Check Point Software Technologies Ltd (CHKP) 2022 Q2 法說會逐字稿

This meeting is being recorded.

I like to welcome everyone to our Second Quarter 2022 Financial Results Video Conference Call.

(Operator Instructions)

Formal presentation will be followed by a question-and-answer session.

Joining me remotely 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 and is recorded for replay. To access the live conference and replay information, please visit the company's website at checkpoint.com. For your convenience, the replay will be available on our website. If you'd like to reach us after the call, please contact Investor Relations by e-mail at kip@checkpoint.com.

During 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 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 our products and solutions, expectations regarding customer adoption of our products and solutions, expectations related to cyber security and other threats, expectations regarding our Q3 2022 projections, our 2022 initiatives, the market for IT security, competition from other products and services supply chain, general market, political, economic and business conditions, including the impact of the COVID-19 pandemic.

These forward-looking statements are also subject to other risks and uncertainties, including those more fully described in our filings with the Securities and Exchange Commission, including our annual report on Form 20-F filed with the SEC. The forward-looking statements in the presentation are based on information available to Check Point as of the date hereof, and Check Point disclaims any obligation to update any forward-looking statements, except as required by law. In our press release, which has been posted on our website, we present GAAP and non-GAAP results, along with a reconciliation of such results as well as the reasons for our presentation of non-GAAP information.

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

Thank you, Kip. Good morning, and good afternoon to everyone joining us on the call. I will start with a review of the second quarter and right at the back, you can see that we had an excellent quarter both revenues and earnings per share at were the high end of our projections, $571 million revenues, which is $11 million above the midpoint of our projections. Earnings per share of $1.64, which is also at the high end of our guidance and $0.04 above the midpoint of our projections.

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, as applicable non-GAAP information is presented excluding these items.

Now let's take a dive into the numbers, and I will start first with the revenues, which were quite nice this quarter. I will start from the total revenues. Revenues for the quarter accelerated reaching $571 million, which is 9% increase and increased from the $526 million, basically more than doubled the growth rate compared to last year Q2, which was around 4%.

And now you will ask me about the billing. So let's hit it as we start. Billing in the quarter reached $571 million, which is a 6% increase I want to remind you that the billing for us is affected significantly by the deal timing, duration and the payment terms. Hence, it can fluctuate between quarter-to-quarter. Specifically, when we have the mega deals, mega deals is $20 million, $30 million, $40 million deals. In Q2 last year, if you recall and go through the script back then, we said specifically, we had quite a few (inaudible) mega deals, which were built in advance. So mega deal can happen but can be built over time or once a year in the split payment.

Last year, we had a few large deals, which were built actually in advance which created the dip in the billing right now, but no effect on the run rate and on the growth rate in general, which you can see very clearly in the P&L.

Deferred revenues is somewhat including that because if you compare the deferred revenues, if deals came instead of in Q2. In Q4, or got advanced it, then it will be part of the deferred revenues. So you can see deferred revenues is healthy at $1.666 billion, which is an increase of $194 million or 13% growth year-over-year. So that's to cover the subject of the revenues.

If you go to the split in the revenues, first, let's start with the 2 line items that together called product and subscription revenues, together with a double-digit growth, 13% growth year-over-year, reaching $343 million. It's a double-digit growth in this 2 lines together for 2 quarters in a row. So it's nice to see it stabilizing on a double digit, and hopefully, it's planned to continue. So it's a great milestone for us.

Even more than that for the first time in many, many quarters, probably maybe 10 years, we had a really strong product and license revenues. I'll remind you that last quarter, when you asked me about the billing, I told you some of it is products that had delayed delivery Infinity where we wait for customers to pull or just delivery of 2, 3 weeks after the order. It could happen every quarter. It also happened this quarter. We have quite a lot of that as well in this quarter.

So that's also slightly affecting the billing, but you can start it already seeing it translating into the P&L, and we see 12% growth in our appliances. It came from -- like last quarter when we talked about it also from SMB mid, large appliances, Maestro was very strong, which is the switches that enable us hyperscale network. We see Infinity customers also starting to use their product allowance as they implement the security solution in the organization. So it's a very nice quarter for the product reaching double digits for the first time in a long time.

We look at the subscription, it was double-digit for a while and it continues to be nice with 14% growth in the subscription, reaching $210 million, an increase from the 12% last year of the $184 million last year. The growth continues to be driven by all the items growing, Quantum, CloudGuard, Harmony. But the double digit is driven by CloudGuard and Harmony, both of them considered new pillars for us on the last year or 2. Our Harmony e-mail security continues to deliver great results and reminding you that we acquired some of the e-mail came from an acquisition in September last year, which will be annualized in September. So we see nice growth in both of them, both cloud and in harmony. All in all, it's about 37% of our revenue is the subscription now. So it's becoming quite a large engine for us in the revenue growth and creation.

