Check Point Software Technologies Ltd. (NASDAQ:CHKP) Q4 2022 Earnings Call Transcript February 13, 2023

Kip Meintzer: Financial Results Video Conference. At this time 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 within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 include, but are not limited to, statements related to Check Point's expectations regarding our products and solutions, expectations regarding customer adoption of our products and solutions, expectations related to cyber security and other threats, expectations regarding our 2023 initiatives, our ability to continue to develop to 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, our share purchase plans and general market, political, economic and business conditions, trying to cover everything.

These forward-looking 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, it has been 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?

Roei Golan: And to review our fourth quarter, so we had a strong quarter with revenues reached $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 required 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 6% last year. Our deferred revenues reached $1.878 billion represents 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 revenues 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 impact on our subscription revenues.

Another effect that had on our accelerated revenues growth was the strong adoption of our Infinity strategy, which had a great quarter, continue to flow in accelerated rate to the revenues with 140% growth year-over-year. If we move to our revenues by geo, so we can see that 49% of our revenues came from EMEA, 39% revenues came from America and the remaining revenues came from APAC with 12%. It's important to note that we had growth across all geographies. Now if we are looking on the P&L highlights for this quarter, so 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 as a result of the continued investment of our -- 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 45% operating margin this quarter. Our financial income this quarter reached $15 million as we invest in higher interest rate over time. Our non-GAAP tax rate for the quarter was around 1% mainly due to update 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, 9% growth year-over. Our GAAP net income was $270 million or $2.20 per diluted shares. 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 was -- increased by 415 employees, 7% increase year-over-year. The effect of the P&L was higher mainly due to the fact that we hedged the compensation in Israel in the beginning of 2022 with lower U.S. dollar rates. And also, we had this highest travel and entertainment expenses as we go back 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 plan to be around 42%, 43%. But as the hiring took longer than anticipated, significant portion of it was done in H2 2022. Also during the second half of 2022, we returned to higher levels of travel. And we expect that our travel and entertainment expenses will continue to grow and continue to normalize at higher levels in 2023. 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 these factors that I just mentioned, we expect that 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 similar tax rate this year compared to 2022 while for the 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 naturally as a result of elevated raw material costs and investments in 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. If we are moving to the portfolio, we see that we generated very strong cash flow with $1.08 billion for the year. We also -- if we're taking the cash flow from operation decreased by 9%. But net of hedge taxes and acquisition-related costs, the operating cash flow was in 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 121 million shares in Q1, moving down to 115 million shares by Q4, assuming share repurchases of $325 million in the quarter.

We -- in addition, we announced today also our expansion to our buyback program in an amount of $2 billion. Under the program, we are authorized to continue repurchase share 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 is above the need of our projection, triple-digit growth for Infinity revenues. And we keep focus on top line growth while maintaining strong profitability. And now I'll turn the call over to Gil.

Gil Shwed: Thank you, Roei, and hello, everyone, and very happy to be here and talk a little bit, shed some on the business and especially what we do going forward. So let's dive in and go ahead to that. First, let me just -- quick slide on the full year of 2022. I think we covered many of these in the previous quarter, but it was a very, very active year. We started the year with light speed, a major platform for performance security. We've ended the year with Titan Horizon, two very 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. And I think financially, I think as you've seen from Roei, we've done very, very well, both for the full year and for Q4.

Photo by Austin Distel on Unsplash

I already mentioned it in some other comments. This year was a little bit interesting from a financial perspective. We are very proud of the results and the strength of the business that we saw. But for the first three quarters, we had a very good business environment. We grew our internal metrics the way we wanted them in a very high rate. Q4 was a little bit different, and we did face some challenges towards year-end. Projects were postponed. Customers didn't have the budget flash, which usually expect in Q4. Despite that, again, the numbers that we have are very, very good, but I just want us to know that it's not business as usual and that -- and even though we have good numbers and good forecast for next year, I think we need to be a little bit cautious more than usual.

