Fourth Quarter and Full Year Financial Results Video Conference. I'm Kip Meintzer, Global Head of Investor Relations. Joining me today are Founder and CEO, Gil Shwed, and our Chief Financial Officer, Roei Golan. Before we start, I want to remind everyone that this conference is being recorded and will be available for replay on our website at checkpoint.com. During the formal presentation, all participants will be in listen-only mode, followed by a Q&A session. During the presentation, Check Point's representatives may make forward-looking statements as defined by the Securities Act of 1933 and the Securities and Exchange Act of 1934. These statements involve risks and uncertainties that could lead to actual results differing significantly from those projected. Factors that could cause actual results to vary include those highlighted in Check Point Software's latest filings with the Securities and Exchange Commission. Any forward-looking statements made are only valid as of the date of this call, and Check Point Software has no obligation to publicly update any forward-looking statements. In our press release, available on our website, we present GAAP and non-GAAP results, along with their reconciliations and the reasons for our presentation of non-GAAP information. If you have any questions after the call, please reach out to Investor Relations via email at [email protected]. Now I will turn the call over to Gil Shwed.

Hi, everyone, it's great to see you all. I want to begin by sharing a brief overview and then transition to our financial results. I have been part of Check Point for 31 years, starting just before we launched the company in February of 1993. This journey has been incredible with remarkable growth, and it continues. Today, I announced my intention to move into the role of Executive Chairman, which allows me to remain very engaged with Check Point and focus more on shaping the future of both the company and the cybersecurity market. I began this journey at 24, and I have evolved significantly with Check Point. I have learned valuable lessons and adapted my management style, and now I feel ready to take this next step. I appreciate your support during this transition. We are not making any changes immediately; rather, we are beginning a new journey. Starting tomorrow, we will initiate a comprehensive succession planning process to find a replacement for my role as CEO. The timeframe for this search can vary, but it typically takes between six months to two years to find the right fit. Everyone at Check Point is very enthusiastic about 2024. I’ll provide more details in the slides later and discuss the current developments. I am excited about starting this new chapter and hope to find my successor soon so I can fully embrace my role as Executive Chairman. Now, I'll hand it over to Roei, who will present the numbers, after which I'll share more about our vision and the business trends we have observed this year.

