Check Point Software Technologies Ltd (CHKP) 2019 Q1 法說會逐字稿

Greetings, and welcome to the Check Point Software First Quarter 2019 Conference Call.

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

It is now my pleasure to introduce your host, Kip Meintzer, Head of Global Investor Relations for Check Point Software.

Please go ahead, sir.

Thank you.

I'd like to thank all of you for joining us today to discuss Check Point's first quarter 2019 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 April 26.

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 this presentation, Check Point representatives may make certain forward-looking statements.

These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 include, but are not limited to, statements related to Check Point's expectations regarding business, financial performance and customers; the introduction of new products, programs and the success of those products and programs; the environment or security threats and trends in the market; our strategy and focus areas; demand for our solutions; our business and financial outlook, including our guidance for Q2 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 release issued on April 18, 2019, which is available on our website, and other factors and risks, including those discussed in Check Point's annual report on Form 20-F for the year ending 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 a reconciliation of such results as well as the reasons for our representation of the non-GAAP information.

Now I'd 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 first quarter.

Revenues for the quarter increased by 4% year-over-year to $472 million, and our non-GAAP EPS grew by 2% to $1.32, both slightly above the mid 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 $257 million.

Our subscription revenues continue to be strong with 13% growth year-over-year, reaching $144 million.

Our software update and maintenance revenues increased to $215 million, representing 4% growth year-over-year.

The growth in our subscription revenues is driven by our advanced solutions, mainly cloud, SandBlast Zero day threat prevention and mobile.

Infinity consolidated solution also started to flow into the revenues and show nice trends.

During the quarter, we had Infinity deals in variety of industries, including finance, manufacturing, software and defense with a significant portion coming from new customers.

We continue to see an increase in customer's annual run rate in Infinity deal, ranging from tens to hundreds of percentage increase, which is a great result.

From an accounting perspective, a small portion of the deal is recognized as product revenues, while majority of the deals is recognized as recurring revenues over the life of the contracts.

Majority is subscription and the remainder as support, update and maintenance.

Deferred revenues as of March 31, 2019, reached $1.312 billion, a growth of $146 million or 13% over March 31, 2018.

Revenue distribution by geography for the quarter was as follows: 45% of revenues came from Americas; 44% of revenues came from Europe, Middle East and Africa region; and the remaining 11% came from Asia Pacific.

Please note, since the beginning of 2019, Middle East and Africa are part of Europe region while before it was part of Asia Pacific region.

The revenue distribution by geography for Q1 last year after the reclassification would have been 47% of revenues from Americas, no change; 42% of revenues came from Europe, Middle East and Africa region after the reclass; and the remaining 11% came from Asia Pacific.

Those were the numbers for Q1 last year after the reclass.

From a deal size perspective, this quarter, we had 47 customers with transactions over $1 million compared to 44 in Q1 2018.

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

Non-GAAP operating margin for the quarter was 50%, as we planned.

We continued to invest in our sales force and marketing in order to execute our strategy, which revolves around prevention, management and consolidation of security.

In addition, this quarter includes the full effect of our recent acquisitions, both of Dome9 and ForceNock.

Our financial income for the quarter reached $19 million.

The increase is in line with the higher interest rate levels in the U.S. Financial income expected to be around $20 million, $21 million a quarter in the remainder of the year.

Effective non-GAAP tax rate for this quarter was 19%, as planned again.

Please note, in the fourth quarter, we expect the tax rate to be around 0 as the lapse of statute of limitation expected to occur by year-end.

GAAP net income for the first quarter of 2019 was $180 million or $1.15 per diluted share.

Non-GAAP net income was $205 million or $1.32 per diluted share, an increase of 2% from the first quarter of 2018 and $0.01 above the midpoint of our guidance.

Our cash balance as of March 31 were $4.2 billion compared to $4 billion in December 31, 2018.

Operating cash flow was $379 million, which includes part of ForceNock acquisition payment of $2 million.

Collections continue to be very strong.

During Q1 last year, we had $45 million tax refund.

Excluding this item, our operating cash flow increased by 2%.

During the quarter, we purchased 2.7 million shares for $305 million at an average price of $115 a share.

This quarter, we implemented a new accounting standard, ASC 842, which changed the recording of long-term operating leases in the financials.

