Check Point Software Technologies Ltd
NASDAQ:CHKP
Earnings Call Analysis
Q3-2023 Analysis
Check Point Software Technologies Ltd
The company's focus on customer engagement has shown a tangible impact, with significant strides made in connecting with both existing customers and prospects. This renewed emphasis on interaction has not only doubled engagement rates but also set a promising foundation for converting these relationships into future deals and pipeline. With a clear correlation between customer meetings and pipeline size, there is optimism about seeing these efforts reflect in the next year's achievements. Additionally, new technology adoptions, particularly in SASE solutions—a sector experiencing healthy market growth—are driving positive sentiment. The company, in its initial forays, is hopeful of replicating the success seen in the email security market over the past two years.
Subscription services are witnessing impressive growth, marked by a 15% increase. This stands in contrast to a 4% dip in non-subscription revenues, highlighting a strategic shift towards recurring revenue models. Even amid market headwinds, including downturns in firewall gateway demand, the company's strategic transitions and innovations, such as Infinity architecture and email security, are compensating for slower product sales. Renewals underscore customer trust in the company's offerings, alluding to a solid foundation for future growth once market conditions improve.
The acquisition of Perimeter 81, coupled with the rollout of Quantum SASE, is expected to bolster the company's subscription line, with aspirations to exceed the current 15% growth rate. This integration aligns with the company's aggressive strategy to scale up technologies that have already demonstrated success on their own, ensuring they continue to thrive without disrupting their upward trajectory.
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To our employees and their commitment to customers and markets. I want to thank all our employees for their resilience and for all our customers, partners in new India investment community because I did receive plenty of support, plenty of e-mails and calls from people that are standing behind us and are supporting us at this time. I really, really appreciate it. We want to thank you. And with that, I think we can turn to business and try to continue with business plans. So Roei, the floor is yours.
Thank you, Gil, and thank you for everyone for joining the call today. I'm excited to give you and begin the review of the third quarter. We had another profitable quarter with 17% growth in EPS, both double-digit growth in net income and EPS in the net income for the second quarter in a row, in the EPS for the first quarter in a row very strong results. In terms of revenues, revenues reached $596 million, $9 million above the midpoint of our projection, while our EPS, as mentioned, reached $2.07 at the top end of our projection. Let's go now to the numbers. So deferred revenues grew to by 4% to $1.709 billion. Our current deferred revenues, actually, the short-term deferred revenue grew by 6% and to $1.246 billion. Our calculated billing reached $531 million, while our current calculated billings is short-term calculated billing reached $535 million. Important to note that the calculated billing includes $8 million related to the acquisition of perimeter AT1. Same as in the previous quarter, due to high interest rate environment, we saw fewer customers that are willing to pay upfront from old-tier deals which was added in shorter billing duration year-over-year. In addition, the Infinity is becoming more and more significant to our business, and the billing terms in these deals are more flexible, some of them on a monthly basis, some of them on a quarterly basis. So that also affects our duration. It is important to note that we saw many positive indicators this quarter. We saw that it's something that we are monitoring.
The annualized booking actually grew year-over-year. And our RPO grew by mid-single-digit level. So I think in general, we saw a very positive indicator in Q3, and we see a positive momentum also going to Q4.
Okay. So our securities revenues grew by 15%. Actually, the highest growth that we had in 2017. This growth was driven by strong demand for our Harmony product family and mainly for Harmony email security. We keep seeing a very strong demand for the Harmony products, and that's bring this growth. On the product side, we still see delays in executing refresh projects. That's resulting in decline of product revenues by 14% year-over-year. It is important to know that we did see strong renewal -- this strong and healthy renewal business as our customers continue to benefit from our security and support. We do see stronger pipeline for Q4 that include also refresh projects that were postponed for prior quarters. So we hope that we're going to see the positive turnaround in Q4.
In terms of Infinity. So Infinity had another great quarter, continue to flow in accelerated way to the revenues with a strong double-digit growth year-over-year. In the third quarter, the revenues from Infinity exceeded the 10% of the total revenue. And we can see more and more customers adopting our platform, which entering Benita, the one umbrella of product and services.
As for the revenues by geography, so 46% of revenue came from EMEA, 43% of revenues came from the Americas, while the remaining 11% came from Asia Pacific. Now let's move to the P&L. So our gross profit increased from $507 million to $534 million, representing a gross margin of 19% compared to 88% margin last year. This is a sort of significant improvement in our supply chain this year, which had been challenging in 2022. Our operating expenses increased by 9%, and this increase is mainly as a result of our continued investment in our workforce, cloud infrastructure, marketing and travel costs. In total, the non-GAAP operating income continues to be strong at $269 million or 45% margin, same as we had last year, very strong profitability. Financial income this quarter reached $80 million as we keep investing a higher interest rate over time. Our non-GAAP tax rate for this quarter was around 15%, mainly due to indexation and update in tax provision because of several tax assessments we had worldwide. Our non-GAAP net income increased to $242 million or $2.07 per diluted charging, the top end of our projection and 17% growth year-over-year. Our GAAP net income was $205 million or $1.75 per diluted share, 19% growth year-over-year. Moving to our cash flow and cash position. So our cash balances for -- as of the end of the quarter was $3 billion. Our operating cash flow was strong at $222 million this quarter, and it includes $22 million founder rollback in connection where our acquisition that we did this quarter. Excluding this effect, our cash flow grew by 2% year-over to $244 million. During the quarter, we acquired perimeter AT1 and Atmos for a total net cash amount of $477 million. We also continued our buyback program and purchased 2.5 million shares for $325 million at an average price of $131.
