Check Point Software Technologies (NASDAQ:CHKP) Q3 2019 Earnings Call

0:00 Greetings. Welcome to the Check Point Software third quarter 2019 earnings conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Kip Meintzer, Global Head of Investor Relations. Mr. Meintzer, you may begin.

0:27 Thank you, Rob. I'd like to thank you all for joining us today to discuss Check Point's third 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 November 4th. If you'd like to reach us after the call, please contact Investor Relations by email 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 Exchange Act of 1934 include but are not limited to statements related to CheckPoint's expectations regarding business financial performance and customers, the introduction of new products, programs, and pricing models, and the success of those products, programs, and pricing models, 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 Q4 2019. Because these statements pertain to future events, they are subject to various risks and uncertainties.

1:56 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 October 28, 2019 which is available on our website and other risk factors including those discussed in Check Point's annual report on Form 20F for the year ended December 31, 2018 which is on file with the Securities Exchange and 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.

2:43 Now it's my pleasure to turn the call over to Tal Payne for a review of the financial

2:47 results. Great. Thank you, Kip. Good morning and good afternoon to everyone joining us on the call today. Revenues for the quarter increased by 4% year-over-year to $491 million. and our non-GAAP EPS reached $1.44. Our revenues were slightly above the midpoint of our guidance and the non-GAAP EPS was at the top end of our guidance. Before I proceed further into the numbers, let me remind you that our GAAP financial results include stock-based compensation charges, amortization of acquired intangible assets and acquisition-related expenses, as well as the related tax effects. Keep in mind, as applicable, non-GAAP information is presented excluding these items.

3:32 Now let's take a look at the financial highlights for the quarter. Revenues for the quarter came $1 million above the midpoint of our guidance. Products and security subscription revenues were $272 million, a 6% increase year-over-year. Our subscription revenues continue to be strong with 13% growth, reaching $154 million. Our software update and maintenance revenues increased to $219 million, representing 3% growth year-over-year. The growth in our subscription revenues is driven by our advanced solutions, mainly Next Generation Threat Extraction Protection, Cloud Guard solutions, and Infinitus.

4:20 Deferred revenues as of September 30, 2019 Revenue distribution by geography for the quarter was as follows. 46% of revenues came from America, 42% of the revenues came from Europe, Middle East and Africa region, and the remaining 12% came from Asia Pacific. Since the beginning of 2019, Middle East and Africa parts are part of 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 Q3 last year, for comparison purposes, after the reclassification, would have been 47% of revenues came from America, 41% of revenues came from Europe, Middle East and Africa region, and the remaining 12% came from Asia Pacific.

5:23 We continue to invest in our sales force and marketing in order to execute our growth strategy. As a result, non-GAAP operating margins for the quarter were 50%, same as the previous quarter and in line with our plan. Effective non-GAAP tax rate for this quarter was 19%, similar to the last quarter. Please note that in the fourth quarter we expect the tax rate to be around zero. and the lapse of statute of limitation expected to occur by the year end. Our expected tax rate for the year remains around 40% as predicted in the beginning of the year. Gap net income for the quarter was $188 million or $1.25 per diluted share. Non-gap net income was $217 million or $1.44 per diluted share.

6:20 Our cash balances as of September 30, 2019 were $4.55 billion compared to $4.72 billion last year. Operating cash flow was $244 million. Collections from customers continue to be strong. Our cash payments increased in line with our continued investment in sales and marketing. During the quarter, we utilized nearly the maximum quarterly buyback Authorized and purchased 2.9 million shares for $323 million at an average price of $112. Now let's turn the call over to Gio for his call.

7:02 Thank you Tal and hello to everyone joining us today. I'm glad to have you all on the call and pleased to provide you with a bit of more insight on the first quarter results. As you heard from Tal, we continue to deliver healthy financial results in the first quarter. We're still in a period of change and transformation as we continue to focus on elevating our customer security environment into the fifth generation of cyber protection. This means that we have taken upon ourselves quite an ambitious goal of preventing the most advanced cyber attack and providing an integrated cyber solution for all elements of the modern IT infrastructure. Networks, data centers, endpoint, mobile, cloud, and IoT. We continue to expand our cybersecurity solution consolidation efforts with the Infinity architecture.

