Check Point Software Technologies Ltd

NASDAQ:CHKP

Earnings Call Transcript 2022-Q4

[Kip Meintzer, Global Head of Investor Relations]

[Call Starts Abruptly] 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 [e-mail].

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, VP of Finance and Acting CFO]

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, Founder, and CEO]

Thank you, Roei, and hello, everyone, and very happy to be here and talk a little bit, shed some [indiscernible] 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.

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.

[Audio-Video Presentation]

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

[technical difficulty]

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.

[Kip Meintzer, Global Head of Investor Relations]

[Operator Instructions] So up first is Adam Tindle from Raymond James, followed by Joseph Gallo from Jefferies.

[Adam Tindle, Raymond James]

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.

[Gil Shwed, Founder, and CEO]

So as I mentioned in 2022 -- first, I mean, I think we do want to invest. Our goal is to grow. Our goal is to do what's right, and I think our margins are very rich. So my focus is not on -- again, I've always been proud and I'm still proud to be a profitable company and don't intend to change that.

I actually think that it gives us a lot of strength, the fact that we had this flexibility and freedom to do whatever we want and generate very good results. And if I look in 2022, actually, what I've seen in the first three quarters, we've actually got into internally, again, in the measures that I see, but some of them you've seen two very high growth rates. We've created more new business, and everything worked according to plan.

Fourth quarter changed that. And again, I'm not shy in sharing that. I wish it was different. And again, I think it's an industry-wide phenomenon. We actually kept winning projects, kept getting very good feedback from customers.

Just in the last week, two weeks, I met with about 100 customers and partners. And they all shared their enthusiasm with our technology, with our strategy. They all were interested in the -- expanding the solution, but there is a bad. I think we've seen what usually we see at the fourth quarter, which is huge budget flush, big projects, projects got delayed, no budget flush. And again, I think from what I've seen in the last few weeks, it's an industry-wide phenomenon that we need to be aware of.

So, so far, what I've seen is that the investment does pay off. Again, unfortunately, we didn't have the fourth quarter to kind of create with strong momentum moving forward. And I think in the future, we will continue to invest.

The level of investment in 2023 is not necessarily going to be the same as 2022. I think in 2022, we built a lot of new organizations. We've been very, very strong in recruiting a lot of frontline salespeople, which, by the way, I think Roei mentioned it in his comments. Some of them -- some of the effect will only see in the spending in 2023 because in December, for example, we hired a lot of people, and they will show all in our Q1 run rate.

[Kip Meintzer, Global Head of Investor Relations]

All right. Next up is Joseph Gallo from Jefferies followed by Keith Bachman, BMO.

[Joseph Gallo, Jefferies]

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

[Gil Shwed, Founder, and CEO]

So I will answer that, and I'll let Roei answer the RPO part. I think what's needed is mainly go to market. When we see -- when we engage with customers, when we deliver our message to the customer, to the CSOs, to the CIOs, they love the message, and they expand the usage.

That's by the way, when you see the growth of Infinity, it's an amazing testimony to what we've got. We can do much better in that. And that's why I'm saying we hired a lot of salespeople. We are still training most of them. And internally, we have plenty of room to engage more with customers, to call on more customers, to bring this message in -- to more customers and in a much stronger voice to the marketplace. And I think that's where the main thing.

Of course, we need more products. Of course, we're expanding the products. But on that, that's actually not the comments that I hear from customers. When I meet with customers, they're enthusiastic about what we do, and they just said, just share more with us because it resonates with what we need.

And Roei, I'll let you talk about the RPO.

[Roei Golan, VP of Finance and Acting CFO]

Yes. So as for the RPO, it's something that we usually don't disclose. We disclosed it onetime, but it grew high single digits overall.

[Kip Meintzer, Global Head of Investor Relations]

Next up is Keith Bachman from BMO followed by Andrew Nowinski from Wells Fargo.

[Keith Bachman, BMO Capital Markets]

Thank you for the question. Gil, I wanted to ask about the product market dynamics. If I think about your guidance that you gave, it suggests that products will grow probably low single digits in FY '23. You grew 4% in Q4, but I think it will be below that for the balance of '23.