Now to summarize the financials this quarter, very strong subscription revenues with 15% growth highest growth since 2017, continued strong adoption of our Infinity platform. And while we see refresh projects that have experienced delay, we see very strong [indiscernible] renewal business. And again, strong profitability with 17% growth in EPS. And now I'll turn the call over to Gil.
Hi, everyone. Once again, nice to see you all. I'm pleased to be here. I'd like to shed some more light about technology and the business and what we've seen during this quarter. First, if we start with some of the highlights and the things we've already heard from Roei. I think on the financial side, we had good financial results exceeded our projections on the top end of the revenues, even beyond that, on the EPS. We did experience strong renewals, and we did see a lot of positive indicators of change, change that I think will mark higher growth with the economy and with all the efforts that the check when people do around the entire world. On the technology and the other activities that we've done this quarter, first, I think we've talked a lot about the acquisition of perimeter AT1, new industry, more than 3,000 new customers, getting into the SaaS industry, I think the name is here several times on the slide and during -- in the next few slides, I will explain what is SaaS and why it's important and why is it such a big deal and I think a big opportunity for our business. But on top of it, we've launched several other products, especially during October, the Horizon play blocks and several others. And I think we remain very, very active. So let me start and drill down a little bit about some of the business activities that we conducted during the last quarter. So first and foremost is market expansion and our acquisitions that we've executed in the last actually 60 days.
In the last 60 days, we've acquired 3 companies making it 20 total account for Checkpoint acquisitions. In several spaces, the biggest one was -- and is a perimeter AT1 for the quantum SaaS. And again, I'll explain that in the second. It's a $3.4 billion market, which is very adjacent and very complementary to our customer base, and I think it's a must for us to play and be strong in that market. In addition to that, we've expanded our technology with a small acquisition of [indiscernible] , a small Israeli start-up that will let us provide better technologies for the SaaS security market providing better technology to secure applications that are being run from the cloud.
And last but not least, if you remember at the beginning of the year, we launched our Infinity Global Services, an organization that aims to complete the set of services that the customer can get from Checkpoint and basically augment the capabilities that each customer has. Infinity Global Services has today more than 30 different services it provides around 400 security consultant. It's a pretty big organization. And what we've done now is added to a few additional services. The main one is actually managed fire service. It plays very well into our installed base, and that was the acquisition of Source think that we've completed just 1.5 weeks ago. So this is another addition, important addition to our market space. And again, we've done all of that in a very short period of time and continue to be even during this -- so let me jump right in and speak a little bit about the challenge of SaaS. What is SaaS? So SaaS means Secure Access Service Edge, and that's actually a big name to the new types of connectivity that enterprises need these days. So if you're trying to understand what does that mean? For example, if in the past, an enterprise was mainly remote users and data center or a corporate -- few corporate offices. Today, an enterprise network is far more than that. It has SaaS application location that are delivered from the cloud. It has many, many branches talking about what we call SD-WAN branch office security and branch office traffic optimization. We need to secure the access of the remote users, not just when they access the data center, but also when we access the Internet, when we access the cloud application. And this don't go through the traditional enterprise gateways. So the connectivity becomes a little bit more challenging or a little bit more complicated because, obviously, each element of that as a novel layer of connectivity and a novel element of security. One approach to doing that is running a big part of it from the cloud. And many solutions today, by the way, what they do is tunnel all the user traffic. Today, when we speak about SaaS, it's mainly about taking remote user traffic and tunneling it through a cloud service that opens that communication inspect and security. We've been trying and we've been active in this space for a long time. But I think now we made a very important step with the acquisition of Perimeter NT1 to build the industry best, what we call a game-changing architecture or solution that addresses all the elements, not just the remote user and not just the brand as like the other [indiscernible] SaaS connectivity in one suite, I think where we've started by launching the Quantum SaaS last -- the week of actually October 8. And we will continue in building that architecture and make it most complete SaaS solutions.