7:51 As you can see from the numbers, we had quite a good success with our cloud solution. Yes, we continue to aim for much higher growth rates across our business. We're still in the period of transformation, moving from a traditional product business into more of an annuity model. We aim to drive our sales execution across all of our business areas. We continue to expand our global field management, and conduct more in field and marketing activities around the world. Naturally, we would like to see higher growth rates sooner, but it does take time and we remain focused on making that happen. We place a lot of emphasis on the cloud and we believe we have the most comprehensive architecture to secure cloud environments. As a result, we've seen nice successes. Cloud business results continue to be healthy.

8:36 Growth percentage remains quite high. Some recent examples of nice wins in the cloud space include two of the world's largest accounting firms, two of the world's largest consulting firms, one of the world's largest business media firms, two of the world's largest retail franchises, two of the world's largest stock exchanges, and the list goes on with many of the world's top companies including shipping, financials, telcos, and government. Our recent success didn't just focus on the cloud. We have won many projects with our advanced threat prevention for network, endpoints, and mobile. One example for such a win is a new customer, an energy company in America. We asked them what made them choose Check Point. We quoted few major reasons. One is that only Check Point has real-time threat prevention. The competition simply lacks these capabilities as their threat analysis work in the background and don't stop the attack.

9:34 The second reason was the superiority of our management. Our interface is more comprehensive and much easier to use. Things that takes hours with the competition simply take minutes with Check Point. Overall, they felt that Check Point has a better architecture with much better TCO. This is quite typical of what we learned from the marketplace. In both the qualitative and quantitative research we conduct, we see three main reasons that customers choose Check Point. First is the real-time threat prevention, second is the management capabilities, and third is the completeness of our security architecture. Here is a real-world example of a customer experience that just happened this quarter. The potential customer started testing our CloudGuard product.

10:21 A week after starting trial, they had enough confidence to turn on the real-time prevention mode. They were in the middle of an IPO process, and that's where the story turned interesting. Our SunBlast technology, embedded into the CloudGuard product, caught a file that contained some command and control malware This model infected a file that was sent from their account to their banker's account. If that file would have gone through, you can just imagine the potential damage to the customer and the investment bank. Many solutions could have been deployed to handle this incident by using almost any other solution in the marketplace, the cost of the investigation, forensics. Collection and remediation of this incident could have been enormous, between hundreds of thousands to millions of dollars. By using the checkpoint product, the file was cleaned by our threat extraction engine, alerts were recorded, and no damage occurred.

11:21 The cost of this incident to the customer was zero, instead the hundreds of thousands of dollars or more in real damages. This kind of incidents happen many times every day. In most cases, we don't even hear the story, simply because the effectiveness of the real-time prevention solution. Unfortunately, our Incidence Response Team is seeing an increase in incidents that have significant impact, which could have been eliminated if the organization had been using our fifth-generation threat prevention solution. Turning the subject to some of the new products we launched in recent months. We continue to upgrade our security appliance family. In July, we launched the 16,000 and 26,000 security appliance family. These high-end and data center grade models provide threat prevention performance in the range of 12 to 30 gigabits per second.

12:16 On the other side of the scale, we launched the 1,500 series of appliances earlier this month with the starting price under $1,000 and the performance between 450 to 660 Megabits of Threat Prevention Performance. These models show the strength and the scale of our architecture and the ability to provide the most comprehensive security architecture at all price and performance levels. A new addition to our family of products was the CloudGuard Connect and CloudGuard Edge solutions. CloudGuard Connect allows the utilization of the same security architecture through cloud service. Connecting branch office directly to the cloud with no on-premise equipment. It opens the door to many new opportunities and is fully integrated into the same policies and management tools used by our customers.

