Greetings my name is Kip Meintzer, Global Head of Investor Relations for Check Point Software. I'd like to welcome everyone to our Second 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 is live on our website and recorded for replay. To access the live conference and replay information, please visit Company's website at checkpoint.com. For your convenience, the replay will be available on our website. If you'd like to reach out to us after the call, please contact Investor Relations by email at kip@checkpoint.com.

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 27A of the Securities and Exchange Act of 1933 and Section 21E 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 programs and success of those products and programs; the environment for security threats and trends in the market; our strategy, focus areas, and demand for our solutions; the impact of COVID-19 on our business, including on our product development 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 Q3, 2021. Because these statements pertain to future events, they are subject to risks and uncertainty, 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 release issued on July 26, 2021, which is available on our website. And other factors and risks including those discussed in Check Point's latest 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 where 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 our presentation of non-GAAP information.

Now it's my pleasure, I'd like to turn the call over to Tal Payne for a review of our financial results.

Tal Payne - Chief Financial Officer and Chief Operating Officer

Right. Thank you, Kip. Good morning and good afternoon to everyone joining us on the call today. I'm pleased to begin the review of the second quarter. Revenues for the quarter increased by 4% to $526 million, a $4 million above the midpoint of our guidance. Our non-GAAP EPS increased by 2% to $1.61 per share, surpassing the top end of the guidance.

Before I proceed further into the numbers, let me remind you that our GAAP financial results includes 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 highlights of the quarter. Revenues for the quarter reached $526 million, with 6% growth in product and security subscription revenues. Our subscription revenues continue to drive the growth with a strong 12% increase year-over-year, reaching $184 million. During the quarter, both CloudGuard and Harmony revenues continued to show great result with high double-digit growth.

Also Infinity deal gathers momentum as customers move to more holistic solution with subscription-based pricing. We had double digit unit growth in appliance sales, mainly in the lower-end appliances and the Maestro orchestrator that enables this scalable solution. At the same time, we continue to see the shift from product to the subscription revenues as larger portion of the deals are allocated to subscription both in appliance deals and Infinity deals.

Deferred revenues as of June 30, 2021 reached $1.472 billion, a growth of $134 million or 10% growth over June 30, 2020; calculated billing of 9%, quite strong. Revenue distribution by geography for the quarter was as follows; 44% of revenues came from America; 44% of revenues, the same, came from Europe, Middle East and Africa region; and the remaining 12% came from Asia-Pacific. So you can notice the strong strength in EMEA this quarter, and Gil will allude to that.

Our non-GAAP operating margin was healthy at 49%. Year-over-year, we had the headwind from the weakening of the dollar, as we discussed, against different currencies around the world. The effect year-over-year was around $9 million, as planned in our budgeting and guidance. Our margin is higher than planned as we are still ramping up on the recruiting efforts; travel costs, while increasing not - still not back to normal.

Our financial income for the quarter was $10 million, reflecting the reduction in the portfolio yield, as the portfolio is rotating [Phonetic] and new investments are in slightly lower or significantly lower interest rates around 0.4% versus 2.5% before, financial income will continue to reduce by $1 million to $1.5 million a quarter as we indicated before.

Effective non-GAAP tax rate for this quarter was around 19%. While tax rates remain unchanged, our provisions are linked to the index in different countries. Since the beginning of the year, we saw an increase in index in different countries, mainly in Israel but also in the U.S., which led to slightly higher tax expenses. We expect similar tax rates next quarter.

GAAP net income for the quarter was $186 million or $1.38 per diluted share. Non-GAAP net income was $217 million or $1.61 per diluted share, an increase of 2% year-over-year and above the top of our range.

Cash balances as of June 30 was $4 billion, our operating cash flow continues to be very strong and increased by 4% to $264 million, strength came mainly from our healthy collection from customers with DSO of 61 days. During the quarter, we continued our buyback program and purchased 2.7 million shares for $325 million at an average price of $118.

So that sums it up for me, and now I'll turn the call to Gil for his presentation.

Gil Shwed - Founder and Chief Executive Officer

Hi everyone. Very happy to see you on our earning call. Actually, we are celebrating today, I think, it's our - my 101 earning call, 25 years as a public company. We went - I mean, Q2 of 1996 was our first quarter as a public company. So I'm very pleased to see you.

I'll go quickly - I'll try to go through this presentation. I'll skip the first few slides, which you saw the forward-looking statements, but I'll speak about the business highlights. This quarter, I chose to focus on case studies that will demonstrate our three pillars of security. So before I jump into that, a quick introduction. You've seen the data, you've seen the numbers, the increase in revenues. The full data again so I won't stop on that. But let's go to state of the business.

First, I think we've completed a pretty good - actually a very good first half, especially in Europe and Asia. If you remember a couple of years ago, we've put some new leadership in Asia. Two quarters ago, we have a new leader for Europe, and I must say that two quarters in, we had excellent second quarter in Europe, very good first half, nice momentum, new customers on all the pillars, so I'm very, very pleased to see that in Europe.