So let me describe what it is and what are the benefits. For example, if we speak about current solution, they channel all the traffic through the cloud. So on one hand, you want to get more security. On the other hand, by tunneling through the cloud, you slow it down and mainly jeopardize the privacy. All your communication that you want to keep private and secure and open it in a single entity that all the customers in the world share. So basically, we're taking a huge risk to the privacy of the communication. What we do with Quantum SaaS? First, we provide twice as fast interest security because we are operating in what we call the hybrid manner with on device and cloud network protection. Again, it's controlled from the cloud. But in most cases, we can -- we don't actually need to go through opening and jeopardizing the privacy, but we can do it from the user device and get a much faster and much more secure connectivity. Second is the consolidation. I described the challenge. And today, if you look at the industry, the customers they're using, if they want to get the full SaaS architecture, a full connectivity architecture, we need around 4 different solutions, usually from 3-plus vendors, and in some cases, much more. What we want to do is create a fully mesh integrated connectivity from 1 vendor, 1 ability to manage it, 1 ability to deploy and get the highest level of 0 trust security that actually works. Zero trust means that we make security far more granular, far more transaction to transaction or user to application grain security, so making security at a higher level. And last but not least, is optimizing the communication when we speak about branch office communication, and that's the sector it's called SD-WAN. And SD-WAN, not just by optimizing traffic but by getting the proper level of security. And I think we are going to integrate it. We've launched our SD-WAN technology at the beginning of the year, and we will make it a very important part of our entire SaaS architecture as part of that solution. So overall, I think we do have a game changer with which we will be able to connect the data center gateway or quantum gateways or quantum firewalls with the branch office, with the cloud, with the end users, with the remote access and make both Internet access and data access everywhere at the highest level of security and the highest level of performance, I think we really have a game change earlier. So that's about the Quantum SaaS. And let me switch to that to a different technology that we launched last week. And that's the horizon play blocks. I think that Horizon playblocks can be a real game changer. Maybe I should use the game changer or maybe a breakthrough technology here that really may take security to the next level. And I think you've heard me speak even at the beginning -- since the beginning of the year about the free seats of security solutions that are comprehensive, consolidated and collaborative. And I think the element is if we get so many security technologies, and they actually don't work together, actually even worse, some of them even within the same domain, don't work together. Let me give you an example. Let's say that we spot some entity or someone that's scanning our network that is doing what's called technically port scanning to our network.
So our gateway will stop the port scan or not we stop -- they're accessing different ports. And the user will keep trying to do the port scan. And then they might even find some application that's open, and they might find the vulnerability in that application and get inside the network. We actually might even do it from a different location. With clay blocks, even within the gateway security, we can see somebody doing a port scan, let's put that entity in the penalty box, and let's not have even the chance to access even places where -- that are allowed access because maybe they are trying to exploit some vulnerability. Now you can do it on the same gateway. You can do it in all the gateways in the company. Again, we've spotted one entity trying to get into our network. Let's not get them in. And then you can do it with multiple products, not just with the network security, but it's also doing it across products. So for example, if we are seeing suspicious activity by one of the endpoints in the company, we block access to that end point by all the gateways and by all the other security means. So that endpoint cannot compromise any other places in the network. And again, the list goes on, and that's what we call in playbooks, the story blocks that could take scenarios and turn them into automatic simple out-of-the-box playbooks that can work and can turn security to be collaborative. I believe that this is a breakthrough, other solutions today in the industry that talk about that are in a slightly different category. Super complicated requires huge investment, requires years of training and the building different scenarios and don't always address the issues. What we are being able to do here is a real breakthrough in taking that idea of collaborative security of automated security and make it super simple and super effective. And you see a customer quote from one of the early customers are choosing that technology that says the level of security that I get here was previously unattainable. So I'm very proud of that technology. That's the first step, and that's going to be included with all the Checkpoint gateways and all the checkpoint products and again, incorporate many other third-party products into that game and in the future even more. So I think it's a very, very good start to a breakthrough technology. We've talked -- again, there is many, many more technologies that we launched mainly, by the way, in the last 3 weeks. And I think Roei already described the success that we have with Infinity and Infinity becoming not just an important part of our strategy, but bigger part of our business.
And you can see here a few examples of wins with Infinity. One is in Asia, financial and insurance services company, full Infinity architecture with Quantum, CloudGuard, Harmony, Single Management solution and facilitated all the security consolidation. Another one is Woodward and aerospace manufacturing in the Americas,
Again, we are using here both the SaaS, which is very nice to see the deployment with our quantum gateways. They get the scalability, they like the ease of deployment that were really, really differentiators because that's a very important part when you do security in the large scale and they are utilizing our Infinity Global Services for optimizing the security policy and delivering better security.
And last one in these examples. And again, you can imagine that we have many, many examples of different customer wins and customer scenarios that we sorted out. To get to this list is a very important customer for us, the U.S. DLA, the Defense Logistics Agency, that's kind of the procurement army of the U.S. Department of Defense, Americas federal government using both the Quantum and our CloudGuard Gateway and cloud and like the flexibility and the ability to deploy more and more technology with the Infinity agreement that have [indiscernible].
