Check Point Software Technologies Ltd

NASDAQ:CHKP

Earnings Call Transcript 2021-Q4

[Kip Meintzer, Global Head-Investor Relations]

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 [e-mail].

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.

[Tal Payne]

Can you hear me?

[Kip Meintzer, Global Head-Investor Relations]

Yeah.

[Tal Payne]

Can you see the presentation?

[Kip Meintzer, Global Head-Investor Relations]

Wonderful.

[Tal Payne]

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 $599 million, which is above the midpoint of our guidance is $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 more into the numbers, and I will start with the revenues. Revenues for the quarter, as you can see, $599 million, 6% increase year-over-year. On the right side, you can see the billing. Billing grew to $851 million, 14% growth in our billing, very significant acceleration from the 8% you see in Q4 last year. Deferred revenues is some kind of a mirror of the billing. We can see growth very strongly as well, 15% growth, reaching $1.77 billion.

Moving into the drivers. So first, let's talk about products and security subscription continued to accelerate, reaching $371 million and 9% year-over-year, product increased nicely with Maestro continued to be differentiator and drives wins with customers.

We've seen strength in many product categories in SMB all the way to large enterprise this quarter. So that was a nice quarter for the products as well. Subscription revenues in line with our expectations, continue to accelerate, reaching 14% versus last year, we can see 10%. So it's already $204 million a quarter. We were the main drivers are, we can see the double-digit growth in Harmony, very nice growth there and double-digit growth also in the cloud guide, so the focus on those areas bear fruit already.

Moving to revenues by geographies. Revenues by geographies, 49% of the revenues came from EMEA, 40% came from Americas and 11% from Asia Pacific. As you can see, EMEA had a great quarter and led the revenue growth. I know when you calculate, you will see lower results in America and APAC. So I'll just give you a highlight regarding the booking. All three regions had a great booking and grow with a strong growth, great results with new customers and in many countries in those regions. As usual, there's a gap between the revenues and the booking as a result of timing and the timing of the booking examples of reasons, the delivery of the -- the consumption of Infinity products, the customer need to pull the product in order for us to recognize revenues. And rendering of the services, of course, is over the period of the service one year and so on or providing the shares.

Moving on, gross profit remained strong at $524 million. The margin is 88%, very nice, still one of the strongest in the market. We deliver to our customers with higher costs relating to the supply chain constraint.

So let's talk a little bit about that. As you know, there's a supply constraint in the market, which affects all of us, many components cost increased, leading to higher cost of the goods sold and slightly lower margin, which is between 1% to 1.5%, depends on the quarter. We believe it's a temporary situation until the supply chain go back to normal, maybe in the second half of next year, I think most of the people think it's going to be resolved towards the end of next year. So just taking that into account as part of the guidance as well for next year.

Now our new pillars, CloudGuard and Harmony continue to show great results with double-digit growth. The gross margin on Harmony Connect and Harmony Security is lower than the average on the Quantum. Therefore, it's also part of this reduction. So all-in-all, very strong results. And taking into account the fact that while there's a lot of constraints, we still meet the target and deliver to our customers.

Operating expenses highlights. You can see operating expenses reached $239 million, an 11% growth. Its main two drivers as usual. First, we were very successful towards the end of the year to recruit our plan in the headcount. So we accelerated the growth and reached the 9% that we were aiming for the year-over-year growth. Most of it came towards the year-end. So we will see it also as part of the higher run rate that we start next year. And the dollar effect, the dollar weakened against the currency also this quarter, which affected the results, mainly you can see it in the R&D expenses as the Israeli shekel and where the R&D is in Israel. So that's the effect you see here. So resulting in operating expenses increasing in 11%.

Operating income strong at $285 million. We can see the operating margin, 47%. We plan to be at 47% before, but we reached it only now that this 47%. We start to see also the results already in the bookings. As you can see, net income margin is also very strong at 49%. Financial income in line with the guidance that we provided, I remind you the yield on the cash is lower as a result of lower interest rates, therefore, the $10 million. And the taxes, you see the breakeven at 0% as the statute of limitation lapse on the provision at Q4. Typically, it also lapse this year in line with our expectation, bringing our tax rate in Q4 to a typical around 0%. GAAP net income was $260 million, which is $1.98 per diluted share.

Cash flow and cash position. Our cash is at $3.8 billion, very strong. $294 million, our operating cash flow. It represents an increase of 1%. It includes the hedge effect, the balance sheet hedge income of $4 million. Last year, since the dollar weakened even more, we made the $26 million income in the cash flow. It closed -- if we exclude the hedge effect, which happens every quarter, the operating cash flow was super strong at 9% growth year-over-year. So that's quite significant. During the quarter, we continued our buyback, $325 million were used to buy shares, 2.8 million shares for an average price of $116.