If I'm going to revenues by geographies. So what you can see here, the percentages are the same like last year. So you see 44% in EMEA, 44% of our revenues coming from Americas and 12% from APAC. If you calculate year-over-year, you will see the revenues grew across all geographies in quite a similar rate. So quite a healthy business all across our regions. So that's also pretty nice and stable.

I'll move to the profitability. So of course, you hear it from many, many companies have included. Revenues we discussed. Gross profit moved up from $470 million to $501 million strong gross margins. So we continue to have strong with 88%. It's a tick down. We actually pay significantly -- we talked about in the last 2 quarters in a row. It's -- I actually expect it to continue for the rest of the year, which is part of the pressure on the margin, but it's okay. It's the temporary increase in the cost relating to either putting our hands on raw material on the open market or expediting shipment because you need to get it early to the production line.

These are strong margin taking into account these higher material costs and also shipping costs. Hopefully, this temporary phenomena will go back to normal towards in 2022. It's too early to say, but it looks like for the second half of the year, it's still here. We see the raw material coming in, this raw material that we produce now are going to be part of the cost in the next 2 quarters. So great results taking into account the massive pressures that all the companies are seeing in the raw material market.

Operating expenses very similar to last quarter. We see operating expenses increasing faster than the revenues in 18%. This is in line with our plan from the beginning of the year. I'll just remind you, our plan was -- we're going to continue to increase our workforce, mainly in sales and R&D. We continue the elevated investment in our bucket, which is mainly CloudGuard and Harmony. So in line with the plan, we increased our workforce year-over-year, even double digits, both in sales and in R&D. In sales, we still have some recruiting to continue. The year-over-year operating expenses increased mainly as a result of that fact, the compensation. Of course, return to travel and face-to-face interaction some cloud expenses and the acquisition that we had last year of Avanan and Spectral this year. So that's also part of those expenses. And there was not part of the original guidance, therefore, us meeting the EPS after these acquisitions as well, it just shows the strength of the results.

If I'm moving to the -- below the operating income. So what we can see here, operating margin is higher than we planned. It's actually 44%. We planned it slightly below because we're still in the recruiting process, we still haven't finished. Financial income. We're starting -- you don't see it here because Q2 versus Q2 is $10 million. But if you compare to Q1, the sequential quarter, you will see an increase. As our portfolio is being released, we invested in higher interest rate and we start to see an increase there.

On the other hand, on the taxes, tax provision are getting indexed since -- as you know, the index is quite high. The inflation, which is the indexation is quite higher than nobody planned for it. It's part of our tax expenses. That's why you see it moving up to 19%. They deducted each other. Therefore, the net effect was minimal this quarter. And the total net income is $209 million, earnings per share, $1.64, which is $0.04 above the midpoint of our guidance. So quite good earnings per share in operating income.

If I'm moving to our cash position and cash flow, I will start with the cash balances. So our cash balances as of the end of the quarter was $3.7 billion. Our operating cash flow this quarter was $212 million, I'm reminding you that we hedge our balance sheet against currency fluctuations in order to minimize the effect on the P&L. So as you do balance sheet hedge, it minimize an effect on the P&L and protects our P&L and also this quarter it happened, but the fluctuations you see in the cash flow. This quarter, the fluctuation in the cash flow was significant. It was about $47 million, the hedge cash expense versus $6 million income in Q2 last year.

Net operating cash flow, excluding the effect of the hedge and taxes is an increase of 2%. So quite a healthy cash flow with continued strong collection from our customers and expenses in line with the growth of our headcount and expenses in the P&L. During the quarter, we also continue our buyback. You can see here, $325 million share repurchase continue. We purchased 2.6 million shares for $325 million, an average price of $123 to $127 per share. So that's the cash position.

So if I summarize, we had strong results, revenues and EPS in the high end of our projection with accelerated revenue growth, double-digit growth in products, double-digit growth in subscription and we are continue to be focused on the top line while maintaining very strong profitability.

And now I will turn over the call to Gil for his insightful comments.

So thank you, everyone, and glad to have you all join us. I will jump right in to give a little bit more color to the business and the environment and mainly about some customer wins. But before that, I want to congratulate our Kip for his birthday. You see that Kip picked a very special day for his birthday and the best group of people that you wanted to celebrate with. So happy birthday, Kip.

Happy Birthday, Kip.