So that's for summarizing everything we had. But let's talk a little bit about the future. So I think one thing we know and one thing that is changing, the cyber environment is growing. I mean, it's -- there's more cyber-attacks, and they become more and more sophisticated. And we as security professional are in charge of keeping the business secure, and that's our job. Just to see the statistics here, the typical organization gets almost 1,200 attacks every single week. That's not per year, that's per week, the 1,150 here. And some sectors are much higher, and some geographies are much higher. That's very, very alarming. So the question is how to win that battle against the bad guys, how to win against the fifth generation and more sophisticated cyber-attacks that we see.

So what I wanted actually to start with here, let me do that and share some -- is invite a friend and see a real case study of a Chief Information Security Officer from a real case and then understand how we can win that battle. So let's watch that. Thank you, Alex. And by the way, Alex that you saw here, both the script and Alex were creation of AI, and 2023 is also the year of AI. But the story that you've heard is real. And even though we at cyber don't have the nice hair that Alex has, the challenges that we face are the same challenges. And you see here the real-case study that occurred last year. On the end of February, I think it was 28th February, that company got some malware. Actually, the malware was first caught by some security software on one of the endpoints, and nothing happened.

But six days later on, I think it was March 4 if I recall correctly, the malware did enter the company, and that message was shown to all employees after the weekend. The plants were shut down. 250,000 employees were sent home. And after negotiation, the company paid $14 million of ransomware. And the question is how to battle it and how we can win that battle. You know this happens everywhere, and you see some more here in L.A., Uber. And again, we see, unfortunately, every day such attacks that occur. So how to win that battle? What should be done differently? Let me draw an analogy to our real world. When we have a fire alarm on the sixth floor, everybody is rushing to stop it. We all get an alert. We are all checking what's going on. The door is shut down, the center of the building checks what's going on, there's a message on the messaging system.

And we are -- the entire building responds to that attack so we can contain it and stop it and hopefully, even prevent it and keeping outside. Now let's draw the analogy and see what happens in the cyberspace. There is an endpoint here on the right. It receives some malware. Let's assume that it even catches that malware and stops it. And what's happened with the rest of the entities around it, the different workloads, the different -- the networking security, the cloud security, everybody else, they don't care. Nothing happens actually. All the other products remain unaware to that security incident and are not doing much to stop it. And that's the thing we need to change. We need to get to an environment when everything works together. And that's what we're trying to build with the Infinity architecture and new in 2023, we call it the 3 Cs. And what do these 3 Cs means?

Comprehensive prevention across all attack vectors, and you see these domes across all the different elements of the IT systems, the cloud, the cloud applications, the endpoints, the remote users, the network, everything has to be secured. Consolidate, Customers spend out tremendous amount of energy, resources, buying, managing, upgrading, renewing 2,000 security solution instead of works together actually instead of unifying it, reducing that complexity and mainly managing in a way that actually creates more value. And last but not least, that's the one I want to focus on of the 3 Cs is the collaborative nature of the security. When we see something suspicious on one hand or when we have a technology that can stop an attack, we apply these technologies to all attack vectors.

And we do it in real time and that's the collaborative element of the cybersecurity. So how do we do that? We have in the middle of our architecture with threat cloud, and now we are launching the threat cloud AI. And I'll explain exactly why do we say AI, not just because it's a nice buzzword in 2023. That central threat cloud connects to all the elements of the security systems to the users and the devices with Harmony, to the cloud elements, to the networking elements and feeds them all and collects information and prevents attack in real time. Now why do I call it AI, not just because it's a nice buzzword. You see, for example, our latest engines with prevention engines, which we introduced into threat cloud, we talked about them, I think, two months ago, and they are getting to market now.

We're in market now. All of these are based on AI technologies. And by now, just to give you the sophistication and the power of threat cloud, we have in threat cloud 75 prevention engines, 42 of them are already based on AI. Just in 2022, released 12 AI engines. So that shows you the strength of threat cloud, something that I don't think any other vendor can match collecting and responding information from all attack vectors, from the cloud, from the users, from the network together and applying AI to them and generating the best prevention actions that we can do over then. So that's the heart, the brain of the system here. So once again, the 3 Cs, comprehensive prevention of attack across all the factors from cold to cloud, consolidation, unified management.