13:12 One change we've also implemented with the new appliance model is simplifying the subscription process. As we discussed previously with the old model, Every appliance included a bundle one-year next-generation threat prevention subscription, and the customer could choose to upgrade it. In addition, the customer had to choose the support level they required, and in the second year, they had to renew both. With the new models, we are simplifying the process. The appliance is provided in a basic configuration, and the support and security subscriptions are bundled into a single offer with three levels. So the first year and the following years looks the same, and there are fewer and simpler choices to make. All customers receive access to 7x24 support services. This new model shifts even more revenues into the annuity part of our business model. It's too early to measure the effect of these business model changes.

14:06 We will only see the full impact of these changes in the future. Talking about business models makes a nice transition to speak about our projection for the next quarter. You know my regular caveat, it's hard to predict the future, there are many promising deals and there is also a lot of unknowns that can impact results. With that said, our revenues for the fourth quarter are expected to be between $527 to $557 million, and non-GAAP EPS is expected to be between $1.93 to $2.04. GAAP EPS is expected to be approximately $0.19 lower. Thank you, and now we'd be happy to answer your question.

14:53 Thank you. At this time, we'll now be conducting a question and answer session. So that we may address questions from as many participants as possible, we ask that you please limit yourself to one question and one follow-up. If you'd like to ask a question today, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the start keys. One moment please while we poll for questions. Thank you. First question is from the line of Brent Thill with Jefferies. Please proceed with your question.

15:35 Thank you. If you could just comment on some of the increased investments in sales and some of the productivity enhancements that you're seeing, particularly in North America, it would be helpful.

15:47 In North America, we continue to invest in the sales and marketing organization, and one big change that we've conducted last quarter is the appointment of a new leader. We hired a new president for the Americas, Chris Canlan. He has a lot of experience in our industry and with our channel. We've also hired a few other people in the telco space, in the channel space for the Americans, but I think this new high-level appointment should take us a long way and should provide a lot of leadership and support for our field people in the Americas. Our next question is from the line of Michael Turretts from Raymond James.

16:38 Hi, Gil and Tal. To the extent you can, can you comment on overall demand for security and what you're seeing? Any weaknesses in any geos, Europe, anything on the telco service provider side?

16:54 I think overall demand remains stable, remains healthy. I think our market enjoys a very high level of demand, enjoys, I think, a very high level of strategic view. On the other hand, suffers from A lot of fragmentation and a lot of confusion and a lot of competition in all aspects and in all sizes. But overall, I think demand is quite healthy, and I haven't seen any specific issues around that.

17:25 And then if I can get a follow-up, as I said, you mentioned Chris Scanlon. There's been a lot of changes in sales management in general. Frank Raj came in, I don't know, something like a year ago. and there have been other changes a level below them as well. Can you just discuss what types of changes strategically you expect and where you are in that process?

17:47 I think first we have people that are doing a very good job and again this quarter I was very pleased to see with many wins that we've seen all around the world. I think what we'd like to do is to first Get More New Customers. That's a big focus. By the way, this quarter we did see a nice increase in the number of new customers. We'd like to see more emphasis on the new strategic areas of the market, like mobile, advanced risk prevention, and the cloud. And again, we've seen nice successes in all these areas. The cloud business was very healthy this quarter. So that's quite a good sign from that perspective. I think we can do much better on the product business, on the traditional product business.

18:35 More gateways to more companies, more refreshes and more new customers. So that is an area that even though consists a big part of our business and we are doing well with it, we can do much better with that. And last but not least is enhancing our relationship and doing better with our partners. in all places and all segments, both with our traditional channel partners, renewed energy for the telco sector, system integrators, and even adding new partners that will help us get to more customers, and especially in the new areas like cloud places. So I think I've captured a very broad picture, but I think for For two minutes, I think it's a very broad picture for what we're doing.

19:26 Thank you very much, Gil and Tal. The next question is from the line of Shaul Eyal with Oppenheimer. Please proceed with your question.

19:36 Thank you. Good afternoon, guys. One for Gil, one for Tal. Gil, this is something I've asked about last quarter. With respect to the Engage plan, the frequent flyer type of plan, we would like to hear about any new updates you can share with us from a customer's perspective, also from the channel.