Thank you. Thank you very much.

And now let's talk a little bit about the threat landscape, which, as you can see, continues to intensify. We've continued -- I mean, we are seeing it for a very long time, and it's actually quite rare that for so many years, we are seeing such a, I would say, tense market, but we're seeing 32% increase in overall cyber attack. We see per organization on a global basis and 59% is sophisticated attacks like ransomware. You can see the statistics last quarter, 1 out of every 40 organizations was impacted by ransomware.

And even more so, these attacks are now going beyond just small scale attacks or just hacking groups to a much bigger impact. We've seen country extortion, we've seen a nation state organization using Gen V attack tools. And we've even seen a lot of geopolitical attacks happening in many, many parts of the world when one country is either spying or actually even attacking and using cyber warfare as a way to disrupt life in another country.

So this is something that's now part of our real life. And with that, we anticipate, and I think almost everyone around us that the strong demand for cybersecurity will continue with that continuous wave of fifth-generation cyber attacks.

I believe, and I think we are seeing that customers, of course, will need the best security, which is what we stand for and what we aim to provide I'm pretty sure that customers will understand and will prefer solutions that are focusing on prevention and not just on detection of cyber attacks. And I think at the end, consolidation will also take a bigger pace both because it delivers better security and also because most organizations cannot manage the complexity of using tens or even more of different cyber solutions, which is happening in many, many cases.

So that's kind of the big threat landscape. How do we address that? Just to remind you, we have in Check Point, what we call the Infinity architecture. I think it's, by far, the most integrated, the most comprehensive cyber security architecture in the market built on 3 pillars or 3 product families, Quantum, most of our business network security; CloudGuard, for the cloud and Harmony to secure users access; and now even e-mail, it's built upon a common management layer; and on ThreatCloud, which actually makes sure that all that information is being shared, integrated and proliferated in real time from one vector to another and we achieved the highest level of security.

How did we do on all these 3 pillars in the last quarter? And I think the good news is that we've seen accelerated core growth in every product pillar. In Quantum, we've seen nice growth from the low end, from the branches and SMBs all the way to the large installations. We've seen I mean you heard about the product numbers, the product double-digit growth, but even more so the unit growth was also very good.

And again, all the way from the very small to the very large. CloudGuard, same thing continues double-digit growth and with Harmony that we've extended Harmony with big investment in e-mail security last year. We've seen over 50% growth in the e-mail security part, which is great.

And I think you've already seen this slide from Tal. So I'll just repeat that shortly. We've seen 9% revenue growth, highest growth in years, more than double than the rate that we've seen in the last couple of years. And that's really fueled by the double-digit growth in products and subscription. You see the green line here. And you see the correlation between the lines when the green line actually takes up eventually the blue line, the total revenue growth. So I mean we are very happy about that trend. We've been investing in that for a long time. And the last 2, 3 quarters, we are glad that restrained intensified. How does it go with the different pillars? So I think the story here is kind of repetitive. Quantum, we've seen strong product demand from the SMB to the large enterprises double-digit growth from the gateways.

And let's look at a few wins. I'll actually start from the small gateways here, and these are both branch offices and also for small businesses. Here are a few examples. Utility companies in Europe, more than 6,500 ruggedized gateways for the different power stations that are stationed all over the country. Another example is the European telco that's using our product to secure shops across the country, zero-touch deployment, very nice type of deployment.

A little bit less usual in Europe, another humanitarian organization that's actually using our gateways for refugee housing project. And this is actually -- first, it's so nice to see that our products are used for such purposes. And it's also nice to see that in 2022, one of the first things that refugees get is actually Internet access and even secure Internet access. That's so important. So that's another project that we just won. And last but not least, is 2,500 gateways in APAC, a big telco that's using that to manage service for again 2,500 small businesses across the nation. And this somewhat represents some of the wins that we have in the lower part of the market.

If you look at the upper end of the market, I picked Tier 2 examples. Both of them are new customers. Both of them are competitive replacements. You can see on the right, the health care provider in Asia support high capacity to get to 20 sites. They liked our management. We replaced their Fortinet and won against Palo Alto. And on the left side, very similar story, slightly different product sets, super high performance with our Maestro scalable performance.

And the reason we picked as is wasn't just for the performance even though we took Maestro is simply because our solution was the only one that actually blocked the malicious file that they were getting. They were getting malicious files -- all the average solution that they tested merely detected these files, but let them through. So people can open the attachment and still be infected, even though the system, in some cases, could recognize them, Check Point, and again, that's consistent with our architecture. We were the only solution that actually blocked the malicious files and didn't let them through. And of course, that's by no coincidence, should be a winning factor to get such an installation. So this is for Quantum.