And I'm very pleased to see the first half in Asia that continues with a positive trend even with the few challenges that were been in Asia due to the corona in the second quarter, especially in India. By the way, I hope within the U.S., where we have now a new leader which was in the quarter for like five or six weeks during the quarter. I hope that within a few quarters we'll be able to see similar trends in the Americas as well.

In terms of technologies and product, the CloudGuard and Harmony product line doubled in the past two years, twice since 2019 and now account for 20% of our subscription revenues, almost doubling the amount that they were before, so - which is again pretty good, the same strategic trend that we're speaking about with the Infinity Architecture.

And last and not least is our Infinity program. The Infinity program includes customers that are, what I would call strategic customers. Customers with we commit to for a multiyear, they commit to us for a multiyear. Usually most of the time, they buy multiple pillars of our technology not just one set of technologies, and this business tripled in revenues and also in deals that we win, which we'll show in the future since second quarter of last year, so which is a very, very good trend.

So let me speak a little bit about our architecture and what does it mean? So the Infinity Architecture include three pillars; the Quantum, that's the network security family; the Harmony, that's our latest family securing user, securing access, very relevant now as we are in corona and post-corona time frame and remote work is becoming more prevalent [Phonetic] in our world; and last and not least is the CloudGuard family, I believe it's the most comprehensive cloud suite in our industry.

All of that is based on a unified threat intelligence, real time threat cloud, unified management and many, many, many other tools that can control the security across all the vectors of attack. My belief is, this is a unique architecture that no one else in our industry has and this is, I think, a very important bet for the future, the consolidation, the simplification and providing companies with the reliability to block threats and the prevention-first architecture to block threat on every aspect.

As I mentioned, what I chose this time is to give a few customer case studies, all deals that we won in the second quarter, some of them are very large, not necessarily the largest deals that we won in the quarter, but each one or each case study of a customer will demonstrate the use of our technology in the different pillars; Quantum, CloudGuard, Harmony and the overall Infinity Architecture.

So let me jump right in and start with the Infinity Architecture. So, the deal that I want to share with you here, it's a quite interesting deal, it's a Fortune 500 financial institution that went through a merger recently. And following the merger, they decided to revisit their security architecture. They had multiple vendors. They work like many hours shifting workloads to the cloud and decided to purchase Check Point Infinity.

Consolidate the portfolio around our network and cloud offerings, replacing several other vendors that they had there before namely, you can see here Cisco, FireEye and Trend Micro. And the overall is an eight-digit deal for multiple years. Again, strategizing and picking the Infinity Architecture is the core of their architecture, so this is a nice first example of a relatively large deal that we had this quarter.

Let's shift gear into Harmony. As I mentioned Harmony is our newest family to secure users and access, and here the deal we picked is actually also very interesting one. It's around Harmony mobile. Harmony mobile is the software that runs on our mobile phones. A very underserved segment of the security - in the security landscape.

And my belief, by the way, we started investing in mobile security many years ago, which is, in many cases, the weakest link in all of our security posture. All of us carry these phones, they see everything we see, they know everything we know, they are connected to our personal life but they're equally connected to our business life, both to the networks and just by seeing everything we see, and yet less than 3% of enterprises do something about mobile security.

In this example, we're talking about a Fortune 500 Food & Beverage company in North America. They are one of those that do see mobile security as an important element. I think by the way one of the reason is that their workforce also works in delivery, you know really mobile people and they decided to change their mobile security of a 30,000 mobile devices for employees. And each customer, we ask, why did you chose Check Point? So first they wanted a complete protection for their mobile workforce. In their checks and in their arguments, they thought that we have a superior threat prevention.

And even more important, they found that the way we block malicious application and also address network traffic. So if you click on the wrong link, if you go to a phishing site, we will know how to block that. They found that technology also superior. In this accounts, we replaced Symantec that had a similar solution to mobile security, which is a good example of - I think Harmony mobile a very important yet still very small part of our portfolio.

Shifting gears to Quantum and Quantum is a very important part of our portfolio, the biggest part of our portfolio. In Quantum, we picked Tier-two examples and of course, this is out of thousands of customers that purchased Quantum during the quarter.

But let's look at these two. First one is an energy company, actually, mainly in energy delivery, pipelines and stuff like that. They decided to consolidate security in three main sites, 36 remote sites and they put the full Check Point solution hundreds of –I think it's close to hundreds of devices of the Check Point Quantum family. And again, we asked them the question why Check Point?

So, first and foremost, it's something we're very proud for many, many years is our superior management, the security management architecture and their experience with a single console. Second was the highest malware catch rate based on their test, based on what they saw. But the third one is also very interesting and you see the slide that impacted them, it's not just the slide, it's everything behind them.

They felt that Check Point is the vendor with the safest solution and what you see here is the number of security or code issues that every vendor reported. You can see what we reported about 16 issues like that compared to over 200 and almost 300 with two of our competitors here.

But even more important, it shows that they felt with our code, it is more stable, more mature, much safer and the product is much more secured is how the - how us, this vendors in the security industry treat our code security. So in the Check Point case, the average number of days to fix a security issue was six days, quite fast. In our competitor cases, you can see four, five months to fix a security issue.