Accordingly, we recorded assets of $30 million against liabilities, reflecting the value of these leases.

There's no significant impact on the income statement.

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

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

I would like to begin today with a review of the highlight of what we witnessed during the first quarter and provide a little more color on our business beyond the numbers that Tal just shared.

Our first quarter was a big quarter in terms of events.

We hosted our global Check Point Experience 360 conferences for employees, partners and customers around the world.

This year's CPX 360 conferences set a new record for the number of participants and generated a high level of audience interest and enthusiasm.

We had 30% more customers and almost 40% more partners attending the conference.

During CPX, we focused on our Gen V and upcoming Gen VI security architecture.

As we've highlighted before, the vast majority of enterprises have security to address third-generation cyberattacks, which means that we are almost 10 years behind the current rates; and only 3% believe that we are protected against fifth-generation attacks, which we are facing every day.

This [stuff] brings to light how vulnerable the world infrastructure is today and the potential for catastrophic damage if enterprises don't take measures to protect themselves against the current generation of attacks.

During the last number of years, we've seen an almost 3x increase in the number of vulnerabilities discovered in the world's technology infrastructure, operating systems, hardware, software, servers, critical infrastructure, et cetera.

Last year, there were over 16,000 reported vulnerabilities, with 800 in mobile operating systems alone.

The fifth generation of attacks are usually multi-vector attacks.

It can be an app that you download on your mobile that steals your cloud credential and from there gets into your internal data of the company.

It can be a file that arrived through e-mail and creates a chain attack like that.

Dynamic payloads are used in most attack tools today and can potentially turn every computer into an asset in the global cyber warfare.

The escalation in Gen V attacks means that we have a huge challenge ahead of us and an even larger opportunity.

While a big part of our marketplace still relies on the refresh of Gen II and Gen III customer environment, the real challenge and opportunity is in upgrading these customers to Gen V cyber protection and consolidating their security infrastructure.

During our CPX conferences, we've also revealed more details on the sixth generation of our cybersecurity solution, one that we believe will revolutionize how security systems work.

We believe it will evolve how people think about security architecture by changing the way they are constructed.

Today, security architectures rely on monolithic system that includes the delivery and the security technology in one big piece of software or hardware.

These consume a lot of resources and are slow to adapt to the evolving [phrase].

We intend to separate the security service and delivery by turning it into a cloud-based architecture that enables nano agent to bring the latest security innovation to every cloud app or IoT device and, of course, to all the other elements of our network.

This nano security agent, combined with a smart cloud security brain, will be the essential pieces of our Gen VI security architecture.

During the first quarter, we introduced a number of new technologies beginning with the new 6000 appliance series with improved price performance and optimized for Gen V advanced threat prevention.

We also delivered Maestro, a revolutionized security solution for scalable network that delivers performance that couldn't be achieved before at the fraction of [today] cost.

Maestro achieved these results by changing -- by chaining multiple security appliances together to deliver an almost linear improvement in performance.

This hyperscale technology provides cloud-grade resiliency and elasticity.

Unlike other solutions that are only targeting the super high end of the market, Maestro can start at the medium business budget and scale all the way up to the performance needed by the largest networks in the world.

Therefore, it opens a much broader marketplace, the previous super high-end solution, and enable cloud-grade elasticity around the marketplace.

During the quarter, Check Point CloudGuard Dome9 received the Security Innovation of the Year award at the latest Cloud Awards.

The recognition was for its comprehensive software platform for public cloud security and compliance orchestration.

In addition, Check Point SandBlast Agent earned NSS Labs 'recommended' rating in 2019 Advanced Endpoint Protection Test.

Sandblast Agent detected 100% of HTTP and email threat and 100% of malware using sophisticated evasion technique while providing zero false positive.

You may have also noticed the recent Homeland Security announcement regarding remote access vulnerabilities in almost all of our competitors' products.

As we've spoken about in the past, our biggest differentiator is the level of security we provide to our customers and our focus on prevention and protection.

Needless to say, the Check Point product was highlighted as a product that is secure and doesn't suffer from any of those vulnerabilities.

On the sales front, we've been putting a lot of emphasis on winning new customers, consolidating the security for infrastructure with a focus on cloud security and our Gen V Infinity total solution.

Infinity deals also generated nice results this quarter with new customers ranging from a few hundred users to over 10,000 users and from the construction industry to high-tech company.

