Check Point Software Technologies Ltd (CHKP) 2018 Q4 法說會逐字稿

Greetings, and welcome to Check Point Software Fourth Quarter Full Year 2018 Financial Results Call.

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

I would now like to turn the conference over to your host, Kip E. Meintzer, Head of Global Investor Relations.

Thank you.

You may begin.

Thank you.

I'd like to thank all of you for joining us today to discuss Check Point's 2018 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 6. If you'd like to reach us after the call, please contact Investor Relations by e-mail at kip@checkpoint.com.

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 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 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, demand for our solutions, our expectations regarding the acquisitions of Dome9 and ForceNock, our business and financial outlook, including our guidance for Q1 and full year 2019.

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 January 30, 2019, which is available on our website, and other factors and risks included in those discussed in Check Point's annual report on Form 20F for the year ended December 31, 2017, 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 the reconciliation of such results, as well as the reasons for our presentation of non-GAAP information.

Now I would like 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 joining us on the call today.

I'm pleased to begin the review of the fourth quarter and the full year.

Revenues for the fourth quarter increased by 4% year-over-year to $526 million, towards the high end of our guidance.

And our non-GAAP EPS grew by 6% to $1.68, exceeding the high end of our guidance.

Before I proceed further into the numbers, let me remind you that our GAAP financial results include stock-based compensation charges, amortization of acquired intangible assets and acquisition-related expenses as well as the related tax effects.

Keep in mind that as applicable, non-GAAP information is presented excluding these items.

Now let's take a look at the financial highlights for the quarter.

Product and security subscription revenues was $307 million.

Our security subscription revenues continue to be strong, with 13% growth year-over-year, reaching $147 million this quarter.

Our software update and maintenance revenues increased to $218 million, representing 4% growth year-over-year.

The growth in our subscription revenues is driven by our advanced threat protection solution, the SandBlast, and our CloudGuard business.

During the quarter, we closed an impressive Infinity deal, with variety -- in variety of industries, including large information and data corporation and a retail company.

Deferred revenues as of December 31, 2018, reached $1,338,000,000, a growth of $151 million or 13% over December last year.

The deferred revenue growth is a reflection of the strength in our security subscription and support.

Revenue distribution by geography for the quarter was as follows: 45% of revenues came from the Americas; 39% of revenues came from Europe; the remaining 16% came from Asia Pacific, Japan, Middle East and Africa regions.

From a deal size perspective, this quarter, we had 102 customers with transactions over $1 million.

The total value of this transaction continue to increase.

Non-GAAP operating margin for the quarter was 53%, similar to the previous quarter, Q3.

Effective non-GAAP tax rate for this quarter was 11%.

This quarter, similar to last year, and as expected, our tax expenses included tax benefits from lapse of statute of limitation on certain provisions.

GAAP net income for the quarter -- for the fourth quarter of 2018 was $238 million, a $1.51 per diluted share, an increase of 4% from the fourth quarter of last year.

Non-GAAP net income for the quarter was $264 million or $1.68 per diluted share, an increase of 6% from the fourth quarter of 2017.

EPS exceeded the top end of our guidance.

Our cash balances were $4,039,000,000 as of year-end.

Operating cash flow was $249 million, similar to last year.

Collections from customer continued to be very strong.

This quarter, part of Dome9 acquisition payment is presented in operating cash flow according to the accounting rule.

Excluding this payment, the operating cash flow increased by 7%.

During the quarter, we purchased 2.8 million shares for $305 million at an average price of $111 per share.

Now let's take a look into our 2018 full year highlights.

Revenues for the year was $1,916,000,000, an increase of 3% from last year.

During the year, subscription continued to be the main growth driver.

The subscription revenues include majority of our new products and services, including our cloud and mobile solutions.

Bear in mind that cloud license is sold as annual subscription, while before we sold it as a perpetual license.

On the Infinity front, in the transaction that's closed during the year, we have seen an increase of 1/10 to 1/100 of percentage in the annual run rate.

This is great news.

The product portion reduced since the allocation to subscription is quite large.

This is due to the inclusion of all of our available services in the Infinity offering.

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

We continue to invest in our sales force and marketing efforts.