Let's look at 1 or 2 examples around CloudGuard. Again, here also continued the growth, and let's look at these 2 examples. In Europe, an important financial institution had the business transaction -- business acquisition. As a result of that, they were looking a way to control their more sophisticated cloud environment that spans between AWS, Azure and the Google Cloud. They wanted better compliance, better visibility, and they actually -- even though, by the way, in this case, many organizations are deploying a solution for the first time. Here, we did replace another solution and won this account.

Another organization in Europe, a leading retailer, part of our cloud transformation. They wanted to get better manageability. They liked our road map of how we provide more and more security to the cloud and another winning factor was the fact that they can connect and control both for on-premise environment and we're a public cloud solution using the same unified experience using similar tools and connect them in a better way. So another nice win on the cloud front.

Last but not least is the Harmony sector, securing users. And again, we've augmented the Harmony with the e-mail security towards the end of last year, and you see the numbers have really accelerated there. They were good before, but we're even better after the consolidation. And 3 quarters later, the numbers are still growing very, very nicely with over 50% growth.

And here, you can see 2 examples in the U.S. One is a holding company. They're challenged by the way, similar to what we've seen with Quantum before, and that's the nice thing in Check point. We apply the same principles, the same technology to different attack vectors to different entrance vectors to the organization. So here it's with the Harmony e-mail. Their old security solution didn't stop the ransomware attempt. Harmony e-mail, identified over 2,800 attacks from very mailboxes and not only identified them, but actually blocked them, highest -- they found the highest effectiveness of e-mail security packages from everything they've seen.

And to the right, another major company in the U.S. in the safety and regulatory compliance industry. Harmony was the only solution that was able to deliver to the unified experience across e-mail, endpoint and mobile, both cases, by the way, it's both new customers and the competitive replacement, which is, in many cases, the best cases. So as you can see, we have this winning streak across all product pillars, across all geographies and across many customer segments.

So to summarize, the quarter what we had, I think you see that the main theme here was the double digit -- the fact that we doubled the revenue growth, the fact that we had a double-digit growth on our products and subscription that drives the new business and drive the business growth. We've got to the upper end of our projection on both revenues and EPS -- and we've continued to see healthy demand both from Quantum, from the small to the large and for Harmony and CloudGuard. So I think overall, I'm very pleased with the results this quarter. And I hope that we'll keep seeing a good market in the quarters to come.

Now before we open it for the question and answer, let me touch a little bit on the guidance and the projections for the next quarter. So let's speak about the projections. Our projections for the third quarter, as you can see on the slide, revenues in the range of $555 million to $585 million. Non-GAAP earnings per share between $1.60 to $1.72. GAAP EPS is expected to be approximately $0.32 less. I always say this caveat, projecting the future is nothing that was given to human kind. I mean, it can be better than what we anticipate it can be worse. I think overall, we are seeing, on one hand, good execution on the Check Point field side, good enthusiasm for us and our team and the healthy demand in the marketplace.

On the other hand, I think you all know that the economy is showing some signs of softness, and there is a lot of uncertainties around that. Some things we see and we know that will affect us like the increase in cost, the fact that the supply chain remains challenging in our regional model, for example, we were predicting that the supply chain issues will kind of get sold in the second half of this year and cost will return to the original cost. Right now, we don't think it will happen in the next half of the year that has an impact on the expenses side.

The revenues and the business growth side, that's something that's even less in our control and less in our ability to project. But again, I think we remain quite positive and with actually a little bit up the range for the revenue. So I mean, you can see that for projection for our third quarter, we're actually better than our original plan and better than what many of you expect based on your current models. So that's -- for the forecast, Tal, do you want to add something on the projection before we open it for questions? You're mute, Tal?

Sorry, no, let's leave it because probably going to ask questions about it. So let's open the floor for the questions.

Good. So I'll stop the presentation, and we'll open it to your questions.

All right. (Operator Instructions) Today, we're going to start out with Gregg Moskowitz from Mizuho followed by Tal Liani of BofA.

All right. Happy 20th birthday to you. So question for Gil or Tal or perhaps both of you. regardless of the macro environment, Gil, if I'm understanding your tone correctly, it sounds like the demand drivers for Check Point are still healthy and intact. But similar to last quarter, your billings were a little below consensus. And in the Q1 period, you had called out that bookings grew strong double digits year-over-year, and that RPO grew over 20%. And so wondering if you're able to share with us what the bookings growth and/or the RPO growth was this quarter.

