Check Point Software Technologies Ltd (CHKP) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Check Point Software 2018 First Quarter Financial Results Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kip E. Meintzer, Head of Global Investor Relations.

Thank you.

You may begin.

Thank you, Donna.

I'd like to thank all of you for joining us today to discuss Check Point's first quarter 2018 financial results.

Joining me today on the call 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 May 2. If you'd like to reach us after the call, please contact Investor Relations by e-mail at kip@checkpoint.com or by phone at +1 (650) 628-2040.

Before we begin with 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 and Exchange Act of 1933 and the 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 and programs and the success of those products and programs, the environment for security threats and trends in the market, our strategy and focus areas for 2018, demand for our solutions and our business and financial outlook, including our guidance for Q2 2018 and full year 2018.

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 April 25, 2018, which is available on our website and the other factors, risks, including those discussed in Check Point's annual report on Form 20-F for the year ended December 31, 2016, 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, and good morning and good afternoon to everyone joining us on the call today.

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 for the quarter increased by 4% year-over-year to $452 million, in line with our projections.

Products and security subscription revenues increased this quarter by 3% over the same quarter last year, reaching $245 million.

Our security subscription revenues continued to be strong with 14% growth year-over-year, reaching $127 million.

Our software update and maintenance revenues increased to $207 million, representing 5% growth year-over-year.

Last quarter, we launched the Infinity Total Protection.

Our Infinity Total Protection solution offers the entire Check Point solutions in a simple financial model, price per user per year.

We already closed few multi-year deals in several millions, and we see a strong pipeline of the deal.

The pipeline is from organizations from all geographies, verticals and all sizes.

From accounting perspective, as majority of Check Point solutions are offered in a security subscription, a small portion of the deals is and will be recognized as product, while a majority of the deal is recognized as recurring revenues over the life of the contract, some of which is subscription and some of which is for support, update and maintenance.

Deferred revenues as of March 31, 2018, reached $1,166,000,000, a growth of $103 million or 10% over March 31, 2017.

Revenue distribution by geographies for the quarter was as follows: 47% of revenues came from the Americas; 36% of revenues came from Europe; and the remaining 17% came from Asia Pacific, Japan, Middle East and Africa region.

From a deal size perspective, this quarter, we had 44 customers with transactions over $1 million.

Transactions greater than $50,000 were 71% of total order value, similar to last year.

The gross margin increased this quarter mainly as a result of changes in the mix of revenues and products.

Non-GAAP operating margin for the quarter was strong at 53%.

Effective non-GAAP tax rates for the quarter were 17%, similar to last year and in line with our expectations.

GAAP net income for the first quarter of 2018 was $187 million or $1.16 per diluted share, an increase of 7% from the first quarter of 2017.

Non-GAAP net income for the quarter was $210 million or $1.30 per diluted share, an increase of 9% from the first quarter of 2017 and was at the top end of our guidance range.

Our cash balances as of March 31 were $4 billion compared to the $3.8 billion in December last year.

Operating cash flow was very strong and showed an increase of 18% from $355 million last year to $419 million.

During the quarter, we had a large tax refund relating to prior year for $45 million.

Net of the tax refund, our cash flow from operations increased by 5%.

We continue to implement our share buyback program during the quarter, and we purchased approximately 2.4 million shares for a total cost of approximately $249 million.

Now let's turn the call over to Gil for his comments.

Thank you, Tal.

As you just heard from Tal, results for the first quarter were good revenues at the midpoint of our projection and earnings per share at the top of our projection.

We started the year with a new and unique strategy that aims to bring the world into the fifth generation of cyber protections.

Before I elaborate on that, let's provide you with a little perspective.

This past year has been quite significant for everyone in cyberspace.

There has been a change in the cyber threat landscape with attacks that are becoming increasingly sophisticated.

These attacks -- these Gen V attacks are, in many cases, multi-vector attacks, polymorphic, and attackers are utilizing the most sophisticated attack tools.

While the level of attacks are at the fifth generation, we believe that the vast majority of enterprises are still using security tools that are somewhere between the second and third generation of cyber protections.

Second generation attacks are focused on penetrating the network, and we believe that our firewalls provide the best protection against this type of attacks.

Third-generation attacks are focused on exploiting vulnerabilities in application inside the network and application that are accessing or are accessible from the Internet.

We lead the markets for integrated intrusion prevention in the network security infrastructure, which is the key element in Gen III security.

However, fourth- and fifth-generation attacks disguise themselves well in network traffic and especially in content file.