We've seen some good signs of success in increasing new customer wins, especially in Europe.

Once we are able to achieve a similar type of uplift in the U.S. new customer wins, I believe we will see an acceleration in our growth rate.

In the U.S., we continue to make several improvements to our sales force.

We brought senior leadership to our channel organization.

We launched Check Point Engage, a new global channel program focused on joint sales activities between our partners and our people.

The program featured Check PointS, a reward program that measures sales activities at the individual level and rewards them points for their Check Point sales activities.

The program will be rolled out gradually starting this month, and we intend to utilize the program as the basis for our partner business model next year.

Overall, looking at our global sales structure, we've seen areas with great improvements, and we've seen areas where improvement still needs to be realized.

I believe that the opportunity ahead of us is much bigger than what we've seen before.

While I'm happy with the progress we are making in some areas, our growth rate should be higher than what we've seen.

This is a good time to address our projections for the second quarter.

You know my regular caveat, projecting future results is very challenging.

There is always a high level of uncertainty.

Results can be better or worse than our projection.

With that in mind, for the second quarter, revenues are expected to be in the range of $474 million to $500 million and non-GAAP EPS in the range of $1.32 to $1.40.

GAAP EPS is expected to be approximately $0.17 lower than that.

Thank you for your time, and I'd like to open the call for your questions.

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

One for Gil, one for Tal.

Gil, you mentioned Gen VI as cloud-delivered security.

Does that mean that you're going to try to approach things from, in terms of cloud-delivered securities -- the security from the cloud, similar to the way some of your competitors that are doing to secure web gateway from the cloud are doing, is that a direct competition?

I think we will have some of these components, but the answer is no.

The short answer is no.

I think our architecture will be a little bit different.

I don't believe in routing all your traffic to the cloud.

We slow down things.

Companies don't want to do it for their internal traffic, and it's not going to work in a fully scalable to bring security everywhere.

What our architecture is based on is having this global threat cloud and that queries can be made to understand if any transaction, a new connection, an app transaction or anything basically that we want to test is something that should work or shouldn't work.

It does a lot of effects, I mean from the standpoint that we can apply all security technologies to every query like that, and it brings a lot of control back to the security professional as opposed to the people who are in charge of the -- or no, the people [as opposed] to the manufacturers of the equipment or the developers of application software.

But it will have very positive effects on the overall performance, on the fact that data doesn't have to leave the enterprise.

Data will remain in its point, and that's the whole concept of what we call the nano agents.

And, Tal, your -- glad that your product is being impacted by the shift to subscription and to Infinity, but you had been having moderating declines in product revenue.

Those worsened this quarter, got steeper again.

Should we expect that you could go to either flat or positive products this -- growth in one of the quarters this year?

I'm not projecting right now.

We gave the guidance for the full year and you don't split between the line.

The total guidance are taking that into account.

And there will be a more than expected quicker shift into Infinity.

While it's great news it's going to affect bigger on the product.

But in general, it -- the product, I don't expect it at that short time to become on a positive note.

I expect the subscription to continue and grow.

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

I've got one for Gil and one for Tal as well.

Gil, it sounds like there's a lot of exciting things happening in terms of new products and we're hearing more optimism from the channel.

And as you said in your comments, there's still improvement to come as you're making changes, especially here in the Americas.

So what indicators are you looking at that give you the confidence to continue investing?

And how long do you think it will take for Check Point to return to market growth rates?

I think the indicators that I'm looking at mainly are the level of activities, how many new customers are we meeting, how many C-level people are we meeting.

Of course, we look at other measures like the pipeline and things like that.

But for me, the most important one is our own execution.

How many of these activities are we making?

And by the way, how many are the partner, our channel partners, are making?

And by the way, that's why we designed the new channel program, the Engage program, to work on that; instead of measuring the results after the fact, measuring every week and every day how many of these activities, marketing, sales and so on are we conducting.

My belief from everything I know that we have more capacity.

We can do more, and we can generate much more results that way.

Great.

And, Tal, I know Gil gave us the updated guidance on Q2, but we didn't hear any update as it relates to the full year.

Is it fair to assume that your full year guidance that you gave us last quarter still stands?

Yes.

Definitely.

The full year guidance stands.

It's -- I gave you a bit more color this quarter just to make sure that you see which lines it's coming from.

