Greetings. Welcome to Check Point Software Technology's 2019 Fourth Quarter and Full Year Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.I will now turn the conference over to your host Kip Meintzer, Head of Global Investor Relations. Sir, you may begin.

Thank you. I'd like to thank all of you for joining us today to discuss Check Point's 2019 fourth quarter and full year financial results. Joining me on the call today are Gil Shwed, Founder and CEO, along with our CFO and COO, Tal Payne.As a reminder, this call is webcast live on our website and is recorded for replay. To access the live webcast and replay information, please visit the Company's website at checkpoint.com. For your convenience, the conference call replay will be available through February 10th. If you'd like to reach us after the call, please contact Investor Relations by email at kip@checkpoint.com.Before we begin management's presentation, I'd like to highlight the following. During the course of the presentation, Check Point 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 business, financial performance and customers; the introduction of new products, programs and the success of those products and programs; the environment for security threats and trends in the market; our strategy and focus areas, demand for our solutions, our expectations regarding acquisitions and their integration, our business and financial outlook including our guidance for Q1 and full year 2020.Because these statements pertain to future events, they are subject to various risks and uncertainties. Actual results could differ materially from Check Point's current expectations and beliefs.Factors that could cause or contribute to such differences are contained in Check Point's earnings press release issued on February 3, 2020, which is available on our website; and other factors and risk including those discussed in Check Point's annual report on Form 20-F for the year ended December 31, 2018, which is on file with the Securities and Exchange Commission.Check Point assumes no obligation to update information concerning its expectations or beliefs 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 the reasons for our presentation of non-GAAP information.Now it's my pleasure to turn the call over to Tal Payne for a review of the financial results.

Thank you, Kip. Good morning and good afternoon to everyone to joining us on the call today. I'm pleased to begin a review of the fourth quarter and the full year.Revenues for the fourth quarter increased by 3% year-over-year to $544 million and our non-GAAP EPS grew by 21% to $2.02 both above the midpoint 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 take a look at the financial highlights for the quarter. Revenues reached $544 million, $2 million above the midpoint of our guidance. Product and security subscription revenues were $322 million.Our security subscription revenues continue to be healthy which represent growth year-over-year, reaching $164 million. Our software updates and maintenance revenues increased to $222 million representing 2% growth year over year.Products are transitioning partly to the cloud solution, which are included in the subscription line. The reduction in product line is naturally driving lower support levels. The growth in our subscription revenues is driven mainly by our CloudGuard business and Infinity deals, which generated double digit and triple digit revenue growth respectively.Deferred revenues as of December 31st, reached $1,387 million, a growth of $49 million year-over-year.Revenue distribution by geography for the quarter was as follows. 44% of revenues came from the Americas, 45% of revenues came from Europe, Middle-East and Africa region. The remaining 11% came from Asia-Pacific.Since the beginning of 2019, Middle-East and Africa regions are part of Europe, Middle-East and Africa, which before it was part of Asia-Pacific, Middle-East and Africa regions. The revenue distribution by geography for Q4 last year after reclassification would…

Thank you, Tal, and hello to everyone joining us today. As Tal spoke about, fourth quarter business results were in line with our projections. Our CloudGuard family of products, Mobility and advanced Threat Prevention solutions continued to demonstrate solid growth throughout the year. These are all subscription-based solution and their continued success shifts our business into more of an annuity model.Overall, we had a strong finish for the quarter and tallied a nice number of wins with our new technologies. We're placing a lot of emphasis on driving the future of cyber security with the launch of our Infinity NEXT architecture. But before we dive into the future of cyber security, a little summary of the technologies we launched in 2019.We're starting with ramping our client's models with the 16,000 and 26,000 series of appliances for the high-end and data center. But unlike most industry, we made the real breakthrough in network security architecture with the launch of the Maestro Orchestrator. Maestro delivers cloud-like elasticity and reliability to data centers. Normal gateway architectures work on the premise that one plus the 10 plus 10 equals 10.For example, traditionally you buy two 10 gigabit appliances to work in a high availability mode, so if one fails the other takes over. And if you run out of bandwidth, again 10 gigabits, you need to upgrade the whole installation. Maestro changes with architecture, you can have 2, 3 or up to 52 security appliances, and they will work in parallel delivering a multiple of the performance, providing n plus one redundancy, not only that is completely elastic architecture, but you can add more and more capacity as demand increases.We're starting to see good adoption of demand of the Maestro-based solution with enterprises of all sizes. We have also complemented our network security architecture…

[Operator Instructions] Our first question is from Brad Zelnick with Credit Suisse. Please proceed.