So these are a few important and interesting wins. There's many, many more. Another avenue of the business is the technology leadership and how it's being recognized by analysts. You can see here, and I won't go through the list, some of the awards and some of the mentions that we got in different analysts mentioned frosting [indiscernible] Forrester, Gartner and several more, but I didn't include here versus, I think, about more than 10. Just here on this slide, most of them, 7 or 8 are just from the last quarter shows the leadership on that. Again, I don't remember even how many years in the Gartner Magic Quadrant for network firewalls. I think the -- but everything we are stepping more and more even in new areas like the Horizon for the security consolidation, the harmony for the user security for the CloudGuard, we're making more and more progress and winning more and more wins into the leader quadrant or the center of the circle that we have or the leadership of the wave in terms of the leadership of our technology.
I think it's something we should be very proud that we should all understand but we're able to lead in many different markets and especially consolidate them. Last but not least, here, we were also recognized by a few publications, the Forbes 2023 World Best Employers, very proud to be here in the fourth year in a row, seems to be the leading company in our industry. Thank you for our employees for choosing us and for voting for us. These are, by the way, both to service that are unaided. We don't know how we are being managed. We don't contribute to them.
So this is independent studies. And the second one, for the first time, we were surprised to see us on not the Newsweek world's most trustworthy companies again, leading in the industry, so customers and partners and many people trust the Check Point brand, and I think that's a very, very important thing, especially when you speak about brand, it's important for cybersecurity. So this is just a complete kind of a spectrum of technology and innovation, users and wins, analysts that recognize that and our employees in general public that recognized the potential and the leadership of the Check Point brand. So to summarize my part, I think we had a pretty good quarter, very good financial results, strong profitability with 17% EPS growth, 15% growth in subscription, highest growth since 2017. I think we have game-changing innovation, free acquisition, the Quantum as Horizon play blocks for collaborative security. And I think like Roei mentioned, we are seeing a lot of signs for positive change. If you remember last November, we started with -- I think what we've seen is a major slowdown in our industry. I think it continued throughout the first and second quarter. And I think now in the third quarter, I'm seeing some good signs of turnaround. I think part of it is the economy and the industry and part of it is the action of our people in checkpoint especially our people in the field that are working very hard. And I think we're starting to see that, and I'm very, very positive about the signs for the future that we'll get out of that. So before I open the call for question and answer, maybe it's the right time to speak about our projections for the fourth quarter. So in general, our projections, I'm actually first very positive. I think Roei shared the positive signs that we've seen, we see more positive signs in our internal indicators and what you can see on the external numbers. We have decent and healthy pipeline production by our field -- so with that, I think we can move to that. I think in terms of revenue, we expect revenue to be in the range of $636 million to $686 million. It's a wide range because I think there's a lot of possibilities. Our field actually is even more positive and more optimistic than I do. I know -- you know my regular caveat, that projecting in the future is very challenging. There is a very high level of uncertainty and results can be better or worse. So I think there are some good signs that it can be better. On the EPS side, I think we are expecting very healthy EPS between $2.35 to $2.55. GAAP EPS is expected to be approximately $0.32 less. And I think -- provided in the beginning of the year. So the next slide will show you how it plays into the ranges that we get in the beginning of the year.
In the beginning, our regional range for revenues was between $2.34 billion to $2.51 billion in revenues. You can see with the fourth quarter now, the range is narrowed. I mean we have 3 quarters behind us already. And I think you see it's right in the middle. So I'm actually -- it's pretty good to see that, especially as we had the year that wasn't easy the first 2 or 3 quarters. Non-GAAP EPS is we are actually even revising the range here and taking the range up. So if the original rate was $7.70 to $8.30, the new range already starts at $8.20 and goes up all the way to $8.40. So this is already expected to be at the top end and maybe even over the original range that we provided. I think these are very good projection. I think they show a lot of, I think, positivity on our side.
We're a little bit cautious on the revenue side, which I think is always a good thing to do. So overall, I think that we had very good results. I think we're having decent projections, and I would be very happy to hear your questions and comments about our business. Thank you very much, and let's open the call to your questions.
[Operator Instructions] Today, we're going to start off with Gabriela Borges from Goldman Sachs, followed by Adam Borg of Stifel.
And our thoughts with you and all of the checkpoint employees on the ground in Israel. I wanted to ask a little bit about your 2024 planning assumptions as you think through what next year could look like. Maybe, Gil, share with us some of the positive indicators that you mentioned in your prepared remarks that are leading you to perhaps think through -- help us think through what the implications are from the positive indicators through to billings growth? In other words, when do you think we'll see a more material inflection in billings growth?