19:57 I think the Engage plan is a new plan that we created with our partners to really engage the partners in checkpoint activities. Usually when you discuss things with partners, There's a lot of discussion about margins, about financial, which are all fine, but they don't drive the daily work in the field. And I think what we'd like to do is drive the daily work in the field, and that's where we created the Engage app and the Engage program that will incentivize our channel partners at the sales rep level to do more work with us and go to customers. I think it's being received well. I don't have a specific update about the usage and so on, but from what I hear, it's coming up quite nicely. I think we will base next year partner levels in big part on the Engage program and I think again we've heard good feedback about that and I think in the next two months we will see more about how it shapes up and which partners gain level because they've been active and because they were going to to more activities and which partners may need some more push, and now we can see it's based on their activity level.

21:14 Understood. And Gil or Ortel, as you further think about the ongoing shift, as you've indicated, of the business model towards an annuity-driven one, would there be any architectural changes to your appliances down the road? In other words, could we be seeing checkpoints embedding more ASIC cycle hardware in its appliances to accelerate throughput and performance down the road?

21:46 I think at this point that wouldn't be our focus and I'll explain why. I think the main issue is yes, we can drive sometimes more performance, more basic performance through hardware acceleration. But what we're seeing more and more is that the big challenge is actually in In the more advanced threat prevention capabilities and in being flexible and agile to the changes in the front landscape. And I think that's not a stable environment. That's not an environment when we set the roadmap. That's an environment that the threats in our world are setting the roadmap. And I think on that front we've seen A lot of success with the open architecture that we are utilizing. We have the most agile software. I think we demonstrate that, again, customers that test our product in-depth see the superiority of security, and we hear it from almost every customer that have gone in-depth to the analysis. And what we found over time, that in order to do that, the right architecture is an open architecture, an ASICs that can do a good job in accelerating very simple operation, simply fail when it comes to advanced capability with security needs. So most of our focus is going to remain on the open architecture that we are developing.

23:05 Thank you so much for that. Our next question is from the line of Brad Zelnick with Credit Suisse. Please proceed with your questions.

23:15 Great. Thanks for taking the questions. This is Ray McDonough on for Brad. My first question is for Gil. Last quarter you announced new high-end appliances and while it's still early on in the product life cycle, can you speak to the conversations you're having with customers around those appliances and if you expect to see any short-term impacts from customers potentially trading down to slightly lower tier appliances as we've seen in the past with product introductions that have significantly increased performance?

23:47 So I think we're seeing a good A good acceptance for the new appliance model, both the $16,000 and the $26,000. And another one, by the way, that adds a lot of value to the market is what we call the Maestro Orchestrator. The Maestro is actually quite revolutionary. Maestro we came in earlier in the year, at the beginning of the year, and it's already actually starting to gain share and get into the market in nice volumes. And Maestro basically allows to take several of the appliances and turn them into a super appliance with much higher performance, with much higher level of redundancy, what we call cloud-like performance, very high level of flexibility and very high level of resiliency. I think we're seeing good traction of that.

24:34 Right now, I'm not seeing a lot of downshift for appliances. I think, by the way, that's also some of the changes that we've made to the appliance subscription model, try to help invest that the basic appliance and many more. The only thing that I would say is that we see that for large projects and large customers it actually takes a long time to move to a new model. I'd expect when we come up with a new model, when I'm the consumer I like to move to the new model the next day.

25:29 What I'm seeing in the sales cycle to big enterprises is that it takes between Three months to nine months and sometimes even more to get the new model into the sales cycle. Many times there's an RFP already with the old model, many times customer needs certification and so I mean the cycle is slightly slower than what I'd like it to be when I'd like to see all the new customers, all the new deals coming with the new appliances.

26:02 Great, thanks. That was really helpful. And a follow-up for Tal, if I could. Can you just remind us if there were any large deals that impacted billings last year as you were facing tough comps on a year-over-year basis? And can you remind us if there was anything in Q4 that we should be paying attention to? Thanks.

