Check Point Software Technologies Ltd (CHKP) 2019 Q2 法說會逐字稿

Greetings.

Welcome to Check Point Software Technologies second Quarter 2019 Earnings Call.

(Operator Instructions) Please note this conference is being recorded.

I will now 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 for Check Point Second 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 July 31.

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's 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 21 (sic) [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 business and financial outlook, including our guidance for Q3 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 July 24, 2019, which is available on our website; and other risk factors, which are included in Check Point's annual report on Form 20-F for the year ended December 31, 2018, which is on file with the Securities and Exchange Commission.

Check Point assumes no obligation to update information concerning its expectations or beliefs except as required by law.

In our press release, which has been posted on our website, we present GAAP and non-GAAP results along with a reconciliation of such results as well as the reasons for our presentation of non-GAAP information.

Now with that, I would like to turn the call over to Tal Payne for a review of the financial results.

Thank you, Kip.

Good morning, good afternoon to everyone joining us on the call today.

I'm pleased to begin the review of the second quarter.

Revenues for the quarter increased by 4% year-over-year to $488 million, and our non-GAAP EPS reached $1.38, 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, 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 were $270 million, a 5% increase year-over-year.

Our subscription revenues continue to be strong with 13% growth, reaching $149 million.

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 solutions, mainly SandBlast zero-day threat prevention, cloud and Infinity solutions.

Deferred revenues as of June 30, 2019 reached $1.286 billion, a growth of $128 million or 11% year-over-year.

Revenue distribution by geography for the quarter was as follows: 48% of revenues came from Americas; 40% of revenues that came from Europe, Middle East and Africa regions; and the remaining 12% came from Asia Pacific.

Since the beginning of the year, I'll remind you Middle East and Africa is -- are part of the Europe, Middle East and Africa region, while before it was part of Asia-Pacific, Middle East and Africa region.

The revenue distribution by geography for Q2 last year after the reclassification would have been 48% of the revenues from Americas; 41% of revenues from Europe, Middle East and Africa region; and the remaining 11% from Asia Pacific.

You can see all region had growth this quarter.

We continue to invite -- to invest in our sales force and marketing in order to execute our growth strategy.

As a result, non-GAAP operating margin for the quarter were 50%, same as previous quarter, Q1, and in line with our plans.

Our financial income this quarter reached $21 million.

Since the beginning of the year, we see a change in trends with a decrease in our portfolio yield as a result of lower interest rate expectations in the U.S. Hence, our financial income for the next quarter is expected to be around $20 million.

Effective non-GAAP tax rate for this quarter was 19%, similar to the first quarter of this year.

GAAP net income for the quarter was $186 million or $1.21 per diluted share.

Non-GAAP net income for the quarter was $211 million or $1.38 per diluted share, $0.02 above the midpoint of our guidance.

Our cash balances as of June 30, 2019 were $4.110 billion compared to $4.042 billion last year.

Our operating cash flow was $233 million compared to $213 million in the second quarter of 2018, a 9% increase year-over-year.

Collections from customers continues to be very strong.

Our operating cash flow includes tax and balance sheet hedged transactions, which can fluctuate from quarter-to-quarter.

Excluding these items, our operating cash flow increased by 4%.

During the quarter, we utilized the maximum quarterly buyback authorized and purchased 2.8 million shares for $325 million.

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

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

I'm pleased with our second quarter financial results.

We were just above the midpoint of our projection, but more importantly our execution and transformation continued to improve.

When I speak about transformation, I'm addressing the modernization of IT security environment.

Protecting the IT infrastructure against Gen V attacks and expanding the security coverage into the cloud mobility and IoT spaces.

In the second quarter, we made good progress around IT modernization.

Our cloud business has grown quite significantly, more than doubling in size this quarter.

We've introduced new solution for security and data analysis with the new logic cloud security solutions that takes information from cloud providers and process that into meaningful insights and actions.

In the first quarter, we introduced Maestro Solution, enabling cloud-like elasticity for customer security environment using our Hyperscale technology.

In the second quarter, Maestro demonstrated solid traction with many new projects.

We've continued to modernize and upgrade our core product line with the introduction of the midrange 6500 and 6800 security appliances in the first quarter, and continued in the second quarter with the introduction of the high-end 16000 and 26000 security appliances.

These security appliances are optimized for Gen V security operation.

Today, we're launching our highest-end model of the 26000 series that delivers performance of over 300 gigabits of pro firewall and 30 gigabits of Gen V security, a 50% increase from previous month.