Fifth-generation attacks add a multi-vector element and, in many cases, can utilize cloud and mobile to deliver themselves into their target.

Bridging the gap between the third generation of attack and the fifth generation of attack isn't an easy task.

Customers are investing heavily in many technologies and increasingly more vendors, yet our surveys indicate that only 3% believe that we are ready for the fifth generation, 97% are simply not there.

This is a huge challenge and a tremendous opportunity.

I believe that Check Point is uniquely positioned to close this gap.

Check Point offers a broad solution that can address Gen V cyber-security challenges in a holistic way.

Our solutions are designed to prevent zero-day attacks across the traditional and new attack vectors, including cloud and mobile.

Gen V architecture is focused not only on speed and feeds of the firewalling capabilities, but it encompasses many other areas of security that have been developed in Check Point and are unique in the marketplace.

Real-time threat sharing, first-time prevention technology, cloud security enforcement and Mobile Threat Prevention are a few examples.

On top of that, to truly manage this type of security architecture, the customer must have a unified security management platform where Check Point has always been way ahead of the market.

Some of the above may sound too technical for many of you, but just to illustrate the differences, most of our industry has been putting their focus on detecting different families of attacks.

This is simply not enough.

I believe that attacks can and should be prevented, and we are demonstrating it every day at Check Point.

We introduced the Gen V strategy in the first quarter at our Check Point Experience 360 conferences in Europe, U.S. and Asia.

We had record attendance and the highest level of customer ratings for our conference and strategy in our history, seeing that our message is that -- of addressing the fifth generation of cyber threat is well received by our target audiences.

In every discussion that I have with chief information security officers and with key IT leaders, they all agree that where challenge are -- that where challenges are at Gen V, yet their staff is still focused on managing their Gen II and Gen III technologies.

Empowering customers to make this big step forward is a great privilege but not a simple task.

In the first quarter, we already delivered a few wins where a customer purchased a full Gen V security solution using our Infinity Total Protection security offering.

This deal demonstrated how the conversation is shifting from transactional products purchases into strategic security architecture, which carry more value; a value that was recognized financially over a longer period given that these deals are all based on annuity models.

We continue to enhance the cloud capabilities of our Infinity architecture.

We launched the CloudGuard family of products, addressing both infrastructure cloud security and software-as-a-service or SaaS security.

In the area of cloud security for the infrastructure, we saw very high percentage increase in sales this past quarter.

This quarter, we will start shipping our CloudGuard SaaS technologies.

Whether we [quote] an Infinity and CloudGuard, we invest not only in research and development, we also continued to define -- to refine our go-to-market strategy.

Key elements that we are making changes is a focus on being much more proactive in approaching new customers and in reaching the higher level in our customer's organizations.

The CISOs -- CIOs and others have the ability to see the bigger picture and update their overall security architecture to fifth-generation protection.

We have elevated the level of our marketing activities, and we'll continue to do so.

Yet, the task of changing the behavior of our productive sales force takes time.

We're asking them to learn new sales techniques, reach much higher in the organization and learn new tactics in approaching new customers and opportunities.

At the same time, we continue to hire new salespeople to augment our coverage where needed.

This quarter, we already saw some early successes of the new changes in the Gen V initiatives.

For example, a financial customer attended the CPX conference in February, saw the Gen V and Infinity Total Protection, returned home and said, "That's what I want." Within a month, it resulted in a 5-year multimillion dollar deal.

We've had our early success within the Infinity space in multiple customer segments and geographies, U.S., Europe and Asia Pacific.

These early successes demonstrate the huge potential ahead of us.

However, with the positives of these early successes, there are also some other implication.

Changing sales execution takes longer than what I'd like.

And while these deals are much bigger than a typical product deal, they take longer to show as they come in on U.S. annuity.

In other cases, they can lead to longer sales cycles.

Therefore, while I'm pleased with the first quarter revenues and EPS, our overall sales are softer than what I would have hoped to see.

It will also slightly reduce our projection for the remainder of the year.

With that, I would like to provide my projection for the second quarter and update some of the full year numbers.

As you know, my usual caveats predicting the future will always carry a higher level of uncertainty, with risks and with potential upsides.

With that in mind, I'd like to share some of the numbers.

For the second quarter, revenues are expected to be in the range of $445 million to $475 million and non-GAAP EPS in the range of $1.25 to $1.35.

GAAP EPS is expected to be approximately $0.15 lower.

For the full year, I'd also like to update our projection by approximately 2% to 3% to reflect the changes we are making.

Full year revenues are expected to be between $1,850,000,000 and $1,930,000,000; non-GAAP EPS in the range of $5.45 to $5.75.

