Check Point Software Technologies Ltd Q4 FY2022 Earnings Call

Financial Results Video Conference. At this time, you are in listen-only mode. During the formal presentation, which will be followed by a question-and-answer session, joining me remotely today are Gil Shwed, Founder and CEO, along with our Acting CFO, Roei Golan. 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 would like to reach us after the call, please contact Investor Relations by e-mail at kip@checkpoint.com. During this presentation, Check Point representatives may make certain forward-looking statements. These forward-looking statements include statements related to Check Point's expectations regarding our products and solutions, expectations regarding customer adoption, expectations related to cybersecurity and other threats, expectations regarding our 2023 initiatives, our ability to develop platform capabilities and solutions, customer acceptance and purchase of our solutions, the market for IT security, competition from other products and services, our share purchase plans and general market, political, economic and business conditions. These statements are 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 this presentation are based on the 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, posted on our website, we present GAAP and non-GAAP results along with the reconciliation of such results as well as the reasons for our presentation of non-GAAP information. And with that, I'd like to hand the call over to Roei Golan, our Acting CFO, for a review of our financial results. Roei? Hello?

And to review our fourth quarter, so we had a strong quarter with revenues reaching $638 million, which is $5 million above the midpoint of our projections. Our non-GAAP EPS was $2.45, $0.03 above the top end of our projections. As we move to the full year, our revenue reached $2.33 billion, $42 million above the midpoint of our initial projections and non-GAAP EPS of $7.40, $0.20 above the midpoint of our initial projections. Yes, so we can see also here the accelerated growth that we had this quarter also and also for the full year, both on revenues and EPS. And before I proceed 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. So now let's dive into the detailed review of the quarter. As I mentioned, our revenues grew this quarter by 7%. This is compared to 6% last year. Our deferred revenues reached $1.878 billion representing 10% growth year-over-year. Our calculated billings reached $869 million. Let me remind you that our billing is affected by deal timing, duration and payment terms and can fluctuate. Now we'll see that our accelerated revenue growth is mainly driven by our subscription revenues that reached $231 million, representing 30% growth year-over-year. That was mainly driven by our CloudGuard and Harmony pillars that both delivered double-digit growth. Also, I want to remind you that Q4 2021 was the first full quarter with Avanan's impact on our subscription revenues. Another effect that had on our accelerated revenue growth was the strong adoption of our Infinity strategy, which had a great quarter, continuing to flow in an accelerated rate to the revenues with 140% growth year-over-year. If we move to our revenues by geography, we can see that 49% of our revenues came from EMEA, 39% from America, and the remaining 12% from APAC. It's important to note that we had growth across all geographies. Now if we are looking at the P&L highlights for this quarter, our gross profit reached $559 million with a strong gross margin of 88%. Those strong margins are impressive considering we continue to have some additional costs for raw materials and shipping as well as price increase by many vendors. While we still see supply chain challenges, there is some relief, and we expect to see modest improvement in 2023. Our operating expenses increased by 13% this quarter. This increase was mainly a result of the continued investment in our workforce, including compensation and increased travel. Offsetting this increase, we also benefited from the stronger U.S. dollar by approximately $10 million this quarter. Now we see that our operating income reached $289 million, representing a 45% operating margin this quarter. Our financial income this quarter reached $15 million as we invest in higher interest rates over time. Our non-GAAP tax rate for the quarter was around 1% mainly due to updates of our tax provision because of several tax assessments we have worldwide. Our non-GAAP net income was $301 million or $2.45 per diluted share, which is $0.03 above the top end of our projections, representing 9% growth year-over-year. Our GAAP net income was $270 million or $2.20 per diluted share. Now if we're going to move to the P&L highlights for the full year, so you can see again that our revenues had a nice growth of 8% to $2.33 billion. Our gross margin was strong at 88%. Our operating expenses increased by 15% this year mainly related to the increase in our workforce. Our headcount increased by 415 employees, a 7% increase year-over-year. The net effect on the P&L was higher mainly due to the fact that we hedged the compensation in Israel at the beginning of 2022 with lower U.S. dollar rates. We also had the highest travel and entertainment expenses as we returned to travel. Our non-GAAP operating margin was strong at 45% compared to 48% last year. As for 2023, a few factors about 2023. A significant part of our workforce increase was towards the end of the year. We started 2023 with a higher run rate. Let me remind you, when we discussed last year's plan for 2023, we planned to be around 42%, 43%. As the hiring took longer than anticipated, a significant portion of it was done in H2 2022. Also, during the second half of 2022, we returned to higher levels of travel. We expect that our travel and entertainment expenses will continue to grow and normalize at higher levels this year. As for the FX effects in 2023, more than 50% of our expenses are in local currency, and the strength of the U.S. dollar is expected to provide us a benefit. Based on the factors I just mentioned, we expect our operating margin for 2023 will be around 42%. Our financial income for 2022 was $44 million, reflecting the increased yield on the portfolio. For 2023, we expect incremental financial income between $1 million to $2 million every quarter due to the higher yield pro forma investment yield. As for the tax rate for 2023, we expect a similar tax rate this year compared to 2022 while for modeling purposes, we expect a 14% tax rate for all four quarters. Now let's move to our cash flow and our cash position. Our cash balances, marketable securities and short-term deposits were $3.5 billion as of the end of the year. We had a strong operating cash flow of $230 million. This quarter, payments increased as a result of elevated raw material costs and investments in the workforce as discussed. During the quarter, we continued our buyback program and purchased 2.6 million shares for $325 million at an average price of $124 per share. In addition, we generated a very strong cash flow with $1.08 billion for the year. While the cash flow from operation decreased by 9%, net of hedge taxes and acquisition-related costs, the operating cash flow was at the same level as in 2021. We repurchased 10.3 million shares for $1.3 billion at an average price of $126. For 2023, we expect our average diluted number of shares to be approximately 119 million shares for the year, starting with 121 million shares in Q1 and moving down to 115 million shares by Q4, assuming share repurchases of $325 million. In addition, we announced today an expansion of our buyback program in an amount of $2 billion. Under the program, we are authorized to continue repurchasing shares up to $325 million each quarter as we did in the last period. So if we summarize our results, we had strong revenues and EPS for Q4 and for the full year of 2022. Our revenues and non-GAAP exceeded our projections, with triple-digit growth for Infinity revenues. We will continue to focus on top-line growth while maintaining strong profitability.

