will be above 10%, that’s the answer. I think it’s more--but it’s going very nicely, especially I didn’t give you the percentage, but it’s grown year-over-year around 70%, the Cloud Guard, IaaS and SaaS, so it still continues to grow at a very fast pace. It will become more than 10%, probably - we’ll get more data, but it’s growing very nicely, and the nice thing to see it’s not coming only from our IaaS or Dome9, which we acquired the IaaS, or the SaaS. It’s really all of them growing very healthy.

[Walter Pritchard, Citibank]

Okay, thanks.

[Kip Meintzer, Investor Relations]

Shaul Eyal from Oppenheimer is our next question, followed by Fatima Boolani from UBS. Go ahead, Shaul.

[Shaul Eyal, Oppenheimer]

Thank you. Hi everybody. Hope everybody is doing well.

Gil, Tal, a question on the billings front. When we look at the healthy billings numbers you’ve provided us with and you’ve shown us, is there a good linearity between the billings performance and your geographic breakdown, meaning to say did you have good billings coming out of Europe versus okay billings in the U.S., or could it be the other way around?

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

So you see that first, you can calculate the implied booking. We don’t relate it, but you can see it was a healthy implied booking, stronger than previous quarters. It goes hand-in-hand with bookings, so it’s not like there is a mismatch here. It was a strong booking. [Indiscernible] positive of course, but the main strength we’ve seen was EMEA and then APAC, so it’s almost in line with EMEA was slightly weaker in Q1, in Q2 it was very strong. We saw a lot of healthy large deals. We saw increase both in the total dollar and in the number of transactions, so it was a very healthy quarter when it comes to deals over $50,000, with deals over $1 million. We’ve seen strength in the large deals, by the way, also in the U.S. was quite strong, but the strength, the main strength came from EMEA.

[Shaul Eyal, Oppenheimer]

Thank you.

[Kip Meintzer, Investor Relations]

Our next question is from Fatima Boolani from UBS, followed by Gregg Moskowitz at Mizuho. Go ahead, Fatima.

[Fatima Boolani, UBS]

Thanks Kip. A question for you, Tal. You were pretty explicit about the software carve-out related to Quantum, so I’m wondering with the momentum that you saw with the Quantum appliances this quarter, how did that impact product growth rates to the extent product was more dehydrated, as you referred to it, relative to the past? And if you can give us some incremental color around shipment volumes and ASPs, and ASP trends relative to the predecessor family, that would be really helpful. Thank you.

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

Sure, so if you recall, we talked about the risk involved when you launch a new product, and we said there’s two risks, of course. One is because the performance is higher, that people might move to lower level, lower cost appliances, and the second risk was related--that wasn’t a risk, that’s a fact, because we bundle NGTX or the Sandblast versus NGTP, which was a lower value, then because now we bundle higher volume, more dollars will go into the subscription.

I will say the following: both happened, but in a muted way, in the sense that ASP, in summer it has moved down, in summer it has moved up, in January kept the same area on average, so that was good, a good phenomenon, so we didn’t pay a price there. When it comes to the Sandblast, it had more but, again, because of the mix of the appliances, the increase was lower than I anticipated. It doesn’t mean, by the way, that it will continue that way because, as you know, it depends on the mix of the appliance that we sell in the quarter.

So for this quarter, it was 50% transition, not 100%, and the mix of the appliances, it was actually breakeven, in a way.

[Kip Meintzer, Investor Relations]

Our next question is from Gregg Moskowitz of Mizuho, followed by Ben Bollin at Cleveland Research. Go ahead, Gregg.

[Gregg Moskowitz, Mizuho]

Right, thanks Kip. Hi everyone. Gil, you’ve been making some good improvements to your cloud security portfolio, and you also highlighted it in your prepared remarks. The question is, are you seeing success there primarily by selling into your install base, or are you also seeing a genuine impact in regard to landing new customers as well?

[Gil Shwed, Chief Executive Officer]

I think we are seeing both. We are seeing a lot of new customers coming from the cloud, and I think in general, by the way, what we are seeing with our advanced technologies, like beyond the perimeter, the end point mobile cloud, the overall Infinity platform are great door openers for new customers. And actually, by the way, our statistics show that new customers are more likely to buy the advanced technologies than existing customers, so it is very helpful.