I don't know how can you be a security vendor if it takes you almost six months to fix a security issue in your own code? But that's what the data says, which is by the way, based on the reports of the vendors themselves. So I mean, this is our own reports, when - what's called the CVs [Phonetic] found, how many days later the vendor fixes that. So this impacted this customer's decision to purchase Check Point and we are very proud of it. We replaced Palo Alto Network and they standardize on Check Points for their network security. So this is a good example.

And let's shift to the second one. Here, we're talking about a European government agency, a government office in one of the big European countries. Like everybody else, they're experiencing a higher and higher workloads as more people access government services, government information over the Internet. And we are looking to protect their data centers, their public services now and into the future.

They chose the Quantum Maestro. Quantum Maestro, to remind all of us, is one of our biggest differentiator. It's the solution that allows the customer to build basically a very scalable, agile, flexible solution simply by adding up - it can be from a single digit number of gateways to dozens of gateways and get basically almost unlimited scalability in the solution and yet on the same time get redundancy, reliability because each one of these solutions is part of - is part of a cluster that makes up each other.

So - and by the way, we've seen many, many examples and that's why we picked this example, Maestro is becoming a real game changer for our customers that are looking for reliability, scalability, performance and so on. So they scaled up - they can scale up now our security on demand. They can find the flexible solution for their fast changing environment and [Technical Issues]

Tal Payne - Chief Financial Officer and Chief Operating Officer

Did all of you lose Gil for a sec? Yes, okay. [Indecipherable]

Kip E. Meintzer - Global Head of Investor Relations

Let's see if we get him back here. The problems with modern day technology. Let's see if he comes back here.

Tal Payne - Chief Financial Officer and Chief Operating Officer

Yeah. He has probably dropped in order to connect again.

Gil Shwed - Founder and Chief Executive Officer

Apologize guys, there was some issue here, and I'm trying to resume the presentation. I don't know until what place did you hear me?

Kip E. Meintzer - Global Head of Investor Relations

It was the energy company deal.

Gil Shwed - Founder and Chief Executive Officer

Okay. So I was…

Kip E. Meintzer - Global Head of Investor Relations

So probably the next one right after the energy company would be where you'd want to start.

Tal Payne - Chief Financial Officer and Chief Operating Officer

Yeah.

Gil Shwed - Founder and Chief Executive Officer

Now, let's see how quickly can I shift slides here. Okay, so I was speaking about this customer. Here I was speaking about Maestro, we're just - I don't know, if you heard it or not. I was speaking about Maestro. Maestro is our scalable solution, it became a real game changer in the last year, year-and-a-half in our solution. Basically Maestro allows the customer to get a cloud like environment in terms of scalability, redundancy, reliability for their data centers, simply by stacking up many solutions and get one high - very high performance network security solution with high level of redundancy.

So, in this case, we're talking about a government agency in one of the largest European countries that needed to protect their public services, and like everybody else, they see more services provided through the Internet in the last year-and-a-half and they're looking for a solution which will not just meet the current requirement but will be a future proof.

And Quantum Maestro was the winner here. The reason they quoted is the ability to scale up security environment on demand, the flexibility of that solution in the fast-changing environment and also very important is the EAL4+ certification, that's one of the highest certification a product in our industry can get. Not many vendor have that certification.

So they liked all these factors and replaced Cisco with our solution. This is a brand-new customer to Check Point, seven-digit deal, so which is a very, very nice win with our European team. And actually, by the way, completes like a winning streak in the same region with every quarter and that we win a similar deal like that, a major customer, new customer, with a large deal. So this is something we're very proud of.

Last, let's move to CloudGuard. I think we all know the importance of the cloud these days. The ability of companies to move workload to the cloud to support private cloud, public cloud. And CloudGuard, I think, provides the most comprehensive solution for cloud customers. I think we have here two examples that demonstrate different aspects of our solutions in the cloud.

First one is a technology company, a North American technology company, like many others, they acquired several cloud start-ups and they realized that now they need to get more visibility, more control into their multi-cloud environment, different companies, different cloud providers and so on. And they purchased CloudGuard's posture management and threat intelligence to get that on this entire cloud.

The reason they quoted is best visibility across the multiple cloud environment and the superior flexibility here. The ability to do automation scripting. Whenever a new asset is added to the cloud, it automatically joins the control panel. Whenever automatic actions are needed to be taken, our scripting ability allow them to do it automatically. And again, seven-digit deal, new customer to us, a new customer to the cloud and competitive win over Palo Alto Networks. So, this is a good example in the heart of Silicon Valley.

And switching to the last example, which is a very large - many year's Check Point customer on the network side. It's a Fortune 500 media company. And what they had here is a complicated project. On one hand, they had a new data center, a new private cloud or physical data center. And on the other hand, they are moving more and more applications to the public cloud and they needed to connect the private cloud and the public cloud.

And what they purchased here is both CloudGuard and the Quantum Maestro, connected together. And the reason they quoted for choosing Check Point was, first, unmatched scalability with Maestro, which I think is great and we talked about it earlier.