And your competitor Fortinet gave guidance kind of mid-teens for product revenue growth. Now there's probably some backlog usage in that number. But I'm just wondering, you talk about the strength of your product and whatnot and the efficacy of it, and yet you're still under growing one of your major competitors.

So I'm just wondering, similar to the last question, what do you think needs to catalyze or ignite the product-specific side of the growth? And then if you could specifically address the SD-WAN announcement that you made this morning, how important was that and when that might help manifest in terms of improved growth for the product side? That's it for me. Thank you.

[Gil Shwed, Founder, and CEO]

Thank you. So first, I mean, as far -- first, you are right in many of the things you've said, but I'll give a least the way I view these things. First, we are shifting more and more business from a product perspective to a subscription business.

And by the way, we keep doing that with Infinity and even most of our new products, and again, that's another highlight that it will take some time, but we've started it. Many of our new products we want to offer them on a monthly basis, simple pricing model.

So it's really easy for a customer to say, I want to secure a branch that starts, I don't know, $13 or $15 per branch per month, very easy, very affordable, very simple model as opposed to the complicated business models that sometimes exist in our industry. That does have an effect whether what's growing is products or not growing.

Same for Infinity. Again, the Infinity contract that we've signed throughout all of last year have shown some effect in Q4, and that didn't necessarily had a big effect on the quarter when we actually got the contract.

Now I think the phenomenon that we've seen over the last year is that our growth rate was going up, and some of our competitor growth rates was going down. I hope that this trend will continue, as I said. I think the economy now changed a little bit this assumption.

If you'd ask me that three, four months ago, I would be far more optimistic. And again, I think we did generate almost double-digit growth rate this year. And in some aspects, internally, we did generate more than double-digit growth rate.

So that's the plan. And the plan is to accelerate our growth. As I said, our potential and opportunity is reaching more customers, engaging more. And I think we are working very, very hard internally to achieve it. I think we have what it takes, but we need to get our act together on that.

[Keith Bachman, BMO Capital Markets]

And when do you think SD-WAN can contribute, Gil?

[Gil Shwed, Founder, and CEO]

I think that from everything I know, we actually have a pretty healthy pipeline for SD-WAN. We have customers waiting for it. We actually have many customers already using it in early access program.

Usually to have some real contribution, it takes between three to six months. This one, I think, has some pent-up demand ready, but still, it's a product that because it's rollout, SD-WAN is usually to roll out too many branch offices, it takes a little bit more time because it's not just installing it in one major location. It's actually a longer rollout.

[Keith Bachman, BMO Capital Markets]

Okay, great. Thank you.

[Kip Meintzer, Global Head of Investor Relations]

All right. Next up is Andrew Nowinski from Wells Fargo followed by Brian Essex of JPMorgan.

[Andrew Nowinski, Wells Fargo]

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

[Roei Golan, VP of Finance and Acting CFO]

Yes. So I think this quarter, I think Gil also mentioned it, we've seen less budget flush. I think we didn't see any budget flush this quarter. I mean, last quarter, we saw -- we had some mega deals that came through this due to budget -- some of them due to budget flush in Q4 2021. And this quarter because of also the macro environments and also deals that the longer sales cycle, so we've seen some of these deals are deferred, the projects were deferred or slipped to Q1. So I think that's, in general, that's affected -- is what you see in the billing.

Also, need to mention, as Gil also mentioned, when we are signing Infinity contract, you won't see it in the billing mostly because the Infinity contract is billed based on specific payment terms, and most of them are not being billed upfront. So it can be billed in the next -- in the future periods. So I mean, that's in terms of the billings.

[Kip Meintzer, Global Head of Investor Relations]

Next up is Brian Essex with JPMorgan followed by Patrick Colville of Scotia Bank.

[Brian Essex, JPMorgan]

Great. Thank you, good morning. And thank you for taking the call. Gil, I was wondering if you could maybe kind of circle back on SD-WAN. Maybe one, hit the decision to build versus buy. And then two, are you seeing the pull-forward or the pull-in for demand on a point solution SD-WAN basis? Or this full end-to-end SaaS that you're seeing, is that kind of the larger driver here? Thank you.

