Check Point Software Technologies Ltd Q4 FY2021 Earnings Call

I’d like to welcome everyone to our Fourth Quarter and Full Year 2021 Financial Results Video Conference. At this time, all participants are in listen-only mode during the formal presentation, which will be followed by question-and-answer session. Joining me remotely today on the call are Gil Shwed, Founder and CEO, along with our CFO and COO, Tal Payne. As a reminder, this 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 site. If you’d like to reach us after the call, please contact Investor Relations by mail at kip@checkpoint.com. During the course of this presentation, Check Point’s representatives may make certain forward-looking statements. These forward-looking statements within the meaning of Section 27A of the Securities 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 related to cybersecurity and other threats expectations regarding our 2022 initiatives, our ability to continue to develop platform capabilities and solutions, customer acceptance and purchase of our existing solutions and new solutions, the market for IT, security, continuing to develop competition from other products and services and general market, political and economic and business conditions, including as a result of the impact of COVID-19 pandemic. These forward-looking statements are subject to 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 this presentation are based on information available to checkpoint 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 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.

Can you hear me? Can you see the presentation? Wonderful. Okay. Great. Thank you, Kip. Good morning and good afternoon to everyone joining us on the call today. I'm pleased to begin the review of the fourth quarter. Revenues for the quarter were $599 million, which is above the midpoint of our guidance of $17 million, quite nice. Earnings per share reached $2.25 above the top end of our guidance, which was $2.22, $0.03 above the top end of our guidance. Before I proceed further into the numbers, let me remind you that our GAAP financial results include stock-based compensation charges, amortization of acquired intangible assets and acquisition related expenses as well as the related tax effects. Keep in mind that, as applicable, non-GAAP information is presented excluding these items. Now let's dive deeper into the numbers, and I will start with the revenues. Revenues for the quarter, as you can see, were $599 million, a 6% increase year-over-year. On the right side, you can see the billing. Billing grew to $851 million, representing a 14% growth in our billing, a significant acceleration from the 8% in Q4 last year. Deferred revenues showed strong growth as well, with a 15% increase, reaching $1.77 billion. Moving into the drivers, first, let's talk about products. Security subscriptions continued to accelerate, reaching $371 million, a growth of 9% year-over-year, along with product increasing nicely with Maestro being a differentiator and driving wins with customers. We've seen strength across many product categories, from SMB to large enterprise this quarter. So, it was a strong quarter for products. Subscription revenues met our expectations, showing an acceleration to 14% from 10% last year, reaching $204 million for the quarter. The main drivers include double-digit growth in Harmony and significant growth in our cloud offerings. Moving to revenues by geography, 49% of the revenues came from EMEA, 40% from the Americas, and 11% from Asia Pacific. EMEA had a remarkable quarter and led the revenue growth. When calculating, you will see slightly lower results in America and APAC; however, all three regions had strong bookings and grew well with new customers across several countries. As usual, there's a gap between the revenues and the bookings due to timing. Gross profit remained strong at $524 million, with a margin of 88%. We delivered to our customers while facing higher costs due to supply chain constraints. As you know, there's a supply constraint in the market that affects our operations. Many components had increased costs, leading to a higher cost of goods sold, resulting in a slight margin reduction of about 1% to 1.5%, depending on the quarter. We believe this is a temporary situation until the supply chain returns to normal, potentially in the second half of next year. Our new pillars, CloudGuard and Harmony, continue to show excellent results with double-digit growth. The gross margin on Harmony Connect and Harmony Security is lower than on Quantum, which contributes to this margin reduction. Overall, we achieved very strong results despite the constraints, meeting our targets and delivering to our customers. Operating expenses reached $239 million, an 11% growth, primarily driven by increased headcount, which expanded as planned at 9% year-over-year. The dollar also weakened against other currencies this quarter, noticeably impacting R&D expenses. Thus, we expect operating expenses to increase by 11%. Our operating income was robust at $285 million, translating to an operating margin of 47%. We planned for this but reached it later than expected. We also see promising bookings, and our net income margin is strong at 49%. Cash flow and cash position remain solid at $3.8 billion. Our operating cash flow was $294 million, an increase of 1%. Including the hedge effect, our operating cash flow would show a 9% growth year-over-year, which is significant. During the quarter, our buyback program continued, utilizing $325 million to buy shares, totaling 2.8 million shares at an average price of $116. Moving to the full year, we are very pleased with the 2021 results. Here, we see our results compared to the original guidance provided early last year. Revenues for the year reached $2,167 million, marking a 5% year-over-year increase, $37 million above the midpoint of our guidance. Our non-GAAP EPS stood at $7.02, exceeding the high end of our guidance of $6.85 by $0.17. Noteworthy is the billings for the full year, showing 11% growth for nearly $2.4 billion in deferred revenues, which increased by 15% year-over-year. The success for the year was driven by our focus on the Infinity strategy and our three pillars: the Quantum, CloudGuard, and Harmony, which all performed well, showing strong growth. We expect subscription revenues will continue to lead growth, showing 13% year-over-year growth. Looking at the full P&L, gross margins were strong at 88.7%. Operating expenses increased by 7%. Most of the income increase came towards the end of the year, affecting the P&L at a lower rate, but we expect that to change early next year. We will see an estimated effect on next year's margins of around 1%. The weakening of the dollar caused a $20 million impact on the full year, but despite this, our results remain impressive in light of the $20 million hit. We forecast for next year remains the same, projecting growth in the face of challenges. Our guidance covers a wide revenue range of $2.2 billion to $2.375 billion, equating to a 6% to 10% growth rate. Non-GAAP EPS is expected between $6.90 and $7.50.