The increased efficiency with the unified management and this sounds simple because I spoke about our management but here it's another angle of that. We're the only vendor that have the same architecture, the same management for both the private cloud and the public cloud solution.

It's the same management, the same solution that can secure the data on both ends and that can connect the data from the data center to the public cloud. So that was a very important factor for them, the ability to control it from within the same panel.

And last and not least and I'm saying it here because they conducted very sophisticated test, real life testing of us versus several other vendors and Check Point got the best results on the security side, on the performance side and you see we won here over Palo Alto Networks and Cisco. So I mean, we are very proud of this seven-digit deal which expands our footprint in this, a large media company.

So I think overall I gave you some color about why the Check Point pillars win and I think you can see some of these reasons. And by the way, it sounds like our marketing material, but this is echoing what customers are saying guys. They like us, first and foremost, for the real-time prevention. By the way, this is a result not just of these few cases but of many, many other cases that we collect an interview. We ask customers, why did you choose us? And these are the reasons; first, our prevention first architecture, the real-time prevention sounds trivial, but it's not most of our competitors rely on detection and remediation, which lets the - which lets the attacks in, not very good.

They liked our security management, something that I think we're winning for 27 years now. And they like the complete solution, the Infinity and you saw here many, many examples that were - part were the Infinity solution and part were multiple solutions from our three pillars that start to show the consolidation and the importance of that consolidation in the marketplace.

So altogether we really get that. We think that we can prevent the next cyber pandemic. We can really protect against the Gen-5 attacks that are now becoming the new norm for Internet and cyber-attacks. So this is - this part is about the customer. One slide maybe about what we are seeing in the overall marketplace with our research organization.

For those of you who follow and I recommend that you can follow our Check Point research CPR blog, you will see dozens of different researchers, dozens of different vulnerabilities that we found. But here I'm not going to go through them because that may deserve a full presentation of its own.

Just some of the trends we are seeing at the high level. So we've seen 93% increase in Gen-V attack, namely here - the example here is ransomware account - attacks. Over 1,200 organization impacted by ransomware weekly, based on our sensors. This is a 93% increase from June 2020. So this is huge and you can see that in the graph.

The leading regions with the largest increases are in Latin America and Europe. But for those of you in North America after seeing the Colonial pipeline and so on, I think you can definitely see that this is not just an issue of someplace else. This is an issue that attacks our critical infrastructure everywhere. And these attacks, if you remember, we coined the term Gen-V, two or three years ago, attacks which are multi-vector, attacks that use zero day multi vector means that they may start from one place, go through the different environments until they hit you. So it's very hard to detect them and very hard to understand where it comes from.

In the last few months, we saw the supply chain, as a vector for entrance, but we haven't seen before. And I think this is becoming the new norm in Internet attacks now. The good news, the attacks that we saw so far, customers that deployed the Check Point Infinity remain protected even though it was zero day attacks, even though many of these attacks weren't known before. So we are very proud on what we delivered to our customers over many years and especially in the last couple of years with the Infinity architecture. So this is just what we should expect.

To summarize and to leave some time for your question, we had a strong Q2 financial results both in terms of meeting our projections and so on, but also in more and more internal metrics that we've seen internally, especially in Europe and Asia. The Infinity Architecture, both as a solution in selling two strategic customers but also in the different pillars that we sell that are part of the overall architecture are gaining momentum with double-digit growth in CloudGuard and Harmony and triple-digit growth for the Infinity deals.

So overall, I think that we have good progress, but there is plenty. We still need to do, there is plenty, we need to ramp up and get to where we need to get, but I think we are fulfilling on the strategy of providing the industry most secure, most comprehensive architecture. So that's kind of summarizing my presentation.

And actually, before I open it to your question one more thing, projections for the third quarter. So here are our projection; revenues are expected to be between $515 million to $540 million. You know my regular caveat, projecting the future is always very challenging definitely these days when the world is turning upside down quite quickly and there is a high level of uncertainty, there is many reasons that can cause our results to be better or worse than our projection. Still the range year in revenue is $515 million to $540 million. And the range of our EPS estimate is going to be between $1.54 to $1.64 and GAAP EPS is expected to be approximately $0.24 less than that.

So, once again, thank you very much for listening. I hope I gave you some good insight into what we are seeing into our business and we'll be happy to hear your question now. Thank you.

Question & Answers

Questions and Answers:

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Kip E. Meintzer - Global Head of Investor Relations

All right, guys. Please keep it to one question at a time. And our first stop is going to be Jonathan Ho from William Blair. And following him will be Rob Owens from Piper Sandler.

Jonathan Ho - William Blair & Company - Analyst

Hi, good morning. Congratulations on the 25th anniversary for the Company. I just wanted to maybe get started with a little bit more color in terms of your recent sales leadership changes and new channel incentives. Maybe, could you help us understand sort of what's making the most difference in terms of driving either improved productivity or channel engagement? Thank you.

Gil Shwed - Founder and Chief Executive Officer

I think, first, in terms of changes. In Asia, we have new leadership for quite few years. So I don't know if it's new anymore. In Europe - we've got in Torsten, who's the new leader for Europe during Q4. So it's now is the second full quarter and I think we're very pleased with the results so far.