GAAP EPS is expected to be approximately $0.62 lower.

With that, I'd like to open the call for your insightful question and looking forward for your great feedback on our strategy.

(Operator Instructions) Our first question is coming from Jonathan Ho of William Blair.

Just wanted to maybe start out with some of the sales execution challenges.

Can you maybe talk about where we are in that process?

Maybe what's worked and what's continued to be challenging?

And maybe the time frame that you see for that to be corrected at this point?

I think there are many things that we are doing.

And there's no -- it's not one thing that we are doing, and it simply takes time.

And again, as I said, a little bit more than what I would hope it to change.

There are some things like we appointed -- we promoted a new sales leader for our U.S. organization.

But the main issue is really about teaching our salespeople how to approach higher in the organization, how to reach the C-level, how to go to cross department and cross projects.

Again, our people have great relationships and great success.

With -- usually, with the network security people within the organization, we really need to expand that.

And again, especially for a very productive sales force like we have, it's hard to adapt to this challenge.

And when we talk about Infinity, again, it's -- in the past, it was, here is a product, take the product, maybe check its performance.

I think one of the most successful sales strategies that we have is doing, what we call, checkup report.

We come to a customer, we analyze their network, we give them a report.

We've seen tremendous success on that.

It can be in a small organization.

It can be in some of the largest banks in the world when we carry that checkup situation.

And almost always, they result in them adopting a broader strategy and understanding the superiority of the Check Point technology.

We've kicked, by the way, many competitive product when they saw that their network is unprotected with this checkup report.

So these are all things that we are making and changing and they simply take time.

Got it.

And then just with regard to Infinity Total Protect, can you maybe give us a sense of what the impact has been on product revenue versus subscription?

I know it's relatively early days.

But there's clearly some shifts that are going to happen between those lines.

And can you give us a little bit more color in terms of maybe what's happening with that?

Sure.

Like you said, it is very early, but we already have a few deals.

And when I'm looking forward, it's obvious that there is a shift that you experience, just like when we historically sold IPS as a product and then we moved into the subscription.

So I'll just give you an example.

If you typically sell appliances and all of these is in the product line and then you might have a touch of subscription, which might be -- it depends on the package, but it can be, let's say, 15% to 30% of that value, and then you have update and maintenance, let's say, 20%.

In a typical Infinity deal, the product proportion is going to be significantly lower of that pie.

Probably around 80% is going to the subscription and support portion and around 20% will go to the product line.

So it's quite a significant shift.

Our next question is coming from Saket Kalia of Barclays.

First, maybe for you, Gil.

Clearly, nice early success on Infinity Total Protect.

And you've talked a little bit about kind of the -- how it attacks or handles Gen V attacks.

But in your conversations with customers, how are they responding to sort of the very different pricing model with the chance for more usage?

I think the pricing model, we actually like.

The challenge is not there.

The pricing model, we like because it makes your life simple, because it's a predictable model.

I think it's very fair model.

The deals that we closed were all at the price that -- I mean, the price that we came up with.

There wasn't a -- there wasn't much price pressure there on that.

So I think from that perspective, it's going very well.

The bigger challenge is actually to get them to consolidate their view.

Today, customers are, especially large customers, are looking at these technologies in many different silos, in different places, in different organization.

And it's really, really hard for them to see how to consolidate, to take the bigger picture and to take that bigger view.

And I think that's one of the sales challenges that we haven't -- not just about Infinity, by the way.

It's in general, selling more architectural sales.

That makes sense.

And then for my follow-up, maybe for you, Tal.

Just thinking about the kind of historical kind of subscription package that we've sold.

We're a couple of quarters now past the anniversary date for that big pricing change you made last time.

Can you just talk about qualitatively how renewal rates have trended on subscription packages over the last couple of quarters?

Frankly, if you remember, I was telling you the move in between packages.

So that's why we don't provide it.

But in general, renewal rates are pretty steady.

The installed base is steady.

The renewal rate is steady.

The challenge to move up into the level and sell additional solutions.

So historically, in our offers, if a customer had Next Generation Firewall, you move them and offer them a higher value with Next Generation Threat Prevention, and then we bundle the Next Generation Threat Prevention.

And the upsell was to move into Next Generation Threat Extraction.

Now we see the Advanced Threat Protection.

Now you have to go all the way up to Infinity and sell them the entire total solutions in one price to -- and be implemented all around the organization.

And that will be a majority of rate in those subscription and the update and maintenance lines.