Thank you very much, Tal. I'm very pleased to see everyone here, especially as we had this amazing quarter. I genuinely mean that this was an outstanding quarter. I'm not just referring to the financial results but also to the strong metrics we see internally. Every quarter, I usually discuss the previous quarter's achievements. However, this presentation will focus primarily on our strategic initiatives as we enter 2022. We're starting this new year with renewed strategy, a lot of energy, and significant investment. I picked out four major initiatives that I wish to share with you as we get started in 2022. Firstly, our primary objective is to continue accelerating our growth. In addition, we are committed to innovation, which includes launching new products and leapfrogging the industry with unprecedented price performance. We're aiming to create a new structure we call the Check Point Rocket. Lastly, we're focusing on continuing to grow our frontline sales force. We have an internal goal to increase the number of frontline salespeople by 25%, which will help us support more customers and reach new ones. Our new positioning includes a fresh logo with the message 'You Deserve the Best Security.' This is significant as Check Point has always distinguished itself with a commitment to delivering the best security over nearly 29 years. The importance of this message cannot be overstated, especially given the current threats we face from cyber attacks. If organizations opt for second-rate security solutions, they expose themselves to breaches. By comparison, Check Point's focus is on ensuring that our customers receive the best protection possible against the ever-evolving landscape of cyber threats. Our Infinity architecture ensures comprehensive coverage across various attack vectors, and we've maintained a strong presence in the market, which reflects our ability to protect our customers effectively.

The logarithmic complexity and omnipresence of vulnerabilities like Log4j have raised serious security concerns. Cybersecurity is crucial as many systems remain vulnerable and open to attacks, posing a risk that requires user and enterprise vigilance. While we strive to protect our users, we recognize the reliance on robust cybersecurity practices across the board. Our proactive measures through CloudGuard have proven effective, allowing us to address recent vulnerabilities even before they were publicly known. Thus, we are confident in the security measures and the technological advancements that are continuously evolving at Check Point.

My apologies for that. Please, everyone that's going to be asking your question, don't raise your hand. We already have a list, and you'll be selected. I will call out your name and also call out the person who’s in the hall. Please limit your question to one so we can get as many of the panellists in for Q&A as possible. Our first question is going to come from Patrick Colville of Deutsche Bank, followed by Gregg Moskowitz from Mizuho.

Thank you, Kip, and thank you for having me on. Congratulations on an excellent set of results. I guess, the standout was the guidance you just gave, very impressive, no doubt. Can you just kind of pick apart the factors behind that? I guess the contributive factors are probably the cybersecurity spending environment, the product mix and suites and any changes around pricing.

Tal, it's for you.

Okay. I want to highlight that last year, we started the year expecting a 3% growth, but as the year progressed, we saw an acceleration in that growth. Both short-term and long-term billing showed positive trends, particularly in the short-term where we noticed billing growth. This growth is beginning to reflect in our profit and loss statements, leading to an increase in our revenues from 3% to 3.5%, then to 4%, 4.5%, and even reaching 5% or more in the fourth quarter. Our outlook has become more optimistic because we are witnessing strong business performance. Although some regions appear weaker than others, billing has performed well across all three regions, suggesting that our investment strategies are beginning to pay off. Investments in CloudGuard and Harmony, while starting from small figures, are beginning to positively impact our revenues too. Considering all these factors, we believe the midpoint is moving closer to 6%. That serves as our starting point, but calculating the range accurately is quite challenging. Gil was very clear about the difficulty in quantifying how various risks will affect us, but we recognize that we are entering a year with increased supply chain risks.