[Gil Shwed, Founder, and CEO]

I think there's multiple factors driving it. On one end, customers are looking for SaaS solutions that they can consume the security from the cloud. Some of it makes sense. Some of it may not. Still many, many customers are deploying customers on site, which gives them a better performance, better latency, in some cases, better economics and the SD-WAN element that talks about the network optimization.

Now the reason to build versus buy, first, we are looking for vendors to buy. We've looked in the past. I think the real answer is that the SD-WAN is very well tightly integrated into the gateway itself, and we build the gateways. And it's integrated in a networking code. So buying an SD-WAN vendor and integrating it might take longer and might not necessarily generate better results after all.

Still having said that, we've looked at many vendors, even in the past, almost completed the one deal to acquire an SD-WAN vendor. If we wouldn’t find the reason we didn't complete it is, was the quality of the solution. Today, SD-WAN solutions are still complicated. I wouldn't say niche because there are some important vendors, but not widely spread as they should be. And we haven't found a solution that will be really the silver bullet to have the quality technology that we can embed in our gateways.

[Brian Essex, JPMorgan]

Very helpful. Thank you.

[Kip Meintzer, Global Head of Investor Relations]

Next up is Patrick Colville from Scotiabank followed by Shaul Eyal from Cowen.

[Patrick Colville, Scotiabank]

Good morning, team. Thank you team for taking my question. So Roei, from a financial perspective, I mean, how shall we model gross margins in 2023? Because we've seen product margins rise for the last two quarters sequentially. I mean, should we think that, that trend continues as supply chain constraints ease?

And then I guess, similarly, I mean, FX has been a big determinant for the last couple of quarters and I presume will continue to be the case in calendar 2023. So how should we model the FX impact at the OpEx next year?

[Roei Golan, VP of Finance and Acting CFO]

So, I think as for your first question, so as for the gross margin, so as I mentioned, I think we expect to have additional improvement. Again, we hope to see additional improvement unless something in the environment will be changed in the supply chain.

But right now, it seems like we're going to have a modest -- we expect to see a modest improvement in the gross margin. Again, to -- I would say that, again, it can range between 0.25 to 0.5 point of the margin, an improvement of between 0.25 to 0.5 point to the margin.

As for the FX, so again, yes, as I mentioned also in my presentation, we had the benefit of the effect of approximately $10 million this quarter. We expect to see also a benefit in 2023 as again, we hedged -- one of our primary currencies in shekels. So, we hedged the shekel for -- most of the shekels for 2023, and we expect to see benefit in 2023. But again, taking all the -- we took all these factors into the model. And I think it's something that, of course, these efforts will benefit us in 2023.

[Gil Shwed, Founder, and CEO]

And that will help us, by the way, invest more without big effect on the margins. That's -- I think we are using it for the good that's...

[Patrick Colville, Scotiabank]

Thank you, so much.

[Kip Meintzer, Global Head of Investor Relations]

Next up is Shaul Eyal followed by Ryan McDonald [ph].

[Shaul Eyal, Cowen & Co]

Good afternoon, guys. Gil, I know Rupal is not on the call, but can you maybe talk to us about some of our initiatives over the course of the past, a little less than a year and maybe as we think about 2023, what's in store in that respect?

[Gil Shwed, Founder, and CEO]

And which initiative you mean that's -- in which aspects?

[Shaul Eyal, Cowen & Co]

All of our initiatives, sales, marketing, go-to-market that you brought up.

[Gil Shwed, Founder, and CEO]

So, I think we are doing a lot of things in Check Point to create a lot of change and a lot of innovation in all these aspects. If you remember, and I think we've created the beginning of the year what we call rockets that are this kind of organizations that have more flexibility and more freedom to run fast, integrating the go-to-market element to the product element.

And I think we had three rockets. One was the e-mail rocket based on acquisition we did, which actually grows very, very fast. I don't know, we didn't mention it much today, but the e-mail aspects, that acquisition is very successful, and it's contributing a lot to our growth.

Another one is the cloud one started the year, the cloud one. We've actually did quite well in fourth quarter, nice growth in the fourth quarter.

And the last one is what we call the MDR/MPR, which is the management of kind of managed security for customers. And that's a tiny start-up, but that's overwhelming response from the market. We have hundreds of customers. We have a nice demand for it and that's with very limited investment even to promote it. We're just a -- nice response from the market to these services.