I will let Tal talk about that. But before that, I'll just say that I think the main reason for that is that a year ago, we had some mega deals. And these mega deals, again, we have like a group of like a dozen customers worldwide that even get to -- not even a dozen, less than a dozen customers. And I think a year ago, we had 3 of these customers that signed a 3-year contract prepaid in advance, and I'm talking contracts for tens of millions of dollars, that had a very positive impact on the billing last year.

So that's the main reason. In this year since they were a 3-year deal, they are not even a renewal or anything like that in this year. So I think overall, for the quarter and for the first half, I think we finished it in line with -- or not in line, slightly better than what I would anticipate for what I wanted. And again, Tal, you can speak more about the numbers.

Maybe I'll just add another one because it's important. I know we're going to be asked about it every quarter. And you know, Gregg, because we are following us for so many years. I always said, billing is not a relevant indicator, but I will provide it to you because you're asking. The reason I said it is always because of that. The mega deals changed dramatically that number and the timing of the payment as well.

And if a deal is being pulled 1 quarter forward, then you have -- and it's a big one, then you will see an effect on the billion with absolutely no effect on the real run rate and vice versa. They can come one week later. It can affect your billing and then a week later, it comes and suddenly it's very high.

So it is an indicator, but I would look at it as part of the bigger picture, and that's why I'm trying to give you more color. So last quarter, it was not about the comparable. Last quarter was about -- we talked about that we had the booking that came, there was not even invoiced yet. And we talked about that in length last time. This quarter end goes. You had invoices billing or bookings that came in was not invoiced. And they're part of the booking. And I can tell you that the new business grew in double digits this quarter as well, okay?

But the biggest effect was really relating to the last year comparable that had a few really large deals, but think if a customer had a large deal last year, it will create a big increase in the billing hence translate over time deferred revenues and so on. But in this quarter, you won't have it so it will actually create a flat or even a reduction, although the business is very healthy with that customer. So I'll say be careful from just concluding for billing. That's why I always tell you, look at the deferred revenues, look at the revenues over time, look over 4 quarters and so on.

So I keep saying the same thing. This quarter was mainly about the fact that there was quite a lot of deals last year that not only was booked in advance, but also build in advance.

Our next up is Tal Liani, BofA, followed by Adam Tindle, Raymond James.

I want to talk about demand and ask. Can you -- can you talk about your expectations for demand cyclicality, meaning in past years, we had better years of higher growth and lower growth, and we're coming here after 3 years of very strong growth of demand for core products. And beyond just the new products, can you talk about your expectations for any demand cyclicality? Any reasons for demand to slow down or accelerate for core products?

And second, on the same topic, you have new sales management in certain regions and you have new products. Can you talk about the breakdown of new customers and old customers, meaning are the new efforts -- do they help you to bring in new customers that you didn't have before?

First, I don't see much patterns right now in the cyclicality. There is, of course, many factors. Some people anticipate that the network security business will slow down because there is a shift to the cloud. So far, we haven't seen that. Actually, if there's a mistake that we made in the past, is maybe under investing in the network security and overinvesting in the cloud. On the same time, again, the cloud will become and is becoming a very important factor. So I think the investment that we have here is well justified. But I think the network security so far remains a strong element.

And from the cyclicality, again, we have customers all sizes all around the world. So I think a lot of it is our execution. But again, we may see bigger factors than just that.

In terms of sales management, I think you're hitting on a good point. We do have a relatively new sales management, reenergized, leading our field. Rupal who's running -- Rupal Hollenbeck who is running our global commercial organization, sales, marketing, and all these functions. Joined us about a quarter ago. This was her first quarter in Check Point. Before that, she was a Board member in Check Point. So she knows us quite well and it was very enthusiastic about the opportunity. It's great to see that refreshed energy. Her team is also relatively new.

Our Head of Americas has been with us for just over a year, and our Head of Europe where both is about a little bit more than 1.5 years. So I think overall, it's a very, very good thing. By the way, Interestingly enough, when you look at this new world, this week, we are meeting here in Tel Aviv for the first time in person. So it's kind of interesting to see that we are a global management team from, I don't know, 5 countries, maybe more. That's been working together for anything from a year to 3 years and are meeting, seeing each other for the first time in person just this week. We started the week by asking everybody to stand up and saying, "well, you got legs", because for the first time, we've met the entire team. And we are also very tall so that's a challenge. So we are here in Tel Aviv this week.