The full effect for both, the headcount and the compensation increase, will be reflected next year.

Also, 2019 will include the full effects of both of our acquisitions, Dome9 and ForceNock.

Hence, we expect our margins to be around 50%.

Effective non-GAAP tax rate for the year was 16%.

For 2019, we expect the tax rate for the year to be approximately 14%, around 18%, 19% in Q1 to Q3 and around 0 in Q4, as the last statute of limitation expected to occur in the fourth quarter as we've seen in the last few years.

GAAP net income for the year was $821 million or $5.15 per diluted share.

GAAP earning per share grew by 7%.

Non-GAAP net income for the year was $911 million or $5.71 per diluted share, reflecting an increase of 7% as well.

For the year, cash flow from operation increased by 4%, reaching $1,130,000,000 compared to $1,090,000,000 in '17.

During the year, the company repurchased approximately 10.3 million shares at a total cost of about $1,104,000,000 at an average price of $107.

For now, I will turn the call over to Gil for his comments and such.

Thank you, Tal, and hello, everyone, joining us today.

As you've seen in the fourth quarter, our business results were better than our projection.

Key driver to our success and growth this past quarter were our advanced security technologies, primarily our cloud and advanced threat prevention solutions.

These are subscription-based solutions and their continued success is shifting our business into more of an annuity business model.

During the year, we made progress on all our key areas of focus.

We introduced and pushed our fifth-generation security platform, Infinity, and made headway in providing it as a platform to customers.

We introduced a new family of cloud security product, the CloudGuard family.

It includes CloudGuard IaaS to secure public and private cloud and CloudGuard SaaS, which secures software as a service application and prevents malware or account hijacking from penetrating into these environments.

The newest addition to our cloud security family is the Dome9 acquisition, which was completed in the fourth quarter and focuses on managing and enforcing security across multi-cloud, public cloud environment.

It's a great product to get control over public cloud security implementation and fits very well to our cloud security offering.

We started 2019 with our CPX 360 sales partners and customers conference.

CPX 360 is held in 3 different locations.

The first one was held for our Asia-based customers and partners in Bangkok last week and was a great success.

We had a higher participation than ever before.

We received excellent feedback on the content and we used it to launch some new initiatives and products for 2019.

We've talked about the future of cyber security and our gen 6 Infinity platform that is under development.

Today's IT environment secure primary endpoints and networks and rely on highly sophisticated software, which is operated in relatively few points on the network.

Future IT environments will include much more workloads that needs to be secured.

In the cloud, we will have new types of assets, virtual servers, containers, web and cloud services and computerless computing such as cloud function.

Future IT environment will also need to secure many IoT devices that are starting to surround us, not to mention the mobile devices, which I believe are the #1 threat to our privacy and security nowadays.

Overall, I believe with the amount of assets we will need to secure will increase by tenfold in the coming 3 to 5 years.

But it's more that just the amount of assets we will need to secure.

If we take an attack method, let's take a malicious file, for example.

A malicious file can come from multiple attack vectors: e-mail, file download, file server, mobile messaging app, et cetera.

I can easily count 9 different attack vectors in which a file can be delivered.

Multiply that by the number of technologies that are needed to present the different types of malware that can be embedded in a single file, at least 8 for that matter, you'll get the complexity of 72 different combination that needs to be resolved and secured.

Take it to the next level and move from the entire spectrum of security, as you'll easily get 16 attack vectors in 26 technologies, over 400 combination that needs to be addressed.

There's no security expert in the world that can manage this complexity and get it resolved and secure.

There is no other way to secure this entire environment without simplifying and consolidating security.

Our future Infinity platform is built to support and provide our vast collection of security technologies to all these attack vectors and to support millions of assets.

It will rely on cloud architecture that is self-updatable and provide vast amount of services to many nano security agents that will reside everywhere security is needed and at every performance level.

While it may sound futuristic, we are making progress quite rapidly.

This month, we introduced some new platforms that apply some of these values into our daily business.

We introduced 2 new appliance sales that are optimized for threat prevention performance and double the performance we provide in their class.

These are matched by one of the more interesting products we launched called Maestro.

Maestro is designed to provide cloud grade scalability into network security.