Thank you, Roei, and hello, everyone! I'm very happy to be here and to talk a little bit about the business and especially what we will do going forward. So let's dive in. First, let me share a quick slide on the full year of 2022. I think we covered many of these in the previous quarter, but it was a very active year. We started the year with LightSpeed, a major platform for performance security. We've ended the year with Titan Horizon, two important upgrades for security. We've created many internal organizational changes with the new rockets organization, new commercial organization, and even rebranding and changing our logo for the first time in almost 30 years. As you have seen from Roei, we've done very well, both for the full year and for Q4. I mentioned in some other comments that this year was a bit interesting from a financial perspective. We are proud of the results and the strength of the business that we saw. For the first three quarters, we had a good business environment. We grew our internal metrics in a very high rate. Q4 was a little different, and we did face challenges towards year-end. Projects were postponed, and customers didn't have the budget flush we usually expect in Q4. Despite that, the numbers we have are very good, but I want to stress that it's not business as usual, and even though we have good numbers and good forecasts for next year, we need to be a bit more cautious than usual. Now let's talk about the future. The cyber environment is growing, with more cyber-attacks becoming more sophisticated. We, as security professionals, are responsible for keeping businesses secure. The statistics show that a typical organization faces almost 1,200 attacks every single week. That's not per year, that's per week. The question is how to win that battle against the increasingly sophisticated cyber-attacks. Just to share an example, you will see a real case study of a Chief Information Security Officer to understand how we can win that battle. Thank you, Alex, and by the way, Alex that you saw here, both the script and Alex were created by AI, and 2023 is also the year of AI. The story you heard is real. Last year, on February 28, a company got some malware that was first caught by security software on one of the endpoints, and nothing happened. But six days later, on March 4, the malware did enter the company, and that message was shown to all employees after the weekend. The plants were shut down, and 250,000 employees were sent home. After negotiation, the company paid $14 million in ransomware. The question is how to battle it and win that battle. This happens everywhere, and we see unfortunate attacks every day. We need to get to an environment where everything works together to contain and stop an incident and ideally prevent it. When there is an attack on one endpoint, the rest of the security systems should respond. That’s what we are trying to build with the Infinity architecture and in 2023, we call it the 3 Cs: Comprehensive prevention across all attack vectors, consolidation to reduce complexity for customers, and a collaborative approach to security. We want to ensure that when we see something suspicious on one front, our defenses respond across all attack vectors. That’s how we intend to implement the 3 Cs in our architecture in 2023. Regarding our Threat Cloud, now launching the Threat Cloud AI, we say it's not just a buzzword. We have in the Threat Cloud 75 prevention engines, 42 of them based on AI. In 2022, we released 12 AI engines. This shows the power of Threat Cloud, collecting and responding to information from all attack vectors. The three principles we've introduced will help us announce many new products. We launched products in many areas, including our Quantum elements, centralized management with Infinity, and the new SD-WAN engine we added for enhanced networking security and optimization. Last week, we held our CPX360 conference hybridly in many locations plus virtual access to many more customers and partners. An analyst who participated shared that 'Check Point achieved an unreal 99.7% zero-day prevention.' This positions us uniquely in the market, where we aim to prevent all attacks, keeping our customers safe and secure. For 2023, predicting the future is challenging, especially given current market uncertainties. However, we expect continued healthy growth with revenues projected between $2.34 billion to $2.51 billion and non-GAAP EPS between $7.70 to $8.30. For the first quarter, we expect revenues between $545 million and $585 million. We are proud of our strong financial results, highest revenue growth in many years, and we are determined to focus on comprehensive, consolidated, collaborative solutions.