The 16000 and 26000 security appliances are powered by our latest version of security software, R80.30, which featured many new and unique capabilities, including advance threat prevention for web downloaded content and the ability to process SSL security with higher levels of security and performance.

While our progress this quarter primarily reflects technology advancements for the cloud and network environment, we also made good progress with our execution in the field.

For example, in Asia-Pacific, we had a terrific quarter with double-digit growth and with substantial increased fields and marketing activities.

This success can be largely attributed to our new APAC leaders that joined us at the beginning of the year.

In the U.S., we saw quite healthy trends this quarter.

Product growth in the U.S. resumed and the majority of regions demonstrated healthy growth rates.

We've also significantly increased our marketing activities.

In the first quarter, we had almost 10,000 participants at our 3 global CPX 360 conferences across Asia, America and Europe.

In the second quarter, we took the Check Point Experience program, luckily with 37 events in different cities around the world, tripling the number of participants to almost 11,000.

Our headquarter hosted many Chief Information Security officers, including 2 large events each attended by over 100 CISOs, including major global Fortune 100 companies.

Our research team continue to generate breakthrough findings regarding malware and vulnerabilities in mobile and cloud.

In the mobile space, we found a vulnerability in Xiaomi mobile devices that may affect over 100 million devices.

We also found malware named Agent Smith that actually affected hundreds of applications and over 25 million Android users.

Additionally, we discovered the vulnerability in Electronic Arts' Apex Legend game that could have affected over 300 million online users, another vulnerability that is the result of the security challenges associated with cloud infrastructure.

Our research team is exposing a lot of vulnerabilities, enabling customers and vendors to fix them and stay out of trouble.

However, there are many other cases where enterprises don't secure themselves that well and the quality of security does matter.

To make things worse, in addition to the cost of business operation, technology, confidence and reputation that are part of being breached, companies are now being fined pretty hefty amounts by regulators.

Just in the past few weeks, more than $1 billion in combined fines were given out to 3 companies that suffered major breaches.

I believe that these cases could have been prevented in real time by using the right technology at the right place instead of being detected months after the damage has already occurred.

We have a big mission to educate the market that real-time prevention of cyber attacks is possible.

Our Infinity architecture is unique in that sense and can really make a difference.

So overall, I'm quite pleased with the progress we made in the second quarter.

We've produced good financial results and are on track to improve our operation and potentially generate even better results.

We continue to bolster our management team with the addition of new leadership for telco initiatives, and we intend to further augment our management team.

For the third quarter, my usual caveats continue to hold true, while predicting the future is always a challenge and there may be surprises, lower or higher.

With that in mind, I'd like to share the forecast for the third quarter.

Revenues are expected to be between $480 million to $500 million.

And non-GAAP earning per share expected to be between $1.36 to $1.44.

GAAP EPS is expected to be approximately $0.19 lower.

Now we are happy to take your insightful questions.

(Operator Instructions) Our first question comes from Brad Zelnick with Crédit Suisse.

My first one is for Gil, and I've got a follow-up for Tal.

Gil, it seems your commentary would suggest you're seeing evidence of improvement in sales execution.

But at the same time, it would also seem you're going -- growing a bit less than the overall market.

And I know you generally always tell us that the environment for cybersecurity spending remains robust.

But is there any reason to believe that if we look at it today or in Q2 versus Q1 or perhaps even a year ago that there has been a change in the spending backdrop in the category?

I don't know if there is any change in the overall spending.

I think the market is healthy now.

It's not the market that show signs of weaknesses.

There are many changes in the marketplace, and I think we are very well equipped to handle them from a technological perspective.

From a field perspective, we definitely need to go through some changes and we are going and we are investing in them.

And I think it shows.

We need -- we're going higher up in the organization to cover a broader spectrum of solutions.

We are selling more architectural approaches that require sometimes people that are trained differently, different sales cycles.

And I think we are making all the right investments.

You can see that in our sales and marketing spend.

But it's not just the spend, it's really the change in the education and the expertise that we are learning as we are bringing to market.

And what I'm saying that I'm optimistic I think it's because I'm seeing a lot of internal trends and activities in other management -- managerial measurements that I'm very, very focused on.

And I think that in the first half of this year and definitely in the second quarter, we saw some big internal changes.

Tal, just to follow up.

We're seeing Check Point step up in sales and marketing investment this year, which, given the market opportunity and your strong technology, seems a very rational move.

And I know you think more in dollars than percentages, but we've seen op margin tick down, even if slightly again this quarter.

Where should we expect it to inflect?