So I think first, thank you for that, and it's too early. We still don't have the 2024 projections. We are just starting to work on the 2024 plans, but we always we have some thoughts about that. And I would say there are 3 factors that contribute to that. One is the technology and the new areas that we are in, and so on. Second is our customer engagement and the level of activity that we have in the field. And the third one is the market itself, which is a little bit beyond our control. So from the end of -- in this year, we really -- we did -- we feel did an amazing job in increasing the engagement that we do with customers. We pretty much double our engagement rates with our customers both with existing customers and even more so with the prospects. And there's still plenty that we can do. We still can reach many more prospects for example. And we still can do more in the qualitative side of the engagement, but we've made a real revolution, and I think there's plenty of credit that our people on the ground in the different countries in the field have done this year. So now all of these things when you engage with the customer, but you haven't met for a long time, when you start the conversation, it takes between, I would say, depends on the situation, I would say, between 6 to even 18 months until it takes fruitful. And the reason I'm saying that because usually the field will say, I'm already engaged with the customers that have a current opportunity. getting me to meet with somebody new. It's usually the one that's not knocking on our door and doesn't have the current opportunity. So these are a little bit longer-term customers. I think that we will see the results from there. And I think we've seen a big revolution in this engagement in the second and third quarter. So that means that we can be optimistic about some of these engagement turn into deals and pipeline in next year. We already see the correlation. The more meetings, the more engagement with customers, the bigger the pipeline with that customer. It's a very direct correlation. So I think that's one sign and that's about our activity. Second, in technology, we have much more, and we've seen that some of our new technologies are sticking and are working well. I think we will see a lot of demand for SaaS solution. It's a healthy market with high growth. So I expect -- again, we're just in the first few weeks in that market. So I don't have indicators that are too strong, but I'm very optimistic on the -- for example, on the e-mail side of things that we've got into like 2 years ago, I think, 1.5 years ago. We already see a very healthy, not just pipe and we see very good results and very high growth. So I hope that we will repeat that success with the SaaS industry. Same thing with our overall vision of overall architecture, which I think is the most important, and that's the Infinity umbrella. And I think with Infinity, we're seeing very nice growth. And again, it of course, ties to are we engaging with high enough people in the organization? Are we -- do they buy into our vision? The answer is yes. The more qualitative engagement we have with the customer, the more likely they are to choose us as an architectural solution with the Infinity architecture. So if I'm talking about these 2, I think that we have a good pipeline of technologies, a lot of innovation and turnaround in the engagement that we have. The third element, which is the market itself and especially our large market for firewall gateways. The market is went all the way to the bottom, I think, in the second quarter, which was the bottom and in the third quarter, started showing signs of improvement. If that improvement is changing and if we combine it with the other 2, we have reasons to be optimistic. If customers are going to keep tight on refreshing. And by the way, the fact that we don't refresh is, I mean we wanted to refresh our installed base and buy more, but that means that we stick to us and tailor solution, and they just pay the renewal fee, doesn't generate enough growth. But in general, the rates that we have of renewal are very high, and we have a good renewal business. So that means that customers like our products, and they keep working for them. So if that will change, that will be a big change. And I hope, and this is a little bit beyond our control. It's a long answer, but I think we've covered...
All right. Next up, we have Adam Borg from Stifel, followed by Brad Zelnick of Deutsche Bank.
Awesome. Maybe just for Gil on Permit 81. Obviously, great to see your entry deeper into SaaS with it. I was hoping you could talk a little bit more about kind of the near-term integration priorities from a sales and marketing and R&D perspective? And how we should think about the CapEx impact as you look to build that pop, I'm assuming over time.
I think in terms of the integration, we built a checkpoint model that we call rockets that we kind of let these businesses on one hand, keep their little bit of their independence, their vision, their integration of activities. On the other hand, work with the checkpoint, both R&D and sales and marketing organization to drive things more forward and move fast and integrated. I think Quantum SaaS is going to be very tightly integrated to Check Point because it's a network solution. And in many cases, it's integrated with our gateways and integrated with our project and sales force. So it's not necessarily different buyers within the organization. It's similar buyers. I think that's the synergy, and that's extremely positive. We already see a high level of interest in the field, people are super positive and super optimistic about that. And it will take us some time to build all the bridges, but we are working very hard. I mean, the only -- there is kind of 2 caveats. On 1 hand, we want to create one product. We integrate all the checkpoint security technologies into the perimeter AT1 offering, connect the perimeter AT1 management with checkpoint. So we have a very strong road map of what we want to develop. On the other hand, it's been growing very nicely on its own and we don't want to disrupt that. So -- and I think, by the way, with the Harmony e-mail that's been a similar acquisition, we built the right bridges. For the first 6 months, kind of most of the growth was driven by their pipeline. 6 months later, we are already reporting that huge part of our pipeline is already driven and brought to them by the checkpoint salespeople and by the checkpoint channels. So I hope we will see here even a faster transition because unlike e-mail, this is even more central to our technology. And in terms of CapEx, I don't know if we have any...
No, in terms of CapEx, no toppings. I mean we expect to invest in CapEx related to pyramid AT1 few millions dollars on something. It's not significant in terms of...
All right. Next up is Brad Zelnick from Deutsche Bank, followed by Tal Liani of BofA.