Gil, I wanted to drill in a little bit on the go-to market changes, and I appreciate all the color in your prepared remarks. Last week, we noticed the new stars global partner program you announced, building on the Engage program that you also I think announced last May, and it seems though, that when we talk to partners, it's still tough getting them to lead with Check Point in net new opportunities, landing new logos. Can you talk specifically about the progress that you made last year? How the new program incentivizes new business? And any metrics or leading indicators that you feel that you maybe -- you've gotten it right now, as we head into 2020?

I think first, it's important to understand, last year, we grew the number of new customers and we grew the number of partners, and we had some nice successes. I think the new programs that we have are all tailored to have some effects on that, and to create the programmatic effect. But to be honest with you, the main job is not the programs, and not the formalities, it's the joint work that our people are doing and will do in the marketplace.To that end again, we've put some new leadership in the channel areas, both on the global basis and especially in the U.S., and I think one of the important elements is to kind of reiterate that matter to our people, go work with our partners. If we create more successes together, we will -- they will be replicated by the partners.Now keep in mind, we are the only vendor that does a 100% of business with partners and through partners. But I think what's changed in the last few years in the last -- again, it's not the last few years, changed many years ago, is that we ended up driving more business and just fulfilling it through the channel. I think what we need to do, is drive the business all the way with the partners. I am encouraged with some of the things I've seen, but again, we have a long way until we reestablish their trust.By the way, it goes both ways, partners working with us, as we're working with and I think in CPXs, we got good feedback from them. We have a very, very successful CPXs. We had two of them, one in Bangkok three weeks ago, one in New Orleans, in the U.S. last week. The biggest one, by the way, by far is going to be our European one, that's going to start tomorrow in Vienna. And again, from what I've seen in the U.S. in particular, we've seen some good traction in getting partners more and more involved.

Thank you, Gil. If I could just follow-up for one -- from Tal. Tal, I think most of us appreciate the transitions that Check Point and the overall industry is going through and the impact it has in your business model, as more revenue shifts to subscription. But if I look at current deferred revenue, for the full year last year, you added $32 million, compares to the prior year at $100 million and the year before that, its $64 million, and this is with strength and things like CloudGuard and Infinity and as Gil talks about, strength in your annuity business. So with this transition and we would -- we would expect it to have an impact on product revenue. Why are we seeing it more build in deferred and any kind of acceleration on the subscription lines? Thanks.

So, you are right. The effect should be reflected in the deferred revenues. The only thing I will say that, two things. One Infinity deals, the majority of the dollars are not coming through deferred, because it's annually invoiced. So you see a phenomena of annual invoice business. And second, I remind you that we talked about it throughout the year, that last year we had a few, call it abnormal huge transaction growth in Q2, and in Q3 and some in Q4, which was very hard to match. Last year, we had the few very-very large deals which were partially part of the deferred revenues, and therefore we don't see it as part of the growth this year.

Our next question is from Michael Turits with Raymond James. Please proceed.

So I think I'll start with Tal. Tal, the two points of margin decline this year, can you just make sure we parsed that correctly, to understand what's coming from acquisitions or from the shekel, and what's coming from incremental investments, and where those investments are and the follow-on question is that, another two points down this year with margins. What the prospects are? Are we bottoming at this point or how do you think about margins longer term?

Yes. So I mentioned three things. There's a lot of details behind it, but the three main thing was one we talked about the headwind from the dollar. The main drop against the shekel happened in Q4. It's already now ILS3.4. We started last year, if I recall, around ILS3.8, but most of the jump happened in the last quarter or two. So the full effect you see in next year, which as I told you, I think based on today's rate at around $10 million. Okay. So that probably explains about half a percent, slightly more.Second, we had the acquisition at -- in cents, its about $0.07 to $0.08 annually. You can calculate how much is in dollars. I think it comes to about also $10 million or so. We had three acquisitions this year if you recall; one in the beginning of the year and during Q4. So it's not a big effect, but it is affecting. All of them have no revenue, just expenses, but it's a good, we bought an amazing technology. That is just part of the expenses for next year.And third, I mentioned, remember that when you recruit people and you are having salary increases, even if we don't recruit people, if you grow the revenues up 3%, 4%, % then naturally, the growth in your headcount plus the growth in the increases in salary, brings higher growth, and that's the third big explanation for the two point drop from 50% to 48%. And that's the average, remember that Q1 starts much lower, because obviously peak season in Q1. So Q1 starts maybe 2% lower, and then the year-end with 2% higher. So the average comes to the 48%.