And a good momentum in the U.S. We've got a new leader, Jeff, Jeff joined us halfway through the quarter. So I think during second quarter. He's only been with us like for six weeks, so I think still needs to deliver the first quarter of leading the field and I think I hope that within few quarters we'll be able to see the changes he implemented, the new hires that he brings, a new spirit that he brings to America.

On top of that, I think that we have a large sales force that is doing a lot of different things. On the last few months we've spent a lot of energy trying to accommodate more the channel, support the channel, even though I must say that I think most of our work is - I mean I know putting the responsibility on the channel or an incentive program, I think it's our people that should work with the channel people. At the end that what would lead the charge moving forward.

We've done it better in some areas. We can do better in other areas and I think overall, as I mentioned, we had pretty good, very good first half in Europe and Asia, stable first half in the Americas, and I hope that the Americas will follow the suit with Europe in the next few quarters.

Tal Payne - Chief Financial Officer and Chief Operating Officer

Jonathan, maybe I would just add that some we can talk about and some we can't, but we did quite a lot of changes in the partnered program with MDF which was introduced as a pilot last year and increasing the amount this year. So it's a - lot of dollars have been poured into the working together and marketing efforts with the partners. We have different rebate programs in different areas. So it is quite a lot of changes in the marketing efforts with the partners and direct marketing as well.

Kip E. Meintzer - Global Head of Investor Relations

All right. Next up is Rob Owens, followed by Shaul Eyal.

Rob Owens - Piper Sandler - Analyst

Great. Good morning. Thanks for taking my question. Tal, want to focus a little bit around the P&L and you've seen strong billings, short-term billings as well for the last year, and revenue has been at this 4% mark and I understand there is still this transition, which we've had three years of hardware to software and how that all plays out. So is there a point in time where we should begin to see then the revenue growth accelerate from the 4% and converge more towards the billing - short-term billings type of numbers that you've been putting up in the high-single digits? Thanks.

Tal Payne - Chief Financial Officer and Chief Operating Officer

Good. So remember - so that is just yes, there should be an acceleration at a certain point. Remember that if you look at the P&L, the product revenue is about 30% and the rest is the subscription and the support. So - and the - what you see in the deferred is mainly the subscription and the support, right, the product portion there is quite small. So over time short-term of course should be reflected as the growth of the support and the subscription together.

Subscription is at 12%, support is a 2%, so it's still not in the rate that you see in the billing or in the deferred revenues growth, but it should get there over time. Products is separate. This is what you see in the P&L, is in line in high level, with what you actually sell because it's not going to deferred revenues typically, except for the split portion of the bundled of course.

Another point to mention is, well, we have an Infinity deal, a total production Infinity where you have product, subscription and support. The product portion, which is much better in the billings or in the deal, we need to wait until the customer pulls the product. Until he pulls the product, we cannot recognize revenues. And that portion is still sitting in the deferred revenues. So as we have more Infinity deals, you might have some delays also in the product portion, but once it will be pulled, you will see it in the P&L.

Rob Owens - Piper Sandler - Analyst

So is there a point in time then Tal that we can expect that?

Tal Payne - Chief Financial Officer and Chief Operating Officer

The future, yes.

Rob Owens - Piper Sandler - Analyst

Fair enough. Thank you.

Kip E. Meintzer - Global Head of Investor Relations

All right, our next question is going to come from Shaul Eyal followed by Patrick Colville.

Shaul Eyal - Cowen & Co - Analyst

Thank you. Good afternoon, guys. Tal, you've mentioned double-digit growth in the lower end of the appliances product portfolio, I believe. Is that a new trend or have you seen that picking up a little bit in prior periods? Why is that happening now?

Tal Payne - Chief Financial Officer and Chief Operating Officer

So I have to say, I see an improvement in the last two, three quarters there in number of units, and that's why I told when answered to the previous question, I said we're losing some of the dollars to the subscription deferred revenues. But the number of unit as a whole, it was a double-digit growth, not only in the lower end, the total appliance is growing double-digit, double-digit higher than 10, higher than 15 really healthy growth. So that was nice.

Low-end grew even higher, and yes, it's a trend, when we launched a new product line, it's really catching nicely. It's not huge dollar, that's why I don't discuss it a lot, but it is growing very nicely because we succeed to penetrate to a few places that are MSPs and they're selling more of this type of products.

Maestro also is a big item because once you have Maestro, you can link to it the difference appliances and you can start with small ones and then grow ahead you need more over time. So the trend in total appliance is quite nice to see. The install base is growing, the footprint is growing, the dollar is been allocated between so many lines, that's why you see the negative 3% but units grew over double-digit.

Shaul Eyal - Cowen & Co - Analyst

Thank you.

Kip E. Meintzer - Global Head of Investor Relations

All right, our next question is coming from Patrick Colville followed by Adam Tindle.

Patrick Colville - Deutsche Bank - Analyst

Hey, thank you so much for taking my question and congrats on an impressive set of results. I mean the way I see it, I think it's the fastest billings growth in four years, so very impressive. Can I ask, were there any large deals this quarter that might have benefited results or was the deal sizes typical for any given quarter?