So moving to the full year. We're very pleased with the result of 2001. This just shows our results versus the original guidance from the beginning of the year. So we can see the revenues for the year reached $2,167 million, an increase of 5% year-over-year, $37 million above the midpoint of our guidance.

Looking at our non-GAAP EPS was $7.02, again, above the high end of our guidance, which was $6.85, $0.17 actually at above the top of our guidance. A few more details, if we calculate the billings for the full year, we see also a double digit for the full year, 11%, which is almost $2.4 billion and deferred revenues, we discussed already quite strong at 15% at the year-end.

When we look at the full year and what caused this success, our focus on Infinity strategy and the three pillars, the Quantum, the CloudGuard, the Harmony showed great success. Subscription revenues led the growth with 13% growth year-over-year versus last year, that was 10% growth, reaching $755 million, already around 35% of our revenues are coming from the subscription. The growth driven mainly by the success of the CloudGuard and Harmony, both again, double digit also for the full year. Infinity revenues, which include two or three pillars that we sell to customers had a great year with a triple-digit growth, which also fuels that growth.

Looking at the full P&L, just a few highlights, I don't want to repeat everything, but just a few highlights. Gross margin strong at 88.7%. Operating expenses increased by 7%. Bear in mind that the majority of the increase in the income came towards the end of the year. So the effect on the P&L was at a lower rate, but expect to come more towards next year -- well, in the beginning of next year. The effects on the margin next year just from that item is probably around 1%. The weakening of the dollar had $20 million effect on the full year. So those results are quite impressive when you take into account that we got a hit of $20 million just from the currency effect.

During Q4, the dollar continued to weaken against the shekel, reaching around 3.1%, which means that we predict also next year, a negative effect on our operating margin. Nothing to be concerned about, it's always fluctuates, but it's part of the guidance, of course, and that's about 1% effect on our operating margin. Still very strong operating margin with 48% non-GAAP operating margin.

Looking at the financial income here, you see the drop again, completely in line with what we expected. Lower interest rate, the portfolio opens and invested in lower interest rate than the 2.5% that we used to have historically. So we see the lower interest rates. Tax expenses ended around 14% as a result of the index, which was higher than everybody expected for this year.

Looking into next year, the guidance remains the same, meaning for the financial income, we expect it to drop maybe $1 million, $2 million for the next quarter or two and that's it. We expect it to stabilize on those levels, around $7 million to $8 million a quarter. Tax is expected to be 17% Q1, Q2, Q3, as we predicted for this year and around zero in Q4 for the same reason, assuming there will be no surprises, the statue of limitation lapse in Q4 and will bring us to the 0%. Average for the year, somewhere between 12% to 13%. Of course, it can be 1% more or less.

We closed the year with a net income -- a GAAP net income of $860 million, which is $6.08 per diluted share, and non-GAAP net income for the year is strong at $942 million, $7.02 we talked about how it is versus the range, 4% growth and $0.17 above the high end of our guidance.

When we look at the operating cash flow for the full year, again, very strong cash flow. Operating cash flow was $1 billion, almost $1.2 billion, very much in line with the operating profit. So it's nice to see the link that we have between our cash flow and our P&L, very untypical. But for us, it continues. So that's nice to see very strong collection, healthy DSO, excluding the effect of the hedge and the acquisition-related costs, there is good 6%. So that's very strong. We purchased about 11 million shares for the full year for $1.3 billion, average price of $109. I'm just reminding you in the last quarter, we announced the expansion of the buyback program in the amount of the $2 billion, additional $2 billion, again, up to $325 million.

For 2022 next year, we expect the average diluted share to be somewhere around 127 million shares starting in 129 million and going down by the year-end to somewhere around 125 million, 126 million. So that's also the forecast for the number of shares.

Moving to the summary. Strong, strong year change in the trajectory, which is nice to see revenues in the top part of the guidance. EPS exceeded the guidance, strong billing growth across all the focus areas, how many double digits, cloud are double digit, new customers, growing nicely and continue to have strong profitability. So very pleased with that.

And with that, I will turn the call over to Gil for his business highlights and insight. Thank you.

[Gil Shwed, Founder & Chief Executive Officer]

Thank you very much, Tal, and I'm very pleased to see everyone here and share, especially as we had this amazing quarter. I really, really mean that this was a very, very unusual quarter, probably our strongest quarter ever, and I'm not just speaking about the external financial results, but about the internal measures that we see internally.