And then just my longer-term question, as I said, it has been a couple of years of continuing declining margins. How should we think about your strategy, relative to margins over the next couple of years?

I think first, I mean I've been saying that we are public now for like almost 24 years. I've been very-very consistent about that from the day we went public in '96. Our focus is not about the margin. Our focus is on building a healthy, growing business, and that's what we are doing. By the way over that period of time, we've actually expanded our margin, not lowered our margin, over the long period of time, and our margins are very, very high; around -- again, whether it's 48% or 52% of operating margin, it's very high.The main strategy is what we do and how we do it effectively. There are many opportunities in the marketplace. We do want to conquer new markets. We do want to take good care of our people, which is also important. We do want to provide good incentive for our partners. The fact that we are able to do all of that and still maintain the high margin, I think speaks for speaks for itself and I think once we see some of it flowing -- some of the growth coming and flowing into our top line, it will flow down to the bottom line as well.

Our next question is from Fatima Boolani with UBS. Please proceed.

I had one for Gil and one for Tal. Gil, you were super helpful in outlining the initiatives for calendar '20 -- in the focus areas for calendar '20. But I did note the emphasis is still on reenergizing if you will, your network security, your product business. So can you help us think about what sort of sales compensation or sales incentive structures you're going to bring into place, that both incentivize adoption of some of your newer solutions, like the CloudGuard family, as well as the traditional network security in the Gateway portfolio?

First, that the product and the network security portfolio is still the majority of the revenues and the activities. So clearly, the salespeople are focused to bring those numbers. Actually, we need to incentivize them to invest in the new areas, where we believe it's very-very important for strategically -- and with the mind share and for building the future revenue streams, and yet they account only for a small portion today of the total revenues, and even -- and I think that's where it comes to play.So, I think we do build the incentive programs and we have incentive programs to help invest. As I mentioned earlier for an earlier question, the main job is not about the commission plans or the incentive programs, the main one is management every day that every salesperson and every sales engineer and every manager in the field should know how to balance their act between supporting and growing the network security business, and creating new business on the total security platform.We're finishing a decade now and I didn't talk much about that. But if you remember where we started the decade, we started the decade with gateway platforms that were -- I wouldn't say basically, we are very rich for that era, for a decade ago, but we started with a Software Blade platform, and what we aim to do is consolidate many technologies into the gateway and make the gateway a much bigger security platform and support that with the new business model, that was the Software Blades model.10 years later, you can see that we've actually achieved that. I mean in the network security business, the gateways are unified. The gateway is a big platform. Our software blades business, or what we call it now the subscription business, already surpassed the new product business. So that's a huge achievement from that point. We built them business with more than $600 million in revenues. Big part of it is the additional security services on top of it, and we really created a consolidation on the gateway.I am really glad, because when we look into the next decade, I think what we are trying to build now with Infinity, is the next platform that will go beyond the gateway and will bring something with the same principles to the entire network security landscape, having the cloud as the first priority, but also the IoT and other spaces in that space. I really like to hope if we look forward 10 years from now, we will see Check Point building such a platform beyond just the network security field, and extending it to the bigger, bigger cyber security landscape, providing the same kind of consolidation and unification.

Our next question is from Daniel Ives with Wedbush Securities. Please proceed.

Yes, thanks. So as you think about the cloud transition, when you look at your current product portfolio versus let's just say, potential acquisition, just how are you thinking about it buy versus build, in terms of just cloud and going after the 2020 opportunity there?

I think, first, we have today a very-very rich cloud platform, including all the key elements. The cloud virtual servers, the multi-cloud management, private cloud, public cloud, cloud workload, cloud SaaS security as a service, or security for software as a service, actually multiple Ss there. A cloud provided security, like the CloudGuard Connect and the SD-WAN solution that's included with that. So I think we've built a very strong platform.I think the core of the platform is built by us, it's based on our threat cloud, and now in Infinity NEXT, which is brand new technology platform for delivering security, from what we call a cloud brain. Inside that, we have a lot of technologies and the lot of places, where we can augment it with acquisition. And I think just this year, we made three acquisitions or just in 2019, we completed three acquisitions in the cloud space for serverless functions, for a -- web services on the cloud, which is very important, at the beginning of the year.And IoT which is -- while it's not cloud, the security is delivered from the cloud, and using that cloud to deliver security. And that's on top of what we've done in 2018 for the cloud management with Dome9. So I think we will continue to look for more opportunities we will. I think as I mentioned before, we are -- we want to secure now at least 50 type of assets, many of them -- more than 20 types of these assets are workloads on the cloud, and the nano agent that we will put into them is sometimes made by us, sometimes it's a combination of something made by Check Point and new technologies that are being acquired, and we will continue to look in all those spaces.