Yeah. I mean, that’s excellent. Thank you so much.

All right. Next up, we have Gregg Moskowitz from Mizuho followed by Adam Tindle of Raymond James.

All right. Thank you Kip. Nice to see the great results. Just terrific to see the improved growth and execution at Check Point. I have two related questions, if I may. So from what we've heard some of your competitors are also doing pretty well. And I guess my question for you, Gil, is within network security, is there anything that you can pinpoint that perhaps is driving stronger demand? And then for Check Point specifically, I believe you said that internally, you're expecting double-digit billings growth for 2022. Now obviously, there's a sales productivity ramp. But my question there is how reliant is your growth projection on your ability to expand your frontline sales force by 25% this year?

So that's an excellent question. First, but I mean, I think that many of the initial numbers that we enter are based on the existing sales force, but we are pushing very, very hard for the sales force to hire fast and actually even higher at the beginning of the year. Usually, when we say 25% growth or 5% growth, we do that growth throughout the year. This time, my message to the sales force is to hire salespeople as fast as you can in the first quarter. Again, I'm not sure that we'll be able to make it. It's hard to recruit people these days. And such growth is not trivial for an organization of our size, but still that's the message. I think if everything works, we are set to deliver very nice numbers. I think not everything will work. I think we won’t be able to recruit all the people we want to or have them all be productive. But I think that we can reach the numbers that we've set, and the range that we've put in based on our current operations.

Thank you.

If I can highlight for everybody also, if you'd like to see the CPX event, you can actually sign-up and register and we'll have video-on-demand. Next up, we have Adam Tindall, followed by Gray Powell from BTIG. Go ahead, Adam.

Thanks Kip. Just a clarification for Tal and then a question for Gil. Tal, six consecutive quarters with accelerated billings, you're now approaching mid-teens growth in the billings metric. Just want to dispel any scepticism there. You've talked before about how billings can be impacted by duration. Was there anything notable in the quarter on that? And I think you also implemented some price increases here in the early part of 2022. Any sense of pull-forward in Q4 ahead of that price increase based on what you're seeing here for billings trends in early February? And Gil, if you could just talk about that broader decision for price increases in any customer or partner response based on your conversation? Thanks.

Okay, that was a long question, but I’ll do my best to address it. First, regarding billing, it was strong. If you look at short-term billing, it shows double-digit growth, around 10% or 11%, which is an improvement from about 6% last quarter. Although I can't recall the exact numbers, you can calculate them. Overall, both total and short-term billing are on the rise. Even though some of this growth comes from OTA, it has still accelerated in the short term. Long-term commitments from customers are a positive sign, even though it’s not the primary focus. Both metrics have increased. As for the second part of your question, I can’t recall all the details—specifically if there was an impact from the price increase. We sell to distributors, partners, and end users, making it difficult to pinpoint the cause of billing changes. I would say there probably was some effect, though not to the extent of hundreds of millions, perhaps around $10 million. So yes, there was likely some impact from efforts to mitigate the price increase.

And remember that our price increases started from January 1st. So again, while there’s a possibility that some of the people made their purchases or renewals a little bit earlier, I think we wouldn't be proud of the billing growth unless we felt it was meaningful. We’re not just showing these numbers because they are impressive. But because last quarter, we saw some very good internal indicators.

Thank you.

All right. Next up, we have Gray Powell from BTIG, followed by Matthew Hedberg from RBC.

All right, great. Thanks for taking the question, and congratulations on the good numbers. So, yeah, how should we think about the upsell opportunity with Avanan? Did that acquisition contribute meaningfully to the improved billings growth in Q4? And then just how should we think about that acquisition in the context of your 2022 outlook?

Just look at the total number. They had an effect, but a very small one. Of course, it's a very small company. But we definitely believe in them and believe that they will grow significantly next year. That's why Gil mentioned we announced it as one of our Rockets: the Harmony Email Security. They are a major part of it. Also, we consolidated it, of course, with Check Point Email Security. So we believe it's a fast growing and we want to invest in it. If anything, it's actually increased our investment profile, which is different from Check Point, which is part of the margin plan for next year because we want to invest in it as we believe it's a very nice and fast-growing market.

Okay. Thank you very much.

Next up is Matthew Hedberg from RBC Capital Markets, followed by Sterling Auty of JPMorgan.