26:20 In Q3, both in Q2 last year and in Q3 last year, we had large deals. Large deals, it means over $50 million. So, yes, there were large deals in both Q2 and Q3, which did not happen and we didn't expect to happen in Q2 and Q3 this year. Q4, I'm trying to think if there was a very large one. I don't remember this size, like over $50 million in Q4. Okay, thank you. Thank you. The next question is from the line of Fatima Balani with UBS. Please proceed with your question.

26:57 Good morning. Thank you for taking the questions. Gil, I have one for you and Tal, one for you as well. Gil, we've seen the cloud security portfolio at Check Point expand pretty nicely over the last year. You're doing TASB, you're doing cloud workload protection, cloud security posture management. I'm wondering if you can speak to if you have any bundles associated with these cloud capabilities and you know to the extent you'd be willing to or would start breaking out cloud specific revenue in the financial model and then I have a follow-up for Tal.

27:33 I think you are right, we are seeing good traction with the cloud product. It consists of actually a broad family with a lot of details and by the way cloud in general is one of the more sophisticated and you can even say confusing markets because there is many things that are called cloud. But overall, we're seeing very good traction on that, both on securing the cloud with our technology, also on the cloud management and the cloud compliance side of business, we're seeing a good traction. And also for the newer technologies like the CloudGuard SaaS that secure SAS applications and Office 365 and so on. We don't intend to break the revenue down based on the specific family, simply too small. Some of the families are too small.

28:24 And in terms of bundling that, first we do offer one, or not bundle, one strategic value which is part of the Infinity model that we have. And in the future, I think we will see, I'm not sure if I'll call it bundling, I think we will see some new and creative business models around the cloud because I think we want to offer much more revolutionary architectures and technologies around the cloud.

28:51 Fair enough. And Tal, for you, just looking at deferred revenue, I don't think we've seen this type of seasonality or sequential downtick in deferred revenue growth since at least 2012. based on my model. So what are some of the things that we should consider here that could potentially be weighing on the growth of this metric?

29:16 So it's basically billing. That's what you see in the deferred. If you look year over year, it was, if I recall, if you look at the short-term growth in deferred revenues, it was around 8%, if I remember. I think if you look historically, like in 2018 and 19, you had some quarter with 7%, 8%, 9%, 11%, 10%, 8%, so I'd say it's pretty much in the same vicinity. The long-term DHA, so if you look year-over-year, long-term contracts or long-term deferred revenues, this quarter increased year-over-year, again, by 9%, and if you look last year, both in Q2, 3 and 4, and even this year you see 11, 15, 16%. So obviously we see less billing with the long-term deferred revenues which is affecting the total growth in the deferred revenues.

30:09 Fair enough, thank you. The next question is from the line of Greg Moskowitz with Mizuho. Please receive your questions. Greg, your line is open for questions.

30:25 Thank you very much. And hi, guys. A follow-up on Michael Turth's question, if I may. Your revenue growth in EMEA actually showed good growth on a sequential basis, and on the face of it, that was, I would say, perhaps a little surprising, just given some of the caution I think many of us have been hearing overseas. Conversely, your North America revenue declined roughly mid-single digits on a sequential basis and was probably a little weaker than I think many would have thought. I'm just kind of wondering if you could comment on both of these regions just from a demand perspective or more specifically if you're seeing any changes at all in the competitive landscape.

31:03 I think both areas remain very, very promising. The potential in America is very high. The potential in Europe is also very high. We are far from reaching the potential of the market. I think the same is true for our execution. We can do better and we can generate better results on both sides of the Atlantic Ocean. I'm pleased with some of what you've seen in Europe. As I've been said, I think we are investing more and more in the Americas. And by the way, the Americas is not one size fits all. When I analyze it, I'm seeing, and by the way, it's true both in Europe and in the Americas. We analyze our region in both places. I see regions that have done tremendously well this quarter, and I see regions that were struggling a little bit.

31:52 And that's true in Europe, and that's true in the U.S., And actually what I was pleased to see because I've done a lot of in-depth analysis this quarter is seeing some of the regions in the U.S. that are starting to show signs of good recovery, good wins, and the right level of execution that I expect.