Or perhaps asked differently, how are these investments beginning to pay off versus your original plan heading into the year?

It's actually completely in line with our plan.

We said our margin will be this year around 49% to 50%.

So it's in line with our plans.

The main expense is the result of the continued increase in our headcount, continued increase in our marketing efforts.

We had many -- just as an example, we've provided the CPX.

Historically, we used to have 3 CPXs, now we have more than 40 -- we have 40 CPXs locally and globally.

So we are stepping on the gas when it came to -- when it comes to digital marketing, events marketing, and we start to see results and leads coming out of that.

So that's nice to see.

It takes longer than -- it's not 1 quarter investment and then the quarter after you see it.

It's over time, you should see the fruits of that translating into growth in the revenues.

Remember also that the trend of the move from product into subscription, from product into cloud, all of those cloud is also subscription for us, creating a lot of pressure on the product lines.

So at the end of the day, it should translate into our growth and the booking and in the revenue.

Our next question is from Michael Turits with Raymond James.

Quickly, Gil and Tal, do we -- given your comment on the full year guidance, is the preceding -- the prior full year guidance still in place?

Yes.

We're keeping the guidance.

Absolutely.

And then I wonder if you could be specific at all about some of the trends relative to the hiring and productivity in the sales force.

Where are you in terms of sales attrition, if we just say 2017, '18 and '19?

And where are you over that 3-year period in terms of the percentage of the sales force that pull [quota] productivity?

Just so we can get a sense of where we are in terms of the transition.

First (inaudible) it's hard to deduct from attrition, if it's good or bad.

I think attrition this year was lower than previous year, but depends where in the world, especially in the U.S. Some of it is very good.

Some of it actually -- and some of it we should do more attrition to handle cases where we need to improve.

But overall, that was no -- I meant the -- it's stable with some positive trends around that.

Okay.

And can you comment on the level of productivity?

In other words, what percentage of your sales force was at full productivity this year?

Where it might bottom?

And when you expect that to improve?

Actually remember that productivity is the result of a target provided.

We provide target that is not easy to reach.

I'll say productivity is probably similar to last year.

We see -- think about it the way we look at it is in order to see the end of the day, the booking, it starts with much earlier measurements, meaning -- and there we start to see a significant improvement.

It starts from meeting customers, meeting new customers all the way to building pipeline, moving it from pipeline to best case, from best case to commit and commit to bookings.

So that's the whole cycle.

And as the more complicated the transactions are and more holistic, then the longer it takes to close the deal.

So we're tracking those trends when it comes to meetings and book -- and pipeline before you get into the booking.

And there we start to see a nice improvement.

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

One for Gil, one for Tal.

Gil, the new Check Point's reward plan.

Any preliminary views?

How is it being viewed by the sales force, by the channel partners?

It is somewhat different from what some of your competitors are doing.

So just interested in understanding how it's being perceived out there?

Okay.

So I'll just recap what we launched last quarter, a new partner program called Engage.

And I think big part of the partner program is to base the rewards and all of that on activity level, it's done through an app.

Sales rep of the partners collect points by doing sales activities like marketing activities, like meeting with customers.

And through the point system, just like in airlines, we can reward and give more points to things that -- to activities that we feel are more important.

We'll -- I think that's quite a unique approach.

I haven't seen a lot of similar things in our marketplace.

We just started with that.

I can tell you that a nice percentage of our partners have already signed up and are using the app.

The top partners that we have, the real top tier of partners, more than 70% of the companies have signed up for the program and have started using the applications.

For the reps that are using the application, we're seeing activity level like we expected.

There's an issue when you launch something new like that, how do you set the reward target, how many points you give.

I mean how to estimate how many activities people are actually doing.

So we are seeing good activity level.

But it is just the beginning.

I think that we will have a lot of learning during the implementation of it because it is a novel approach that's -- at least we didn't try before.

And I think it is based on my belief that what we should focus on is on the activity.

It's not -- I mean if we'll do the right activities, if we will work together with our partners, then we will achieve the results together.

Got it, got it.

And one for Tal and maybe Gil, if you want to comment about it, and maybe also building on Brad and Michael's prior productivity-related questions.

So if you're bringing today -- if you're hiring a new sales rep, whether you brought him from a competitor or from another organization, how many quarters does it take until he or she are up and running and already providing revenues and hence commissions?

It really varies in the region of the world that the rep himself is bringing with him a set of connections that he's already involved in, but mainly in the type of the accounts.

So for a global account, it can take -- by the way, global account in general, the sales cycle can be multiple years.