One way with the security admin that CISO can manage the entire system and last but not least, the collaborative element of that. The best security engines, but we are applied not to one vector, not a great vector applied just to e-mail, not a great engine applies just to endpoint, but all the best engine applies to all attack vectors and are doing their work in real time with an architecture that's based on APIs, that's based on integration and that allows even integration within our framework and even to external vendors. So that's the three principles. Along these three principles, we will announce many, many new products. And we launched products to speak about in many, many areas. I want stop here to do that. That will take too much, and I don't think that's necessarily the main focus of an investor call, but you see from the Quantum elements to the left to the centralized management with Infinity from the cloud or not from the cloud in the middle, all the way to the new.

You remember, we had three product pillars, three major families, Quantum, CloudGuard and Harmony. And now we've added Horizon that provides far more threat intelligence in a centralized way that creates this collaborative effort. And we don't call it just XDR or MDI, which is detection. We call it NPR or XPR prevention, prevention and response. One interesting product that I think touches to a market that has importance in terms of market size and customer demand, that's the SD-WAN element. We are introducing now an SD-WAN engine or an SD-WAN what we call it, blade into our different gateway families, very comprehensive prevention, making networking both fast, optimized in many networking environment, but also with the highest level of security, so just one important product amongst all the others.

Just to show an interesting quote, we had last week our CPX360 conference, again, in a live mode in New York. It actually was kind of a hybrid conference when we did it in six different locations plus virtual to gain access to many, many more customers and partners. And an analyst that we invited doing actual security analysis and testing of product, Rob Smithers, CEO of Miercom surprised us even with -- not with the data because with data we know, but very, very good slogans that he shared with us on stage, says "Check Point, what you got is unreal. 99.7% 0-day prevention is unreal." Then he continued and say, "Now guys, I thought when I saw it, maybe our tests are too easy, but other vendors, your competitors, not our vendors, only reached 30%." I've checked the report, actually, some of them get all the way to 40%.

But guys, this is very, very different. It's not the same, a little bit better. It's the difference between letting the bad guys in or preventing the attack altogether, and that's actually what Rob continues. He says, "Prevention is first place. Only Check Point is doing prevention. Second place is the victim, and that's what we don't want to be." So just an interesting anecdote from last week. So I think what we have altogether is a very, very robust strategy, a lot of activity inside the company to bring this message to the market. And I think a lot of work on new technologies to implement this vision in a better way. Before I finish and summarize, just to provide you with our projections for 2023 in the first quarter. As I mentioned before, and as I'm mentioning every time, predicting the future is always difficult.

The level of uncertainty in the market now is actually higher than usual, not that we haven't seen that kind of uncertainty in the markets in the last few years. But even to that level, I think we are three years ago, we've been to a similar situation. Now I think we're getting into another interesting period of the marketplace. I think, by the way, in the mid- and long range, it can play to Check Point's strength because in times like that, people look for consolidation. In times like that, people look for strong vendors. And I think that can very much play into our strength of providing the best security. But just to put things in perspective, the projection for the year shows continued healthy growth, continued healthy investment with revenues between $2.340 billion to $2.510 billion.

Non-GAAP EPS is expected to be between $7.70 to $8.30. GAAP EPS is expected to be approximately $1.22 less. For the first quarter, we are also expecting decent numbers, especially given the economy. Revenues are expected to be between $545 million to $585 million. Non-GAAP EPS is expected to be between $1.68 to $1.78, and GAAP EPS is expected to be approximately $0.31 less. So that's summarizes, I think, what we had to share so far. We're very proud of the strong financial results, I think the highest revenue growth in many, many years. EPS for the fourth quarter exceeded our range. We will be working very hard to harness these 3 Cs of best security, providing a comprehensive, consolidated and collaborative solutions. And we expect both our investment in the business and the growth that we will see as a result of that to continue in 2023.

So I really want to thank you for joining us today, and we'd love to open the call for your questions.

A - Kip Meintzer: So up first is Adam Tindle from Raymond James, followed by Joseph Gallo from Jefferies.

Adam Tindle: Okay. Thanks, good morning. Gil, I guess I just wanted to start with kind of 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 terms of revenue growth. So 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.

See also 15 Most Valuable Greek Companies and 11 Most Profitable European Stocks.

To continue reading the Q&A session, please click here.