Our next question is coming from Sterling Auty of JPMorgan.

Just curious and you talked about sales execution, but what were win rates like during the quarter on the competitive?

How are you sure that's -- it's not a technology and a competitive issue?

I think the competitive win rates were the same.

We had many cases when we kick out -- kicked out competitors from accounts all over the world.

As I mentioned with our checkup report, we've seen cases, even again in the most sophisticated and largest accounts in the world, not just accounts that are -- have limited staffs on them, so some huge banks.

We sold deals when we did the checkup report, and they were shocked to see how many malware they have on their network that penetrated what they were thinking is a good security solution.

And again, we started, especially in the very large one, we started the early process of replacing them.

So I mean, I don't think that our issue today is in technology, quite the contrary.

And again, if you remember last quarter, there was the NSS report that shows the bit -- the Breach Prevention System report, the first NSS test that they did that actually really tested advanced threats and the ability to prevent them.

We scored a clean 100% ratio on that, and we were, by the way, the only vendor that even got to this test with a single gateway and not with a host of 5 or 6 different technologies.

If we were to add by -- if we were to add it by the way, our other systems, we'd keep the 100%.

But again, it can't get any better, and that's why we got to the test.

We're the simplest system out of all vendors and still got the highest strength.

So I am pretty sure about the capabilities of our technology.

Got it.

And then as a follow-up, with the promotion for the head of sales in North America, is there additional changes that you feel that need to be made underneath?

Or it's more just a training and experience this year at this point?

I think we will keep making changes, and I think there is a lot of places that we have to build and we have to change and -- especially augment where we hire.

We are hiring, especially in the Americas.

We have a lot of open positions, and we encourage our salespeople to have the people in the right places.

And I think we will add people all over the place, both at the top end and then the people that are actually doing the work.

Our next question is coming from Shaul Eyal of Oppenheimer.

Maybe building on Sterling's prior question.

So Gil, on the sales and the marketing front, I think all of us are taking United Airlines flights over the course of the past few weeks have seen the Check Point commercials.

But as it relates to sales force hiring, can you maybe quantify for us how many salespeople were added during the first quarter?

And maybe the second question in that respect, a very competitive landscape right now, both in Israel and, without a doubt, you mentioned the U.S. How can Check Point draw top talent?

And when you draw talent, where are you bringing this talent from?

I don't have in front of me the number of people we hired and so on, but I think it is a nice number.

But as I said, we have many open headcount.

So we are -- we can still hire more, especially in the U.S. In terms of drawing talent, again, it is a competitive market.

It is hard to recruit people, but I think we're able to do that.

It's very, very different when you speak about the sales force in the U.S. or in the rest of the world.

And by the way, U.S., rest of the world and Israel are very, very different.

In most countries, I think Check Point is quite an attractive leading vendor for new people to join, in most European countries, in Asia and so on.

And so I think there, we can attract very, very good talent.

In the U.S., I think we're also a very attractive vendor in the cybersecurity space, and by the way, we see that.

We see the people that left Check Point 2, 3 years ago to move to other vendors in the security space, sometimes even to our competitors -- there aren't, by the way, many people that leave us for our competitors.

So -- but even some of these people are asking to come back, and some did come back.

Some we did recruit back.

And I think what they all want is not just the work atmosphere, but the fact that they like to work with the best technology.

And they like to stand in front of the customer knowing that what they sell is a credible story with a leading technology.

In Israel, it's very -- it's quite different because, first, we have to try to get developers, researchers and so on.

The market here is competitive.

But here, I think we're definitely considered one of the most prominent companies that people want to come and learn and grow in.

We -- in Israel, we mainly recruit people in the early stage, not even early stage of their carrier, before they start their career.

Most of the people we recruit are during their second and third years in university.

They become interns, and then during their university studies, and when they graduate, we can pick the best one to stay here.

I can give you one excellent example of a program that's really unique, that we've done last year.

We call it the Check Point Security Academy.

We trained really the top, top talent of security researchers.

Usually, most companies are looking for people with prior experience in that.

And there aren't that many people that have prior experience from that.

So we understood that at the macro level, there's a limit of how many we can try to recruit.

And we simply created our own program.

We got the first round of people in that program, and they are amazing.

One of the graduates of that program that, again, came with no prior experience, fresh out of the program, within a month, found the -- one of the most significant vulnerability in the Microsoft Office, for example.

So we have some very, very nice wins in that.

Our next question is going -- coming from Gregg Moskowitz of Cowen.

Question, Tal, just on software updates and maintenance because the revenue did decline by 2% sequentially.