32:12 It is helpful, thanks Gil. And then just a follow-up on CloudGuard Connect, which you talked about in your prepared remarks. One of your close competitors has been doing quite well here. Another competitor recently announced plans to enter this market, and so I was wondering if you could talk to how well you think your integrated offering will compete there.

32:31 I think first we have a terrific offering and I've tried it. It's actually very easy. You can just go on the web, get up and running, connect a branch office or connect few users very easily with really few minutes, no training. Really simple onboarding process which is what people expect from a cloud solution like that to ease all that process. I think there are two big differentiators in what we have. I don't know, by the way, if the competitive landscape is that easy or that simple to turn on. It would be very hard to compete with what I've seen with our product. What I definitely can say is two things that differentiate ours is one is the level of security. We provide much higher level of security, much higher level of threat prevention. And the second is the ability to tie into the overall enterprise management and enterprise set of rules all really being part of the same enterprise solution.

33:32 So we built our solution to support that, to be part of that, and we're seeing some nice demand of that. I don't have very high expectation from immediate results that we'll see because I think some of the targets markets that we have are the large customers and they are very well interested, but it takes them time to onboard and to shift infrastructure, but it's definitely a promising area that we have.

34:01 Great. That's helpful. Thank you. The next question is from the line of Karl Pierstedt with Deutsche Bank. Please proceed with your question.

34:10 Thank you. Gil Ortaldi. The R77 to R80 OS migration is obviously ongoing in your installed base, especially in 3Q as a lot of customers faced the R77 end of support date in September. It can sometimes be hard for us on the outside to determine whether a big OS migration like this is a catalyst to upgrade or a reason perhaps to hesitate. I'd love if you could share your thoughts about what you're seeing with that migration issue in 3Q and how you expect it to play out in 4Q. Thank you.

34:48 First, I mean, it's a very good point. And again, what we're seeing in many times of the high level, macro level is very different than what customers are facing, which is exactly which version and which OS and a lot of technical details that are on our customer heads. I think what I'm pleased to see is that the majority of our customers now are on R80. That's very, very good. There's still a portion, a minority, but still an important portion that haven't migrated to R80. We are supporting them. We are supporting both what we're doing now and we will support their immigration to R80 because we'd like them to have the latest security and I think it is critical for them to enjoy the latest security features that we have.

35:36 How does that impact the migration or the sales? It's very hard to say for me. Again, I'm seeing some customers that it would help them if some of these things were easier. I'm seeing other customers when it's a no-brainer and they like the situation that we are in and that we are with. So I can't say, I can't put right now any... It's very hard for me to quantify that impact at this point.

36:05 I would just say that, you know, the good news is the majority passed. The better news is that while we have still a small portion that needs to move, while they move it can help us increase because when you buy the new appliances and many times when they finish the refresh it can create an opportunity to buy new products when they finish to upgrade their software system. So I'm less concerned about the end of life Thanks very much. The next question is from the line of Ken Talanian with Evercore ISI.

36:59 Please proceed with your question.

37:01 Hi, guys. Thanks for taking the question. You mentioned earlier it takes a long time for larger customers to get accustomed to new models. And I was wondering if you could give us a sense for whether you did any pricing studies ahead of the new appliance pricing model and any anecdotes you might have from customers on that.

37:23 The pricing model, you mean what Gil was referring to. So I will say, first, of course we checked with customers and partners before. It simplifies significantly for them the universe. I'll give you an example. Before, when they purchased and applied, at that point of time we gave them the NGTP incorporated. So they didn't have much of an option to choose if it's NGFW or NGTP. On the other hand, they could have upgraded to NGTX if they chose to. Then they had to make a decision what level of support they want. and they have different level of support, it can be the standard, the premium, the diamond, they can choose on-site support, non-on-site support and so on. So there are many many options for just buying that appliance. Now it's much simpler model, it's basically they choose the appliance, it doesn't integrate in it the subscription, So it's a cheaper, in a sense, or lower price when you come to the base model.