Our next question is from Brent Thill with Jefferies. Please proceed.

Thanks. Tal, billings that missed consensus numbers, I'm just curious for this year, how we should be thinking about billings? Is it something you pay attention to you, or how we should think about that? As that remains a key metric that many investors are focused on?

We don't report billing. The reason is, that it can fluctuate easily as you've seen this year, very clearly, or between some quarters, because billing has two effects. If you invoice multi-year, you will have an upside on the billing, and if you had a great deal, but you're invoiced monthly or annually, then you won't see feel it. So we're very careful on that, well we look at it as a run rate.Now rightfully, you're right, the P&L reflects the run rate and the right way with a single-digit, and we aspire to increase it significantly. But the guidance is aiming for single-digit as well at this point, because of the transition between the products and the cloud products into subscription and the Infinity, which is annual versus multiyear and so on. So the guidance remains in this level, and like you will say it can have upside or downside, but that's where we are at this point of time.

Our next question is from Gregg Moskowitz, Mizuho. Please proceed.

Thank you very much. First just a high level question for Gil, how would you characterize demand for physical firewall?

Could you repeat that because you were sounding very weak, the sound.

Hi, Gil. Just any better?

Yes, much better. Much better

Terrific. Sorry, about that. So just a high level question, I was wondering how you would characterize demand for physical firewalls as well as the virtual today versus 6 to 12 months ago?

It's hard for me to say. Some of the shift in attention in every organization does go to new platforms. By the way, I was surprised last week when I surveyed partners to some of their priorities for 2020. I was expecting to hear, all have cloud on their agenda, but I was expecting to hear more cloud and I heard more about IoT and SD-WAN connectivity. So there are multiple levels of interest, not just cloud. I think the demand for gateway and physical network security remains pretty stable. I'm not sure if it means the small increases, small decreases, but stable.

Our next question is from Karl Keirstead with Deutsche Bank. Please proceed.

Thanks. Gil and Tal, I'd just like to press a little bit on the Q1 in 2020 revenue growth guidance of 3%. Gil, you described it as conservative, but throughout this call you and Tal have mentioned on a few occasions, this mix shift from product to subscription, which should put a little bit of pressure on growth. Tal, you mentioned not assuming some of the chunky deals that you closed in the middle of last year.So given those comments, I would have expected your revenue guidance to be a little bit lower. So 3% is about what it has been frankly in the last several quarters. So there must be some positive offset to these sources of revenue growth pressure? Maybe you could outline what one or two of those that might be. Thank you.

First, my aim is to much higher growth rate. I think the combination in for -- is again, some of what's happening in the marketplace, some is the shift in the businesses, some of the investment in new areas that are still fairly small. I think at the end of the day, we take all the data that we have. We balance it and we got to the numbers that we got. My goal and the sales goal is to try and create business again, no matter how you measure it. If you measure it on the revenue side or you measure on other amounts that will generate at least that with amount of growth. Tal?

Again, I will do my part in the sense of the balancing. So first, you're right. I'm seeing like the last few quarters. I see the 3%. You're right, when the products are negative, the support is under pressure, therefore it's is going down as well. But we see the outlook for you on the CPX and the salespeople what they feel about next year, and the partners that we met in the CPX. So I think when you look at the full year, then we expect to see some changes already in the second half of the year. I don't see it tomorrow.You're right. It will take some time. But this is like balance do you can be -- if the product transition to the cloud will be faster, then you right, there will be much more pressure than you thought of the guidance. But if you will see, products is picking up because of the execution of the partners and the field in the network area, then you might see an upside. And that's why we have a range.

Our next question is from Brian Essex with Goldman Sachs. Please proceed.

Tal, I was wondering if I could ask you a little bit more about last quarter, I believe you noted that sales cycles are lengthening, particularly as you transition from more products to annuity-type revenue. How are you seeing the backlog evolving? And maybe a Part B of that question, sales and marketing, it continues to accelerate maybe faster than revenue growth. Is there a point where you see maybe an inflection point in the backlog, where you might get more sales and marketing leverage? And how are you measuring incremental dollars of sales and marketing spend in that light?