It provide organization with almost unlimited network security elasticity by changing network security appliance in a very simple way and turning them into a giant security powerhouse with scalability, resiliency and performance that is hard to match.

In the coming weeks, we will continue our series of CPX 360 conferences in the U.S. and Europe.

We expect to see record level of attendance in both conferences.

But beyond technology, in 2018, we've made some significant changes to our sales force, focusing on new customer acquisition and going to the C level of our current and prospect customers.

From my meeting with CIOs and CISOs, Chief Information Security Officer, I can say that there is a great level of interest in our approach and platform.

We are making great progress, but have a way to go to see the full impact of these changes.

Last year, we appointed a new Chief Customer Officer.

We started 2019 with a new Head of Global Partners and a new head for our Asia sales organization.

So clearly, we continue to invest in our sales organization.

Our technology and sales efforts are designed with one thing in mind: to be at the forefront of cyber security.

Our research team is one of the strongest in the world.

And last year, we delivered some major headline.

In the fourth quarter, our researchers identified the major shift of known and unknown campaign towards the use of fileless techniques.

Our new set of SandBlast technologies were able to uncover and prevent these campaigns despite their highly evasive nature.

This included the GandCrab ransomware, Ursnif banking Trojan and the WannaMine cryptojacker.

Furthermore, our researchers uncovered several critical vulnerabilities in popular application and services, including the ability to penetrate drones through the DJI cloud control infrastructure.

And for those of you who play Fortnite or have kids that do, we protected you by finding a vulnerability in the Fortnite cloud that allowed account hijacking.

Both DJI and Fortnite were fixed.

We often talk about the use of automated tool in AI and cyber security.

We utilized some of these techniques.

And our engines were able to find 50 different vulnerabilities in an Adobe Reader in 50 days, highlighting the vulnerability of every piece of software and infrastructure around us.

Overall, it looks like the activity in cyberspace isn't slowing down and we'll have plenty of work ahead of us.

So this is a good time to talk about the 2019 projection.

We expect to see a gradual change in our business model as we continue to move more revenues into subscriptions.

And you know my regular caveat, it's hard to predict the future.

Results may vary.

There are many factors that can help us achieve better results and many other factors that can cause worse results.

With that in mind, let me share the projection for next year.

Revenues for the full year of 2019 are expected to be between $1,940,000,000 up to $2,040,000,000.

That's 1-9-4-0 to 2-0-4-0.

Non-GAAP EPS for the full year is expected to be between $5.85 to $6.25.

Again, $5.85 to $6.25.

GAAP EPS for the full year is expected to be approximately $0.70 less.

For the first quarter, revenues are expected to be in the range of $460 million to $480 million and EPS in the range of $1.28 to $1.34.

GAAP EPS is expected to be approximately $0.16 less.

Thank you for all of your support, and we'll be happy to open the lines for your insightful questions.

(Operator Instructions) Our first question is from Michael Turits with Raymond James.

Two questions.

One, this looks like a very good quarter, a better quarter for products on a sequential basis, even with the move to subscription.

So I was wondering if you could talk about what drove that.

And then second question is margins into next year, if you could -- as you have them going down a bit again, maybe you can walk through what's flowing through from this year and what the incremental investments are into next year.

So I think for the quarter, we had, I think, a good quarter.

I think things were as we expected pretty much.

We did win deals from -- of all types -- on all types of customers, new customers, renewal customers.

Again, we continued to see the shift toward subscription, but we still have a decent number of product sale.

I think this quarter for the first time, you'll notice that our subscription revenues surpassed the product revenues, which I think is a good sign for us and reflect what we're saying for a long time.

As for the second time about margins for next year.

I think, first, our margins are very high and they've always been very high.

So I'm always saying for since we went public almost 23 years ago, but my focus is not managing the margin, but managing the effectiveness of the business, managing the growth and managing the technology.

Last year, I think our headcount grew by about 11%.

So as we move into 2019, that will be reflected in additional expenses.

We only saw some of the expenses in 2018, and we will see all of it in 2019.

We still expect to hire more people in 2019.

We still expect to invest more in sales and marketing.