Thank you, Gil, and everyone for being on the call today. I am pleased to join you as we review the fourth quarter of 2023. We had an impressive quarter, achieving an operating income of $309 million, which reflects a 7% increase year-over-year, along with a robust operating margin of 47%. Our revenues totaled $664 million, exceeding our projection by $3 million, and our non-GAAP EPS was $2.57, surpassing the high end of our forecast by $0.02. For the full year, our revenues reached $2,450 billion, marking a 4% increase year-over-year, while our EPS stood at $8.42, reflecting a 14% year-over-year growth. This is our highest EPS for a quarter since 2011. Regarding our revenues and deferred revenues, we saw a 4% increase in revenue. Our deferred revenues amounted to $1,908 billion, up 2% year-over-year, and short-term deferred revenues increased to $1,440 billion, a 4% rise from the previous year. Our calculated billing was $862 million, with current calculated billings at $831 million. Additionally, due to the interest rate environment, we observed several customers willing to pay upfront for multiyear deals, which affected short-term billing duration. Our Infinity deals offer more flexibility in billing terms, contributing to a growing segment of our business. The annualized bookings we present in the next two slides have not been billed yet but are included in our backlog, which stands at approximately $2,250 million, growing 5% year-over-year. The growth in revenue was primarily fueled by subscription revenue, which rose 15% this quarter to $266 million. This performance reflects strong demand for our Infinity platform and Harmony Email, both of which are showing positive momentum. As we look at our new business annualized bookings this quarter, we saw double-digit growth across all geographic regions. This marks a notable turnaround compared to Q3, where growth was nearly flat. In Q4, we saw favorable upward trends, and we anticipate that this growth will translate into billings and revenues soon. The Infinity consolidated platform continues to contribute significantly, with revenue growth exceeding 10% of total revenues. We are witnessing more customers adopting our platform to meet their comprehensive needs. Geographically, we experienced strong demand in America, accounting for 42% of total revenues, primarily driven by Infinity and Harmony Email. EMEA accounted for 48%, with Asia Pacific contributing the remaining 10%. Notably, annualized bookings in these regions saw double-digit increases, indicating solid momentum in Q4. Moving to the P&L, our gross profit rose to $591 million, translating to a gross margin of 89%, up from 88% last year. Operating expenses increased by 4%, driven by investments in our workforce, recent acquisitions, and marketing. Non-GAAP operating income remained strong at $309 million, a 7% year-over-year growth, and the operating margin improved to 47% from 45% last year. This improvement resulted from better margins and favorable FX impacts, particularly relating to the shekel, which was somewhat offset by headwinds from our recent acquisition. Regarding financial income, it reached $18 million this quarter as we continue to benefit from higher interest rates. Our non-GAAP tax rate was approximately 9%, with tax expenses noticeably higher than last year due to tax accounting differences. However, the effective tax rate for the full year remained consistent with 2022. Our non-GAAP net income was $298 million, or $2.57 per diluted share, exceeding our projection by $0.02 and reflecting a 5% growth year-over-year. GAAP net income was $249 million, or $2.15 per diluted share, representing a 2% decline due to increased amortization tied to our recent acquisition of Perimeter 81. As for our cash flow and position, we ended the year with cash balances of $3 billion, consistent with Q3. Our operating cash flow was robust at $236 million for the quarter, up 3% year-over-year. We continued our buyback program, purchasing 2.2 million shares for $313 million at an average price of $142 per share. Now, looking at our 2023 annual performance, total revenues increased by 4% to $2,415 million, while gross profit reached $2,154 million, maintaining a gross margin of 89%. This improvement is attributed to a better supply chain environment compared to 2022. Operating expenses rose by 7% to $1,075 million, reflecting ongoing investments and our recent acquisitions. Our non-GAAP operating income remained strong at $1,079 million, holding a 45% operating margin similar to last year. Looking into 2024, we anticipate a headwind of approximately 2 points to the operating margin due to recent acquisitions, but we also expect benefits from currency fluctuations between the dollar and the shekel, which could provide a tailwind of up to 1 point. Our financial income for the year was $77 million as we leveraged higher interest rates. For 2024, we are estimating incremental financial income of about $1 million each quarter, and our tax expenses for 2023 were $159 million with a non-GAAP tax rate around 14%, consistent with 2022. We expect to maintain a similar effective tax rate in 2024. Our non-GAAP net income grew to $997 million, or $8.42 per diluted share, exceeding the top end of our original projections by $0.02 and indicating a 14% year-over-year growth. GAAP net income for the year was $840 million, or $7.10 per diluted share, reflecting 13% growth year-over-year. For the number of shares in 2024, we anticipate the average diluted share count to decline to approximately 130 million shares, starting at 160 million at the end of 2023 and reducing to around 111 million by year-end. We expect to decrease by about 1.3 million shares each quarter due to our buyback efforts, taking into account the effects of stock price fluctuations. Overall, we had strong results this quarter, with revenues exceeding projections and significant growth in EPS. The acceleration in quarterly and annual subscription revenues highlights the positive performance driven by our Infinity and Harmony Email platforms. We are pleased with the positive turnaround in our business environment during Q4, noted by double-digit growth in new business annualized bookings and strong profitability, achieving a 47% operating margin and 14% EPS growth for 2023. I'll now turn the call over to Gil.