Okay. Thanks and good morning. Gil, I wanted to start with the financial model here. If I look at 2022, margins came down by about 400 basis points, and billings growth was only about 5%. If I look at your guidance for 2023, we've got more margin compression coming and not a significant acceleration in revenue growth. So I'm just curious to get your take on how patient you're going to be with this investment and the timing to see some growth acceleration on the other side of it? Thank you.

As I mentioned in 2022, we want to invest. Our goal is to grow and do what's right, and our margins are still very rich. I'm proud to be a profitable company and that gives us strength and the flexibility to generate very good results. In the first three quarters, we achieved high growth rates. Fourth-quarter results changed that, and I'm transparent about it. Projects got delayed, and there was no budget flush as typically expected in Q4. Moving forward, I believe investment will pay off; however, the level of investment in 2023 may differ from 2022. In 2022, we built many organizations and hired numerous salespeople, and while we did see positive outcomes, the changes will likely be seen in Q1 run rates.

Hey guys, thanks for the question. A bit of a follow-up to that last one, but I understand there was macro in a tough 4Q comp, but what is needed to explicitly grow double digits? Is it products? I saw you lean more into SD-WAN or is it go to market? And then I may have missed it, but just a quick clarification. Could you give us a sense of RPO or annualized new business in the quarter? Thanks.

I'll let Roei talk about the RPO part. What's primarily needed is go to market. Engaging customers and delivering our message works. Our Infinity growth is a testament to our strategy, and we need to engage more customers. While we are also adding products, the feedback from customers indicates they are keen on expanding their usage of our existing solutions. Roei, can you share about RPO?

As for RPO, it's something we usually don't disclose, but it grew high single digits overall.

Thank you for the question. Gil, I wanted to ask about the product market dynamics. If I think about your guidance, it suggests that products will grow probably low single digits in FY '23. You grew 4% in Q4, but I think it will be below that for the balance of '23. Your competitor Fortinet gave guidance for mid-teens product revenue growth. So, what do you think needs to catalyze or ignite the product-specific side of the growth? And could you address the SD-WAN announcement?

You're correct, and I acknowledge your observations. We're shifting business from product sales to subscriptions, especially through Infinity and new product offerings. Although some competitors may show higher growth, we did see internal growth in certain aspects. Our plan is to accelerate this growth significantly, as we have the potential to reach a wider customer base. I expect SD-WAN to have a healthy contributing pipeline; however, rollouts take time as many branches are involved.

Good morning, and thank you for the question. I know your billings can be unpredictable due to large deal activity. So, could you discuss both linearity in the quarter and any large deals you may have had in Q4 or lack thereof that might have impacted the billing growth in Q4, notwithstanding that tough comp from last year?

This quarter, we've seen less budget flush. Last quarter, we had mega deals coming through due to budget flush in Q4 2021. This quarter, because of the macro environment and longer sales cycles, we've seen some deals deferred into Q1. That's influenced the billing impact too. Also, remember, when we sign Infinity contracts, they aren't always billed upfront due to specific payment terms.

Great. Thank you, good morning. Gil, I was wondering about the decision to build versus buy regarding SD-WAN. Are you seeing demand on that point solution basis, or is the full software solution the larger driver?

There are multiple drivers for SD-WAN. Customers are increasingly looking for SaaS solutions, but are also deploying systems onsite for better performance. We have integrated SD-WAN tightly into our gateways, and we determined it was more effective to build rather than buy a vendor. We have conducted due diligence on potential acquisitions but needed a quality solution that we couldn't find.

Absolutely, thank you. My question is on visibility into the Harmony product portfolio. I would also like to understand how challenging it was to support over 1,000 applications with blade integration.

The SD-WAN blade we've introduced supports well over 1,000 applications, two to three times more than our direct competitors. The integration draws on the existing knowledge we have in our network security products. Regarding the Harmony portfolio, our Harmony email is growing very fast. We anticipated that a crowded market would challenge us, but we've shown success and built integration with our technologies, which is essential as most attacks start with an email link. So if we do it right, Harmony has the potential for significant future successes.