You can see our sales and marketing are higher than some of your models, while the financial income is higher so you can balance between the 2. But the results, the annual results, are expected to be the same.

Our next question is coming from Shaul Eyal from Oppenheimer.

I actually want to start with a question that hasn't been asked in some time now regarding the competitive arena.

Gil, do you believe that Check Point is actually regaining market share?

I think it depends how you look at it.

I think overall, our growth numbers should be higher and we are aiming at that.

I think with Infinity, we're actually capturing new land.

We're getting to new spaces, and we are taking full architectures of new customers.

The number of these customers right now is still small but is growing nicely, and the first quarter was a great indicator for that.

The dollar volumes on that can be significant, and we are seeing a mix of customers.

Some are small and small here in hundreds of thousands of dollars, which is kind of large in our (inaudible) scape, and some are multimillion-dollar contracts, which are a good event.

And the main value for that, that we actually give these customers the full security to combat the cybersecurity challenges that they've got and, believe me, this is needed.

Understood.

And maybe one for Tal.

So good work on deals greater than $1 million.

My question is were there any Dome9- and Infinity-related transactions?

Part of this, I think you had 40 -- I think 44, 47 this quarter, if I'm not mistaken.

Yes, we had 47.

I would say no, but some Infinity deals are part of those deals, and in it, you have also have the cloud solutions, of course.

So the answer is yes on Infinity and Infinity includes also Dome9.

Are there stand-alone Dome9 in this category?

I'm not sure.

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

I just have one on the pricing front.

Just curious what you're seeing in -- just on price environment out there starting the year.

And then also you're focusing and obviously specifically on Infinity, too.

Any sort of color there?

Obviously, the pricing and packaging there is very different, but any sort of color and feedback you're getting from customers on Infinity and its go-to-market price would be great.

Yes.

I can talk a bit about the Infinity deals that we sell.

So like we spoke before, I'm following each one to see the trends there, and I continue to see what we talked about in the previous quarter.

We see deals, like Gil said, from customers that have 100 users to customers that have more than 10,000 users, which is very nice to see that it's fitting small companies and very large companies.

We see in terms of the customers, a significant portion is new customers, which is actually something which is nice to see.

This quarter, it was even more than the previous quarter.

So we see it helping us more and more with new customers penetration.

Again, small number but a nice phenomena, which hopefully will be a consistent trend, and we do see that the run rates are increasing significantly.

So it's the customer that maybe had only firewall before.

Then once they buy Infinity, the increase in the run rate can be hundreds of percentage.

And if it's the customer that's already have NGTX and maybe cloud and the increase is only tens of percentage, but it's still increasing the run rate, increasing the satisfaction, which is very nice to see.

So that's the color.

Revenue is very, very slow.

Revenue recognition actually, remember the deals that we see on average is probably 3-year deals.

You don't see it in the balance sheet.

Most of them you don't even see in the deferred revenues because it's annually invoiced.

So it's a backlog that you don't see as part of the deferred revenues.

And you see it in the revenue, the subscription and the support over the life of the contract.

Majority of this is subscription unlike a typical regular customer that doesn't buy Infinity, that's why we will see a strong shift over there over time and smaller portion going to the product.

And the product is recognized only once the customer is actually pulling the product.

Got it.

Great.

And then also just a follow-up for Gil on Dome9.

You gave some commentary earlier on that.

Now that you've owned that for a couple of quarters there now, what's the feedback been from customers and prospects?

And how do you think about Dome9 competitively out there?

I think the feedback is actually very positive.

We're seeing nice activity in the field.

It's in the very early stages because the field now needs to learn the whole new Dome9.

We've made a drastic shift in the go-to-market from a small sales force of a handful of people to a large sales force with hundreds of people that basically starts from 0 and need to learn the whole concept.

But when I'm looking at, again, the activities in the field, what I sampled, I saw a lot of activity around Dome9.

In CPX, we got a lot of positive feedback to Dome9.

So I think it will take us some time to ramp up, but the feedback so far is terrific.

Our next question is coming from Fatima Boolani from UBS.

I have one for Gil and one for Tal.

Gil, maybe a bigger picture question for you.

Just with regards to the overall demand environment for perimeter-based controls and perimeter-based security.