Great. Gil, I don't recall checkpoint having a significant U.S. federal business, but we saw the DLA deal that you highlighted, which I think was a $6 million deal, which is a really great win. Can you remind us, is there a broader opportunity that you're going after in U.S. federal? And is this also maybe a reason why we don't necessarily see all of the success that you're having in billings because we all know that the U.S. federal customer doesn't necessarily pay multiyears in advance?
And I don't know if it has veteran answer about the billing and so on. I think the opportunity on the U.S. federal government is huge. Even though the U.S. federal government is a very, very is kind of -- it's a tough customer, especially for foreign companies. And foreign [indiscernible] and Canadian company. very hard to penetrate where if you are not in America. And I think the fact that we have a good success there. Hopefully, it's a good sign moving forward. The opportunity is huge. I mean the opportunity in the federal market was untapped. We are making good progress on other government business in the U.S., especially the local government and again, the opportunity there. It's also very big. And I think we still have plenty of potential. And we are doing a lot of different things. The good news, again, we have many industries and many sectors that are still again, we are active in all of them. We have presence in all of them, but we are -- but in some cases, like U.S. Federal, we're too small. And Roei, does it have much effect on the...
On the federal side, it doesn't -- I mean, it doesn't have any effect on billing. I would had about the billings because I would assume that I will get questions on that. So again, on the bidding side, the timing and the duration really affect the billing. I can give you as an example is something that wasn't in -- I didn't mention it in the script. But for example, we have the large mega deal that was expected to be closed this quarter and was due to certain administrative delays was closed 2 days after. And that's something like that affect the billing. It's a timing of billing. It's a classic timing of billing that these kind of things, effective being, I understand that you are covering the billing and it's important probably important metric for you to understand the business. But we can say that, again, we saw this quarter -- I mean positive indicators, as I mentioned, the booking went up year-over-year. We see a very positive indicator for the pipeline for Q4. Again, we need to be cautious. It's still only pipeline and not it's converted yet to business, but we see many positive indicators it had.
All right. Next up is Tal Liani of BofA, followed by Joseph Gallo of Jefferies.
Two questions. at the end of the day, you're only growing 3%. And we talked about it like last year, you talked about Infinity and you talked about the year before about other products, but it's very evident that it's hard for the company to translate technology superiority into higher growth versus competition.
And the question is, what other parts do you need to invest in go-to-market, marketing, whatever it is? What other parts do you need to go to? And what are the challenges that you have in order to translate your technology into better growth rate? The second question is kind of related, not related subscription, very nice growth, 15%. What are the trends in the nonsubscription? It's down about 4%. So what is their substitution? Or what are the other trends that we see in non-subscription?
So first, you're absolutely right. We need to do better. We should do better. I by the way, believe that we were on the same big market trajectory that we've been a year ago. I think our results today would have been double-digit growth. I think we've faced a double-digit decline in the core market of buying new gateways, delaying -- what we call delaying in refresh and in a nice way, and I think we've shown it in our slide. And despite that, we've seen growth. And the growth comes from both from customers sticking with us and doing the renewal, both from the fact that we've been able to transition a big part of the business from product purchase to subscription. And also from some of the -- some of it comes from the Infinity deal, with our multi-architecture, both user, cloud and other elements of the security elements. And some of it comes from the new technology like e-mail and a few others that are gaining traction. But relatively still small but are gaining traction. So that's how we offset that. Again, if you just looked at it on a neutral basis of just selling at gateways, it wouldn't be -- it wouldn't even been 3%. Now again, I'm not happy with that percent. I think we should a much, much higher -- I think this year, my focus internally was on customer -- meet with their customers and prospect. I think I already mentioned that we have the great progress there, doubling the rate, which is not reveal and much more activity by the field. Next step, by the way, is twofold.
One is to elevate the level of quality, making sure that we reach the right people that we go broader in the organization and so on. And second, I think you've seen the translation of that. Again, you engage with a customer, it doesn't always come with [indiscernible] Sure, we'll give you the next order and say, well, if we had the project, we would come to you. But what we'd like to have happen is once this project comes and I would say every enterprise will have a project within a year, then we will have a very much higher chance of winning that project because they are there because we know that we are present. Unfortunately, and again, I would admit our shortcomings. That's the feedback I get from when I meet with CIOs and CICOs, they all tell me, we know Check Point the leader. Check Point is a very good brand for us. We knew Check Point many years ago when we started our career and we love your store. That's the main thing that they tell me, we love what you're -- what the architecture and the vision, that's the positive side, the negative side the same and how come we didn't hear for you for so many years. And that's what I want to fix because if we say all these good things that we have good technology, good brand recognition that we have a good story today then what we need to fix is making sure that they know it. And we know it because we need to be in front of it. And I think, by the way, as I said, we have the people, we have the bandwidth. We just need to execute on that, and I think we're making progress there. And I truly hope that it will bear fruit.