For a smaller transaction, it can be 3 months.

So I would say that the average is around 6 months.

But it really -- a big -- but there is a big variance between the person, the type of account and the specific situation.

Like if somebody is stepping in into a region which is -- with healthy activity and everything works well, he picks up where the previous rep left.

And somebody is stepping in into a region when the rep -- when the previous rep wasn't doing a good job or when there wasn't a previous rep and they need to build everything from scratch, it will take longer.

So I don't think that was a clear answer, but I would say the average is somewhere north of 6 months.

Our next question is from Phil Winslow with Wells Fargo.

A question to Gil first just on the pricing environment.

If you think of it actually by tiers of customers, kind of telcos, large enterprise, midsized businesses.

Anything that you'd want to call out there from a price environment but also just from a demand perspective too, that'd be great.

I think the pricing environment and the whole environment remains competitive.

We haven't seen any major trends in the discounting environment.

And all of that remains quite stable, which is a good sign because for years it did change and I think it's -- now it's a little bit more stable.

Got it.

And then also if you think about just the brand environment sort of across the tiers, too.

Anything you've kind of highlight, especially now that we're 6 months through the year versus last year?

Any changes?

Not really.

I think that we have -- we have plenty of opportunity.

I think we're not missing opportunity.

I think a lot of it is up to us, to our execution.

For example, I mentioned that we brought last quarter a new leader for our global telco activities.

We brought him because we think that there is a much higher potential in telcos.

Even though we're doing quite well with some telcos, but I think the potential is really much higher.

But on the same time, I can say that there is a single sector that I would say is kind of saturated.

We have plenty of opportunities.

We have plenty of new customers to win, and we have plenty of existing customers where we can expand.

Our next question is from Shelby Seyrafi (sic) [Shebly Seyrafi] with FBN Securities.

So I saw that your billings growth was flat year-to-year.

It decelerated for the past 2 quarters.

Can you talk about the strength of your pipeline going forward?

It's actually not really relating to the pipeline.

The pipeline actually grew, especially when we talk about the product pipeline, which is very important to us as well.

It's really relating to the fact that in the first half of last year, we had a few very, very, very large transactions.

We talked about some of them.

You can see in Q2, we had 2 large transactions last year of tens of millions of dollars, which typically do not repeat.

It's a multiyear typically.

I always say that when it's a multiyear, you need to look at the year-over-year.

So when you look at the deferred revenue growth, year-over-year you see 11%.

And when you look at the implied booking, which again, we don't report booking because there can be a big variation between implied booking and booking in revenues because of the multiyear, which is the math you just did.

Multiyear has a huge effect on booking in our industry.

And last year, we had a few very large multiyear transaction, which obviously if they were signed in Q2 last year, now for 2 years we will not see.

So for example, if you had a $50 million or $60 million multiyear for 3 years, then you got last year a big pick and this year you will see minus $20 million basically from the potential.

So I would be cautious with looking at the implied booking.

Okay.

And just to be clear.

You didn't have those large transactions in the back half of last year.

So are you suggesting that, that headwind goes away in the back half of this year?

Actually, no.

Actually, to admit, I don't remember if we had in the back half.

I need to go and look into the numbers.

I know clearly about Q2 just because when we analyzed the numbers, we saw 2 very large transactions, there were tens of millions.

And obviously, it's created a lot of pressure on the booking this quarter naturally.

And of course, there is nothing bad in this transaction, it just skews the measurements year-over-year.

Okay.

Separately, it looks like, according to my math, your EMEA revenue growth decelerated to 2% roughly from 9% in Q1.

You did well on Asia, but what happened in Europe?

So actually Europe, we had the strongest run in Q1.

So sometimes you need to look at the year-to-date in order to see the full effect.

So you're right, Europe had a weaker quarter this quarter and they had a very strong quarter in the previous one.

So it's just log-based is what you're saying?

Yes.

It can happen.

Our next question is from Andrew Nowinski with Piper Jaffray.

I was just wondering if you could provide any color on how you think Check Point is positioned in security for cloud-based applications relative to Palo Alto's GlobalProtect cloud services and Zscaler?

I think it's -- many different ways.

I think first, this area is an area that we are addressing.

We are building the solution.

And I think we'll see some nice solutions there.

I think overall, when you look at the overall cloud service that we provide, we have a much more integrated and comprehensive approach to cloud security.

Again, what you asked about is one aspect of security, about remote access and some small branch offices, which is an area which is right now not the key focus of what we did.

But I think we are addressing it, and we'll have some nice solutions to that.