Even if I take this first quarter when we have the 3 CPX 360 conferences, we have more attendance than last year and that means a bigger expense, which is a huge project, is one example of things that we are doing.

And I think Tal can speak more about the numbers, but I think the spending is going up and we are investing more in our operations.

And I will just add that, remember, there's also the acquisition of Dome, almost had no effect in 2019 -- '18 because we purchased it toward the end of the year and it's going to have the full year effect in the expenses next year, and the smaller acquisition of ForceNock as well.

So all in all, I will say the effect of the acquisition, the majority of the increase of the headcount of last year, which you'll see the full effect of it next year, and you will already see it in Q1.

I mean, the reduction to those margins, you will see in Q1 already.

If I -- you talked about adding more headcount.

But if you really think about what needs to be more effective for you in going to market and being competitive, is it just more salespeople?

Or do you need a different approach, something that would make you, let's say, more aggressive from a sales and marketing perspective?

I think we will -- I think we are doing fine, but I think we need both.

I think it's -- the #1, I believe, is quality and not quantity.

I always believed in that.

So I think that's a -- so we are working on how we address C level, about how we address the new customers, that's the majority of the investment.

But in terms of coverage, yes, we can have more coverage and we can cover more customers, more areas, more accounts.

And I think one last thing, which is very, very important, is working with partners.

We are investing in working better with our partners.

If you remember our legacy, our business was with 100% reliance on partners.

These days, I think we've taken more ownership of directing our business, and we've done an amazing job investing in the last few years, but I think it's time to reinvest in our partners and do both and get a bigger leverage for our business.

I think that's why we hired the new Head of Global Partners at the beginning of this year, and I think we intend to invest more also in partnerships.

Our next question is from Brad Zelnick with Crédit Suisse.

I've got a question for Gil and then a follow-up for Tal.

Gil, from earlier meetings with CISOs and other tech executives, how are you thinking about the overall spending environment for security into 2019?

Because some are calling for a period of digestion.

And as you think about it, how does the environment factor into the 2019 outlook that you've provided?

I think that can definitely happen.

On one hand, everybody's talking about cyber as a top priority and about they want to invest more in cyber.

On the other hand, IT budgets are under pressure.

And every IT department and every purchasing agent is looking to reduce cost with every vendor, nobody is just throwing money.

They are all renegotiating their contracts and reducing their -- trying to reduce their cost, which is very understandable.

I believe the key to our growth will come not from people throwing money and not from a hyper growth in the market, and the market is growing, but it's not growing in crazy rates right now.

I think it will come from really penetrating more projects at the higher level and consolidating many things in the customer environment.

That's a challenging task.

But that's, I think, the future of what we need to invest in because that will be the real solution for security.

It's not just a matter of business model.

It's not just a matter of practicality.

It's a matter of what can really make the world secure.

I described in my -- in what I've said earlier, the complexity of security.

There's no other way to obtain security than to consolidate and move into new types of platform.

And we are now building the platform that I believe can really provide cyber security for the next generation.

Excellent.

And Tal, now that we've got another quarter under your belt selling Infinity, can you talk a bit about the impact to the model?

I mean, you mentioned it in your caveat at full year guidance to say that you're assuming some portion of the business is taking Infinity.

But can you maybe quantify for us what those assumptions are?

And is it fair to say that if Infinity adoption is greater than expected, it can be a headwind to revenue?

How should we think about that?

Yes.

The second statement is correct.

We assumed likely to continue in this space, which we see more Infinity deals and we will see more in the future, but it takes time and we didn't expect anything over-excessive here.

So we took that into account in the model.

But the range is exactly relating to items like that, for example.

Since when you think about it, on the one hand, the run rate is growing, which means from a business perspective, it's great deals.

If you have a run rate of $100,000 with the customer and it's growing up to $150,000 or to $300,000, depends on the customer and what was the opening point, which means, in all cases, it's a great business deal because we're increasing the run rate and it's great for the customer because it's getting much more secure.

When we talk about the allocation, the allocation is, by definition, a lot of it is going into the subscription, not all of it, but a lot of it, because we offer everything that Check Point can offer and majority of those are in the subscription line.

Hence, the discount rate for the product is increasing, right?

So because it's more dollars are going into the services, less dollars going into the products.