By the way, these services or this technology, it's the same technology that we will have in our XPR product. So, we're actually leveraging one another. So, you can get it as a product in the XPR product for it to manage service with the MPR service that we provide today.

Next to that at the beginning of the year, we created a new go-to-market organization, appointed new leadership through Rupal Hollenbeck based in Silicon Valley. And again, she is building a very robust infrastructure for everything, doing many changes. Again, I think we do less revolution, more evolution the Check Point way, and we are doing them nicely without creating too much earthquakes.

Actually, I think you see that going well, but she's doing a very, very good job building an organization that can scale too much what we think we have the potential to a much bigger scale. In the product organization, we also have a lot of investment in many areas from SD-WAN to SSC and SaaS, which is cloud-based delivery of security, the whole -- I mentioned the XPR technologies are also quite interesting in terms of new technologies.

We talked, I think it was last quarter about the Titan package, which again, some of it is great new security technology. Some of it is really new markets like IoT security. So, there's a lot going on in our organization. We are building now a new model for partnership with our partners. We've invested in the brand last year. So, I think there's a lot going on in the organization right now.

[Kip Meintzer, Global Head of Investor Relations]

All right. Thank you. And next up is Raym from Guggenheim.

[Raymond McDonough, Guggenheim Securities]

Kip, I've only known you for, I think, half a decade. It's Ray. Ray McDonough from Guggenheim, but I appreciate it.

[Kip Meintzer, Global Head of Investor Relations]

I'm sorry. I blew it.

[Raymond McDonough, Guggenheim Securities]

It's all good. I wanted to double-click on cash flow if I could. And Gil, the comment that you made for shifting towards more of a subscription-based model and more flexible buying programs, so to speak and what again, the impact of cash flow would be on -- or the impact of lower invoicing duration, if you're seeing that this quarter, what the impact of cash flow was this quarter from lower invoicing duration, again, if you're seeing it? And then how we should think about that going into '23? Should we think about that as being a headwind to '23 cash flow as we look forward?

[Roei Golan, VP of Finance and Acting CFO]

So, I think, again, I think it's tough to quantify, I mean, the effect on the cash flow, I mean, in terms of moving to -- in terms of the duration, but I would say that, yes, we've seen less multi-year deals, more kind of one year deals that customers intend because of the macro environment, the higher interest rates.

And so, we've seen less multi-year deals. Also effect on our cash flow, something that we should again, our cash flow was -- this quarter was much more back-end loaded. I mean, usually, Q4 isn't back-end loaded, but this specifically quarter was much more back-end loaded.

We've seen much higher billings in December. You can see it also in our receivables in the balance sheet. So again -- so that's also affected our cash flow this quarter.

As for the future, again, it's also depends on -- again, on our billings next quarter and next year. In order to quantify, I mean, again, it seems again as long as this macro environment will continue, we probably will see the same. But again, we never know. It's not something that we can project.

[Kip Meintzer, Global Head of Investor Relations]

All right. Thank you. Next up is Gray Powell from BTIG followed by Brad Zelnick from Deutsche Bank.

[Gray Powell, BTIG, LLC]

Okay. Great. Thanks for taking my question. Yes. So, one for Gil. Just looking back over the last few years, demand across the firewall space has been pretty strong. You all sound fairly cautious about 2023. To me, it kind of like 2023 is going to be more of like a digestion type year or a consolidation kind of year.

Feels fairly similar to what we saw in 2016, I think that was like the last cycle. Does my read seem correct you? Does it feel like 2016? And if so, like on a relative basis, like how do you feel today versus sort of the last consolidation period within network security?

[Gil Shwed, Founder, and CEO]

First, I think we have there is a lot of demand and there is a lot of need to continue with what we've done on network security. What I see now is a little bit different. It's not just digestion because I don't think that we finished all the refresh cycles and all the upgrade cycles. I think it's more of a huge change in the economy.

Again, I mentioned it several times. What I've seen is three good quarters in 2022 that we have in one way, and then the fourth quarter was different. Now again, whether this difference will continue, I mean, I've heard some companies saying that we reached the bottom in December. I don't know if it will be that way or it will continue.