Now every quarter, I usually speak about the last quarter achievement. This presentation, I'm actually going to dedicate primarily to speak about our strategy getting into 2022. We're entering -- I mean, on the foothills of this amazing quarter that showed really business growth, real business turnaround in all three pillars, by the way, the Cloud, in the Harmony and even some very, very good metrics of our core business, the Quantum Network Security business that's probably contributed a lot of growth last quarter. All the regions, EMEA, APAC and the Americas showed very good internal metrics.

So on top of that, we're entering a new year with a renewed strategy, a lot of energy, a lot of investment. And what I wanted to do here is share with you the key initiatives with which we start 2022. So I mean that's where we start. I picked here four of our major initiatives, and there will be more. The number one objective, of course, is continue with accelerating our growth. We start that and for the next 20 slides will go into each of these four initiatives with a new message, new logo, new branding that I'll speak about in a second. We are continuing with a lot of innovation. And I think we're starting the year with new products and leapfrogging the industry with unprecedented price performance. We're going to create a new structure that we call the Check Point Rocket, and I'm going to share and speak about that.

Last but not least, growing, continuing and growing our investment in our frontline sales force. Our internal goal, which I hope we'll be able to make is grow the frontline salespeople by 25%, supporting more customers, reaching more customers and, of course, delivering growth this year. And mainly, actually, this investment will translate into results, hopefully, by the end of 2022 and in 2023.

So let me start with the first message or the first initiative here. Our new positioning, our new branding, best security. Now best security, by the way, has always been the Check Point differentiator. I think that's our reputation. That's what we do. That’s what we do for 29 years, delivering the best security. And one of the things that's very, very important is to show that message and to explain it to everyone, understanding why it's so important.

So you see here, we started the year with a fresh new look our new logo and a new message that says you deserve the best security, first time in 29 years that we changed the logo. And I think so far is being accepted with a lot of enthusiasm showing all the new energy. But the most important message is understanding why is that so important? And I think we know that I don't need to go too much into that, how much we're dependent on the Internet, how much we're dependent on cyber space, and we need to keep it secure. And I think the latest attacks that we've seen on ransom ware, the log for vulnerability all showed us how important it is.

But when it comes to cybersecurity, you can't get good enough. You can't get second best. That will get you breached. When you drive a car, you can say I want to pick brand A, brand B, brand C, each one have the qualities different prices, different positioning. At the end of the day, all three cars will get you to your destination, roughly at the same time, roughly at the same shape. In cybersecurity, that's not the case. If you pick second best security, you will get breached. If there's one small thing that's open or like almost our entire industry does letting zero-day infected file come through. If you let these files come through, that's where you'll get the ransomware. And with Check Point, that's the small difference, which is actually huge, you won't get bridged because we won't let these files through. And there's many, many examples of how we deliver this best security.

We believe with only one vendor that delivers the best security to protect against all these fifth generation cyber attack and that’s us the Check Point. Again, I can take now two hours and by the way you can register to our Check Point experience, CPX360 conference that just ended today, watch the presentation and understand better why.

But I will try to summarize some of the differences even in one slide. It's all based on our Infinity architecture. Now I think you've seen this slide before, the Quantum Cloud, or the Harmony network cloud, user and access all based on the same platform, all working together, all translating each information piece about the vulnerability to an immediate protection and all the different pillars, and when you see what it means, that's where you see the security coverage that we provide in Check Point.

So if you look at the different attack vectors, mobile devices, network attacks, e-mail the vector in which malware gets in, web servers also, I mean can't underestimate very important, endpoint devices, the cloud. And I picked here some of the best players in the marketplace, some of them are our direct competitors, some of them are not our direct competitors. But you can see that no one comes even close to give you the full coverage and the full spectrum of prevention and protection against all these types of attacks.

And now let's see at the Check Point Infinity and you can see full coverage to mobile, full to network attacks, including zero day for unknown and prevention for unknown corporate e-mail web servers, endpoint devices where we score amazing results and amazing scores on every renew and every test and cloud, which we just expanded. Only Check Point Infinity can actually deliver that, and that makes the whole difference between being penetrated or preventing the attacks. And I think that's the message that we want to convey. We want to get our customers secure. We feel that each one of your organization and each customer deserves the best security, and we are here to deliver that.

I think you can see that in this expansion, a few years ago, we were known to be the network security company, and we were scoring now for 22 years in the Gartner market quadrant for firewall in the leaders quadrant. This one is actually a different vendor, G2, which captures audience, customers' feedback, real feedback about product. And you see we're not just scoring now in the network security or in the firewall sector, we are scoring in nine categories. We are leading in nine categories, all coming -- and you see, by the way, in many of these categories, there is more than one Check Point technology in the leaders quadrant.