And that's what I alluded to when I said it's putting pressure on the product growth, but you can increase the subscription line.

So we took that as a -- at the midpoint is what we expect.

And if it will be faster, then it will have a greater effect on the product.

And if it will be slower, it will have slightly less.

So that's the general comment about Infinity.

But from business perspective, which is what we are interested about in our run rate for the future, but it looks like really good transactions, good deals for the customers and for us.

Our next question is from Shaul Eyal with Oppenheimer & Co.

Gil, still sticking on the Infinity topic.

So I think it's been right now about 18 months, probably less than maybe 2 years or so, feedback from the channel is quite encouraging.

I don't know whether it's too early to gauge a quantitative view.

But from a qualitative perspective, can you talk to us about the incremental revenue opportunity you might be seeing from customers migrating to this platform, even on the expense of the product?

I think what we've seen is between, I think, what Tal says, between 50% to almost...

10%.

Between -- to doubling or even tripling the annual spend that a customer does with us once we shift to Infinity.

And I think some of it come by getting more security, some of it come by consolidating and getting things that other people have done, not necessarily our direct competitors, but some -- the broad security space that we are consolidating into security.

So I think that's kind of what we'll see.

I think Infinity has 2 major effects right now.

One is the immediate one with which we provide customers more security.

We get more stickiness into the environment.

And we get more revenues for that for the -- I mean, in an annuity basis, so it's not affecting the individual quarter.

But in the foreseeable future, it increases our run rate by, again, big percentages, which is the immediate effect.

The second effect is the mind share.

When we are struggling with just -- like every vendor, by the way.

When we are offering a product-by-product approach, it's a very different level than we speak to when you speak about Infinity.

Infinity is where the CIO, in some cases, even the CEOs, CIOs, CISOs, they're listening, they are open to that approach.

Sometimes, we are going on that approach, in which case we gain the immediate deal.

Sometimes, they're not ready to really roll their entire infrastructure into that program, but that opens the door to many, many other projects that we have.

So I think from what I get from the field and the customers and the channel with Infinity, it's both a very good tool to sell but it's also a great door opener because we have something at a much higher level that differentiates us, that takes us to the next level of discussion beyond just we have with better products or with better functions and features.

So I think that's the 2 roles that Infinity plays in right now.

Got it.

And maybe a follow-up for you, Gil, or for Tal.

So I think we understand the investment Check Point has been pursuing throughout fiscal 2018 and I think the ones that you will be pursuing during 2019.

And my question is, aside from the recent hiring and future hiring, has anything changed in terms of channel compensation?

And I know, Gil, you've addressed the need to reinvest within the segment.

But anything changed on that front on channel compensation?

And maybe even for Tal on the gross margins.

Should we expect gross margins to remain stable for the most part throughout 2019?

So from a channel perspective, not much have changed last year.

This year, we are investing in a new channel program.

And I think the full effects of that will actually be -- we are -- the main economical specs so that if there will be any, I don't know yet, will be in 2020.

So we're starting with some new approaches to channels.

And it's more about working together, managing the activities and so on, less about touching the economics.

I think this program will result in also some changes to the economics in 2020.

I hope for the good but, I mean, time will tell.

About gross margins, Tal, I don't know if you want to say anything.

No.

Gross margin pretty much is also -- it remains in the same area.

I will say the same for operating margin and gross margin.

Taking everything into account, it can be 1% higher, 1% lower.

This is acceptable ranges.

But I don't expect any material change there.

Our next question is from Andrew Nowinski with Piper Jaffray.

I was -- you had very strong growth in billing this quarter despite the average duration remaining essentially unchanged.

And I know Q4 is typically a strong renewal period.

So I was wondering if you could talk about the impacts from renewals this quarter and if that contributed to the strong growth in billings.

Yes.

So I think part of it is a reflection because, as you said, it's not about long-term contracts because long term is presented separately.

And you can see the deferred revenues also grew very healthy, also in the short-term deferred revenues.

If I recall, it was 12%, so it's pretty strong.

And the reason is that the Q4 versus Q4, so it's not an effect of the sequential period.

We just had a strong quarter.

We have it for 2, 3 quarters.