I think Gil can say his part. The way I look at it is, it's not yet in this level. First, we would like to see, the pipeline is growing and the execution is improving and to see that booking increasing and then translating into the P&L. Once you get there and you see the pipeline is growing, you will see the measurements per salesperson are improving and then you can talk about leveraging. But two things are clear, the opportunities out there. The cloud opportunity is opening.We see our cloud numbers are increasing significantly. We see our Infinity and number of deals are increasing significantly. We see when we close an Infinity deal, the annual value is increasing between tens of percentage to hundreds of percentage. So the opportunities are there. Well, we need to start seeing it, building into a significant amount in order to to balance the reduction that you see in the product. And that's what we are looking for on the next year, specifically in Americas.

Got it. Very helpful. Maybe I could just do a quick follow-up on M&A activity. Is your pipeline building? Are you looking at more activity out there, or are things just -- valuation expectations just too inflated at this point?

We always look at many-many opportunities. You see, this is actually -- the conversion rate was high, because we converted three opportunities into acquisitions. So that I think is the most we purchased actually in one year, or if you look at 12 months from December to December, we actually had four, because last year it was in December as well, if I remember the deal. So, we see more acquisition, and then it depends on what we see. If we see good opportunity, we will seize it, definitely.

Our next question is from Shaul Eyal with Oppenheimer. Please proceed.

Gil. I know that in prior quarters, and probably throughout 2019, the main focus from a hiring perspective was senior personnel, mostly in the US. But I wonder what the status of sales leadership is in Europe and other any changes or planned additions?

I don't want to give too much from a competitive standpoint to all the searches and all the position we are looking. But we're looking for good people all over the world. By the way we are looking for good people also at all levels, at every level, it's important. And we do have several -- and by the way, when you look at the sales in the world, I mean, we look at the total results and what the total percentage. This varies a lot we have regions within the U.S. that demonstrated very nice success and very high growth rates.We have region within or countries within Europe and Asia and Latin America that demonstrated their very nice growth rate, and we have the opposite example. So I mean it's not uniform. The percentage which looking for is far from representing the run rate of every every single geography that we have. So yes, we have several countries and several geographies that we are looking to strengthen our leadership, in particularly specific areas. And we're looking for good personnel, especially in the field and in sales all over the world and always.

Our next question is from Walter Pritchard with Citi. Please proceed.

Hi. A question I guess split for Gil and Tal here. On the new appliances, you've gone through these releases a number of times and even gone through the process of deferring more of the revenue into subscription. So I'm wondering, Gil, as you look at the new appliance releases and how customers may adopt them, there is always this potential trade off of of buying cheaper boxes that have better throughput. How would you compare this release to priors? And then Tal, could you help us understand, just from a mechanical perspective, what the increased deferral rates are on the new appliances, with the subscription attach?

So the general direction I'm looking for and we yet again don't want to pre-launch anything, is to give more security value with each appliance we have. I think we need to spend for the best security. We tried last week the models when we sold the basic boxes and multiple options for different level of security. To tell you the truth, I don't think that's necessarily the right approach. Our approach should be to stand for the highest level of security, to always protect against Gen 5 security, to deliver to our customers, what we believe is right, which is the highest level of security, then we can choose to activate it, renew it, and so on.But my approach would be to give more and more security services inside the gateway that we provide. It has -- again, accounting implications from calculating deferred value of the appliance and the subscription service. I think it's a little bit too early to say what they are, because there is a lot of moving parts in that, like what will be the ongoing cost of the subscription after that and so on. But my aim is to provide the highest level of subscription, the highest level of security, and then to provide very competitive subscription rates for future years.

Our next question is from Sterling Auty with JP Morgan. Please proceed.

Yes, thanks. Hi guys. Just wondering with the investments that you made, can you give us a sense of what the total sales and marketing headcount finished 2019 versus where it finished 2018?

In general, it's increasing a few percentage. Average versus average, it was 7% or 8%. The actual number we didn't provide. We will provide it as part of the 20-F.

And by the way, most of the change wasn't year-end to year-end, but was throughout the year. Because last year we have actually, in the end of Q4, we accelerated hiring.

Yes.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Kip for closing remarks.

Thank you, guys, all for joining us today. We’ve got a plane to jump for one of us, so we are going to have to cut it just slightly early today. But we look forward to seeing you throughout the quarter, and have a great day. Take care.

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.