Thank you, Kip. Congratulations to the team on the results. I really like the new logo and the branding. Gil, I'm interested in the expectation of a 25% growth in the sales force. How does that compare to your previous targets? It seems like a significant increase from your historical performance. Additionally, can you discuss the challenge of attracting quality sales talent these days? Is that possibly a limiting factor? The target looks very strong.

First, you're right. It's much, much bigger than what we had before. In the last few years, the numbers were all single-digit growth. In many cases, we didn't achieve them. Some were missed because we weren't investing enough, but some simply because the nature of the sales force—salespeople tend to want to keep territories big to reap the benefits for themselves. They often prefer to hire support people rather than additional sales personnel. This investment is more about a strategic shift toward the future. Yes, we need to drive growth. Yes, we aim to capture new customers and serve existing ones better. This is a significant internal change. I believe it's achievable with the right pipeline, though it might take some time to hire the right individuals.

Thank you.

Thanks Matthew. Next up is Sterling Auty from JPMorgan, followed by Joel P. Fishbein, Jr. from Truist Securities.

I want a full name like that, Kip. Thanks guys. Tal, can you help us? I wasn't completely clear on the extent of the price changes you implemented. What changes were made during the December quarter, and what changes came later? How should we consider those impacts on the gross margins in relation to the EPS guidance you provided?

The price increase was in the beginning of the year. So that's one. Secondly, we didn't do an increase. I know many people increased significantly more. We increased, I think, only by 7%, so it's not a huge increase. So that’s part of the next year, you will start to see that. To your question, I don’t expect it to be $50 million, $60 million increase, right? So it might have shifted millions, but not hundreds of millions. It may have been $10 million, just to make an estimation. So it’s hard to project that accurately.

All right. Our next caller is from Junior, and then it will be followed by Philip Winslow from Credit Suisse.

Thanks Kip. Gil, this one’s for you. Log4j has made a lot of noise, but we really haven't seen a lot of breaches from it right now. What do you think the potential impact is of that for the overall market? And then also you hit on it a little bit in your prepared remarks, but I'd love to hear how that could be an accelerator for you guys to the overall results?

We are not relying on any specific breach as an accelerator for our growth. Still, it will affect the market as one of the most challenging vulnerabilities ever found. It’s easy to exploit and widely spread. Many systems are vulnerable, and while organizations patch and safeguard, many remain exposed for the foreseeable future and will be exploited over time. Therefore, our proactive measures against such threats are critical, and we are well-prepared to meet these challenges. Our CloudGuard technologies provide robust solutions to block even unknown attacks effectively.

All right, our next question is from Philip Winslow, followed by Jonathan Ho of William Blair & Company.

Great. Thanks for taking my question. Great to see you're all doing well. Gil, a question for you on cloud security. If you think about the commentary we've seen from the hyperscalers in the past couple of quarters, you had accelerating shift workloads to the cloud. But also, just the mission criticality of the workloads that are shifting, not just through a single cloud, but multiple clouds. When you think about the impact of that on Check Point and just call it attach rates of security in the cloud, what are you hearing from customers? And maybe if you could give us some more context on CloudGuard in particular, that would be great.

I think cloud security is a very high priority for every customer. We see that in every conference or interaction. It's not a giant industry just yet, but it's crucial and there are significant opportunities. The big cloud providers are making significant investments. They are working to secure their platforms, but not necessarily addressing customer applications, that remains the customer’s responsibility. However, Check Point is committed to providing comprehensive security for our clients across all environments, ensuring we meet their critical cloud security needs while fostering innovation.

All right, thank you, Philip. Last question is going to come from Jonathan Ho of William Blair. Go ahead, Jonathan.

Thank you for squeezing me in. And let me echo my congratulations as well on a strong quarter. I wanted to touch on the Lightspeed comments around cannibalization that you made. And one thing I did want to understand a little bit better, I don't think I've ever seen Check Point play the price performance game. So does this signal a shift in your strategy going forward? And how do you think about the potential impact, just given that the ratio dramatically changes with something like Lightspeed?

So first, we've been competing within the price performance sector for some time, but we’ve typically focused on innovation over price. The introduction of Lightspeed will elevate our competitive edge by providing unmatched value in the data center market segment. We're conscious of risks associated with pricing strategies, yet we believe it’s essential for maintaining our market position and capitalizing on long-term opportunities.

All right, guys. Thank you very much. We appreciate you attending today. We'll look forward to speaking with you after the call and in the coming days and weeks. Again, if you guys would like to revisit CPX, go ahead and sign-up. We have it on video-on-demand for those of you that missed it, and we'll see you in the coming weeks. Thank you.

Thank you very much.

Thank you.