We are capturing and we are leading in the entire Infinity architecture framework securing the entire enterprise and I think that's a huge difference. Customers love Check Point and our leadership now extended into all these areas, cloud, endpoint, mobile, management, intrusion prevention, remote access, firewalling, everything. And I think we use that and we continue to use that to drive innovation.

Now of course, if I would give you our roadmap, that will be another two hours. But I want to point here one important product that we just launched at the beginning of 2022 that can change the dynamics of our industry. I think it's one of the most important, if not the most important network security product launched in the last decade. And let me talk a little bit about that. We call it Quantum Lightspeed. Focusing on the data center, focusing on where data moves very, very fast where people need super fast, low latency data security. And here, we are going to introduce the world's fastest data center firewall, 20 times better, 20x better in security price performance than before and much better than the competition.

So if you try to see where the markets were until now, again, the car analogy, and you can see three the leading vendors here, and you can see the differences. With Paloalto, you would get for roughly $200,000, 58 gigabits per second. Check Point before, much better 78 gigabits per second at almost $140,000. And you can see how Fortinet gives almost three times better performance, almost 200 gigabits at $40,000, huge difference. And I think that's what Fortinet built itself on this huge gap in price performance that they can deliver. And we are going to change that and change the dynamics in our marketplace and say that you don't need to compromise with the new Quantum Lightspeed, and that’s where Lightspeed would come in. 250 gigabits, $45,000. That's, by the way, the low-end model. That's not the highest end here, 20% better than Fortinet, 20 times better than Paloalto, that's unbelievable.

That's a lot of work done by our development team and for the first time, utilizing ASICs in our core products to accelerate this firewalling performance. First time for Check Point with partners with NVIDIA, the world's most successful ASIC providers these days to deliver these super high performance and our product line for Quantum Lightspeed, it four models from 250 gigabits to 800 gigabit hyper fast throughput, ultra-low latency, less than three microseconds. It's 10 times faster before it was 30 microseconds. And scalability with Maestro to three terabits per second, no one in the industry actually can deliver that kind of scalability and that kind of price performance. So we are very, very proud of that. We think that can changed the dynamics, at least in the data center part of the network security industry. So that's, I think, a very good place to start the year with.

And then we move to the next initiative to our next initiative, and we call it Rockets. So, what are Rockets. Rockets are -- will be kind of new types of internal organization where we want to drive and invest in places that are strategic, what we feel that there is a high potential for growth. So we want to focus with agility and growth. We want to align all the resources. If in the past, Check Point was a very unified company, everything is together, one R&D, one sales organization, one marketing. We want to create new structures that will reside within that that have the ability to move very fast, developers tied with marketing, tied with sales to drive growth in all these areas and to be able to invest much more and much faster in key areas.

It's not the entire business is moving to this direction. We are trying a new model here. And we start with three areas; cloud, which is a big area for us, hundreds of people, Harmony Email, that's an emerging market, a very important one based on the acquisition that we did recently. And the new one that I won't spend too much time here, maybe next time, MDR/MPR managed detection and response, or the way I would like to call it, manage prevention. And this is kind of automatically managing the customer assets.

So we detect things that needs that are not working and immediately prevent the attacks. I think we can create here a new industry or take on a new industry that we haven't been playing in before. This is a small start-up, which starts from a few people and no revenues. Again, the Harmony Email is tens of millions of dollars and the CloudGuard is over $100 million. So each one trying a different model in different ways to try this new model.

Let me focus a little bit on the CloudGuard Rocket. I think we're very proud of what CloudGuard delivered today. Our pre-emptive prevention was the only one that handled Log4j before it was known. So I mean, once we've seen a tack on Log4j, without a signature, without the attack being known, our AI technology blocked it. And that's based on new CloudGuard technology, CloudGuard uptake introduced around a year ago, exactly the right time, exactly the right place, the technology that protects APIs and web servers, really blocked Log4j before it was even known.

And this is one example about how our CloudGuard Rocket is being able to address so many areas, you can see the list of them workloads, posture management, the uptake, the network and the cloud, a lot of threat intelligence, and we continue to expand that. We continue that with the fifth acquisition in recent years, and that's expanding our cloud presence to what we call cloud security or developers first security. That's a new area that puts inside the new type of customers for us, developers, by developers and I think it has a lot to do with the challenges that coding the cloud has.

Now we found this company, Spectral. It's a small start-up. We really fell in love in the platform and the technology and we felt it had wide range of used cases that we can go into because it's such a good technology to analyze the cloud code, scan the infrastructure code, look at code tempering prevention and maybe the first application, which we call secret prevention, something we may understand even us that are less developers these days.