All right. Next up is Joseph Gallo from Jefferies, followed by Saket Kalia from Barclays.
Congrats on another over of double-digit EPS growth. You've talked a ton about top line drivers and product drivers as we think about 2024. How should we think about leverage in the face of these investments and the M&A integration? And then what, if any, impact does FX have as we look out over the next 12 months?
Roei, will you start?
On the FX side. So I would say that in the next 12 months, of course, we're going to benefit probably from the shekel. I remind you that we usually hedge our currencies between 3 to 4 quarters ahead. So some of it already hedged for next year, but some of it will be hedged in the second half or they will be hedged in the next quarter or 2. So there will be a benefit next year from the FX. Again, it's still early to say to quantify that, but there will be a benefit. As for this quarter, we also -- again, because this quarter was already hedged a year ago or 3 quarters ago so we -- so the benefit was less than the FX content that you see today, which is approximately around -- we benefit around 1 point -- I would say between $5 million to $6 million of FX benefit this year compared to last year.
What was the second part of the question?
Just -- you talked a lot about drivers and trying to drive growth higher. But how should we think about the leverage your investment needed to drive that or the M&A integration costs?
So I think we need investment and we keep investing, but we also need to see more leverage from the investments we already made. We have today many, many people that work in driving new technologies. And again, we need to see more results of that we've been building. And I think I'd like to see us seeing the fruit of all these efforts. Again, we are going to keep investing, but I think the main thing for me is seeing the investments that we already make bear fruit, and then we can invest more in the areas that have been working with.
All right. Next up is Saket Kalia from Barclays followed by Hamza Fodderwala from Morgan Stanley.
Okay. Great. Roei, maybe for you. Maybe just broader. Can we talk about the M&A impact here on the model, both in terms of annualized revenue and just annualized margin impact as we start to incorporate these deals into our model for next year, and maybe just a quick clarification. I think you said that there was a large deal that signed 2 days after the end of the quarter. I mean, can you give us a sense for kind of what billings would have been had that deal had closed on time?
Okay. So for your first question on the M&A. So I think we mentioned when we announced on perimeter 81, we mentioned the proximate AR so that's something that when we acquired and that was the annual recurring revenue that Perimeter had. The other acquisition doesn't have any significant effect. I mean I'm talking about the Atmosic 1, which didn't have any significant revenue, then -- and the one that we just recently announced, I think, in the beginning in the middle of October, also will have a few millions of dollar effect, not significant effect on our total revenues. So that's on the -- from the top line. And again, in terms of perimeter, I mentioned that the -- it's a start of the pet. I mean right now, it's losing money. I mean, hopefully, again, in the long term, I mean, the aim is to be profitable. They're going to be possible. But again, in the next -- I would say that for the -- in the short term, it will be dilutive to our margins. So that's how you should think about it. What was your -- the second one that you had on the...
Yes, Yes, the large deal that closed 2 days after that impacted billings.
So the last year is approximately 2 points, approximately 2 points on our billings in [indiscernible]
All right. Next up is Hamza Fodderwala from Morgan Stanley, followed by Patrick Colville from Scotiabank.
I'd also like to offer my support to you and all your families. I'm sorry. We couldn't be there in person this year as well. So I wanted to ask a question about sort of the product refresh. And I think this was hit on earlier, but maybe in a different way, I think if we look at your historical product cadence, it suggests there's, I think, new hardware coming out possibly early next year. What is your -- what are you seeing in terms of demand and sort of interest around that? And to what extent are customers sweating their assets in anticipation of new appliances that may be coming up on?
It's a good question. I wish I knew the answer. I think we are -- again, we are getting very good indicators about the price performance and about our products. Like every time, we are always looking to refresh and renew. But I don't know if there is a built-in expectation in the market or not. And I don't know if we can speak about the timing of new solution. By the way, last week, we did announce a small new appliance but we didn't mention it here, but actually for ruggedized environment for a mission-critical application and so on. It's a small market, small submarket, but we have a very good offering. So we did come out with a new one already last week.
Our next question is from Patrick Colville from Scotiabank, followed by Joshua Tilton from Wolf Research.
Echoing the other analysts, our thoughts are with you and your family. I just want to ask a clarification question and then it's a proper question. The clarification is, did you say that you thought 2Q was the bottom in terms of product demand and 3Q, you saw signs of improvement. And then I guess the other question I wanted to ask is why Perimeter 81 because in our field work their traction was kind of really strong in the SMB space and maybe lower mid-market, but not really the enterprise and Checkpoint as a business has had excellent success in the enterprise. So why that asset?