The main reason is that if we see growth in the subscription, the majority of that number were all deferred revenues or substantially all is supporting -- and subscription, and both of them are showing a healthy growth.

That's great.

And then last quarter, you launched the new 23900 appliance.

I was just wondering if you could give us any color on the initial traction of that appliance that you saw in Q4 and heading into 2019.

You remember, this is a high-end unit, so it's great.

It started great.

But remember, we're not talking about thousands or hundreds.

It's the top end of the appliances.

So it's doing what we expected.

It's doing nice.

And I don't know if you notice, this year, we started the year.

Last week, we launched 2 new appliance model, more in the midrange, the 6500 and the 6800.

They are providing like double the performance in their class compared to other models.

Then I think this is going to be something quite exciting this year.

And I also mentioned Maestro that is the real -- I think this can be a big change in the marketplace by being able to chain many, many of these to achieve almost unlimited performance and cloud-like operation with resiliency, scalability, flexibility that's never seen before.

So I think we started the year with some new and exciting products that will hopefully have some traction in the marketplace.

Our next question is from Gabriela Borges with Goldman Sachs.

Gil, I wanted to follow up on your earlier commentary on overall demand trends.

Just want to make sure I understood this based on your comments.

Is your base case assumption that there is more pressure this year in overall security spending relative to last year?

And any color that you can give on specific geographies or verticals, like government or carrier for the go forward would also be really helpful.

I don't think that there's any major change, not according to what I see.

I'm just saying these are the general trends in security, specifically '19 in general.

People are very open to investing in cyber.

On the same time, when you have a contract that's being renewed, any purchasing department is trying to reduce the cost and negotiate it down.

That's one hand.

The other hand is that companies, they're really, really confused about what to do with cyber.

They want to do more.

They really don't know what will be effective and what's the first priority.

Sometimes, they are addressing the right target.

Sometimes, they don't.

I think we've been saying I think that was a big thing that we talked about in 2018.

We're facing now the fifth generation of cyber attacks.

Most of your organization, most of the organizations in the world are still defending only against the third generation of cyber attack.

This is a huge gap that needs to be breached.

And by the way, that's the reason why there's so many attacks happen and everything is so vulnerable.

If we are protecting against Gen III and a Gen V attack comes, it's no wonder that it's a successful attack.

But still, the reason customers are not jumping is not just because they are uninformed or conservative in their approach, which happens, too.

It's also because if they will now start to address all the hundreds of combination of things they need to secure, they get really, really confused and they don't know what to do.

And I think it will take time until our approach will catch up and until we'll be able to show and demonstrate how effective is this approach.

And believe me, it's extremely effective.

If you look at real-world cases, if we take the Infinity approach and the consolidation approach, we can get much, much higher level of security and reduce just -- in real world example, with what a security team of 6 people can do with Infinity that a security team of 30 people with 7 or 8 different products cannot achieve.

So this is huge effectiveness and savings that companies can achieve.

That's helpful.

And the follow-up, if I may, is on the longer-term way to think about margins and the model for EBIT.

Is it right to think about the 50% for this year as being a little bit of a floor?

Or is there a scenario where you would consider maybe dipping below 50% for a short period of time based on how you're thinking about the longer-term lifetime value of the customers?

I think it's a generic -- I'll give you a generic answer because we don't plan like 5 years ahead of margin, as you can see.

And as Gil said, we don't really manage the margins.

What we're trying to manage is the growth and the profitability of the company, which we've been doing very well.

The effect on the -- I don't expect it to be materially different.

Just, for example, you find something very interesting, new markets, you want to grow, you want to expand, you have a new investment in the cloud, you find it in another company and so on, things can change.

But in general, I think it's a reasonable area.

Our next question is from John DiFucci with Jefferies.

I have a question for Gil and a follow-up for Tal.

So Gil, you mentioned the new 6500 and 6800 appliances and some of the -- that technology looks really interesting.

I'm just curious, are these entirely new appliances?

Or do they improve upon existing offerings in the enterprise category?

I guess I'm trying to figure out, will they displace existing products or are they just like sort of a new thing supplementing your portfolio?

I think they will displace existing models.