Thank you very much, Roei, and thank you everyone for joining me. I’d like to share some insights into our achievements and outline our strategy moving forward, highlighting what sets Check Point apart. In summary, we had strong results in the fourth quarter, surpassing our EPS expectations, achieving 15% growth in subscriptions, and experiencing double-digit revenue growth in the Americas. Overall, I am very proud of our execution this past year. It’s important to note we started the year from a challenging economic situation in which customers delayed projects and investments, leading to a decline in new business for four consecutive quarters from Q4 2022 to Q3 2023. However, last quarter, we noted signs of a slight recovery. It's difficult to ascertain the extent of this turnaround attributed to the economy versus our team’s impressive execution, which enhanced customer engagement and increased our pipeline across all regions. In the fourth quarter, we recorded double-digit growth in our new business metrics, which I believe is a strong indicator of the shifts taking place. I sincerely hope this positive momentum will continue into 2024, providing us with economic support rather than challenges. Now, let’s discuss some of our achievements. We’ve emphasized the significance of the Infinity platform, which now has hundreds of customers—typically those with substantial business with us—utilizing it across various layers of security. We're proud to count renowned brands like FedEx, Benetton, Bayer, and Pirelli among these customers, showcasing our platform’s reach across diverse industries and global markets. This consistent success continued throughout the year and into Q4. Also, regarding our industry recognition, our leadership mentions from analysts have significantly increased every year from 2019 to 2023, indicating improvements in our products, marketing, and security services that are well recognized by customers and analysts alike. Looking ahead to 2024, we will continue to focus on being a platform company. The Infinity platform is becoming increasingly crucial, and I want to highlight two main attributes. Firstly, it's cloud-delivered, which means many services come from the Check Point Cloud. Secondly, it is AI-powered. We predicted at the beginning of 2023 that it would be the year of AI, and we've successfully integrated AI into all facets of our products, positioning us as leaders in cybersecurity and AI. We also discussed our 3 Cs framework: comprehensive, consolidated, and collaborative cybersecurity. I'd like to focus on the collaborative aspect, as it is specifically vital. ThreatCloud now comprises over 90 security engines capable of identifying and blocking a wide range of attacks, with more than half of these engines powered by AI—up from 40 last year. This growth indicates our consistent advancement, as we introduce an average of one new engine to the Infinity platform each month, adding significant strength to our offerings. Each engine can be utilized across various delivery methods, such as network security gateways, email security, and cloud security. This versatility means we can make advanced security investments that customers can deploy across multiple areas. Consequently, we prevented three billion attacks last year, a staggering figure. As for generative AI, it is making strong inroads into the front-end processes of our offerings. At our recent CPX conference, we showcased an exciting development: our generative AI tool can analyze access issues swiftly, which would usually require manual analysis ranging from minutes to hours. With a simple command, this tool can assess situations and suggest resolutions, completing tasks in a matter of minutes. It’s an innovative and powerful feature that’s already available to customers, and we witnessed substantial interest at the conference. Most of our security gateways, which form the backbone of our network security, already utilize ThreatCloud services. 100% of our email, endpoint, mobile, and cloud workloads are integrated with the Infinity ThreatCloud, indicating vast potential for growth as customers increasingly adopt our cloud solutions. The collaborative nature of our platform sets it apart, allowing various components to work interchangeably to mitigate threats efficiently. This capability enhances security response and streamlines system integration, making it straightforward for customers to manage their security without needing extensive training or hefty investments. We’re proud of the results from the recent MyCom report, which indicated our effectiveness against zero-day attacks, achieving a 99.8% success rate—an improvement over last year. Our ability to block a wide array of attacks stands in stark contrast to competitors, and it's crucial that we provide comprehensive protection against both known and unknown threats. As we move into 2024, I want to highlight our three families of products: Quantum for network security, CloudGuard for cloud security, and Harmony for workspace security. All these services leverage the core resources provided by Infinity, ensuring comprehensive security solutions. Before concluding, I want to mention our recent CPX Experience conference. We held our first major in-person event in four years, attracting thousands of attendees, with the Bangkok gathering seeing participation from 1,500 enthusiastic individuals. The high satisfaction ratings reflect our commitment to delivering valuable content and engaging discussions. In summary, even amidst challenging market conditions, our team continued to produce strong results, culminating in double-digit growth in new business, a key indicator of our health, profit margins, and innovative advances that will be rolled out in 2024. I am excited for Check Point's future and our team's dedication. Now, let’s review our 2024 projections. We anticipate revenues between $2.475 billion and $2.625 billion, translating to growth in the range of 6% to 9%. Our non-GAAP EPS is projected between $8.70 and $9.30, representing growth rates of 7% to 10%. For the first quarter, revenues are expected between $575 million and $610 million, with a midpoint growth of 5% and a high-end growth of 8%. Non-GAAP EPS for Q1 is projected between $1.95 and $2.05, equating to growth of 11% to 14%. These are robust figures to kick off the year, and I remain optimistic that our efforts in customer engagement and product innovation will yield positive results. Thank you all, and let's now open the floor to your questions.

Our first question will be from Adam Tindle at Raymond James, followed by Patrick Colville from Scotiabank.

Gil, I just wanted to start with your announcement, and congrats on many years of building such a strong, profitable company. But I guess I'd like to start asking why now? It sounds like, based on the initial guidance, we're at a point of acceleration at Check Point. So why was this the time to make that announcement? And secondly, the characteristics that you'd be looking for in a success or the key vision items that you and the Board would like to see?