And by our estimates, that does represent the biggest sequential decline that we've seen in the last decade or so.

It sounds like you're not seeing any change in win rates.

But with that being the case, does this reflect any change in pricing on maintenance contracts?

Or is there some other factor that you would attribute it to?

Typically, between Q4 and Q1, there's a reduction.

It depends how much.

You don't have only update and maintenance there recurring.

You also have there a training.

You have installation.

You have professional services that sometimes, you have more in Q4 as a result of implementation of large projects.

So nothing dramatic, no.

Okay.

And then just getting back briefly to the go-to-market changes that you've discussed on this call and previously.

Do you guys have a line of sight into when things will be back on track?

Because you talked about the architectural sale that Infinity entails, and obviously, that has a lot of promise but it does also introduce more complexity.

And I'm just kind of curious when do you sort of think you may get to that point of returning to better execution.

I think we will see changes, and we will see some effect already this quarter and some improvement compared to some of the internal metrics that we have over the first quarter.

And even in the internal -- the first quarter, we saw improvement in some metrics that we are starting to track and starting to work on.

The overall impact on the revenues, I think it can take time because it's -- we are talking here really about different phenomena that it's hard for us to estimate.

Like large deals, I'd really like us to penetrate more, strategic large deals.

These deals, by definition, are very long sales cycles.

So if we win them, it will take time.

If we don't win them, I don't consider that even an option.

Let's put it that way.

Small deals that are more architectural and so on with smaller customers, these deals can come faster in some cases, but their overall impact, it's hard to mitigate.

And again, if we talk about these architectural deals, then their revenue recognition would cause the revenues to come a little bit later.

So it's a little bit hard to predict that.

Yet I'm very, very optimistic about what we have and the acceptance of the new messages that we have in the marketplace.

Our next question is coming from Andrew Nowinski of Piper Jaffray.

And maybe just starting with a clarification.

It looked like product and license sales declined about 6.5% year-over-year, which sounds like it's just due to that mix shift from the Infinity program.

I guess in light of your lowered annual outlook, are you able -- are you still expecting product and license growth in the second half of 2018?

Or is that no longer on the table?

I think if you look at the guidance, you will see that in our midpoint, it doesn't assume that.

So we -- there's 2 -- I just want to clarify, there's 2 things.

It's not that the Infinity takes longer to recognize that as revenue, which is obviously a significant effect, but what Gil was relating to is also the length of the time it takes to close such deals on architecture, moving up in the hierarchy in the large organizations, getting the right people in order to get the big picture and pressures in Infinity.

So while we see a very nice pipeline, we estimate it to take longer to close it.

And so on the one hand, it delays product and refreshes because now, you can get into the Infinity.

So you see an effect on the product revenues, and then it takes the time: a, to close the deal; and b, once you close it, to recognize it into the revenue.

All right.

And then last quarter, you had talked about making progress winning new customers.

But we're not really seeing that showing up at billings, which were flat again despite even a higher duration.

I guess is Infinity driving any new customer growth?

Or are you seeing Infinity driving really more sales to your existing customer base?

Maybe just because we started with the accounting, so I didn't discuss it at all.

But I can just say, now that Infinity is paid over like annually, which means you won't even see it in the deferred revenues unless it's the customer that decided to pay everything upfront.

So just take that also into consideration.

With our customers, we have a mix of both existing and new.

I think it's a potential for both, and we're working on both opportunities.

I can give you one example of the customer that we won that -- where we actually recruited 5 vendors with the Infinity solution, and that's a great solution.

And we did win over some of our key prominent competitors in that deal and again kicked out of the account 5 of our vendors of the solution is really, really comprehensive.

Our next question is coming from Anne Meisner of Susquehanna Financial Group.

I just wanted to dig into the subscription growth deceleration a little bit.

More of that's beyond what we've been modeling for deceleration.

So this is maybe a bit of a follow-up to Saket's question.

But is there any further color you can provide on pricing of the subscription bundle renewals?

You did say that the renewal rates were good, but maybe there's some pricing going on there.

And then any commentary you can provide on subscription attach rates on new business?

Just to remind you, when we discussed it last quarter, I said to expect some deceleration in the subscription as a result of the acceleration last year.

Some of it was relating to bundling in 2016 of the NGTP into their appliances, which created a pressure on the product but then the acceleration in the subscription over -- close to the entire year last year, which means this year, you see some of the deceleration back to normal rates.

Okay.

Great.

And then a quick follow-up.

So considering your strong cash balance, strong cash flow still, and you're kind of going through a bit of a sluggish period for sales.