Overall, in the cloud, I think we're making great progress in cloud security management, in building the future cloud architecture.

We -- what we call Infinity 2.0 that will provide a very robust and comprehensive cloud security architecture, one that I think nobody has and nobody is actually building at the moment.

So I think that in general, on the overall cloud, we are positioned quite nicely.

Okay.

And then I just had a question on your product revenue growth or lack thereof.

You had some new product launches this quarter at the high end.

I know you said you're going through a big mix shift to subscriptions, but I'm just wondering when do you think product revenue will perhaps return to growth given some of the new appliances you launched?

It's a very good question.

I think first, this quarter, we had some positive trends around that.

So I'm -- internally, the metrics that I'm seeing is actually quite positive.

I did mention in my comments that in the U.S., for example, when we had the challenge with product growth, we did see a product growth this quarter, which is a very good sign.

I think overall, I would say that my main focus is looking at the business growth overall.

I think moving to subscription is a very positive thing.

And I think that part of the business is growing and is steady, and we're developing more and more methods to understand, to analyze, to understand the real impact of that.

Because sometimes it can be confusing like when you sign a multiyear deal, it looks like subscriptions are growing but they are not really growing.

So we've actually have good metrics for that, and they are positive this quarter.

From everything I have analyzed and I've seen, the trends are positive.

And hopefully, if we do the right thing, then also product growth will be stronger.

And when all of that comes together, we will have even better results.

I would just add, though, when you look at the longer term, our goal is to be -- to grow in products naturally.

And we focused on it, we have a lot of focus on that, and we saw, like you said, nice trend this quarter.

But I will say, when you look at the long-term trend, it's clear that the entire industry, and we cannot ignore it in the background, is putting a lot of pressure on product by choice and moving all of it into subscription-support type of revenues, which is recurring.

Infinity is recurring model, cloud is recurring, virtual licensing now is recurring revenues, also in subscription.

So all the new products are being launched as a subscription.

Now historically, you had the gateway as a product, and all the add-on security solutions as subscriptions.

Now even the product itself, which is the license for the firewall, if you want to call it that way, is based on the cloud or as a virtual in a private cloud is now being sold as subscription as well from 2 years ago.

So it's naturally putting a lot of pressure on that line that is called product.

And that's why our focus is on the total growth.

Our next question is from Dan Ives with Wedbush Securities.

So to the prior question when you think about cloud and dynamics going on there, do you continue to think you can get there organically?

Building out sales and obviously the product portfolio?

Or just maybe talk about M&A.

And obviously, you've done some M&A, but just maybe talk about that philosophically, how you're thinking about cloud organically versus M&A?

First, we've already made couple of acquisitions in the cloud.

So it's not a theoretical question.

We do think that we can use our technologies, and the Dome9 is an example, and the ForceNock that we made at the beginning of the year is another example.

I think overall, my belief that the strength of what we provide and not just the strength of what we provide, but the real value of security is not having a supermarket of few dozen products, each one addressing a slightly different niche of security from a different standpoint but sold from the same vendor.

The value of security is really combining it to one architecture.

And to this point, from what I see in the marketplace, we remain the only vendor that is actually implementing this approach.

Our competitors are not doing well in terms of providing unified architecture.

And the ones that are expanding are doing it with, again, many different fragmented solutions that don't really connect to each other and don't provide one high level of security for all the different needs.

And I think in the long run, I'm a big believer that best approach is a must and win-win.

And I think -- I mean so the combination of one -- what we had, the threat cloud, one set of technology that are very strong in security and multiple delivery methods, delivery on the cloud, delivery on the network within the cloud, delivery for a IaaS/SaaS cloud application and so on and so forth is critical.

That's the only way to deliver the security level that the world need.

And that's what we have today and that's what we are expanding and building.

Our next question is from Gregg Moskowitz with Mizuho Securities.

Gil, I didn't hear much commentary on Infinity in your prepared remarks this quarter.

And so just wondering how demand for Infinity is tracking relative to your expectations thus far?

So actually, we're doing fine with Infinity.

Revenue from Infinity were better this quarter basically because we've got deals, both from this quarter and previous quarters.

New deals we signed -- pretty much the same amount of deals that we signed in the first quarter, which is good.

Much more than of course what we've done in previous years when we just started.

And the overall pipeline in Infinity keeps growing and keeps growing in pretty big numbers.

So I think overall I'm pleased with what we're doing with Infinity, the potential is high, the execution actually is a nice thing to see that it scales from small businesses to medium businesses to few even very large deals.