For example, if you leave the kids to your application or to your safe box on your desk at the office, the chances of somebody taking advantage of this are very slim, mistake, it's not – you shouldn’t leave the key written on the -- on your desk or the physical key on your desk. But again, the office is isolated and protected in many layers, so nothing will happen.

In the cloud, it's completely the opposite. A developer put a secret key that enables access to the other applications inside the source code, that source code is being shared on public repositories. And within minutes, there will be a bot that will scan the network, will find the key and will take over our servers. And we see it, again, a lot in the cloud.

We know how to detect that. We know how to block it. And the developers that will use it can install that in a few minutes, and within seconds, get very accurate results and block that. We are also getting into that with a nice open source community. There's over 30,000 downloads of the Spectral open source version of the product, and I think this is great because it lets us play into a new audience, not only the CISOs and the security administrators will support us, but we can get to the developers from the time they start developing the codes. So we are very happy with this acquisition that we just announced and completed the visual.

So to summarize, and again, there's many much more that I can speak of because we do so much more in all the aspects of the business. We're entering 2022 with a lot of energy based on our accelerated results from Q4, 14% billing growth, which is a great number. And again, I wouldn't share it, I mean the billing you can calculate and you do calculate on your own but I think this time, it's really an indicator to a lot of the internal things that we see in the company, which a lot of the internal indicators, strong financial double-digit billing growth, we're accelerating our innovation and two examples that I just talked about, Lightspeed and cloud code security.

And we are going to accelerate our investment. It would be very easy to say, this is our growth rate. We will keep doing that. We will keep monitoring resources and delivering and get our profit margin to go to the sky. We have the highest profit margin in the industry. And we decided to actually take the money that we make and invest all the access one and make the right investment in growing further and changing the mode of operating -- of operation into high growth.

So we are going to expand the sales force. I mentioned that 25% is our internal goal, create the Rocket when we can make very focused investment in the growth areas. And I think -- we really think that our business can grow faster. It's not going to be easy. It will take time for all the initiatives to show the results, but we are more optimistic whenever about what we think we can deliver here.

So before I open the call to your question, that's the time for a projection. I think I already stated that some of the assumptions that we have during the projections, we feel that our billing can keep growing, growing in a nice rate. Our internal projections are definitely for -- our internal goals are definitely for double-digit growth. Not all of that will translate immediately into revenues, partly because we are growing the subscription part of our business and the deferred revenues, partly because there's risks associated with the supply chain and others that may slow us down on some things, even the introduction of Quantum Lightspeed, which is great because it can enable us to capture new markets and new market share has some risks in it. Let's not forget that, because when we are bringing to the market 10 times to 20 times better price performance, there can also be price cannibalization that can hit us right away. But again, that's the right thing to do to capture the market and to win in this segment.

So we will be a little bit more -- I mean, the translation of the billings to booking may be a little bit more conservative, but we feel that we can drive very nice growth in revenues as well, much faster than we projected in the past, of course. And we will invest a lot in the business.

So if we start with that, let's look at the projection for the full year. For the full year, we actually have here quite a wide range. And again, based on everything I just said, plus the uncertainty about the economy that we are seeing every day. So between $2.2 billion to $2,375 million, that's the range for the revenue. If you translate that that's a 6% growth target at the mid-point and 10% growth at the high-end. I mean, as you know, my regular caveat, projecting the future is very challenging. There's always a high level of uncertainty. Again, there is the potential of better results or even worse results in our projections. I hope it to the better part, but you can never know.

Non-GAAP EPS is expected to be between the range of $6.90 to $7.50 and GAAP EPS is expected to be approximately $1.22 less than that. That's for the full year. For the quarter, the range for the revenue is expected to be between $517 million to $547 million, and non-GAAP EPS is expected to be between $1.48 to $1.58, GAAP EPS is expected to be approximately $0.32 less. So that's kind of conclude our presentation, and we'd very much love to hear your questions.

So who's going first?

[Tal Payne]

Well, we're waiting for Kip, he’s probably going to do that.

[Kip Meintzer, Global Head-Investor Relations]

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 panellist in for Q&A as possible.

Our first question is going to come from Patrick Colville of Deutsche Bank, will be followed by Gregg Moskowitz from Mizuho.

[Patrick Colville, Deutsche Bank]

Thank you, Kip, and thank you for having me on. I mean, congratulations on already 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 then any changes around pricing? So can you just kind of give us some colour around how those factors are playing into that guidance?

[Gil Shwed, Founder & Chief Executive Officer]

Tal, it's for you.