I hope it won't. I think from -- when I speak to customers, and as I mentioned, I did a very nice tour in the last few weeks around the world and met with many, many customers and partners. They see the need, they want to invest. They see the value in more security and the Check Point Infinity architecture.

But I can do without the bad about the economy. And right now, I think it's nothing to do with network security or anything like that. It's clearly the more of the macro economy that's behaves a little bit different in the last quarter.

[Gray Powell, BTIG, LLC]

Okay. Thank you very much.

[Kip Meintzer, Global Head of Investor Relations]

All right. Next up is Brad Zelnick from Deutsche Bank followed by Fatima Boolani from Citi.

[Brad Zelnick, Deutsche Bank]

Thanks very much. Gil, just wanted to ask you about the buyback. It's good to see the continued discipline on the share repurchases. But why cap the quarterly amount at $325 million? And is there a scenario where opportunistically, perhaps you'd look to buy back more stock?

And related, is this a time to maybe get aggressive with M&A.? I mean, it's -- we all know there's a ton of great technologies out there, in some cases, companies that are having trouble raising funding maybe to do something even transformative? Thanks.

[Gil Shwed, Founder, and CEO]

So first, both your questions are right on spot. There is a possibility that we will increase it if we need to. So far, again, as we've been doing that policy for buyback for over 10 years, and it works well. But again, there's no -- I don't have any objection to see that if there's an opportunity in the marketplace, we will increase the buyback.

I hope, by the way, it will go the other way around but -- in the buyback. In terms of opportunities to acquire companies, you're absolutely right. There will be more opportunities. But still, I mean, when I look at the market and we analyze it all the time, it's not that -- we don't do it on a public market, the valuation starts to change a little bit, even though still you can find a lot of cyber companies that are losing tons of money.

And I'm not sure that what you want us to do is to buy a company that will cause us to start to growing from very nice earnings to fund their business model, which may or may not be justified over the long run. I mean, that's one challenge.

On the private market, I think we will see some opportunities in the future. I'm not sure that the valuation reached the level that we need to reach yet. Some -- we do get once in a while a call from a company that we think is interesting and reached this point of time that it may be interesting.

So far, we haven't made -- I mean again, we made many acquisitions. If you look, we've made I think like 18 acquisitions over the history of Check Point. Over the last three, four years, I think made like six or seven.

So, it's not that we are not active on the M&A frame. But I think in the future, there's definitely an opportunity that we will do more. And by the way, that is a good reason to keep some cash, especially if we will find something more transformative, and then not that I'm underestimating spending a few hundred million dollars on a company is also a big bet and a big investment. But maybe we'll find something even bigger, and then it's good to have some cash to fund that.

[Brad Zelnick, Deutsche Bank]

Thank you.

[Kip Meintzer, Global Head of Investor Relations]

All right. Next up is Fatima Boolani followed by our last caller, Sami Badri from Credit Suisse.

[Fatima Boolani, Citi]

Good morning. Thank you for taking my question. Either for Roei, but I would love to get a more financial and quantitative perspective on this. Going back to your margin guidance for calendar '23. So, we are seeing a compression in spite of the fact that you will benefit from the stronger dollar more visibly in 2023.

So, what I wanted to understand is as you think about the go-to-market organization, the sales capacity, the productivity trends that you've been seeing and maybe attrition trends you're seeing, how is that changing, if at all, in 2023? And where can we see potential uplift?

Or if you're changing any incentives to drive some of this new product adoption? I'd love to get a little bit more granular on why we'd still underneath the hood, if you will, from the FX impact, still see margin compression? Thank you.

[Gil Shwed, Founder, and CEO]

So first, I mean, before I jump Roei might add some more value with the numbers, but because you asked about the sales force and so on, so I think in 2022, we grew the number of sellers, the number of frontline salespeople by like mid-teen percent. In 2023, we still plan to grow it by a double-digit number.

Again, I think we will adjust it according to the economy. But we've already started the year with many people that were in the process and in the pipeline in 2022. So, it's not just a question what we'll decide in the second half. We've already started with a strong momentum, again, -- by the way, in the U.S., when you hire somebody, they join in like a month or so. So that's a cycle that's relatively short.