So we have potential in all the different market segments.

So I think we're making good progress on that.

Okay.

And then you also talked about R80.30.

I know it has enhanced SSL inspection as well as threat extraction and some other capabilities.

Do you see R80.30 though as something that can drive incremental revenue per customer on a go-forward basis?

How are you thinking about that?

I think with every version that we [cover], there is a potential for more revenues, more customers, more potential with the new features that customer need.

On the same time, keep in mind -- and not that I'm saying there is any other option.

On the same time, when you come with a new version that means that the customers have to spend their time upgrading and investing in the upgrade process itself, which sometimes slows them down from expanding because upgrade in our marketplace is still -- especially by the way, the large customers.

For them, doing an upgrade cycle is a very long and resource-intensive process.

So overall, I think in our market, the right thing to do and what we must -- I think we are the strongest in what is upgrading the customers' base, bringing them all the time with the best security, with the highest level of security, I think that's where we excel.

And from an operational standpoint, upgrades are time consuming for everyone.

Our next question is from John DiFucci with Jefferies.

I have a 2-part question.

And I think that the first one is sort of a follow-up to Shelby's (sic) [Shebly's].

So Tal, I think even the short term or current billings were a little bit below our expectations.

They were up less than 1% year-over-year.

I guess can you provide any more commentary on [the access] not affected by duration?

Perhaps the product launches at the end of the quarter could have delayed some purchases, I'm thinking?

But it sounds like sales execution is seeing some progress.

But -- so that's the first part.

And the second part is, what follow-through have you seen after those launches over the last -- it's only been 3.5 -- well, it's 3.5 weeks since the end of the quarter.

Especially as Gil said, you've announced the highest-end 26000 series model launched today.

So just kind of trying to get a sense here because business looks stable, but it just feels like it could be doing a little better.

Sure.

First of all, when you're talking of the implied bookings, it also affects the multiyear, even in the short run because if you would have got each year on the right time, the deal of that year, then you would've saw -- you saw the growth because the deal that was signed last year was not just a renewal, it was significant growth.

So you missed that growth in the calculation of the implied deals here.

But putting that discussion aside, you're absolutely right when you talk about the launch of the new product.

Typically when you have a new product line, then it takes time for the customers to check it.

When you talk about the high end, then high end need to get an approval for these new products, what you call certify the new product, and that can delay some transaction.

Remember that the launch of the high end was toward the end of the quarter.

So it still didn't reflect in the numbers almost.

Also remember that when you launch a new product, you can have some cannibalization between families.

When people get much more throughput in a new product, then they can choose to go one level down, get more throughput and pay less.

It's a short-term bad phenomena but it's good for the business because it increases throughput of the customers and when they have more throughput then they can adopt new technologies and new subscription in a later stage.

So it's good for the long run, but sometimes in the short run, it creates pressure and it definitely creates pressure, yes.

Any commentary over the last 3.5 weeks?

I mean -- let's not -- that's a very short time, I know, since the end of the quarter.

But we sort of expect to see some benefit after the launch of these products.

It's very -- I haven't seen the updated numbers.

The quarter has started strong and very well, which we never say.

But even if I say it doesn't matter, some quarters start strong and weak -- some quarter starts weak and then strong.

So I'm just saying, I looked this morning on my dashboard, all the lights were green and I was very happy.

But it's not an indication to how we will end the quarter, just to be clear.

Our next question is from Walter Pritchard with Citibank (sic) [Citigroup].

I guess, Tal, just to clarify on the comment before on the product side.

It sounds like it's too early to tell the impact of the new products.

Any sense as to whether or not some of those impending product launches impacted negatively product sales in Q1 and Q2, just given customers knew those were probably coming and might have been waiting and not purchased in front?

It's absolutely impossible to calculate it.

You can theoretically see what was things that [we're in] commit.

In best case, it didn't happen and being delayed to a quarter after, but it's too theoretical to calculate.

It's obvious though because we've been doing these refreshes for a while.

We know when we come with a new product line, the market is evaluating it.

It takes time to go through the channel.

Many times the partners want to sell the all -- the deals and then involving you.

It takes time, right?

So it's typically -- but the high end -- when I recall the last family, the high end typically takes slightly longer because it's -- sometimes require -- it's a very large customers and it requires internal certification from their end.

And I would also that we use the new product to make some more changes than just replacing your model with a faster model.

We did use that opportunity to make slight changes to the business model.

For example, how we do subscription for the new model.

So we are trying a new model for subscription, which we think is very competitive and can have -- I think any change like that can have positive effect and can have some negative effect because it changes business behavior.