I think they are kind of priced and positioned right in the middle between several different models.

And I think because it provides much better price performance and the expansion of almost everything, we will replace some models that we have -- currently have.

Okay, great.

And Tal, margins remain very strong, which is nice to see.

And we've been expecting sales and marketing expense to sort of ramp up and we're not really seeing that.

Is this partly because of ASC 606 or IFRS 15 and the deferral of commissions on subscriptions?

Because as you pointed out, you're seeing more of a mix shift to subscriptions and even some initial maintenance.

Or is there something more operational happening here?

You're just not...

Yes.

I think because you're looking at the percentage and that can be confusing because, remember, the Q4, because the revenues are so high, even in percentage, you see a reduction.

But if you look at the actual expense, you see it increased.

And that's why I paid you -- made sure you pay attention to it because in Q1, you will see the same expense and more.

That's why your margin will drop already in Q1.

So the answer is we're investing a lot more and you will see.

That's why it's already headcount that we have.

They're already here.

It's just that in Q4, in percentage, you don't feel it because the revenues are much higher.

Okay.

So just to make sure I understand that.

Because you've said similar things in several previous quarters, but are we just seeing, like in this quarter, just seeing the revenue being better than perhaps the margin expectation would have been with a little bit lower revenue and you sort of outperformed, so we're just seeing that go to the bottom line?

Is that kind of what we're seeing here?

Sure.

For sure.

If your revenues are higher than you expected, then obviously it helps your margin.

That's one thing.

And also remember that this year, we got some headwind, tailwind?

Tailwinds.

Tailwinds from the dollar versus the other currencies.

So the dollar got stronger against the other currencies.

It helped the EPS this year.

And next year, I don't see it happening.

But -- so take that also into account.

Our next question is from Saket Kalia with Barclays.

Tal, maybe for you.

Gil had mentioned that new product, Maestro, and that architecture that enables some elasticity in network security.

Maybe specifically in Maestro, Tal, can you talk about how that solution is priced?

Is that a product type of solution?

Or is that subscription?

And what are the metrics that a customer is going to pay for when they adopt the Maestro type of solution?

So the idea is that the Maestro is enabling you to link many different -- a large number of appliances.

It's also an appliance, so it's priced the same.

It's an appliance that you sell.

And you can buy a 6500 or you can buy the 6800 and just link it to Maestro, which is the orchestrator, and then you can have 1 to 52 appliances.

So it enables you to scale very quickly and to get much more performance.

In terms of the pricing, you can see it very clearly in our pricing in website.

Do you recall the specific price of Maestro?

Mainly offering it right now with -- like selling a cluster of 3 or more appliances, which is actually priced quite competitively.

So it's not -- no big premium to that because we want to -- people to deploy that technology.

And also, the effect actually can be quite high because, today, most customers buy security in pairs for high availability.

So they buy 2, they pay for 2, but they get the performance of 1. If they buy Maestro, they'll actually buy 2 or buy 3 but will get 3x the performance.

They'll get 2x the performance from the same cluster.

So it works in load-balancing and not just in high availability mode, which is a great benefit as you scale up.

And it should make us very competitive in the appliance area as well.

That's great.

That's great.

Maybe just quick follow-up for you, Gil.

The question was asked before about channel compensation.

I'm curious about whether anything with the sales force in terms of compensation here can change in 2019.

Obviously, we've got a new Chief Customer Officer and other kind of senior changes in the organization.

And we're trying to sell higher into our customer base into the C level.

How are you changing the comp model, if at all, in '19 to sort of encourage that sort of behavior?

I would say the short answer is every year, we make small tweaks.

Our plan for 2019 is not revolutionary compared to 2019 (sic) [2018].

It's using the same principle.

If I want -- if you want me to expand on that, I would say that what I'm actually trying to change is not the comp model in terms of more commissions and so on but actually shifting some of the compensation to bonus which will be based on activity.

So we will reward more of the employees on going to new customers and objectives like that because I think the change needs to start.

I mean, when you get to the results, that's not the problem.

When you achieved the results, you're happy and everything is fine.

I think where we need to drive change in general with our salespeople, with the channel is the behavior at the beginning of the process and to encourage them to do the right thing, which is going to C level, going to new customers and so on.