Gil Shwed - Founder and Chief Executive Officer

I think we had an increase in large deals and that was very good in terms of, especially on the size of the deal. I'm not sure, I bet Tal can comment, if we actually benefited them financially this quarter because many of these deal, like Tal says, are Infinity deals when even the products portion may be deferred over a period of time. So Tal that's for you.

Tal Payne - Chief Financial Officer and Chief Operating Officer

Yeah. So I'd say first it was a really nice quarter when it comes to large deal, but we've seen it for a few quarters. So that's a nice trend in general, which is in line with selling more to customers and having more deals that have two pillars, three pillars, and they're multi-year. So that's nice phenomenon, which we expect when we succeeded in a specific quarter with a large Infinity deal. So that's one.

In terms of the revenues, most of it didn't get to the revenues yet, because remember, let's take a typical Infinity deal, majority of the - first you have a nice increase in the annual run rate with the customers. So let's take a deal that have 30% growth in the run rate. The subscription will typically start to be recognized only the quarter after, support will start to be recognized only the quarter after, because remember we're very back-end loaded. So typically the deal comes in the last week, last two weeks and so on.

Product, always depends when does the customer actually pulls the appliance. So we will see it in the product revenues only once you will ask for delivery and he has like a bucket each year. So if he signs three year's deal, he has, let's say, a bucket of $2 million for the first year, $2 million for the second year, $2 million for the third year, and you can take it immediately or over the quarters or at the end of the year, just as an example. So, there is less correlation between the timing of the booking and the billing versus the timing that you actually see it in the P&L.

Kip E. Meintzer - Global Head of Investor Relations

All right, our next question is going to come from Adam Tindle followed by Joel Fishbein.

Adam Tindle - Raymond James - Analyst

Okay, thank you. I wanted to ask on investments, Gil. You entered this year with expectations of investments in R&D and sales and marketing. In Q1 opex was flat year-over-year and from Q1 to Q2 revenue grew faster than opex. I think I was just bracing for more investments year-to-date. Wondering how this has played out versus your expectations entering this year? And maybe Tal can touch on how we can think about investments on a go-forward basis. Is this going to extend over a few quarters where margin is going to continue to trend down below 50%? Thank you.

Gil Shwed - Founder and Chief Executive Officer

First, yes, we do want to invest heavily, especially in sales and marketing and in R&D. We've hired many, many people since the beginning of the year. So I mean the hiring is actually going very well. We have received a lot of CVs. Our profile as an employer is actually also working very, very well and we see huge increases.

On the same time, entire industry is also seeing increased attrition for - I must say that when I analyze the data, I'm happy to - I mean I know I'm not happy with high the level of attrition. I'm happy to see that amongst our high performer, amongst our leaders, it's still relatively low, but to match the two together, it's hard.

So I think overall, we're like a 100 people up in the past few months once we started investing more in the hiring, but there is still much more that we need to do. For me, I would like to hire, I would say, probably another, net not gross, 300 more positions between now and year-end, maybe even more, I'm just trying to be realistic in what we think we can achieve.

Tal, anything that I missed on the numbers here?

Tal Payne - Chief Financial Officer and Chief Operating Officer

Yeah, I would just say, Adam, you're absolutely right. It's - we have a plan and we are ramping up. That's why I mentioned it, because I didn't want you to have an expectation that is going to be in [Indecipherable]. We did recruit, but we didn't recruit all the plan because we are increasing the plans as well. And the market is, you have people coming in, people coming out, you see it all across the board, right. So we are ramping up significantly that also. The recruiting probably - hopefully you will see a reduction in the - hopefully you'll see a reduction in the margin Q3 and in Q4, as we continue to recruit the people that we want in order to execute on the growth, on the revenues over the longer period.

Kip E. Meintzer - Global Head of Investor Relations

All right, our next question is coming from Joel P. Fishbein.

Joel P. Fishbein, Jr. - Truist Securities - Analyst

Hey, good morning, good afternoon. I just have a follow-up. Gil, you talked a little bit about concerns about the macro environment, but you're - obviously your win rates are very strong here. I'm curious about the funnel and the pipeline going into the back half of the year, if you can give us some color around that irrespective of your macro concerns?

Gil Shwed - Founder and Chief Executive Officer

So first, I think - by the way, the need for cyber is going to remain with us for a long time. So I mean, the long-term projection with eye for cyber space is positive - is very positive. And I think the fact that companies, I mean right now, the competition is very tough, there is a lot of good companies around us. But on the same time, I think the value proposition that we provide in terms of the level of security, in terms of consolidation, I think will win over the long run.

In terms of the pipeline that we're getting with, I think the first [Phonetic] quarter started with very positive pipeline, especially in the places that I say we are seeing the nice changes in the management. So in Europe, in Asia, it's very positive. In the U.S., it's also improving, but for the U.S., I think it will take us a few more quarters until we will see the effect of all the changes that we are implementing.

Kip E. Meintzer - Global Head of Investor Relations

All right, our next call - our next question is going to come from Gray Powell followed by Gregg Moskowitz.