Keep in mind that, again, we have a large number of very important customers, so these customers, we’re always trying to expand and break into additional segments. By the way, not always easy. Sounds trivial, but remember the network security guys that are buying our solutions and are very good and loyal Check Point customers are not always the ones that talk about different security technology, and things like our Infinity SOC, for example, that we launched just last week, again I don’t know how big is the addressable market there, if it’s huge or if it’s small, but I do know that it can open us the door to many more important influencers in the security decision making in companies.

I think we are selling both to existing and new customers. I think we have--I don’t know exactly, but like 4,000 cloud customers by now, which is a huge number, I think by any means comparing to any company in the marketplace. That’s a nice number of enterprise customers.

[Gregg Moskowitz, Mizuho]

Thank you.

[Kip Meintzer, Investor Relations]

Thank you.

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

Gil, I’ve just seen your question--sorry, just in the chat, Kip, it says, can you talk about the hiring trends in the quarter, what are the hiring plans for the year looking like now?

[Kip Meintzer, Investor Relations]

You want to answer, Tal?

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

You can answer that, Gil. Yes.

[Gil Shwed, Chief Executive Officer]

I think overall, we keep hiring people. Unlike other companies, we haven’t made any hiring freeze. We’ve hired about 100 more employees this quarter, so our headcount is almost exactly 5,400 people around the world. We’re not too aggressive on that. We are also not letting many people go. I think at this point in time, I’m trying to give every opportunity--every employee the maximum opportunity to prove himself and stay in Check Point. I don’t think it’s a good time to let people go. I’m talking about their own performance, we are trying to give people the maximum opportunity to stay and prove themselves with the company. But overall, we grew by around 2% headcount just this quarter alone to roughly 5,400 employees.

[Kip Meintzer, Investor Relations]

All right, our next question is from Ben Bollin of Cleveland Research, followed by Rob Owens of Piper Sandler. Please go ahead, Ben.

[Ben Bollin, Cleveland Research]

Thanks Kip. Good afternoon and thank you, I appreciate you guys taking the time to do this.

I wanted to ask about the channel strategy that’s been developing, in particular in the Americas. You’ve got some new management, the [indiscernible] keeps evolving. Could you talk a little bit about your assessment on how that has developed, maybe talk a little bit about how you see it contributing to pipeline, new partners, new customers, and I’d be interested in your thoughts on how you see it playing out over the next one to two years. What’s the long game here? What are you seeing today, and where does this go? Thanks.

[Gil Shwed, Chief Executive Officer]

So first, I want to say we’ve always been a 100% channel partner company, even while there’s a shift of who controls the deals and who brings the deals, as opposed to the other roles of Check Point as the vendor and the channel. But partnership and channels have always been very, very important for us. I’m proud--I mean, I started the security, cyber security channel 26 years ago, and I’m very proud that it’s still with us and it still exists.

Having said that, we can do much more today with the channel. I think we can leverage the channel much more. We can bring new customers with the channel, and I think what we’re dealing with now is, A, creating the right business environment for the channels to succeed; second, to identify new partners where they are needed, and it’s not one place, it can be national partners in the U.S., it can be specific partners that specialize in cloud, it can be very, very different things. I think we brought new leadership the channel area in Check Point, both worldwide and the U.S. one, all are based in the U.S., and I think who are proving to work hard and to be very committed to that.

I can’t say that I have today a huge drive of business that’s new from the channel yet, but I hope that it will come. We are very committed to that. I think our channels are committed, I think eventually that can lead to a business expansion and more new customers and more opportunities.

[Kip Meintzer, Investor Relations]

Rob Owens, you are our next question, Rob Owens from Piper Sandler, followed by Brad Zelnick of Credit Suisse. Go ahead, Rob.

Can we un-mute? Thank you.