Okay. So first, you are correct about what we said about the market and Q2 being the bottom in Q3 seeing some turnaround and improvement in demand for firewall gateways so that's correct. About why Perimeter 81, not only because the traction that we have but because of the technology. I think they have a differentiated technology, very hybrid model of doing some work in the cloud and some work at the client side. I think it's a very good one in terms of the -- the right architecture. I believe in that. And what we also found that in many cases -- and I again, we looked at many companies in the SaaS space. I can tell you that in the past, we've almost completed 2 acquisitions in that space and somehow during the due diligence, we decided to take off. And the main reason that we've seen some companies that have nice numbers and so on, but the main challenge that we had with them that some of them didn't have an offering that's simple, but straightforward to set up -- and that's is being a solution. Again, if you look at all the startups, many of them, almost all of lose plenty of money. Now the question if you can really make one. And if you can make money is because it can scale because you can take that and to sell it to more customers without enclosing the every customer win means huge efforts, huge installations, very slow to deploy, then you can scale it and getting it to the Check Point installed base, getting it to 100,000 customer installed base means that the solution has to be simple, straightforward and scalable. And by the way, that in many cases, when you take SMB technologies that have to be like that because otherwise, you can support them and you can't install them. And the -- and I think we have a very, very good by the way experience with the acquisition of the e-mail security that we have. We also took an SMB product and our largest installation are kind of in the 100,000 seats. So we took a solution from 200 seats, and we are now making very nice progress in up. So again, we've checked that on the due diligence. We know what's our limitations. We know what we need to scale and so on, but we believe it's doable.
Joshua Tilton's our next, followed by Fatima Bolani as our last question of the day.
I just want to sneak 2 quick ones in. My first is just what is your guys' current expectation around a 4Q budget flush? And do you feel like you need to see one in order to kind of hit out the numbers that you laid out for us? And then my second question is, do you guys view the Perimeter 81 acquisition as a way to kind of fill a hole that's sort of been left behind by weaker firewall appliances? Or do your customers kind of still view SaaS as an incremental purchase to firewalls with the expectation being that just firewall demand will come back at some point?
So let's start. First, I do hope to see budget flush in the fourth quarter. It usually happened, I think the only year that it didn't happen in my experience was last year. And when you look at our growth model, it doesn't assume high growth, huge growth in products in Q4. So we kind of don't assume that there will be a big budget flush. If there will be a huge one that we didn't anticipate. I think it will all be an upside for us. But again, every year, except 2022, I believe in my career, we've seen a budget flush in the end of the year. Last year was the exception. Second part was about the Perimeter AT1. I don't think it still a big hole that we didn't have because we weren't active in that space. I don't think that in the enterprise space, we're like 90-some percent of our sales are people are going to shift to turnover traffic through the cloud. We will keep their data centers, they will do that, but there's plenty of opportunity. When we see a change when fees can happen is on the branch side, branches are important part, and there's -- when you take a company with 300 branches or 20,000 branches, then an architecture like what we have with SaaS can work very well. I think incorporating branch offices, but some will have our appliances with SD-WAN and some will have pure SaaS, is also a good architecture for a network I think in terms of remote user access, it's a good solution. So I think most of it augments what we do. They are directly in our industry. I can paint it as a different industry. it's not a different one. It's connectivity. I think 80%, 90% of that is not a replacement for our products, but it's an addition, maybe 10% or 20% was an overlap between some products, but most of it is not an overlap from a dollar standpoint..
All right. And last up, welcome back Ms. Fatima Boolani.
And Gil and to your entire team just sending my thoughts in Syria, difficult tumultuous time. I wanted to ask a Roei a question regarding the security subscription segment. So the 15% acceleration we saw this quarter, I wanted to get your thoughts on where that potentially could trend up towards over the next couple of quarters? And if you can help us with some very specific pieces on -- are you seeing very strong expansion activity into other product pillars are you finding that really making a more meaningful impact in driving the acceleration there? So any thoughts around where that 15% could go in the next quarter in the near term and in the medium term? And some of the key components that are going to drive that acceleration.
So first of all, again, we hope we will see the -- I mean, acceleration of this growth. I mean, I remind you that we also bought Perimeter AT1, that hopefully will also help us with accelerating this growth and the subscription because the revenues from the quantum SaaS will be part of this line. I mean, will be included in this line item. In terms of well from a the growth is, so I would say, again, in the, hopefully, it would be higher than the 15% that we see. But again, it all depends on the execution. On where we see today, I mean the drive for the 50% growth, it's mainly coming. I mean it's coming, first of all, from the EMS security. It's becoming more and more significant for our business. is growing in a strong double-digit growth, very strong double-digit growth, and it's -- we don't disclose the numbers, but becoming more and more significant to the subscription revenues. And also, it's driven by expansion, mainly around -- under the Infinity platform that customers are expanding, getting more services from us. So all this stuff together with the growth in the CloudGuard, it also grew double digit in revenues. This quarter, all of these came -- brought us to this 15% growth and co would be even higher in the next few quarters, but it's still too early to see.
All right. And with that, we'll conclude for the day. Thank you, guys, for joining us, and we look forward to speaking with you after the call and throughout the quarter.
Thank you very much. Appreciate that.
Thank you.