I think year in year out, we continue to hear sort of mixed messages on where customers are actually focusing their cybersecurity energies in dollars as it relates to product investments.

I wanted to get your take on how the customers' view on network security and perimeter-based security like firewall solution is evolving.

And then I have a follow-up for Tal.

I think we're seeing a good level of demand.

I think -- I mean I think people are still refreshing their infrastructure.

Some companies are still building new data centers.

So I think the challenge is not there.

I mean the demand is healthy.

I think the challenge is how do we elevate the level of security and not how we compete on the things that were relevant for 10 years ago.

And it is a competitive marketplace, and that is a challenge.

But I think overall, there is a healthy demand.

I don't see that the challenge is there right now.

Fair enough.

And, Tal, maybe for you.

Just a quick housekeeping.

On the reclassification of the geographic revenue, was there any organizational change that prompted you to do that?

Or it was just sort of a mechanical thing?

And then a more specific question on your Blade subscription and maintenance revenues.

They did decline sequentially, so I did want to understand some of the drivers that would have those subscription and recurring revenue line items down sequentially.

And that's it for me.

Okay.

I'm not sure I understood the second part, but let's first take the first one.

So structurally, we changed.

Africa and Middle East is reporting through Europe now.

It's now called EMEA.

So expect -- if you remember 10 years ago, that's exactly how it was.

We moved this back to EMEA, so now it's called EMEA.

And we moved those percentage -- obviously, it's a smaller region, but it's moved to report into the Europe, Middle East and Africa structure versus APAC, Asia Pacific.

So as we changed it structurally, then we also reclassed the revenues and the P&L, of course.

And I think it's just internal managerial issues.

And mainly, if you look at the geography, especially we are in Israel and we're part of the Middle East, geographically, we're in Asia.

But in terms of proximity, we are much closer.

In the distance, we are 1/3 of the distance to Europe than we are to the headquarters in Asia.

So it's -- so I mean there's always these 2 balances.

Yes.

That makes sense.

And just to clarify the second question around the sequential decline in Blade subscription and maintenance and support revenue in the quarter, just wanted to understand some of the dynamics that would have those recurring revenue line items down sequentially, whether you can shed light on renewal rates or Blade subscription package renewal rates and any dynamics there.

Actually, not relating to renewal rates.

It's relating to the fact that even in the subscription line, accounting-wise, you have some Blades that are recognized like products.

The revenue recognition is like products.

Just one portion, but in Q4, you can see a tick up where there's more -- like you have more product revenues, you have more of those type of Blades, and then you can have an uptake in Q4 and then it's going back to regular rates in Q1.

So that's the generic -- or it has nothing to do with the renewals.

Renewals are pretty much consistent, even slight increase there in some quarters.

So in general, it's just some subscriptions that are recognized immediately.

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

You mentioned putting more emphasis on acquiring new customers.

I was wondering if you could expand on the changes you're making to the sales incentives for both direct sales and the channel and how they compare to the prior model.

I think it's mainly about activity management.

It's making sure that people go out and do these kinds of meetings.

It's a weekly measurement.

It's a weekly focus on kind of these things.

But, of course, some bonuses and some MBOs and so on in terms of getting to these activities.

But the key is around -- but the key is about being trained and actually going out and doing those meetings.

Okay.

Great.

That's helpful.

And also, I was wondering if you could give us a sense for how the pipeline is building around the Maestro products and the 6000 Series of appliances?

I think it's building up quite well.

I mean we've seen in Maestro a nice number of deals already in the first quarter, even voluntary revolutionary concept.

And I think -- I don't know if we have a specific pipeline for the 6000 Series because it's in line with the general core business that we do, but we're seeing that we get more and more into the marketplace.

People are enthusiastic about that.

We need to place them correctly in terms of the price performance and so on, and I think it's working okay.

And I would just add that we don't reveal the numbers obviously, but we see a nice transition.

It's been launched only 2 months ago, like in end of January, beginning of February.

And it's already, let's say, more than 10%, more than 20% transition, so it's quite well.

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

Just 2 questions.

First, why do you think your growth in Europe continues to outperform the Americas?

I think it's execution management and focus on the right thing.

I think it's also better alignment with the channel partner that I think works well in Europe.

And I think we continue to focus on executing on both areas because I think we have far more potential in both places.

Okay, very good.