[Rob Owens, Piper Sandler]

There we go, thanks Kip. Good afternoon everyone. I wanted to talk a little bit about your new appliance, the 1570R, and really the convergence between IT and OT networks. I think the OT side had traditionally been serviced by other sets of vendors, either cyber related or some other, so maybe you could elaborate, Gil, a little bit on the convergence potentially, and is this an opportunistic solution or will we see you develop further things to address OT opportunities?

[Gil Shwed, Chief Executive Officer]

No, it’s actually not an opportunistic solution, it’s a very strategic one in terms of what we do. First, the security technology that we have can address all these environments. Investments that we make, not just on the IT but on the OT side there for many years now. By the way, we’re expanding more into that with the IoT solutions, and IoT and OT in many cases are not the same but they are related.

And by the way, the new appliance that we have is the second generation of ruggedized appliances that we have. The previous generation, 1200R, was a terrific one too, and the new one is even more interesting. If you look at the picture on our website, you see it’s equipped with all kinds of communication. It can be a real standalone with WiFi, with the components of different wireless communication that can be attached to that. It can sustain any weather condition, and again we have installations of that on boats, on trucks, on power stations when you don’t have a server room and it’s extreme weather conditions. It’s pretty high performance and it’s very low in form factor, and relatively low in price, so I think it’s quite unique in the industry.

Again, it’s part of the fact that we want to be everywhere on the network, and it’s not--again, it’s packing the technology that we have for years with the right package for these environments, and I think it’s very, very important for us and we will see more and more expansion in these areas.

[Kip Meintzer, Investor Relations]

Great, thanks. Our next question is from Brad Zelnick of Credit Suisse, followed by Philip Winslow of Wells Fargo.

[Brad Zelnick, Credit Suisse]

Thank you. Can you guys hear me?

[Kip Meintzer, Investor Relations]

Yes.

[Brad Zelnick, Credit Suisse]

Excellent, thanks so much. Nice to see everybody, and congrats on a nice quarter.

Gil and/or Tal, I wanted to ask about refresh cycles, and I appreciate in the past you’ve always told us it’s hard to distinguish because there are always customers buying new boxes and replacing old hardware at different points in time. But are there any observations you can share from a refresh perspective, specifically is there any reason to think that just given the disruption in the world that customers might be sweating their assets and taking longer to update their hardware? Thanks.

[Gil Shwed, Chief Executive Officer]

First, again as you can see, the demand remains healthy, the results are good, we are on plan and, in some places, actually ahead of plan in terms of internally. My internal measures, many things are slightly ahead of plan, which is great.

I would say that in general in these corona days, customers are trying to do anything to avoid changing something physical. If you think about most of our companies, most of companies, there are no people in the buildings, and again people do go into the data center, people do go to do maintenance, but they are not enthusiastic about that, so we try to minimize the number of changes that you make to the physical infrastructure.

The fact that business remains almost as usual means that there is some nice need or nice demand with that regard. That’s what I would say. Again, I can’t--you would say maybe what if there wasn’t corona, if there was much higher demand? Maybe it’s the other way around, but in general if you just think of the sense of an IT department or on the general, we’re trying to do everything without touching something physically, so people are not rushing out to operate huge installations. They are trying to postpone, not to accelerate those.

[Kip Meintzer, Investor Relations]

Our next question is from Philip Winslow of Wells Fargo, followed by Tal Liani of BofA. Go ahead.

[Philip Winslow, Wells Fargo]

Great, thanks Kip. Appreciate you all doing this call in this format. Glad to see you all are well, and Kip, congratulations on the haircut.

A question for Gil. Gil, obviously you mentioned cloud-native security, Check Point Cloud Guard for example, serverless products. One of the things that we’re hearing about obviously is an acceleration in digital transformation due to COVID, they need to be more agile, to develop faster, to iterate faster in terms of software development. Where are we in your opinion in just the adoption lifecycle of cloud-native development? Is this an RFI year and next year is an RFP year, or is COVID accelerating that? How does security play into the decision making process?

[Gil Shwed, Chief Executive Officer]

In general, COVID should accelerate that, but most of these technologies are fairly new. I mean, if you go--there are companies that are called born to cloud, and they are using all these technologies and building businesses. Most of them are not giant companies, a few are, but most of them are not, and most of them, by the way, are using their own home built security. If I look at the general market, the big companies like the one you’re working for or the ones most of the people work here, are investing a lot in the cloud but still 90, 95% of their applications are in their private cloud, not in server expansion, not in the public cloud and so on.