So, in terms of new customers, existing customers, I do put a strong emphasis on new customers. We are seeing that successful, especially in Europe and Asia. We also got some nice wins. I think I showed them in the Americas. But I think in America, in the U.S., especially, we have plenty of potential toward more new customers that will join the Check Point family. And a lot of our growth also comes from existing customers that expand. We are actually seeing that -- in many cases, we win new customers with our network security, and we win and with the existing customers, we've actually expanded and add things like the CloudGuard.

I think the pattern in many cases is that they like Check Point because of the network security and then we expand to the cloud. With Harmony, I've seen both cases, some new customers that start with Harmony and some existing customers that expand to Harmony.

All right. Our next question is going to come from Adam Tindle from Raymond James, followed by Saket Kalia from Barclays.

I just wanted to ask, you've got some company-specific tailwinds to both growth and margins as we look forward and I wanted to double-click on each. On growth, maybe you could recap the pricing actions that you've taken to date if I've got it right, I think there was maybe another one just about a month ago that you took. So pricing actions to date that should catalyze growth moving forward.

And on margin, Tal, you mentioned material costs. You also have some currency that I'm not sure immediately reflects. So the tailwinds to both growth from ASP increases and margin from material costs and currency moving forward would be helpful.

Yes. So maybe first on the pricing, you're correct. We had a price increase from the beginning July. So it's not relevant for this quarter. theoretically should be relevant for the future, but I would say, there's a gap between the theory and the actuality in terms of what you see when the deals are coming in. So hopefully, it will help. But I'm not counting on it, let's put it this way, because there's a lot of pressure also on our customers now because we're all in this new economic environment. So it's a tool to try to , but I hope it will help, but I'm not sure. So that's one. Regarding the...

Just to capture that. I think so far, the price increases that we are doing are trying to kind of pay for the increase in COGS. But on the same time, there is a counter pressure on discounts. I think overall, it kind of balances off. It's not -- customers are not paying -- let's -- if you look at the average, customers are not paying a higher unit cost to Check Point at the moment.

So Adam, it is the good result is the discount will not increase, right? I don't plan it to actually increase (inaudible), but maybe who knows. I don't think so, but we will see. When we're looking at the cost, it's definitely increased. You can see, to be honest, I'm not that concerned about it because I believe at this point of time, I think it's a short-term phenomenon and much more important is to be able to deliver. I think you can see in many industries, there's just no ability to deliver. And that kills the entire model, right? It kills your ability to deliver. So our focus is -- even if we need to pay more, we want to pay more in order to get it and to be able to ship it to our customers and keep them secure.

So that's our -- and the price for it is that we lose a few sells, but I don't think it's a big deal. I was hoping that it will fade away in the second half of 2022, but it doesn't look like it's going to fade away at this point of time. So we will follow up, and we will update you as we see some changes. But again, for a company like us, $10 million is not nice, but it's not something that move us to a problem, right? We have profit. It's okay. So that's regarding that.

Will it stay the same or increase the gap might even increase, right? Because remember, every time there's something new showing up, some things are moving like problems solved in certain raw material -- and some problems are not solved. And if you follow the company or the chip companies that's published, it doesn't look like they're going to solve the problem in Q3, I hope, in the future.

So everything they see in publish is affecting companies like I think like servers and all the raw material that the server needs. It's quite a lot of effect.

All right. Our next up is Saket Kalia, followed by Joel Fishbein.

Okay. Great. And happy birthday, Kip. Tal, maybe for you, just on the mega deals from last year. You talked about a few customers and tens of millions of prepaid. Just to make sure that everyone is on the same page, can you put a finer point on that, right, just so that we could kind of think about that normalized comparable just to make sure we're not maybe necessarily mispositioned kind of going forward. How do you think about -- you called out in Q3, Avanan, I think, is going to lap just as we calibrate our Q3 billings, how much should we think about Avanan sort of lapping year-over-year, if you will.

Avanan actually joined in September. So that's not a big deal. And in general, remember, Avanan is a few low millions, right? It was when we acquired. So, It will have some effect, maybe on the subscription, right? But it's not 10%. It's 1%, maybe 2%, right? So it's nothing dramatic there. But -- so that's regarding that. Spectral acquisition, a few million dollars increased expenses but it was this year. And again, nothing dramatic. But when you accumulate a few acquisitions, it's, of course, affected like when you looked at our expenses, then of course, it added to our expenses, a few millions of dollars as well, right? So that's part of that growth that you see in the year-over-year when you compare Q2 versus Q2.

Remember on the mega deals of going back to the billing, it's also very hard to predict it, right? Because even if you know that you have in a final specific deal, you don't know if it will account for 1 year or 3 years and what will be the payment is, right? So this is something that's hard to predict. That's why I would say billing is a trick. It's okay for you to measure it, but be careful not to give it overweight. That's all I'm saying.