And then with regard to billings, it was up about 3.4% off arguably an easier comp from last year, which looks like it may have been a bit below the market growth rate.

And I know you launched a number of new appliances over the last few quarters, including the 6500 and 6800.

So I'm wondering is that lower growth rate maybe simply due to the Infinity sales model?

Or is there another reason why your new appliances are not driving -- translating to better growth in billings?

So I think in related to that, I mean we don't talk about the billing, but you're right.

When you calculate the implied booking, you're around 4%.

Remember, some of the deals are off-balance, but in general, we said that Europe did well and America still needs to improve.

Our next question is coming from Gregg Moskowitz from Mizuho.

The first question is just on Infinity.

So for the customers where you are seeing a big uplift, in other words a 100% uplift or more, are those customers actually displacing third-party technologies?

Or is their deployment additive to what they previously had?

I think both.

I think they're displacing and they are also using technology that we didn't have before, which is most of the Gen V capability.

And by the way, remember, we've said that this quarter we've actually had a very nice contribution to Infinity from brand-new customers, in which case they basically displace their entire security infrastructure with a Check Point solution, which is great to see.

Okay.

And then a few months ago, you've brought on a new channel head and you did touch on some channel changes a little bit in your prepared remarks, but what changes should we expect to see over the course of 2019?

I think the main change -- there was actually 2 changes.

One is the day to day where we work with partners, and the other is the programs that need to support that.

So in terms of the program, I spoke about the Check Point Engage partner program.

Again, it is designed to work on the activity level.

Partners actually collect points for every activity that they do, meeting, conference and so on, and they can see every time in their team how are they scoring on their activity level and what level of attainment they've got to.

And this is driven -- I think this is kind of a way to encourage, to gamify and to support the day-to-day activity in the field, which is designed around the exact same thing.

If we go out together, if we teach together, if we go to customers, I believe that we will win a lot more.

Our next question is coming from Shebly Seyrafi from FBN Securities.

So I want to talk about the gross margin, which declined year-to-year by 0.4 percentage points year-over-year.

It looks like the product side declined more.

Is that correlated with the hiring of Frank Rauch as the new channel head?

What we're hearing from our channel checks that Israel is allowing North America with Frank leading it in the channel to make more pricing decisions on its own.

And I'm wondering if that's leading to more price aggression and, therefore, a decline in the product gross margin.

Really, I think if you look at the numbers, the total gross margins actually moved up.

I think it's more relating to the mix.

You're right that in general, price pressures for -- the last few years, there's price pressures.

I think it's the mix of the product, sometimes can shift it a few -- not even percentage, less than 1%, but just 1% up, 1% down.

It's nothing material change in the U.S. versus the other regions, and the same with policies.

I mean they can compete in effective way anywhere around the globe.

And I mean I'm glad we hear the feedback that people feel better about the changes and the authority that people have.

We're definitely trying to make that happen and to support the people in the field and make it easier for them.

The success of us will be determined not by the way we manage the gross margin at the end but the way we manage the top line.

So I'm -- so I mean that should be our focus and that is our hope.

Okay.

And you also stated that you're not happy with growth, and I think you elaborated with Americas' growth in particular.

What do you think are the key factors driving that disappointment?

Is it increased competition from Palo Alto and Fortinet?

What are the other factors?

I think the main factor is our own execution.

It's what we do in the go to market, the level of activities that we do, whether we address the right targets.

I think we have an amazing set of people in the field.

I think we have a very good set of customers.

But I think in many cases, for example, we are working with the same people on the same projects but what we need to do is to aim higher at the C level and sign new projects, and that's true for existing customers.

And, of course, the most important element for me is going to new customers.

Again, it's not easy to change the salesperson behavior on that.

With existing customer, you always find a place with the higher win rate because it's an existing customer with a bigger project, again, because they already have a large installed base.

So to get into this more challenging market of the greenfield of new customers, it's always more challenging.

But again, as I said, I think that we are adding the capacity.

I think our people do have that capacity, and it's a matter of training.

It's a matter of focus, it's a matter of activities, marketing and so on.

And I think we're -- we've made all the investments.

We have more people and we've done more marketing and we are doing far more of all of that.

So it's a matter of taking the time to see all of it happening.

And by the way, daily execution challenges that our people are dealing with, and I think they're dealing with these very well.