Is there any thoughts, I guess, on just increasing your stock repurchase beyond $1 billion per year that you've been doing?

It's something that we can -- that we should -- that we can consider.

It's an option.

Again, I don't even have a strong position for it.

Again, what we usually do, by the way, on these things, of course, it's a board decision and the board decides that, and usually, we collect feedback from shareholders before we make major decisions in that space.

And I'll just add that typically, once the old program is coming out to an end, then we have a discussion, we bring over data and based on that, make a decision.

Our next question is coming from Ken Talanian of Evercore ISI.

I was wondering if you could frame how your renewal pipeline compares for the remainder of the year versus this time last year.

Well, it should be the same, slightly up, since our subscription is the same and slightly up versus last year.

Installed base is a little bit bigger, therefore...

Exactly.

So the installed base is bigger.

So the opportunity should be slightly higher.

So in that area, there's no -- I would say, not much drama, right?

Like it can fluctuate between quarters, it just depends on long-term contracts.

But when you talk about the regular potential, regardless if you put aside multi-years, then it's pretty much the same.

And I guess as a follow-up, do you expect there to be more or less multi-year deals than you've seen over the past year?

That's really hard to predict.

I'm not driving it into big multi-year deals.

It's always a struggle with the sales force, like in many cases, who wants to make these multi-year deals.

I'm actually not pushing for that because I think there's no reason to sacrifice future revenues and give higher discounts for that.

But again, it's varied.

And if somebody comes up with a great proposal, then of course, we accept the booking.

Our next question is coming from Phil Winslow of Wells Fargo.

Just to get a view on Infinity.

Obviously, it's a big change not only from a technology platform perspective, but just pricing and packaging, not just for you guys but really relative to the industry.

So curious as to what you're seeing competitively, the response being from the others in the market to Infinity, whether it would be pricing, promotion, just any sort of competitor response that you're seeing would be great.

I think there are some responses.

I'm not that familiar with the details.

But I think, realistically, they can do that because they don't have the full architecture or our competitors don't have their management to manage a holistic security.

Most of our competitors don't even have the management to manage a -- just the network security as one unit.

They don't have the mobility portion of that.

They lack on the cloud and definitely on the cloud SaaS part of application.

And the overall message of let's bring you to Gen V and do full prevention, none of our competitors does full prevention at this point.

And that's, I think -- and again, people hardly miss that because they take benchmarks on bits and pieces of their technology capabilities.

But to do first-time prevention, that's really, really unique to us.

Our next question is coming from John DiFucci of Jefferies.

This is Julian Serafini on for John.

So big-picture question, I guess, for Gil.

You talked about multi-vector attacks, and I'm thinking about the endpoint, in particular.

And I know some of your competitors are pushing more into the endpoint.

I know Check Point offers the SandBlast solution on endpoint.

But realistically, it means that Check Point hasn't been considered a large endpoint player.

I guess, how do you consider that market being, a market that can't give you more, something that will give you more in the future?

Or how do you think about it?

Very good question.

And I apologize, by the way, for the noise.

It started an amazing hail here, which is very untypical for a hail.

(inaudible).

So I think, first, we do have excellent endpoint suite that we can put on customer networks.

And I think it's very integrated.

It has all the capabilities and especially on the development.

The basic features of an endpoint, like antivirus and so on, we have an excellent package and much better than our direct competitors in the network security space, and we have the best AV engines and so on.

But -- and on the advance capabilities, we really have very, very unique capabilities on that.

But at the end, the real big story, I think this is very, very good for the security story and the architecture, but I don't think that most customers would replace their existing endpoint suite from -- and many of the other endpoint vendors that are out there.

I think that the endpoint business -- again, I think that the impact we can have, we are (inaudible) in Check Point.

All the network security companies can have on the endpoint is very, very limited.

It's very hard to replace a full endpoint suite.

And what we can do is augment that with the advanced technologies.

And there, I think we have a lot to offer.

From our advanced SandBlast Agent and the advanced capabilities to the browser extension that we have, which is very again unique to us, a browser extension that checks all the download that you agree when you're in your browser.

Our next question is coming from Walter Pritchard of Citi.

Question for Gil.

Just on sales and marketing.

I'm wondering if you think from a multi-year perspective, given the industry remains pretty competitive, do you expect to have increased sales in marketing as a percentage of revenues as we go out, not necessarily this year, but in out-years?

It just seems like the industry has kind of not let up in its spending.

I'm wondering if you have to respond in that way.

I think we will increase slightly the sales and marketing expense.