Our next question is coming from Joel Fishbein, followed by Brad Zelnick of Deutsche Bank.

Happy Birthday, Kip. Gil, for you, you did -- you helped us with the customer wins around Quantum. But I was hoping that you would help give us a little color around some of the customer wins with regard to CloudGuard and Harmony and what the competitive dynamics look like in that -- in those 2 areas.

So I think I gave the examples on all fronts. I gave a few examples with Harmony and we've one of them, Harmony e-mail we won because we were -- we're blocking files that weren't blocking. And again, that's ransomware that was impacting the customers. another one, it was that plus the fact that they got a more consolidated view.

First, in both cases of Harmony and CloudGuard, the markets are a little bit more fragmented. We actually compete against many, many different vendors, cloud, for example, there is probably a suite of, I don't know, at least half a dozen, if not more different, even major different subsegments of the market with Harmony even more, it's from endpoint, mobile, e-mail, disk and data security, so many categories. I think the value proposition that we provide is not to compete necessarily by against each one of the vendors, especially on the cloud side, but also on the endpoint, but more providing the overall architecture, providing an end-to-end cybersecurity solution.

And I think that completeness of solution, the architecture and the vision is something that's very, very unique to us, especially because these are all integrated. Because when we see a malicious file coming from your e-mail, this file will also get blocked when you try to download it on the network. And I don't think any other solution does it actually even worse. Many of these average solutions will see the malicious file, we let it through, and 20 minutes later, we'll send some alert that says, hey, you've been infected, and that's too late.

And again, I don't think that we get the full credit from customers that understand that. I think we need to do a better job demonstrating showing and winning that. But this is a fact, and this is something that makes the Check Point's security so much better than anyone else.

All right. Our next call -- our next question will come from Brad Zelnick of Deutsche Bank, followed by Shaul Eyal Al from Cowen.

Excellent. Happy birthday. Kip. Gil, congrats on the accelerating top line results, which seem to demonstrate strong resiliency in the business. You overachieved first half expectations, you've guided stronger for Q3. But you also gave some caveats when you guided about the environment, and you didn't update your full year guidance. Is there something you're seeing in real time that gives you hesitation? Or is not raising the full year just your typical conservatism? But regardless, Check Point has weathered many cycles. And people seem to expect spending on security to be resilient during a downturn. What is your experience from prior downturns? And what are you seeing today, Gil?

Okay. That's very multiple parts. And I think they're all related to the same subject, but it's excellent because I think your question is something that many people here probably worry about. First, I don't see anything that you don't see. I mean my concern about the global economy is what we all see in terms of the Check Point sales force, the Check Point customers, I don't see any changes. I mean our forecast or our pipeline, the feedback, as I mentioned, we are just seeing here for the first time, our sales leader in person. I haven't sensed from them that they sense any -- anything different about the third quarter or about the rest of the year, but we also see the economy, and we know that things can happen.

In terms of the full year guidance, we didn't want to open the full year guidance. We are still within the range that we've provided at the beginning of the year, but we've actually looked into that and it's likely that we'll be slightly to the right there. That we will be -- I mean, we probably won't get to the lower part of it because we've already got some, I don't know, over $10 million in additional revenues from the first 2 quarters. I don't know, Tal, if you want to discuss it a little bit more in detail. But yes, the guidance for the -- we can provide we can calculate a narrowing range a little bit more to the right, more to the upper end of the guidance that we provided at the beginning of the year. Tal, do you want to?

Yes. I just said, Brad, it's like I know you know us, but it's not only about knowing us. It's about we gave a guidance in the beginning of the year. We are in a very, I would call it, bizarre macroeconomic environment, many different metrics showing up on different direction, unemployment on the one hand, inflation, on the other hand, interest rate war -- many moving parts, Ukraine, Russia, there's many things happening and you should be cautious.

So on the one hand, we don't see anything to worry about, except for everything that we see around us, right? So -- and we never -- if you look at our history, we -- I don't think we ever updated our guidance because this is not -- we don't think you should update your guidance to the year. Some companies provide guidance only for 1 quarter. We provided a year, in the beginning of the year and then each quarter going forward.

So in the short term, looking into Q3, you see quite a good guidance. So that means we don't see anything dramatic. Q4, It looks like beyond the mountains, right. We need to wait to see what's happening in general in the market. Q3 is ahead of us, and it looks like we gave a very good guidance there. So there's not too much details into that logic.

All right. Our next question is coming from Shaul Eyal, followed by Matthew Hedberg of RBC.