We do see a shift, we do see an investment, we do see that people need that, and I think right now for many companies, this is still an RFI-RFP stage, and not large deployments. I think in my mind, these technologies are essential or assets, that’s why we invest in them. So we are seeing a high level of interest, we are seeing good things that we are doing with the technologies.

There are cloud native--by the way, the ease of, say, using that, this is a huge shift and maybe a year from now or maybe a few quarters from now, we speak about that, but if in the past a Check Point customer needed to have a physical appliance and a physical management station and so on, we are now in the midst of a big revolution when you can deploy everything you want, we call Infinity Portal, and you can manage even the traditional gateway with a touch of the button from the cloud, without installing any physical equipment, and do it--again, things that took weeks and months to order, get, install, and again went days and weeks to configure, they can be done now in a matter of minutes from the cloud, even while maintaining the old infrastructure. I think the whole digital transformation will be important and we still have long growth ahead until it gets to our mainstream.

[Kip Meintzer, Investor Relations]

All right, our next question comes from Tal Liani of BofA, followed by Keith Bachman of BMO. Go ahead, Tal.

We can’t hear you, Tal. Still can’t hear you.

Sorry Tal, we’re going to have move onto the next one. All right, so--

[Gil Shwed, Chief Executive Officer]

You can ask the question on the chat.

[Kip Meintzer, Investor Relations]

Go ahead and ask your question on the chat, Tal.

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

So maybe--yeah Gil, until it’s sorted out, two questions. One is the M&A, regarding our appetite to M&A, and the second, the linearity. I’ll take the second one.

The linearity was very similar to year-over-year, so no dramatic. Started the same and ended the same, back end loaded as usual, so nothing, no material change here.

[Gil Shwed, Chief Executive Officer]

In terms of M&A, our appetite remains good, healthy, the same as it was before. Unfortunately, the corona doesn’t generate amazing technologies because the focus we have is to find the best technologies, and corona doesn’t create yet new technologies that are out there. Also, it doesn’t create amazing business opportunities because if you look at the entire market and look both at the public markets and the private markets, valuations haven’t changed much. [Indiscernible] went up but valuation remains healthy, but again first and foremost for us is to find the right match for us, and again we do look at some opportunities, there are some good ideas. We will make acquisitions, but it remains the same appetite and the same things that we’ve done before, hopefully a little bit more, but I’m saying it all the time.

[Kip Meintzer, Investor Relations]

All right, our next question is from Keith Bachman from BMO, and we’re going to skip Dan Ives since he put one in the chat, and we’re going to move on to Jonathan Ho from William Blair after Keith Bachman. Keith? Can we un-mute Keith? Guys, can we un-mute Keith?

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

Give them a second. They’re trying to find him.

[Kip Meintzer, Investor Relations]

Ah, got you. There we go. Hang on one sec, Keith, we don’t have you un-muted yet.

Keith, can you un-mute yourself? Un-mute yourself, try un-muting. There you go.

[Keith Bachman, BMO]

Yes, I’m un-muted. Can you hear me now?

[Kip Meintzer, Investor Relations]

There you go, okay.

[Keith Bachman, BMO]

Yes, I’m having a little audio connection issue, so hopefully--.

Okay, let me try again. This is to Gil. Gil, BMO is a large Check Point customer, and when COVID hit, we actually increased our purchases of firewalls in March and April, and normally we have a fairly steady cadence associated with our purchases of Check Point firewalls and so in order to increase capacity and enable work-from-home, we really had to go out and purchase some incremental firewalls.

But going back to Sterling’s first question, are you not seeing that from other customers, or you just don’t [indiscernible]?

[Gil Shwed, Chief Executive Officer]

I didn’t hear the last part of the question, but I’ll try to answer based on the first part. As I mentioned, in March, we saw some nice deals that were driven by increased capacity for the internet based on the corona crisis. I must say that the deals that I saw in the second quarter, especially the large ones, I haven’t seen many of these large deals, almost all the large deals that we saw had good reasoning that were not corona-related. It may be very possible that there were some deals that were, but remember we processed north of 20,000 orders every quarter and it’s very possible that we had some midsized deals that are more corona driven.