It's a great question, and I know there’s never a perfect time for these kinds of changes. I've faced this query for nearly 27 years, almost since we went public. My response has consistently been that I enjoy what I do and I’m dedicated to Check Point; it's my mission. While tough times can make you reconsider, I feel it’s crucial to be present and ensure Check Point's success, especially during challenging periods. Lately, I've been reflecting on this again, but I want to emphasize that I am fully committed to Check Point and plan to continue my work here. I’m not planning to leave; Check Point is my life’s work, and I am passionate about it. I chose to announce this now because I felt everything is in place: our products are performing well, the results have been outstanding, and the internal trends were strong in the fourth quarter. Meeting people at our recent conference in Bangkok inspired me, as I witnessed great enthusiasm from customers and even potential clients. This signals to me that it’s the right moment to start the transition process. I want to highlight that we are just beginning this process; we haven’t initiated the search for my successor yet. It may take time, and while I hope it will be a swift process, it typically spans six months to two years. I want to assure you that I will remain here, and when we find the right candidate, I will collaborate closely with them to ensure a smooth transition. My role as Executive Chairman signifies my intention to stay deeply involved with Check Point, focusing on strategic areas such as the future of cybersecurity and enhancing our platform. I also look forward to increasing my interactions with customers and partners to better understand their needs. Lastly, I believe we have a fantastic management team in place that gives me comfort in pushing forward with this decision. As for the characteristics I seek in a successor, we're just beginning to define that, but I want someone passionate about cybersecurity who understands what Check Point represents. They should be detail-oriented, able to see the bigger picture, and be enthusiastic about sales, willing to engage with customers and partners globally. We have excellent leadership in place, but there’s always room for growth. I believe the opportunity ahead of us is tremendous, and I’m looking for a candidate who can complement my skills and bring additional strengths that will benefit Check Point.

All right. Our next questioner is Patrick Colville from Scotiabank, followed by Joseph Gallo of Jefferies.

Yes, just to reiterate that, I mean, Gil, it's been a real pleasure working with you. I think we can all agree, you're definitely one of the OGs of the acuity industry. And we wish you all the best in your new Exec Chairman role. Let me ask you about the guidance. The fiscal '24 guidance is no doubt impressive. My kind of quick math suggests it's a reacceleration. Can you just talk about the inputs to your guidance? I mean touching on the product line and the kind of the key subscription line as to how you got to that forecast.

Thank you very much. I will provide a high-level overview, and then Roei can add his thoughts afterward. Our forecast is primarily based on input from the sales team and the visibility we have into the pipeline. In 2023, we focused heavily on customer engagement, meeting with significantly more customers and prospects than before. We aim to maintain this trend, which translates to an increased pipeline. It's important to note that even though we are having more meetings, the pipeline may not grow proportionately because the sales team often targets the easier opportunities first. Increased customer engagement does result in a larger pipeline overall, and we observe a direct correlation between these engagements and the pipeline size. We are also considering industry growth trends and economic indicators. While there are some positive signs in the economy, I'm cautious about declaring that the challenges from last year have fully passed, as some competitors are still experiencing slowdowns. This introduces a level of uncertainty that we cannot overlook. From my experience over the last 30 years, I’ve learned that surprises are often around the corner. We've seen this during the pandemic and in the following years, where anticipated economic rebounds did not quite occur as expected. Recent events, like the situation in Israel, remind us that unpredictability persists. Despite these challenges, I'm proud of Check Point's consistent execution, and I hope we can enhance our performance even further. Roei, do you have anything to add regarding the quantity?

I think you mentioned several things. We reviewed the last quarter and noted that the real turnaround happened then. We started to see more demand for our appliances and a strong interest in our subscription business, Infinity. Our outlook is optimistic. While there's still a wide range of possibilities, we believe that our guidance is solid, and we hope to be at the high end of that range.

All right. Next up is Joseph Gallo from Jefferies, followed by Jared Poland of Susquehanna.

Awesome. Gil, congrats on the 31 years of success, and glad you are staying involved with the company. Guys, great double-digit new business growth in 4Q. How should we think about it in calendar '24? And how does that correlate to billings growth in calendar '24? What is needed to drive billings growth to double digits? And can we expect that in '24?

I'll address that, Gil. First of all, Q1 was a strong quarter with significant growth in new business. This growth will eventually translate into billing. I want to emphasize that we are noticing more flexible billing terms in the market, as our competitors also seem to be offering such options. If we are to continue seeing consistent growth in our new business like we did in Q4, I believe we will also observe that reflected in billing. It's worth noting that the billing duration decreased in 2023 due to the high-interest environment compared to 2022, but it seems to have stabilized. I hope that in the coming quarters, we will see growth from billing, which will contribute to our revenues, not just from new business.

I believe we should leverage our financial strength and significant cash reserves in a positive manner, not only to attract customers but also to develop more annuity-based business models. This involves transforming some capital investment models into annuities, which benefits customers who are increasingly accustomed to subscription-based models. It also benefits us, as creating these models leads to more predictable and long-lasting business. I think this approach can positively affect our short-term billings by providing a forward-looking perspective.