The last sampling that I did showed that there are real changes happening now.

As I said, in Europe, they already produced some good results in the first quarter, so that's very encouraging.

In the U.S., what I've seen so far is that we there are changes in the behavior and the activities, and the result still needs to come.

Okay.

Lastly, for me, ForceNock.

What is the expected revenue contribution this year?

None, really.

It's more a technology that we acquired as part of our Gen VI future products.

Our next question is coming from Walter Pritchard from Citi.

Just wanted to kind of trace back the narrative we've heard here in the last, say, 3 or 4 quarters.

And it felt like first half of last year was a little bit challenging, and then Q3, you sort of hit the inflection.

You talked about bookings improving, and Q4 was really strong coming through on the P&L.

It feels like this quarter took a little bit of a step back with the results being back in the midpoint of the guide.

Was there -- I'm curious if there is sort of like deal slippage or anything that was kind of seasonal factors that you might just expect in Q1?

Or is it truly just sort of execution, some of the things you talked about that just need to ramp up in the Americas?

I think, first, Q1 is always the seasonal weak quarter.

People try to finish the year with the biggest project through flushing the budget.

Customers have new budget.

Our people are basically starting from a very low level of pipeline.

During the year they build the pipeline, and again, it reaches the top in Q4 and again reaches the bottom or the beginning of the pipeline in Q1.

Also, remember that with all the marketing activities that we've talked about, the Check Point Experience conferences and so on, people are not at the office all the time.

People are building their plans for the year.

So Q1 is always the quarter that's challenging.

With that in mind, by the way, I think that we've done quite well in the first quarter.

I think as the year goes, we're building more and more into that.

And again, my expectation is that there is a lot of upside.

Whether it will come Q3, Q4 or 2020, I think time will tell.

So I think right now, we have a balanced expectation from ourselves, and I think there's a lot that we need to do that we need -- that we can and we should improve, but again, I'm not sure when it will come.

Great.

And then, Tal, just a quick clarification.

I didn't quite catch what you said on tax rate for Q4.

Q4, the GAAP tax rate was really low in '18.

You said near 0 in 4Q of this year?

Yes.

Just reminded you what we said in the annual that I said expect around 19% in Q1, Q2 and Q3, and in Q4, 0%.

And I just reiterated that, that was the guidance.

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

Just back to the go to market.

I had 2 more specific questions.

In terms of accelerating the new logo acquisition in the U.S., is there a plan to meaningfully accelerate sales rep hiring through year-end?

The fact that you're reaffirming I think the 50% operating margin guide for the full year suggests not, but I just want to ask.

And then secondly, as part of the channel changes, are you thinking about altering the economics or margins to the channel partners?

In terms of the hiring, we still have a plan to grow hiring in the field.

But again, right now the focus is not on more people but the productivity and the activities of the existing people.

I think that's where we will -- especially this year, that's where we will see the results and that's where we will see the most of the investment.

In terms of the channel partner economics, I think we want to align it with the new program.

I think we want to make it attractive to partner, especially to partners that invest in our activity around promoting our solutions.

And I think that's what we want to align it, not based on partner size but based on the actual investment and the activity that the partner is doing with us.

Our next question is coming from Dan Ives from Wedbush Securities.

My question is, obviously now that we're through 1Q, in terms of budgets -- that's pie you're going after in terms of cybersecurity, especially within the U.S., is its yield incrementally bigger than maybe we saw a year ago, just given cloud and some of the secular shifts?

Maybe you could just talk about that in terms of what the overall pie that you're going after this year versus maybe years past.

I think customers do have a lot of focus on the cloud.

On the other end of the cloud, we don't always figure out exactly what we want to spend on security, on other things.

It's a new field.

And many customers, by the way, are not -- don't have any run rate or don't have any specific plans for what the spend on security should be in the cloud.

But again, since we're starting from a small base, that shouldn't be the major factor for us at this point.

I think overall, what -- the message which we are giving to customers is you need to look at security at the top level.

You need to consolidate, and this way, you can achieve a much better ROI on your investment and mainly much better security to your enterprise.

And I think, for example, when you look at the Infinity program, we give the customers the full flexibility.

We give customers the full capabilities to implement security on-premise, on the cloud for end users, for mobile.

All of that is included so the customer doesn't have to worry whether it should be more on-prem or cloud or all the other factors that exist.