So maybe let me try and continue on Brad's prior question on narrowing the annual range. Tal, I understand that maybe you haven't done it in the past. But in the past, you haven't even like had a powerful presentation that you've started like 2, 3 quarters ago. It's a great thing by the way. So, maybe that -- it's a good point to reconsider that. In other words, any reason to think that you wouldn't be growing at least the midpoint or above your former wide range guidance.

I was going to say, you know what, I'll take you advance. And next quarter, I will update the annual guidance.

We are probably going to come. Again, I want to -- Tal, don't kill me, but I think we'll probably be roughly at least $10 million more than -- the new midpoint should be probably at least $10 million more than the previous midpoint. On the revenue side, and I think we're very happy about that.

I would say just -- I would just say, if you look at Q4, which is the biggest quarter, the biggest risk always relating to the product line, right? It's a huge product quarter and to product the very low visibility by the nature of the beast, right? So taking into account the general situation, it's -- think about it, it's like 6 months away because all the booking coming in December. It's just a bit too early to be brave about December. That's my opinion.

No argument.

All right. Our next question is going to come from Matthew Hedberg, followed by Gray Powell of BTIG.

Happy Birthday too, Kip. You've been around security for a long time. And in prior downturns, you were primarily a firewall appliance center. Obviously, now it's a much more diversified platform. How do you think some of the newer lines like CloudGuard and Harmony will do versus Quantum? And I guess specifically, is there a higher ROI aspect to some of the newer products, maybe quicker implementation versus maybe some historical maybe more transformational type sales?

First, you're right. I mean if you implement the full Infinity architecture, you can get an amazing ROI and you can get much better security in much shorter time. And we've seen it. We've seen it in some installation. I think I gave the example in Q1 about one major Infinity deal that we have but we're getting installed through Harmony agent immediately. So malware, we didn't stop there. And so that this organization was infected with some really serious spying from probably another country. And within 2 weeks, we completed the full transformation for that organization security architecture with the full Infinity architecture. This process usually takes between 6 to 18 months in most organizations. So I think that potentially, if you jump into the Infinity architecture and adopt both Quantum, CloudGuard and Harmony is huge to elevate the level of security in a short time.

Our most organizations doing that. I think, unfortunately, there's still a lot of work to develop the work methodologies to convince the customer to jump into this deepwater and do the transformation. By the way, once people do the transformation, the ROI is amazing. You've got one console, one set of products. You're seeing -- you're preventing, again, everybody speaks about visibility. We get much better visibility, but more important, you simply block the attacks that other people don't, I think, just some of the wind cases that we've seen is it's actually so ridiculous to see that -- another solution, we'll take a file, let the filing in and 20 minutes later will tell you you've been infected.

We know how to stop the file from getting in if it's infected. Or another solution, you'll see a malicious e-mail coming to your organization. You will identify. An hour later, the same file can come from the network because somebody will download it and it won't be stopped. And these are all the things that are unique about the Check Point architecture. We know how to block all these cases. And I think if customers would implement our CloudGuard, our Harmony and our Quantum solution as part of the Infinity architecture, we'll get huge return on investment and much, much better security.

All right. Our next question and last question will be coming from Gray Powell, BTIG.

Yes. So just to follow up on sort of the macro line of questioning. I was hoping we could drill in on Europe a little bit. How have customer conversations been in Europe, like the last 3 months. Are you seeing any changes in sales cycles there? Or any additional scrutiny on deals? Just any additional color you can give us on Europe would be great.

No, I haven't noticed any change in Europe. I mean, it's -- the markets are open. It looks like -- I mean our discussion around in Europe is the fact that we are seeing that the everything is being opened up. People behave like there's no corona and you have the corona increases. But it's not -- in terms of cyber spending, I don't think that I've seen much discussion, maybe with the exception of Russia, that's partly in Europe that has impacted our revenues.

And actually, the results in Q2 are very good. So we didn't see like some issues there.

Okay. Just in terms of the 12% product revenue growth, was that pretty evenly split across geographies or anything stand out Europe or elsewhere?

You can see at the slide that shows the -- the sales by geography, and we were the same this quarter and a year ago, 44% in Europe and in America and 12% in APAC, both Q2 last year and Q2 this year in terms of revenues.

All right, guys. Thank you very much -- guys and gals, thank you for attending today, and thank you for all the birthday wishes. We look forward to seeing you during the quarter. And we'll be speaking to you after the call, obviously. So take care, and have a great day. Bye-bye.

And thank you, Kip for sharing your birthday with us.

Thank you. Have a great day, guy. Bye-bye.

Bye-bye.