Our next question is from Sterling Auty with JPMorgan.

I know the 2 acquisitions are small, but I didn't catch, what are you including in the guidance in terms of revenue contribution from those deals?

You didn't hear because we didn't say, but I will say because we can't split it now, right, it's all consolidated together with our products, with the CloudGuard.

We're selling it to our entire field.

So when we acquired them, there was very minimal revenues.

And for next year, I hope it will be very large, together with our sales force and our CloudGuard and our CloudGuard SaaS and IaaS.

So it's all going to be combined.

That's the Dome9.

The second one, the ForceNock is really small technological approach...

With no revenues.

That should be part -- with no revenues now, and it will be part of the sixth generation platform that we are developing.

I think it will be an essential component there to secure a web application and API and things that are in the cloud.

Great.

And then one follow-up.

Have you made any changes or do you plan any changes on pricing for support and the Software Blades here for 2019?

Nothing material.

For what?

For the...

For the Software Blades.

We might make some changes with the 2 new appliances to the pricing model.

You have to have Software Blade subscription.

We always do a few changes.

We see what we can do that is benefiting to the customers and to us.

So we say, in general, I don't see anything dramatic at this point of time.

Bear in mind that the biggest change in the subscription is the fact that it's -- all of Check Point products are included in Infinity.

So when you think about Infinity, the ultimate package of Software Blades and appliances, right?

So it's all together and that change already been made in the last year.

Our next question is from Phil Winslow with Wells Fargo.

Just wanted to focus back in on just the pricing environment.

I wonder if you could provide just some more detail on what you saw this year, especially as, obviously, you just changed the dynamic with Infinity.

Just sort of what you're seeing out there on the market will be great.

I would say, in general, the market was and remain very competitive.

You have the players that play only on price and that's always a challenge.

Where you win is where you provide the value.

Value is Infinity.

Value is the quality of your solutions.

Value is your catch rates and so on.

So some players are fighting only on price.

Some players are fighting through a very extensive marketing.

Some players fight through technology, in quality of the solution.

We believe this is us.

We invest much more in sales and marketing to combat those others.

And in general, we say I didn't see anything changing except for the fact the market was and remain very competitive.

Got it.

Then also just from a vertical perspective, anything stand out in terms of your strength or weakness?

And as you look in 2019, some other thing, others would call out, for example, a service provider market as being a little slower.

Just maybe sort of color you could provide on the vertical side will be great.

On the vertical side?

Nothing major.

I think we are -- remains strong in financials.

All the other vectors we're seeing all over.

All the different verticals are there.

There are verticals that we can invest more and we will invest more like telcos and others, that I think they present -- I mean, we're selling a lot of these to them, but still where the potential is much, much higher.

So I think there's nothing major here at this point.

And I know there is a -- that there was -- I don't know if you still -- there is but there was a lot of discussion about governments and the government in the U.S. regarding budgets.

Remember, we are not dependent on the government, so that's an advantage, I think, for Check Point.

So we don't see anything dramatic in any of our verticals in general.

And our last question will be from Dan Ives with Wedbush Securities.

Just a question on cloud.

Are conversations starting to change with customers in terms of the move to cloud on the security side?

And the obviously, you guys have been more acquisitive.

Feels like that you've gone more on the offense.

So maybe you can just walk through, from a high level, how conversations are changing in terms of the move to cloud and where Check Point sits there.

So the answer is yes.

Every customer is interested in cloud.

That comes up in every conversation.

I think it's still early stages.

But last year, we saw healthy revenues, healthy sales, and I think growth of more than 100% in cloud.

So we're clearly growing there and that's starting to be a real business for us, not anymore very small numbers.

The numbers are starting to be meaningful.

Hopefully, 2019, it will be slightly more.

Ladies and gentlemen, we have reached the end of our question-and-answer session.

I would like to turn the call back over to management for closing remarks.

Thank you for joining us today.

We look forward to speaking to you after the call.

If you'd like a callback, please just send me an e-mail and we'll follow up with you.

And other than that, we'll see you at the conferences over the next quarter.

Thank you, and have a great day, guys.

Bye-bye.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time, and thank you for your participation.