That's for the models that we launched, the 2, 16000 and 26000.

We are trying -- we are applying the same changes now for the 6500 that we introduced in the first quarter.

And again, there we also did some changes to how we conduct business with -- for example, came up with models that are more competitive and have much better price performance.

So we tried to limit the level of discounting that are given to them.

I think it was successful, but again, it sometimes delays things and sometimes cause some disruption.

So it's not just technical changes in the product.

We are using the new product launches to try some new business changes that hopefully in the long run will have positive effect.

And then Tal, on the sales investments, can you talk about as you move into the second half and then looking at next year, how are you determining -- and especially how could we in terms of us looking at the financial statements get a sense as to whether or not it makes sense for you to be investing incrementally more into sales and marketing in 2020?

I think it's way too early.

I mean everything happens in Q4.

So I think we don't look at that yet.

We need to see how the year has closed.

We need to look at the productivity.

We need to look at the -- at everything in Q3 and specifically in Q4 in order to make the plan for 2020.

Typically, we start our planning in Q3.

But it stands there in wait until the results of Q4 and after that we do -- we have the final budgeting.

So it's a bit early to talk about it now.

Our next question is from Ken Talanian with Evercore ISI.

First off, I was wondering were there any changes to your renewal rates on either maintenance or Software Blades?

Not really.

No.

Okay.

And then are you seeing any sales cycles extend as Infinity is presented as a purchase option?

Can you repeat the question, please?

Are you seeing sales cycles extend as Infinity is presented as a purchase options to customers?

Infinity by definition, it's -- basically offers the customer the entire product portfolio, from the network to the endpoint to the cloud to the mobile.

So when customer is interested in that, it can take longer time.

Having said that, I some transaction that closed really fast.

And I saw some transaction that closed longer than we thought.

So it really depends on the size of the customer and his readiness.

Maybe as a quick follow-up to that.

Are you giving an incentive to sales reps or channel partners to push Infinity, right?

Are they getting an extra benefit if they are able to close a deal there?

Yes, they do.

But again, it's more -- think about the customer.

The customer is the one who is supposed to take all these technologies and implement them over the next few years.

So the answer is yes, we give more incentives.

But it's an incentive that is in proportion to the potential for us and the growth opportunity for us.

And by the way, there's an inherent incentive because Infinity deals are much, much larger than Point product deal.

But still I think the main value is not -- especially on a strategic deal for the customer, the customer is the one to determine.

And they need to get convinced and they need to do their due diligence.

And by the way, in many cases, they need to combine different forces from different sub-departments of security, networking, operation to make their decision.

So, yes.

Our next question is from Keith Bachman with Bank of Montreal.

I had 2 related questions I'll ask concurrently.

The first is per the previous question, I just want to try to clarify, do you believe that you're seeing an impact

(technical difficulty)

market impact from offload capabilities like Zscaler?

Is that impacting firewalls in your judgment?

And the second is, as you think about today, you've talked about the move to subscriptions and Infinity.

But as you think about your portfolio, how much do you think -- or could you give us some estimation about how much your revenues are non-firewall today?

And how do you think about that over the next 2 to 3 years?

How do you feel like you want to or seek to diversify your revenue streams?

So first, I don't think that right now technologies like what Zscaler has is -- has much impact or a direct competition with what we are doing.

There maybe a marginal one, but not in the mainstream market.

And we don't see a lot of -- I mean a real head-to-head competition between the 2 areas.

It's definitely an area for expansion for us at least.

As for how to classify the revenue, that's a very interesting question.

It really depend what you classify as firewall, what you classify as non-firewall.

For example, take all our subscription revenues.

This is advanced technology.

This is way beyond the basic firewall.

And that's today bigger than the basic firewall sales.

So that's one example.

So I think it's -- I don't have a number on top -- from the top of my head.

But if I look at beyond maintenance and support that we sell, the portion of advanced technology, the advanced security, technologies and capabilities today is probably bigger than the basic network firewall proportion of our sales.

I would've said as a rule of thumb it's exactly what Gil said, in the sense that what you have right now in the product line, and that's why it's such a tough line to grow, is basically the appliance or the initial license, which includes the architecture and the firewall and everything else is in the line of the subscription, meaning the antivirus, anti-spam, advanced threat protection, and next-generation threat protection, our SandBlast, our cloud licensing and our mobile and the endpoints.

So majority of the rest, which is the add-on technologies is not all, but in a high level I will say is in that line.