But I think overall, the issue is not just increasing the spend.

The issue is doing it smartly.

So now this year, yes, we're doing 2, 3x more marketing activities.

And when I'm talking about increasing marketing activities, it's really, really high percentages.

You can see that the impact on the financial is hard to spot.

Can we do more?

Yes.

Will we do more?

Probably yes.

But if we will do more, I also expect revenues to come in return to that.

Great.

And then, Tal, you referenced the mixed shift in gross margins.

Can you talk about the mix shift in product and especially address what you're seeing on the virtual series, which is all software?

Yes.

No.

What I meant is that you see our gross margins slightly moved up.

And I will say, the gross margin can move up 1% or move down 1%, it depends on the product mix.

So this quarter, when you look at the product, product was lower and the growth came from subscription.

Subscription came in at higher margins, hence, the improvement on the margin.

And on the (inaudible), it's the software.

So you understand that anything that has to do with virtual, software, subscription, mobile, anything that is the software in the gross margin is like 98% margin, right?

The cost is actually in the R&D expenses.

Our next question is coming from Brad Zelnick of Credit Suisse.

It's actually Will Lunn on behalf of Brad.

I wanted to ask, when we think about segmentation of the business in terms of low, medium and high end.

So I guess, branch, SMB, enterprise and then data center.

It would be really interesting to know where you're seeing the most momentum and perhaps any color you can share around discounting trends within those buckets.

I think there is every quarter, and there's no direct pattern.

Right now, we're seeing strength in the low end, in the midsized and in the super high end.

Where I see softness, it's actually in the sort of the large products but not the super high end.

The super high end, we've seen that.

In the cloud space, we see a big trend.

We've seen very nice growth from the cloud sales, the infrastructure cloud sales, and that's a trend that continues now for more than a year.

Just to give you guys some insight on the noise you're hearing, this is golf ball-sized hail, something that doesn't happen in Tel Aviv.

Very, very rarely I think is the way to look at it.

So we apologize for the sound, but proceed with the questions.

Our next question is coming from Keith Weiss of Morgan Stanley.

And Gil, congratulations on that Israel Prize.

That's definitely a big honor and really a testament to what you guys at Check Point have done in the overall security industry.

My question was kind of along the lines of that, the investment dent.

With the changes that are going on with the sales organization, we did see sales and marketing expense up like 11% this quarter.

Should we expect that investment to continue?

Or do sort of the new leaders have to come into place and sort of get their efforts into place before you sort of hire on kind of additional kind of resources under them?

Sorry, with the noise here, it's very hard for me to hear.

Can you repeat the last part of the question?

The general gist of the question was with changes in sales leadership going on in the Americas, do you have to pause the investment in the Americas while you're making those changes?

Or does the investment continue with the new leadership?

No.

We actually need to upscale what we're doing.

And the new leader that was promoted, she's been a Check Point veteran for many years.

So she knows our market, she knows our people.

She knows -- I mean she's an internal promotion, which is always better, and I think she will push all the people inside to ramp up to where they need to be.

Got it.

And then on the cloud side of the equation.

In the press release, you talked a lot about CloudGuard and the sort of ability to protect those cloud-based environments.

Could you talk a little bit about sort of virtual firewalls and sort of the adoption you're seeing of those virtual firewalls in cloud-based environments?

Has that started to pick up?

Is it becoming a more significant part of your business today?

It is a small part, but it is -- we did ramp up significantly, almost double this quarter.

Take into consideration that this is also sold today mostly in annuity models.

So in the past, people purchased software firewall.

It's a onetime forever price basically.

Now with the cloud, which is actually also moving into annuity pricing, which in the long run is good.

In the short run, you see again a shift from the product revenue to the subscription revenue.

Our next question is coming from Fatima Boolani of UBS.

Tal, a question for you and just want to better understand the sequential decline in subscription revenue.

I can appreciate some of the changes that are happening on the product side, which you've characterized kind of being dehydrated.

But subscription revenues being down sequentially, it's the first time I'm seeing that since you started breaking it out.

So can you help me better understand what the driver would be for that to happen?

And what the trajectory for growth for the subscription line looks like for the rest of the year?

Sure.

So when we talked about the guidance in the beginning of the year, I said we expect it to go back to the levels of 13%, 14%, 15%.

So it's actually quite expected.

Think that the process of subscription is built in layers.

So when we move from NGFW to NGTP, then it created an uplift, an acceleration.

It started as a bundle, which the way we do it, we put it as a bundle and then the next thing is to renew, and you enjoy a very nice growth.