[Tal Payne]

Okay. So I'll say the following. We see -- we've seen last year when we came into the year with an expectation of 3%, but we have seen through the year an acceleration. If you look at the billing both short-term and long-term, but even if you look at the short-term, you see billing growing. So it's starting to translate into the P&L. So we start to see our revenues increasing from 3% to 3.5% to 4% to 4.5% to 5%, even higher in the Q4.

So we came in more optimistic because we see a really nice business. You see in the revenues, that's why I talked about it some regions look weaker than the other, but actually billing three of them finished strong. So hopefully, it's an indication that we're starting to see the results of some of our investments.

We invest in CloudGuard and in Harmony. So while starting from small numbers, it's starting to have also an effect on our revenues. So that's nice to see that as well. So taking all of that into account, we feel that the midpoint is moving up to the area of that whatever it was the 6%, right? So that's the beginning point.

The range you take into account, and that's something very hard to calculate. And I think Gil was very open about it, how much each risk translates, very hard to know. But we do know that we're going into a year that there's higher risk when it comes to the supply chain because we see like Q2, Q3, Q4, we see more and more issues. We sold all of them. We're working on them daily, closing items, new problems opening, solving them. So it's a very fast run with the shortages. We assume it will continue probably in the first half of the year and start to elevate towards the second half. I'm not sure it will happen, but I'm hoping it will happen. So that's really relating to the shortages.

Macroeconomic, I don't know what will happen. I hope it will continue to be strong. COVID, travel is going back, more and more people travel, how much it will affect. We took an assumption midpoint, we didn’t assume a full return to 2019 level. We assume stronger levels of travel in this year hopefully, but we don't know. We see different waves showing up in different regions and different reaction. So travel is somewhere in the middle.

Currency, we took the current rates. So if it will change dramatically, I'm not talking only about the expenses. It also changed customers' behaviour with their budgets. So I'm assuming that what we know right now about the currency would stay. So it affects the expenses, but hopefully no effect on the revenues. So the assumption there is no additional shift there. Growth in the CloudGuard, growth in Harmony, growth in Infinity, definitely part of the assumptions there. I hope that answered your question.

[Patrick Colville, Deutsche Bank]

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

[Kip Meintzer, Global Head-Investor Relations]

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

[Gregg Moskowitz, Mizuho]

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?

[Gil Shwed, Founder & Chief Executive Officer]

So that's an excellent question. First, -- but I mean, I think that many of the initial numbers that we enter 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 along the year. This one, my message to the sales force is higher sales people 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 a trivial growth to an organization our size, but still that's the message.

I think if everything works, we are set to very nice numbers, but I think not everything will work. I think we won’t be able to recruit all the people we want to all be productive. But I think that we can get to the numbers that we've said to the range that we put in based on what we have now and based on the productivity we have now. So that's the kind of the general.

And again, I can tell you, we just finished our CPX conference, CPX conferences for customers, partners and employees, we had free in APAC in Europe and in the Americas. Today, the European one is going to end, and it went very, very well, 25% increase in attendees, excellent scores, excellent feedback, excellent energy. So I think we're starting the year on the right track.

[Gregg Moskowitz, Mizuho]

Thank you.

[Kip Meintzer, Global Head-Investor Relations]

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.

[Adam Tindle, Raymond James]

Thanks Kip. Just a clarification for Tal and then a question for Gil. Tal, six consecutive quarter 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 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.

[Tal Payne]

Okay. That was a long question. I'm not sure I remember it, but I’ll try. So first on the building, the billing was strong. You can see also when you calculate the short-term billing, you see a double-digit growth, right? I think it was 10% or 11%, which is also an acceleration from, I think, 6% last quarter. I can't find the numbers, but you can calculate them. So the growth is -- if you look at total billing or even short-term being you see that it grows. So even if some of it came from OTA [ph], which it always does, you can see that it accelerated also in the short-term.

Long-term is a good phenomenon. It's not the focus, but it's a good phenomenon because customers are going with you for the long run, so that's always good, but both of them increased.

The second part of the question, I don't remember -- if there was maybe an effect on the price increase. Remember, we sell to the distributor, sales to partner or sell to the end users. So it's very hard to know what cause the billing. I will say, probably there was an effect. I don't think it was hundreds of millions, right? But it might have been maybe $10 million, yeah, there probably was some effect of trying to avoid the increase in the pricing.

[Gil Shwed, Founder & Chief Executive Officer]

And remember that our price increases will start from January 1st. So again, the impact is that maybe some of the people did the purchases or the renewals a little bit earlier. But again, I think we wouldn't be proud of the billing growth unless we felt it's meaningful. Let's we put it that way.