Again, on the same token, we had a lot of business with maybe a deal postponed due to corona I many places based on multiple reasons. I’m sure that we did deals like that, but again in Q1, I could have mentioned we had this and this and this, and those deals, and I could have quantified that. In Q2, it seems to be like it was less of a driver to the business.

Tal, I don’t know if you want to add to that? You also analyzed the numbers very well.

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

Yes, of course. I didn’t see it in the large deals actually, but when I looked at the mobile access as an example, which is a VPN access from mobile devices, like laptops, then we saw some increase. I gave you the percentage, but it’s small numbers, so if I had to quantify it, which is hard, but based on what I see, I would say a few low millions. I didn’t see anything dramatic.

[Kip Meintzer, Investor Relations]

All right, our next question is from Jonathan Ho of William Blair. Jonathan? Can you un-mute? There you go.

[Jonathan Ho, William Blair]

Great. Just given the performance this quarter and now that you have a little bit of coronavirus experience behind you, I guess my question is why not provide guidance at this point, and what are some of the main concerns that you have related, now that you have a bit more experience working through these environments? Thank you.

[Gil Shwed, Chief Executive Officer]

I think this is an excellent question, and we are debating with that also internally. As I mentioned, the level of uncertainty is still very, very high. The fact that we had no huge surprises up or down, this quarter slightly up, at the end of the day it was reasonable, doesn’t mean that it’s not coming. Again, if I look at the world today, we’re still struggling with supply chain issues every day. It’s not over. I mean, we are still--the level of demand is changing all the time. Again, we are seeing countries in Europe open, but when again with some increased activity, some countries are going into a second wave and they’re putting in new lockdown.

So the level of uncertainty still remains huge, so that’s one element. The second element, which is of course unrelated, is the whole effect of the macro economy. Up to now, we haven’t--we know that the macro economy in most countries around the world is being hurt in a really bad way. The level of unemployment, consumer spend is not going to be the same. Businesses are not going to get everything they used to get before. So far, we haven’t seen a big meaningful impact of that on our business, maybe except a few small sectors, but I’m sure that--or not sure, it is a very high likelihood, I’m not sure of anything at this point, I must say, but in my mind there’s a high likelihood that some of that will have effect.

Now, the effect may be three months delay, maybe six months delay, maybe nine months delay, and again I can’t predict that, and once that happens things will start to impact again. It’s not just Check Point, it’s everything.

So that’s why I’m saying our sort of next quarter annuity revenues are relatively predictable, but beyond that, the level of predictability in my mind is very low, and again I would like to think that we have upside, I would like to think that things will be handled well. I mentioned it in my comments earlier and I’ll mention it again, our pipeline now looks positive, actually giving more [indiscernible] on what we’ve seen so far, so the pipeline that we have for the quarter looks healthy, but everything can change in a minute in our world. The last thing you want to hear from me is all the good cases or all the bad cases that can happen to us, and I’m sure that even in at least 10 cases, I won’t find the right case that will happen because the world is proving to be completely unpredictable at this point.

[Kip Meintzer, Investor Relations]

Thank you. Our next question is from Gray Powell from BTIG, followed by our last question from Mandeep Singh from Bloomberg. Go ahead, Gray.

[Gray Powell, BTIG]

Great, thanks for taking the questions. Can you hear me okay?

[Kip Meintzer, Investor Relations]

Yes.

[Gray Powell, BTIG]

Okay. Yes, it sounds like you’re seeing pretty good traction on the Cloud Guard product set. Can you maybe talk about the advantages that you have there, particularly Cloud Guard Connect versus some of your cloud-native competitors, just why customers choose Check Point over peers?