Then we move add solutions.

So we move to advanced threat protection, we added NGTP and then we added NGTX.

Again, the first year of the bundling, this creates a pressure on the product.

And then a year after, you see a very nice, accelerated growth.

This year, Infinity is that next phase.

Meaning, now we see people, but the Infinity is not bundled.

Remember that.

Actually, Infinity, you need to introduce to the market.

The more Infinity transactions you will have, you will see more pressure on the product.

But 3, 4 quarters later, you will see it well.

Second quarter later, you will start to see revenue recognition and again, acceleration in the subscription line.

So the more you succeed the first year, you see a pressure on the product.

In the second year, you start to see an acceleration on the subscription.

And that's what we were relating to, and this is also part of the effect of the Infinity, the cycle of closing the deals.

And once you close this, you will see it over time in the revenue.

That's helpful.

And maybe a question for Gil.

I know you spent sort of a lot of times you're talking through the sales cycle elongation associated with Infinity and some of the go-to-market changes you're making to empower your salespeople around Infinity.

Can you speak to the efforts you have around your partner community and your channel community and how -- and what sort of investments you're going in, in that distribution avenue to help with Infinity and improving the sales velocity there?

And that's it from me.

First, our partners are very, very important in the cycle.

And when I talk about our CPX 360 conference, for example, that's the perfect example.

This is the first time we are doing that conference.

It's a joint conference for all of our sales force, all our partners and our customers, which is why the conference has become very, very big.

And for the first time, by the way -- that's why, by the way, they moved from the second quarter to the first quarter because we combined that with our salespeople meeting.

And I think overall, we need to do more and work more with our partners to explore that opportunity to get to them.

By the way, still 100% of our business is fulfilled and is done jointly with a partner.

So our business remains 100% joint business with the partners.

And absolutely, yes, we need to invest more in doing it with partners.

There are some, by the way, large nice opportunities around it, like working better with large systems integrators to give the customer a fully integrated approach for security.

And in many cases, the system integrator, not just the local resellers can help us.

But first (inaudible), and there's plenty of opportunities with our channels and resellers to all levels that can promote with them.

Our next question is coming from Matt Hedberg of RBC Capital Markets.

Maybe a first one.

With your exposure to Europe, I'm curious with GDPR going live like next month, is that impacting sales at all?

I mean, are you seeing a positive benefit there?

Is it coming up in customer conversations?

Just sort of curious of any color there.

I think GDPR definitely raises the conversation, and it's a good way to speak with some executive in the marketplace.

So far, I haven't seen a big impact on sales.

But again, it's a way to bring people to activities to do seminars to educate people.

People are very interested.

We have some material and white papers and so on about GDPR and what you should do in terms of security to comply to that.

And by the way, I think that we have plenty of technologies in our product and technology that can help customers invest, things in the spaces of data leak prevention and the document security and encryption and so on that are really, really helpful for customers if they need to comply to GDPR regulation.

That's great.

And then -- and maybe a quick one.

Somebody asked earlier about the potential for an increased buyback.

I'm curious with -- I believe you have about $4 billion cash, thoughts on incremental M&A at this point.

Obviously, you're spending more on sales and marketing, but curious on sort of R&D and/or M&A.

How do you kind of think about that?

We continue to look for attractive companies for acquisition.

I think we really look for unique breakthrough technology.

And it's not that easy to find, especially because I'm very, very confident in the -- about the technology and innovation that comes from within Check Point so far.

But there are some promising ideas and promising things outside, and I think we're trying to look at them with more intensity.

Our next question is coming from Karl Keirstead of Deutsche Bank.

Tal, I apologize if this has been asked.

I dropped for a second.

But on the last earnings call, you mentioned that you had a high level target to hit $1 billion in operating cash flow in 2018.

Just in light of the investment that you and Gil have discussed, are you still comfortable with that or no?

Yes.

In general -- I don't expect changes there, right?

So in general, anything can happen.

But when you look at it, it's pretty much in line with what we've seen in the operating income with a delay of a quarter, right, in general, taking into account the operating cash flow.

So we should be -- I think it can be slightly more or slightly less.

But yes, I feel comfortable at this point in time with around $1 billion.

Yes.

All right, guys.

That's -- that was our last question.

Thanks for working through the adversity with the hail with us today, and we look forward to speaking to all of you throughout the quarter, and we'll look for your calls coming in later today.

Thanks, and have a great day.

Ladies and gentlemen, thank you for your participation.

This concludes today's conference.

You may disconnect your lines at this time, and have a wonderful day.