As you know, every quarter, we are trying to play down the billing number because again, in many cases, it doesn't represent. This quarter, I think we've seen some very good indicators. So we are not just showing these numbers because they are impressive. But because at least last quarter, I don't know if you predict the next quarter, but last quarter, we've seen very good internal metrics.

[Adam Tindle, Raymond James]

Thank you.

[Kip Meintzer, Global Head-Investor Relations]

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

[Gray Powell, BTIG]

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?

[Tal Payne]

Just look at the total number. Now, 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. And that's why Gil said, we announced it as one of other 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, which is different profit profile than Check Point, which is part of the margin plan for next year because we want to invest in it as we believe we say it's a very nice and fast-growing market.

[Gray Powell, BTIG]

Okay. Thank you very much.

[Kip Meintzer, Global Head-Investor Relations]

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

[Matthew Hedberg, RBC Capital Markets]

Hey, thanks a lot Kip. Congrats guys on the results. And by the way, I love the new -- the logo and branding is great. Gil, what reached out to me is the 25% sales force growth expectation, I'm curious, how does that relate to maybe prior targets that you've had? Because it seems like it's a substantial uptick from what you've done historically? And then can you talk about the challenge of finding good sales talent these days? And is that maybe an inhibiting factor as well, but the number -- the target looks really, really strong.

[Gil Shwed, Founder & Chief Executive Officer]

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. And in many cases, we didn't achieve them. And some of them, we didn't achieve them because we weren't investing. And some of them because the general tendency of the sales force is actually the salespeople, they like to keep their territories very big, so they keep the opportunity for themselves. And if they got the budget for hiring, they like to hiring support people that will help them.

So over the last few years, it actually analyzed our growth in the sales, big part of it came in the form of creating overlays that can support our strategic products in more technical help to the salespeople. But in some areas, and particularly in Americas, we didn't -- we almost didn't increase the capacity, the salespeople, and we need more salespeople. So this investment is not just an investment from -- it's a big change internally in the mindset of people.

Yes, we want to go and an attack. Yes, we want to go and find new customers. Yes, we want to go and serve our big customers and not only the big customers in all segments better, and it's a big change internally. Now I think it's doable. I think the target I've set for the people is that you can hire all the people in the first quarter. I don't think that we will necessarily achieve all of that in the first quarter. But I think there are good people. Many people do want to work for Check Point.

We understand that sometimes working for our company, I mean, there's a lot of promise, for example, working for many start-ups, but on the other hand, trying to build your reputation and establish yourself in the marketplace is not as easy as it sounds. So I think that we do have a good cadence. We do have a good pipeline of salespeople, it will probably take us some time to hire that, but I think the change should be meaningful. Some of it this year, some of it we may rely this year and a lot of it next year.

[Matthew Hedberg, RBC Capital Markets]

Thank you.

[Kip Meintzer, Global Head-Investor Relations]

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

[Sterling Auty, JPMorgan]

I want a full name like that, Kip. Thanks guys. So Tal, can you help us -- I wasn't completely clear what was the magnitude of the price actions that you took? What was instituted during the December quarter, what was instituted after? And how should we think about that impacting the gross margins in light of the EPS guidance that you gave?

[Tal Payne]

Actually included as part of that, right? So let's talk about it one second. First, the price increase was in the beginning, and now it's December or maybe in October for the beginning of 2022. That's one.

[Gil Shwed, Founder & Chief Executive Officer]

Price increase in the fourth quarter, it starts on January 1st, just to be clear.

[Tal Payne]

Yeah. So that's one. Secondly, we didn't do an increase. I know many people increased significantly more. We increased, I think, only in 7%. So it's not a huge increase. So that's not -- so that's part of the next year, you will start to see that. And that's why to the question, maybe some of them put it before. It's not like 30% more increase, so it might have shifted millions, but not -- this was -- I don't expect it to be $50 million, $60 million increase, right? So it might be have been $10 million, right, just doing an expectation, but it's very hard to know.

For next year guidance, we too into account everything, so on the one hand, you have that. On the other hand, you have, price competition is regular. You have Lightspeed, which might pull the ASP actually down, and you have the higher costs. The increase -- the cost is higher than 7%. So it's included as part of the margin, right?

[Sterling Auty, JPMorgan]

Got it. All right. Thank you.

[Kip Meintzer, Global Head-Investor Relations]

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

[Joel Fishbein, Truist Securities]

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?