Gray Powell - BTIG - Analyst

Great. Thanks for taking the question. So, yeah, it was good to see the additional disclosures on CloudGuard and Harmony, 20% of revenue, doubled since 2019. How should we think about growth in those products going forward and how big do they become over the next call it two or three years?

Gil Shwed - Founder and Chief Executive Officer

Before Tal gives you a little bit more of the numbers, if she can, I don't know if we can or if we have specific projections for them, I must tell you that there is a huge discussion in the marketplace about the potential for cloud and so on, and yet at the end, it's a pretty small market today.

And we're seeing the big vendors selling, I mean I think I saw this week one of the analyst categorizing the big companies in cloud, security companies with over $50 million in revenue, which is even if it goes to $100 million or $200 million it's still tiny compared to the average security sub segment. So I think we all bet on the cloud. We all think that the cloud is going to be very important for the future but we will see how quickly it will evolve and how big it will become.

From my experience for three decades now, some of these markets become real and become important and that's why we bet on them. Some of them become important but not that big. So I mean, we are right now betting on the cloud but it's still not a giant market. For us, I do expect that we will see consistent double-digit - high double-digit, not low double-digit growth in Cloud and in Harmony and they will become a significant portion of our revenues and take share from the network security and Quantum. I also hope that the Quantum family will grow, but the Quantum, I think, the projection, if we get everything right that it will grow in, I mean, single-digit or low-double digit percentages, if everything works perfectly well in the world.

Tal any feedback or…

Tal Payne - Chief Financial Officer and Chief Operating Officer

No, I think it's correct. At the end of the day, if you look at the way we build it, we build a few growth engines in order to - if one of them succeed, we will be in a good shape. I think Harmony, it's a great potential and Cloud is a great potential and Infinity is the combination, right, so it can be Quantum and Cloud, Quantum and Harmony, CloudGuard and Harmony, so it can be a combination but they're all philosophies, let's up-sell through giving value to the customer of consolidated security, the best security and in an affordable price. That's at the end of the day the approach and most of those dollars will come into the subscription line.

So hopefully, you will see what you saw before where we had 9% growth in subscription and then moves to 10%, 11%, 12% and hopefully it will continue. So that's why you will see, if one of the two or both of them will continue in the double-digit, they will get big portion and therefore subscription growth will continue to grow. This is when [Phonetic] it will be pulled-up, because remember, support is linked to the product, so - and the product is their clients. So, I would say, support and product, there's potential there when you get a bigger footprint in the customer Quantum, but Cloud and Harmony, majority of it, if not all of it, is already in the subscription and there's where you should see, if we were succeeding the plan.

Gray Powell - BTIG - Analyst

Got it.

Kip E. Meintzer - Global Head of Investor Relations

All right, our next question is coming from Gregg Moskowitz followed by Saket Kalia.

Gregg Moskowitz - Mizuho - Analyst

All right. Thank you for taking the question. So you outlined, Gil, some case studies that involves new customers and/or customers that have expanded in the cloud with Check Point. So now that we're halfway through 2021, I'd love to just hear how things are tracking with respect to your goals for sales to grow their new business by 20% this year?

Gil Shwed - Founder and Chief Executive Officer

I think in Europe and Asia, we are on track, not really full hit, the full 20%. But I think we had a very good first half and in Europe we had an excellent second quarter and we are tracking right. In U.S., we are seeing stability, we've seen some good changes there, but again, it's still too early to say what we will see at year-end.

Gregg Moskowitz - Mizuho - Analyst

All right. Thank you.

Kip E. Meintzer - Global Head of Investor Relations

All right, our next question is coming from Saket Kalia followed by Brian Essex.

Saket Kalia - Barclays - Analyst

Okay, great. Thanks for taking my question here guys. Maybe just a broad question on guidance for you, Gil. I don't think we saw an update to the annual guide, and I was wondering, if now that the first half has done and we have a Q3 guide, was there any commentary that you wanted to make here on Q4 or just how you thought about the prior annual guide, just as we think about sort of fine-tuning our models for the year?

Gil Shwed - Founder and Chief Executive Officer

No, I don't think that we have many changes for now. We are staying with our annual guidance. I think everything is tracking okay. I wish that I would have saying that things are tracking much better than what I think, and it may happen, you never know. Again in all my experience, we sometimes had suddenly a huge wave of deals coming through the last quarter, and it ended up very well. In some years, we ended up very tough, I must say. But for all the years we finished them well, we finished them on plan. But I think it's not too early, I mean, I will know that answer probably somewhere in the end of December. That, to your question, how it ends [Phonetic].

Tal Payne - Chief Financial Officer and Chief Operating Officer

That's the reason why - I understand why you're asking it, because you see we are higher than the midpoint of our guidance, which I completely understand. But you know the biggest question to your question of the annual, is that product booking of Q4, and it's such a low visibility that there's no point to play with the guidance before you finish the year, right.

Saket Kalia - Barclays - Analyst

Got it. Thank you.

Kip E. Meintzer - Global Head of Investor Relations

All right, our next question is coming from Brian Essex followed by Ben Bollin.