In Europe, the cycle is usually six months. So, if we have somebody that started in January, it may be somebody that we've started recruiting in April, and we've signed a contract in kind of July, August. It's not -- it's a very long cycle. And again, our sales force is very distributed around the world, not necessarily U.S.-dominated.

So, we keep the investment on that. We do want to use some of the FX trends that we have to invest in our workforce. Some of it may be in existing sales force, some of it is -- again, to allow us to recruit more without any major effect.

Remember, if I would say that we grow the company by 5% or 10%, the impact on the margin would have been much, much bigger if we haven't using what we have. What else are the trends that are impacting that? By the way, there is a trend in general of providing more cloud-based solutions. And many of our products and technologies are now delivered from the cloud or are using the cloud.

The margins on this are usually lower than the margin that we have on just software or even in some cases, on just appliances. Cloud is expensive. Let's remember that. So, our cloud expenses are high.

Again, like everything we do in Check Point, I think we manage them, and we do them far more efficiently than most companies that we see. We see it on M&A that we have a very efficient operation, but I think we will keep investing in that because it makes sense and gives us an opportunity to bring many more technologies to the market and up the level of security.

[Kip Meintzer, Global Head of Investor Relations]

Next up is Sami Badri, our last question.

[Sami Badri, Credit Suisse]

Absolutely, thank you Kip. My question is on any visibility you can give us on the Harmony product portfolio? So that's my first question. The second question is when I go back to one of your product slides on blades, you put a reference in there that the blade product is now optimized for 1,000-plus applications or other type maybe vendors or integrations.

Can you describe or maybe elaborate on how hard it was for you guys to get to that point? And how many other vendors actually have comparable integrations for a very similar type of product or solution set?

[Gil Shwed, Founder, and CEO]

Okay. I think what you meant with the blade is the SD-WAN blade. I mean, again, we have a software architecture that we call software blades, which we featured many years ago, but it's still a big part of how our products are being built.

And now we built the SD-WAN blade. And the SD-WAN blade is very robust with -- we're supporting, I think, well over 1,000 different applications, and we are optimized. I don't exactly remember, but I think it's two, three times even more -- supporting more application and optimized for more application than our direct competitors.

By the way, part of it is the investment in SD-WAN. Part of it is the fact that it is integrated. It's not a different product. And it leverages the know-how that we have about the deep analysis of application that we already have on our network security products. So that's there anything I didn't answer? So, then that's the -- so I hope that our SD-WAN product will reach market success that it deserves. And I think many of our customers are waiting for it.

[Sami Badri, Credit Suisse]

And then just the Harmony product portfolio visibility. Anything you can give to us for 2023?

[Gil Shwed, Founder, and CEO]

So, the Harmony is comprised for many different products that are securing users and access. Some of them are growing very fast. Some of them, there is -- we have different strategic thoughts on their future.

The one that's growing very fast and the one that we are very happy with is the Harmony e-mail, doing extremely well, reaching -- meets all the expectation from an important acquisition like that, integrates well with the rest of our technology like our anti-malware engine is used in that product. Their anti-phishing engine is used in many, many of our other technologies, everything that I said about centralizing this threat cloud brain is working well.

Sales are integrating quite well. In the beginning, they had a separate sales force, and that brought most of the growth. Now most of the -- big part of the growth comes from the Check Point enterprise sales force. And these are all the right signs because that means that we can leverage the Check Point engine, reaching more customers and reaching more places.

So -- and let's not forget, for years, I've been cautious about wherever we want to enter into the e-mail space or not because it's a crowded market. I'm very happy with it first because we see the success, but mainly because most of the attacks start with an image. So, it's really, really important that we are there.

Our competitors, by the way, are not there. So, we know how to secure that e-mail link and especially the cloud e-mail, which is where the world is going to. So, I think that should -- I mean, if we do it right, that should give us many years of success and growth because the market potential is very, very high.

[Kip Meintzer, Global Head of Investor Relations]

All right. That concludes our call today. Thank you all for joining us. We look forward to speaking to you throughout the quarter, and we'll see you at the next earnings. Thank you, and have a great day.

[Gil Shwed, Founder, and CEO]

Thank you very much.

[Roei Golan, VP of Finance and Acting CFO]

Thank you.

[Kip Meintzer, Global Head of Investor Relations]

Bye-bye.