It comes all included because I think that's what customer needs.

Our next question is coming from John DiFucci from Jefferies.

Just wanted to go back for a quick question on sales and marketing.

You talked about it increasing, Tal, and it did, and Gil talked about focusing and winning new customers.

I'm just curious because your new business metrics or at least the way we calculate them actually moderated this quarter.

It's still better than it was prior to the last 2 quarters but sort of fell off a little bit from the last 2 quarters.

I'm just curious, is there -- because of the increased expense, are you -- do you have like more of unproductive salespeople at this point right now?

Or is it just the marketing spend that you just talked about relative to the new business signs in this quarter?

So I think the way I view it is we invested basically before the growth.

So we invest now, and we hope and expect and plan to see the growth coming later on.

Now we have 2 growth drivers when we look at the increase in our sales and marketing, which is where the main growth is.

One is the headcount.

We increased the headcount.

We talked about it and you mentioned it.

It's the majority of the growth is actually already from Q4.

It's that just you see the full effect in Q1.

That's one effect.

We continue, of course, to increase the headcount but not in the rate that we saw last year, that's one.

Second, we invest a lot in marketing.

We talked about it that when we start to invest in marketing, we see things starting to be according to plan.

We're going to increase our investment in marketing, and we do.

I'll give you 2 examples.

CPXs.

Historically, we used to have 3 global CPXs, which we had a huge increase in the presence there this year, over 30% increase.

So that's one example of CPXs in Q1 that is a significant increase in the expense there.

And we are doing local CPXs across the U.S., across Europe, across Asia, which also will increase the marketing expenses.

We increased presence in third-party events and so on.

So we do increase headcount and investment in marketing, in events, Check Point events or third-party events.

Okay, okay.

And I guess maybe just one other question, just sort of dust off an old one, and the question has to do with virtual firewalls in the public cloud.

Is there any -- has there been any change in adoption or even discussion?

I realize it's early, but some of the work survey that we've done says that customers plan, once they do start to move more aggressively, enterprises anyway, to the public cloud, they plan to use same vendors that they're using on-prem.

But customers change their mind all the time, right?

And I know there's different kinds of security that has assessed these in the cloud.

But I'm just curious, in your virtual firewall in your products, is there any change in demand or any change in discussion with your customers?

That's actually the part that's doing very well in the cloud.

I mean there are other parts in the cloud that are doing well, but our virtual firewall sales in the cloud are actually growing quite nicely.

Again, and there is much more potential there, but it's growing nicely.

We also have a nice growth rate for our SaaS solution, which is a completely new field in that regard.

So definitely, we have a lot -- and again, we have at least 3, 4 elements today just in the potential on the cloud, and I think it's going well overall.

I would just add, as you know, the cloud, when we look at the part in the subscription, it's actually becoming quite nice.

It's -- I can't give you the number right now, but I can tell you it's growing quite nice.

The growth is over 70% and it's growing and it's no longer -- and it's a few tens of millions a year probably going to be by the end of the year, so it's becoming quite significant there.

Our final question today is coming from Sterling Auty from JPMorgan.

Not to mention new customers and, Gil, you mentioned both augmentation and displacement.

I'm curious if there's any trends in terms of where you're seeing those win rates either by geography, by industry, by type of customer or even by usage.

So in terms of industry, it's all over.

I think I mentioned that we've seen basically everything, from construction to technology and everything in the middle, finance, manufacturing and so on.

Geography, Q1 was very strong in Europe, and I think we've talked about it a number of times.

Europe, at least this quarter, got it right, and is showing nice growth rate in new customers.

In the U.S., I've seen a nice change in activity levels, and I hope that, that will be translated to the actual results later on.

Okay.

And then one follow-up.

Did you guys make any changes to your pricing for either Software Blades or support for 2019?

Nothing, nothing -- we have tweaks in the pricing but nothing dramatic, I think.

We reached the end of our question-and-answer session.

I'd like to turn the floor back over to management for any further or closing comments.

Thank you, everyone, for joining us today.

We look forward to seeing you throughout the quarter.

If you do have any calls that you'd like to have with us, please send us an e-mail, and we'll try to get back to you as quickly as possible.

Thank you, and have a great day.

Bye-bye.

Thank you.

That does conclude today's teleconference.

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We thank you for your participation today.