Brian Essex - Goldman Sachs - Analyst

Yeah, thanks, Kip. Gil, congrats on the results. Looks like solid billings growth for sure. I guess, I wanted to ask if - I'm told I get one question. So I guess I'd like to ask about the channel and what you're seeing in the channel. We're hearing about greater competition among channel providers, Westcon in particular, more competitive on the margin.

How does that - what are you seeing in your business, I know your margins are relatively stable with regard to impact on pricing, relationship with channel and these new deals that you've done that you kind of highlighted examples, how many of those were Check Point driven new relationships versus channel driven? Thanks.

Gil Shwed - Founder and Chief Executive Officer

I think what drives the channel, I mean there's a lot of discussion about channel programs and the margins and the - and all of these. I think that has the least effect on the channel performance. And I'm sorry here, but I mean sales people would like to say increase margin, everything will follow. I don't think that that works.

First, we provide good margins to channels and it's a good business. But at the end of the day, at every deal, everybody wants to win. So if you work together and everybody wants to win with something that's very familiar and they know and they feel that they can deal with. And I feel that for a long time, and again, I don't want to go into the past, we've taken more and more ownership of our deals, we worked more closely with customers and the channel role.

The channel, by the way, is involved in all our deals. I think we're the only vendor that's a 100% channel. But the role of the channel became a little bit smaller in some of the deals, and I think one of our tasks is to actually make the channel role bigger, which is actually make the channel work harder which is get the channel to bring us customers but also support the channel in a much better way because when people work together they are committed, they see how we - how they win, they become motivated, and again when you win, you also, I mean, all the margins and all the program take effect.

And I think we are trying to invest more and more in that and it's a lot of education, it's a lot of working closely with, I think we get a lot of good feedback recently on both the programmatic side and also the field side. In the programmatic part, I don't think - again, we can do more, but I don't think that will create the big differences. On the field side, we can do much, much more than what we are doing. We need to educate every field person, every channel person, every account manager person on how to work together with the channel and I think if we'll do that we can get very, very nice yield and increase in the effects that we get from the channel.

Again, I was born - I built a lot of the security channel that we see today is not a lot, all of it didn't exist when we started Check Point. But part of it, I don't know, if it's 60%, 70% or 80% of the channel partners that exists today in the marketplace were born and raised with Check Point, and I think it's our job now to win them again and to make them work with us and for us and for the customer by the way, it's not for us it's for the customer to bring them the best solutions.

Kip E. Meintzer - Global Head of Investor Relations

All right, our last question of the day is going to come from Sterling Auty. Please proceed.

Sterling Auty - JPMorgan - Analyst

Thanks guys. So I'm kind of curious, Gil, I think there is a perception from investors that there is a surge in security spending because the increase in ransomware attacks and the SolarWinds breach etc. How would you kind of characterize what you're seeing? Do you think that there is a surge maybe like we saw back in 2013 or 2014 or is it a modest increase? How would you characterize it and how sustainable is it?

Gil Shwed - Founder and Chief Executive Officer

At least from what I've seen, and again, I'm not sure that I'm following all the macro trends, there's a modest increase. There is not a surge, there's not a huge increase. And the main thing, by the way, today is not the shortage of budgets or anything like that, the main thing is the confusion, customers don't know what to do. There is a way too many vendors; in large customers, there's way too many opinions within the account; in small customers, they're overwhelmed by the spectrum of solutions.

By the way, I saw some - we had some - I didn't talk about them here in the examples, but we have some customers that bought into the total Infinity Total Protection, the full Check Point architecture really doing a 100% or close to 100% of their security. We had a few deals like that with small companies, few hundred people in different areas in construction, in transportation, in finance, in low firms. We have a nice collection of deals like that with Infinity, these are amazing.

And when I meet with the person they're saying, you see - and he's telling me, you see to me alone, I can deal with 12 vendors, I can deal with 55 vendors, which is what companies like yours are dealing with. And for me, the Check Point Infinity is really saving me in terms of the ability to deliver the highest level security.

And by the way, business-wise here is the technology it turns an account like that on normal days, the sales force would look at them as a minor customer with the potential for a $10,000, $20,000 transaction and the sales people would like to focus on a bigger one and make these customer a few hundred thousand dollar customers because they now buy the full portfolio for three or five years and suddenly from $20,000 customer, it becomes $0.5 million customers, and now everybody pays attention.

So this is part of the potential. Again most mid-sized companies are not there yet, but I have good examples of customers like that. And again I gave some of the fields that we saw. So these are pretty good.

Sterling Auty - JPMorgan - Analyst

Makes sense. Thank you.

Kip E. Meintzer - Global Head of Investor Relations

All right. Thank you all for joining us today. We appreciate you guys attending, and we look forward to speaking to you all throughout the quarter, and we'll see you next earnings call. So thank you and have a great evening or day.

Gil Shwed - Founder and Chief Executive Officer

Thank you very much.

Kip E. Meintzer - Global Head of Investor Relations

Bye guys.

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CHECK POINT SOFTWARE TECHNOLOGIES LTD

Q2 2021

Earnings Transcript

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