38:18 That, like you said, can hurt our product revenues. We understand that. But the benefit is, for the customers and for us, that now we have... An ability to choose one of three options, NGFW, NGTP or NGTX package, including the support, which is 24-7. So there's only three options. And you can choose that and then in the second year just renew it and continue. So customers love it because it gives them much more flexibility. So if they choose not to have NGTP and just want NGFW, they can. If they want NGTX, they can still go with NGTX, of course. But now they have the support embedded in it in a very simple pricing model because it's a percentage of the base price of their appliance. So it's not a price that is a fixed price. And this fixed price can be similar historically between small appliance and maybe one level above each appliance. Now it's a percentage of the base.

39:10 So it's very, very easy for them to understand the pricing model and therefore they should like it.

39:16 Understood. And I guess as part of that, have you seen a greater inclination to move to the higher pricing of those three?

39:28 As I said, I think it's too early to say because what I've seen that especially on the higher end model, it takes customers a little bit longer time to simply shift the model. So I haven't seen enough cases to see a

39:43 We said it from the one that brought the new appliances. We see some that moved down, some that moved up, but remember that the percentage now is compensating for that. So we took it into account in the pricing. We know that on the product it will be lower, but over time we should see more in the subscription.

40:01 Great. Thank you very much. The next question is from the line of Walter Pritchard with Citi. Please proceed with your question.

40:18 Any way to quantify in terms of how much that shift may be under a base scenario and how that might compare to shifts you've seen in the past?

40:28 So first remember that when they buy the new appliance, they have to choose one of the packages. So all of them, when they buy an appliance, they will have a subscription portion and, of course, a support portion. So the lowest they can go is NGFW, but they can go up to NGTX, including the premium. So it's included in all of these options. The majority of them, there will be an uplift in the subscription. The short-term price is in the product line.

40:53 Okay. And then just a quick one on DSO. Actually, it's probably the lowest DSO you've seen in a number of quarters here, dropped into the 50s. Just wondering, anything around how the quarter progressed or large field impact that influenced that number?

41:07 Thanks. No, it probably was slightly less back-end loaded, but it's in general nothing dramatic. Collection remains the same. It's a good signed DSO, but this time it came from the levels of the booking, so it basically remains the same in general. If you look at it by month, because we calculate by month, it's the same DSO.

41:28 Thank you.

41:29 Sure. Our next question is from the line of Sterling Audie with JP Morgan. Please proceed with your question.

41:37 Yeah, thanks. Hi, guys. Gil, I wanted to go back to the CloudGuard Connect commentary. You talked about solution being more secure. In those large enterprises, I think both security and performance are the key issues. Can you comment to kind of the architecture that you're using in that product? How it compares to the other solutions that are on the market a little bit more specifically to understand both the higher security as well as what kind of performance expectations you have out of it?

42:06 Sure. First, I think the engines that we have and the capabilities that we have are much, much higher. Both our threat extraction, threat emulation, SSL inspection. We have more and more web inspection capabilities, more than any other vendor. in the marketplace. All of that put our security level in a much, much higher level. The fact, by the way, that when you're talking about processing files and things that I've described, I think we're the only vendor that actually offer all these things in a mode that prevent mode, that you don't get what's called patient zero is going to be caught, and not first you get infected, and then hours later you need to deal with the consequences because it was detected. So this tells for the...

42:52 for the level of security that we provide. In terms of the architecture, I think we are providing each customer with a more private environment. It's still a cloud environment, but every customer gets an instance of where data is more safe, is more secure, it's not shared with others, and the specific policy that each customer has is applied to their data. So it's much less like a consumer service that you get a secure pipe to a highly secured pipe with your level, with your privacy and your level of management and your policy.

43:37 Much more in what our customers like to see and that's by the way why the number one target that we have is for small branch offices that would like to enjoy this kind of capability.

43:53 Got it. And then, Tal, one follow-up for you. Given the good growth in the subscription side, can you just qualitatively remind us at this point what are the biggest contributors to the growth in that line? So in other words, which bundles, which products are driving the growth?