And as you can see, even if you look at this quarter, you will see that the product and license was $122 million and the subscription was already $149 million.

So it's bypassed that.

Our next question is from Sterling Auty with JPMorgan.

This is Matt on for Sterling.

So I know someone has asked previously about the Europe performance.

I just wanted to ask if there are any changes happening in the sales force similar to what was done in the U.S. and if there are other factors that contributed to the result?

Well, I think in Europe, we're quite stable.

Management structure is good.

We did have a very good Q1.

I think Q2, things continue to happen but wasn't the strongest Q1.

And hopefully again, we'll see few more quarters that are strong there later in the year.

Our next question is from Karl Keirstead with Deutsche Bank.

I just had 2 clarifications.

Gil, your comment that product growth resumed in the U.S. I thought was interesting and encouraging.

Just to put it in context, when was the last time you saw U.S. product growth?

Was it the first half 2017 when Check Point's overall product growth was last positive?

And then I've got a follow-up.

I don't remember exactly.

But I think you're in pretty much the right time frame.

Your calculation, I think, are in the right framework.

Okay.

Helpful.

And then the second clarification, again for you, Gil.

In response to a previous question, you used the phrase that there were "big internal changes at Check Point." You mentioned in Q1 and especially in 2Q.

Just to be super clear, what were you referring to?

And assuming you were referring to leadership changes, were there 1 or 2 that were particularly significant?

I just want to be clear on what you meant by that.

I think first, I'm doing a lot of changes in them -- in getting not just me, I mean the entire team here focused on a lot of changes in inflecting sales measurements, sales disciplines and being much more clear and about the activity level of people in the field.

In terms of management changes, we're also filling a lot of positions and sometimes replacing a lot of places we think which we can have more potential, I mentioned telcos is one.

I think we are making more and more changes in the U.S. leadership, and you will see some more changes around that pretty soon.

We're doing a lot of training to people in the field.

At the beginning of the year, we brought a new leader for channels worldwide, a position we didn't have for -- I don't remember when was the last time we put so much emphasis on working with the channel and doing it in a global level from the highest level to the lowest level.

I mentioned a new leader for Asia that we brought in the beginning of the year.

So again, if I'm trying to recall from my memory, we are doing a lot of changes.

We just promoted somebody internal to run a sales enablement and sales planning and promoted somebody else to take her position in another department.

So there are a lot of changes.

We are okay.

This is not big -- most of these are not big revolution that affect things negatively.

It's a -- it's growth.

It's few new people from the outside.

And I think the most important one is I think we're very, very focused on the things we are trying to achieve.

Activity management, new customers, working with the partners and the whole going higher level in the food chain, Infinity consolidation and all this family of attributes that I think are one big focus area.

Our next question is from Saket Kalia with Barclays.

I'll just keep it to one just in the interest of time for you, Tal.

Tal, can you give us a quick refresh on ITP and its impact to billings?

Specifically, can you just remind us if these deals are largely annual and advanced for multiyear commitments?

And how do you sort of think about how we should look at billings as that business grows?

Because it clearly sounds healthy.

And so I wonder if billings is really capturing all of that as that billings kind of duration changes?

So the answer is the opposite.

The billing doesn't catch it because it's typically a multiyear deal and it typically -- let's say the customer signs for 3 years, he has a commitment for 3 years.

But you see in the billing, typically only the first year because they pay annually, unless they chose to pay everything in advance.

But in many of the cases, they pay annually.

So it hurts your billing, although I got the booking, which you can't see.

So that's one point.

Second, I will say -- and it's quite -- it can be quite large deals that you can't see through the implied booking.

The second I will say, the accounting, you're absolutely right.

When you look at those deals, it's split between all the lines, product support and subscription.

But a small portion of the deal is recognized as product revenue while the majority of the deal is recognized as recurring revenue over the life of the contract because the way the deals are is that the customer gets everything Check Point can offer.

So he gets all the subscription, all the endpoint, all the mobile, he gets everything.

So when you do a sales value split of the deal, majority of the dollars are being sucked into the subscription line.

Although it can get quite a lot of product, but in the product you will see a smaller portion.

So it will be all the lines but majority will go to the recurring and specifically to the subscription.

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

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

Thank you all for joining us today.

Obviously, we'll catch up with you throughout the quarter.

If you guys would like to talk after the call, please send me an email and we'll fit you in.

If not, we'll catch up with you during the quarter at the conferences or on the roads during an NDR.

Thanks, and have a great summer, if we don't talk to you.

Bye-bye.

Thank you.

This concludes today's conference.

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