All right. Next up is Jared Pomerantz from Susquehanna, followed by Tal Liani of BofA.

And congratulations to you, Gil, as you begin the transition to our next role as the Executive Chairman. Maybe just one for me. You guys spent some time in the prepared remarks speaking to the Infinity platform and the strength that you're seeing there. Maybe if you could just dive in a bit further. How much of that new business strength that you pointed to would you attribute to Infinity? And how are you thinking about the go-to-market and potential shifts there down the road?

Roei, your comment?

A significant part of our new business today is coming from Infinity, and every quarter, the contribution from Infinity increases. It's growing rapidly with strong double-digit growth in new business bookings. As we've shown in the past few quarters, we are consistently achieving strong double-digit growth in revenues. We anticipate that a substantial portion of our new business related to Infinity will continue to grow each quarter, driven by the current demand and the pipeline we have for the entire Infinity solution.

All right. Thank you. Next up is Tal Liani.

I have two questions. First, what are the trends regarding new customers compared to existing customers? Are you seeing more growth from new customers than in the past? Can you provide some trends or contributions from new customers over the last few years? Second, when I analyze your figures, the services show a steady 2% growth per year in the maintenance area. Meanwhile, the subscription services are consistently growing around 15% annually, with a bit of acceleration. The most noticeable change is actually in the products and licenses, which are declining at a slower rate than before. So, what are the underlying trends in products and licenses? Can you share more insights about the numbers? How might this look over the next year or two, and what factors are driving these changes?

I would like to provide you with an answer. First, as we mentioned, every product in Check Point with a subscription model is experiencing rapid growth. Harmony E-mail is a prime example; it's offered as a subscription and is growing quickly. There are several other products that are also seeing significant growth. Additionally, each gateway we sell includes multiple subscriptions, which are also on the rise, with more services being utilized alongside each gateway. Last year was challenging for three quarters at the year’s start, as many new projects were delayed and product sales declined. However, thanks to the strength of our subscription model and the fact that 80% of our business is annuity-based, we managed to meet our quarterly results consistently, which is a notable achievement. In the last quarter, while product revenues were still decreasing, product orders increased by double digits, signaling a positive shift as we move into 2024. The early indicators for the first quarter are also encouraging. It's important to note that even with an Infinity deal, revenue recognition and product delivery can take time. Unlike traditional deals where you receive the product immediately after purchase, Infinity deals involve a three-year commitment, allowing customers to choose when they want the product, sometimes even having the flexibility to select products over time. Some of this growth may take longer to materialize, but the outlook is very positive. If this trend continues, it will be a crucial factor in driving growth in the future. We experienced a significant increase in new customers in 2021 and 2022, although it still represents a small percentage of our overall business. Nonetheless, the numbers are promising across all sectors, with many small customers acquired through recent acquisitions, as well as hundreds of large customers in our enterprise segment. In 2023, despite a challenging economic environment and a decline in new business for three consecutive quarters, we managed to maintain stability in this area, with only slight growth. Looking ahead to 2024, we are optimistic that our ongoing investments and efforts will lead to an increase in new customers and logos. We are prioritizing these objectives, ensuring our sales team focuses not only on expanding relationships with existing customers but also on acquiring new clients, which is one of our top priorities for the year.

All right. Our last question is going to come from Shaul Eyal.

Congrats, Gil. Maybe you can share with us some color on 7-digit transactions, government business, and with respect to the incoming CEO. Is there a prerequisite that he or she will be Israeli-based? Or could they also be U.S.-based?

We observed significant growth in our large deals, particularly those around seven digits, this quarter compared to the previous one, with double-digit growth in both the number of deals and their dollar value. This trend was part of the positive momentum we mentioned, and we also performed well in the government sector. While there is still room for faster growth and improvement, we believe our government business is in solid shape.

As I mentioned, we're just starting this process, but I'll openly share my requirements and preferences. I prefer to conduct a global search for the best candidate, whether she or he is located anywhere in the world. Ideally, I would like this person to be based in Israel since our headquarters and main hub for operations is in Tel Aviv. This increases the likelihood that the candidate will be Israeli. However, they will need to travel extensively. I want them to spend considerable time around the world, but again, the focus is on finding the best person globally, with a strong preference for someone to reside and be part of the team at our headquarters.

All right. Thank you all for joining us today. We appreciate you coming and spending the time with us, and we look forward to seeing you throughout the quarter. Thank you.

Thank you very much, everyone. Really appreciate it. Thank you.

Bye-bye.

Bye-bye.