44:12 So it consists from all the subscriptions, but specifically the main growth coming from the cloud Infinity, and NGTX, or the Sun Blast Zero Day Protection. So that's the main one. Remember, by the way, that Q4 have usually an effect also from the DLP and the compliance, and some of them come in Q4, and that can change sometimes the growth to slower or to faster, depends what happens. So it's very hard to predict. Thank you. Our next question is from the line of Shelby Safrie with FBN Securities. Please receive your questions.

44:54 Yeah, thank you. I'm trying to gauge the comparison in billings in Q4. In Q4 of 18, your deferred actually accelerated from Q3 of 18, but you didn't call out large deals in Q4 of last year, which suggests the billings comparison is easier. So I'm trying to understand Do you think that the comparison with Billings on a year-to-year basis is easier or harder in Q4?

45:25 I'm not sure I followed you regarding the Q4. I was asked before if I remember a very large deal. I admit from the top of my head I don't remember a very, very large deal, but Q4 is a huge quarter. There were large deals in Q2 and Q3 of last year. Were there potentially large deals in Q4 of last year? So I said, I don't recall, I don't have it in front of me, so I don't want to throw it from the top of my mind, but I remember it was very high growth.

46:11 If I remember, Q4 growth year over year was about 15%, so that was a huge number. So I would define it as a tough compare.

46:19 Okay, that's it. Thank you. Our next question is from the line of Dan Azis with Web of Securities. Please receive your questions.

46:30 Yeah, good, thanks. Gil, going into next year, you're not going to get it, but just in terms of overall spending on security, I mean, is your sense in a lot of your customer conversations that spending, especially in the move to the cloud, is actually increasing, flat, decreasing? I'm just interested from your perspective on overall security.

46:54 I think with overall security, I mean all the customers at the high level are willing to invest in security. Also all the customers have their budget under control, so I don't think that anyone has huge additions to their budgets that they can spare. So we are looking somehow to balance between the new investment. We are going to invest a lot in the cloud space. I think it is going to be important and it is going to be, and it is by the way a big place where customers are investing and customers are We need to be there. We need to make it secure. By the way, I think that the importance of cloud security is also very, very high. We see almost all the cases of data leakage in recent years result from weaknesses in the cloud. I mean, I'm seeing it every day. When you make a small mistake on the cloud, it's being exploited within minutes. I have a few horror cases like that from the last quarter that I've seen. Kip Meintzer, Roi Karo, Nataly Kremer Great. And just tangentially,

48:39 In terms of private security deals, are you seeing more and more assets out there from an M&A perspective in terms of valuations, maybe more sort of digestible with a lot of private companies and consolidation? I'm just interested, is there any change in the M&A landscape, especially on smaller private companies? Thanks.

49:07 Because of the fragmentation of the market, I think there are many opportunities. Obviously, some parts of the market valuation are getting out of control, but at the same time, we also see a lot of companies with really, really cool technology that can fit our portfolio, and that may be a good fit. So, I think there is no one answer to that. We do see some opportunities, and I think, hopefully, we will be able to do more with that. Thank you. We've reached the end of our question and answer session. We have time for one final question, which will be coming from the line of Phil Winslow with Wells Fargo.

49:47 Hey, thanks, guys, for taking my question. Gil, just a question for you. I'm curious just what you're seeing in the pricing environment out there, particularly if you could maybe talk through sort of the enterprise versus the telco space, which I know has been a growing focus for you guys.

50:02 I think it remains very competitive. I haven't seen big changes on that. But, I mean, I don't know, Tal, if you have anything to add on that?

50:14 No, I would say in general, you know, I don't see something specific in telcos. Telcos, you know, they're always very competitive, especially in pricing. We're creating a focus on the telcos, you know, because we believe there's a nice opportunity for us there. But I would say nothing dramatic this quarter versus the previous quarter.

50:32 Great. Thank you. Thank you.

50:36 Thank you guys for joining us this quarter. We look forward to seeing you out on the road at conferences and such. If you guys have any questions, please reach out to us after the call and we'll do our best to address any of those questions. Thank you and look forward to seeing you guys. Take care. Bye-bye. This concludes today's conference. We disconnect your lines at this time. Thank you for your