[Gil Shwed, Founder & Chief Executive Officer]

We are not relying on any specific break as an accelerator for our growth. But it will have an effect on the market. It's one of the most challenging vulnerabilities ever found, not only because it's easy -- for a few reasons. First, it's easy to exploit. Second, it's on interfaces that are open.

Many vulnerabilities are on interfaces that are behind closed doors that are internal to the data center, but there's a higher level of protection. But Cloud4J is almost on every web server and every -- and many, many web services outside there, and it's really easy to exploit. One string causes a remote code execution. So that's the worst part.

Now I think the industry created a lot -- and by the way, that's evident. Usually, you see vulnerabilities every day. We see that inside the industry. But most of them, you don't find an exploit and maybe there are exploits that are being used rarely, so we don't see them but you don't see the exploits. In Cloud4J, within 48 hours, we saw like 60 different variants of exploitations. So it was very, very easy to understand how to use that to attack systems.

I think with enterprises around the world do the right thing and patched it and try to fix things and so on, and that's great. But I think there remain tens of millions of servers out there that nobody touched, because nobody knows that they're there because nobody is managing or nobody in handling. And they will be the source of infections for probably many years because, again, the attackers are not just on day one. On day one, they showed that they know how to do it, but -- and maybe I'll explain when you look at the attack there's multiple steps. There's model, the Maestro model, which shows how it works. So first is collecting intelligence. Second is finding the entry point and very inflecting it with the malicious the malware. So this is the new entry point. It's an easy entry point and this can be used in the future by many hacking groups, whether it's by many criminals, and I'm sure it will be used, and it will have impact on the industry.

[Joel Fishbein, Truist Securities]

Thank you.

[Kip Meintzer, Global Head-Investor Relations]

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

[Philip Winslow, Wells Fargo]

Great. Thanks for taking my question. Great to see you’re all are 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 the 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 just more colour on CloudGuard in particular that would be great?

[Gil Shwed, Founder & Chief Executive Officer]

I think cloud security is a very high priority for every customer. We see that every conference, or every interaction. It's not a giant industry at the moment, and it's unclear, by the way, how it will shake up. There is plenty of start-ups that are targeting it for multiple directions. The big cloud providers, Microsoft, Google and Amazon are investing in that. I think we shouldn't be blind to that. They are investing in creating -- on top of the -- by the way, one of the big confusions. The big cloud providers are investing in making and are doing good job in making their platform secure. They are not usually taking care of the customer application. That's the customer responsibility.

But now we are making investment in securing the whole thing and making security also part of their business. Even in some cases, in multi-cloud environments because one of the arguments for our industry is that we will deal with everything. So there is an investment there. I think it still remains a very important area for us to protect, a very important opportunity in the marketplace, how it will shake up? I still don't know. I mean, we've seen markets that have taken I'll give you another example.

Mobile security is a good example of a market that I think for me it's evident that people need to invest, but companies are not investing in mobile security enough. I think that cloud will change that because the structural impact of it is much, much bigger. It's not an individual device. It's the whole company. It's the whole assets.

And I think the benefits of Check Point remain very important. The fact that we are connecting the private cloud to the public cloud, the fact that we are connecting all the different elements. But it's still a very interesting and a very challenging market. And so I mean, we'll continue to invest in that. And I think we're expecting some good evolution in that marketplace.

[Philip Winslow, Wells Fargo]

Great. Thank you.

[Kip Meintzer, Global Head-Investor Relations]

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

[Jonathan Ho, William Blair]

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 Check Point play, the price performance game. And so does this shift -- signal shift in your own strategy going forward? And how do you think about the potential impact, just given that the ratio dramatically changes with something like Lightspeed? Thank you.

[Gil Shwed, Founder & Chief Executive Officer]

So first, we've been competing in that and not necessarily on our lease price, but we are -- but we have been very competitive. And by the way, we win many of the big data centers, especially of the big financials, when we compete head-to-head with other companies that are making price performance for only business.

So I think that's the reason that we feel the Lightspeed can change with dynamics. Again, there is some risk and we have -- we put in place the measures to try and contain it for cannibalization because, again, when you sell 10 times more or 10 times to 20 times more performance for the same price or for a much lower price. It can change the behavior. But I think overall, it's the right move for us, and we want to win that, and there's many, many hundreds of -- let's put it that way.

The opportunity in the data center is far bigger today, then, for example, cloud security. In five years from now, I don't know, but in 2022, the data center market is bigger than the cloud security market. And it's a market that ours. We know the customers, they love us, they use us and so on. So expanding our market share in the data center is an important opportunity.

[Kip Meintzer, Global Head-Investor Relations]

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.

[Gil Shwed, Founder & Chief Executive Officer]

Thank you very much.

[Tal Payne]

Thank you.