[Gil Shwed, Chief Executive Officer]

First, it’s a broad question and we don’t have much time. I would love to, by the way, provide you if you want--get you with our product experts, which can give the full pitch, which may take more than two minutes. But in general, I think that no other company has a cloud--is an umbrella for the cloud like we have. The solution that we have is broader than anything I know in the marketplace. By the way, it’s one architecture controlled from one portal. There are other companies that have, I don’t know, 50% of the components that we have or 70% of the components that we have, but I don’t think that they are the right quality. They are not providing prevention. They are not--and they are not connected and managed from the same Infinity portal or the same tools. So overall, I think what we have is amazing.

Again, now go tool by tool and the cloud posture management, what we have is amazing. The Cloud Connect, that we have the ability to connect, for example, the Cloud Guard Connect enables you to both connect to cloud resources and also connect to traditional networks, so connecting--by the way, that’s been a huge issue, connecting both to the public cloud and to the private cloud. If you are a customer or you’re an employee, you want to connect both to the cloud resources and to the in-house resources, and the cloud native solution provides just one and some of our competitors provide only the other one. We provide both.

So I think these are some of the elements that we have, so it’s coverage, it’s manageability, it’s level of security, and the fact that everything revolves around prevention. Last but not least, it’s the fact that it’s integrated and you can get it from one vendor. Again, when you’re thinking about the cloud and you have so many technologies, and now you think that you need another dozen technologies just to secure this cloud, that’s almost mission impossible. If you go with Cloud Guard, I think it becomes mission very possible, that one suite can give you the highest level of security.

[Kip Meintzer, Investor Relations]

All right, thank you. Our last question is going to come from Mandeep Singh. Please make it a quick one. Thank you, sir.

[Mandeep Singh, Bloomberg]

Sure, thanks Kip. Gil and/or Tal, can you give us a sense of what percentage of your customer base is shifting from NPLS to SD band, and how does it affect your outlook and product mix expectations?

[Gil Shwed, Chief Executive Officer]

That’s a very good question. I don’t know the answer to that, I must tell you. There is a level of interest in SD1. It’s still a relatively small market, but it’s a market that’s evolving and interesting. We are both developing capabilities in our own product and are also partnering with some of the best vendors in the space. So far, it works fine this strategy for us. Moving forward, we are going to keep this strategy, but we are going to evaluate it all the time.

Again, I still don’t know whether SD1 will develop into a security related market segment or to a networking market segment. Given my experience from the past, there has been technologies, networking technologies that found themselves centerpieces to the security, and there has been technologies that we invested in and we were participating in five years ago or 25 years ago that turned out to be complete networking technologies and less the security when outside. So for me, it’s too early to say whether SD1 will turn out to be cyber or security related or networking related.

I don’t know, Tal, if you want to go through some of the questions still in the chat room?

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

Yes, I think they were light. If I looked at it, there were two. One was the digital transformation. When we look at the outside of the greater capacity related spending, could you frame how the most substantial digital transformation efforts driving security spend, and how do you think about the sustainability of those efforts?

Gil, go ahead?

[Gil Shwed, Chief Executive Officer]

I think that in general, the digital transformation will very, very much need cyber security. I think the challenge now is that it’s a very fragmented market. I wish there was one technology that we can say, that’s the future, let’s invest in it, and hopefully we’ll find the silver bullet that will win the market. Today it’s divided into, again as I said, dozens of sub-segments. These sub-segments are very much related to different things. Customers are very confused about the level of security and the reason much more security is needed, so I think long term for the market, I have no doubt in my mind that security will be central and the market will grow.

Which sub-market of digital transformation, cloud, whether it’s serverless, containers, cloud posture management, and I can name probably another dozen names of technologies will become the winning one, I don’t know. By the way, that’s one of the reasons why we have this portfolio of Cloud Guard that we believe is addressing most of the important elements.

[Kip Meintzer, Investor Relations]

All right, I think our conference has come to an end. Thank you guys for joining us today. We appreciate your participation, and we look forward to speaking to you throughout the quarter. If you would like to speak with us after the call, just send us an email and we’ll try and fit you in, in the coming days.

Thank you guys, and have a great day.

[Gil Shwed, Chief Executive Officer]

Thank you very much. Really appreciate you taking the time. Thank you.

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

Thank you, great seeing you all.

[Kip Meintzer, Investor Relations]

Bye.