Check Point Software Technologies Ltd. (CHKP) Q2 2019 Earnings Report, Transcript and Summary

Greetings welcome to the Check Point Software Second Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] please note, this conference is being recorded.I will now turn the conference over to your host, Kip 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’s 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 email 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 of the Securities and Exchange Act of 1934 include, but are not limited to, statements related to Check Point’s expectations regarding business, financial performance and customers; the introduction of new products, programs and the success of those products and programs; the environment 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 factors which are included in Check Point’s Annual Report on Form 20-F for the year ending 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 representation of the 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 and 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 that as applicable, non-GAAP information is presented, excluding these items.Now, let’s take a look at the financial highlights for the quarter. Product and security subscription revenues were $270 million, a 5% increase year-over-year. Our subscription revenues continued 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 Solution.Deferred revenues as of June 30, 2019 reached $1,286 million, 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 came from Europe, Middle East and Africa region and the remaining 12% came from Asia Pacific.The revenue distribution by geography for Q2 last year after the reclassification would have been 48% of revenues from Americas, 41% of revenues came from Europe, Middle East and Africa regions and the remaining 11% from Asia Pacific. You can see all [ph] region has a growth this quarter. We continue to invest in our salesforce and marketing in order to execute our growth strategy.As a result, non-GAAP operating margin for the quarter were 60% 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 the decrease in our portfolio as a result of lower interest rate expectation in the US. Hence our financial income for the next quarter is expected to be around $20 million, effective non-GAAP tax rate for this quarter 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 million compared to $4,042 million 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.Collection from customers continues to be very strong. Our operating cash flow includes tax and balance sheet hedged transaction which was 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 for $325 million.Now let’s turn the call over to 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 continue to improve. When I think about transformation, I’m addressing the modernization of IT security environment. Protecting the IT infrastructure against Gen cyber-attacks and expanding the security coverage into the cloud mobility and IoT space.In the second quarter, we made good progress around IT modernization. Our Cloud business has growth 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 insight and action. 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 introduction of the mid-range 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 5 security operations. Today we’re launching our highest end model of the 26000 series that delivers performance of over 300 gigabit of firewall and 30 gigabits of Gen 5 security, a 50% increase from previous model.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 for its prevention for web downloaded content and the ability to process SSL security with higher level of security and performance. Where our previous mid-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 increase field and marketing activities. This success can be largely attributed to our APAC leader that joined us at the beginning of the year.In the US we saw quite healthy trends this quarter further growth in the US resume and the majority of the region demonstrated healthy growth rate. We’ve also significantly increased our marketing activities. In the first quarter, we had almost 10,000 participants at our Free Global CPX 360 Conferences across Asia, America and Europe. In the second quarter, we took the Check Point experience program locally 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 two large events each attended by over 100 CISO’s including major global Fortune 100 companies. Our research team continue to generate breakthrough finding regarding malware and vulnerabilities in mobile and cloud. In the mobile space we found vulnerability in Xiaomi mobile devices that may affect over 100 million devices. We also found malware Agent Smith that actually affected hundreds of applications and over 25 million android users.Additionally, we discovered a vulnerability in Electronic Arts, Apex Legend game that could have affected over 300 million online users. Another vulnerability that is a result of the security challenges associated with cloud infrastructure. Our research team is exposing a lot of vulnerabilities enabling customers and vendors 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 with our part of being breached companies are now being fine pretty hefty amounts by regulators. Just in the past few weeks more than $1 billion in combined fines were given out to free companies that suffer 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’ve made in the second quarter. We’ve produced good financial result and our own 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 initiative and we intend to further augment our management team.For the third quarter, my usual caveat continues to hold through that predicting the future is always a challenge and there maybe 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. Now we’re happy to take your insightful questions.

[Operator Instructions] our first question comes from Brad Zelnick with Credit Suisse. Please proceed.

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 growing a bit less than the overall market and I know you generally always tell us that the environment for cyber security 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’s been a change in the spending backdrop in the category.

[Indiscernible] if there’s any change in the overall spending, I think the market is healthy. Now is not the market that show signs of weakness. There are many changes in the marketplace and I think we’re very well equipped to handle them from a technological perspective, from a field perspective we definitely need to go through some changes and we’re growing and we’re investing in them and I think it showed.We’re going to hire [indiscernible] the organization to cover, grow their spectrum of solutions. We’re selling more architectural approaches that requires sometimes people that are trained differently, different sales cycle and I think we’re making all the right investment. You can see that in our sales and marketing spend, but it’s not just the spend it’s really the change and the education and the expertise that we’re learning, that we’re 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 in activities in other 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.

Thanks very much Gil and Tal just to follow-up. We’re seeing Check Point step up at 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’re op margin tick down even if slightly again this quarter where should we expect it to inflect or perhaps ask differently, how are these investments beginning to pay off versus your original plan heading into the year?

It’s actually and 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 plan. The main expense is a result of a continued increase in our headcount, continued increase in our marketing efforts. We had the many just as an example of we provided the CPX, historically we’ve had three CPX’s. Now we have more – we had 40 CPXs locally and globally. So, we are stepping on the gas when it comes to digital marketing, events marketing and then we start to results and list coming out of that, so that’s nice to see. It takes longer and it’s not one quarter investment and then the quarter after you see, its overtime you should see the fruit of that translating into growth in the revenue. Remember also that the trend of the move for product into subscription for product into cloud all of those cloud is also subscription for us creating a lot of pressure on the product line. At the end of the day, it should translate into our growth in the booking and in the revenue.

Thank you so much for taking the questions.

Our next question is from Michael Turits with Raymond James. Please proceed.

Quickly Gil and Tal. Can you comment on the full year guidance as the appreciating the prior full year guidance still in place?

Yes, we’re keeping the guidance absolutely.

Thanks Tal. And then I wondered if you could be specific and all that some of the trends relative to the hiring and productivity of the sales force. Where are you in terms of sales attrition, if we just say 2017, 2018 and 2019 and where are you over that three-year period in terms of the percentage of the salesforce and full quota productivity, just so we need a sense of where you’re in terms of transition.

First, it’s hard to deduct from attrition is it good or bad. I think attrition mid-year was lower than previous year, but depends where in the world especially in the US, some of which is very good. Some of it actually we should do more attrition to handle cases where we need to improve, but overall --

Stable.

It’s stable with some positive trend around it.

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 [indiscernible] and when you expect that to improve?

It’s actually remembered the productivity is a result of the 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 the way we look at it is in order to see at 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 booking. So that’s the whole cycle and as more complicated the transactions and more realistic than the longer it takes to close the deal. So, with 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.

Okay, thanks guys.

Our next question is from Shaul Eyal with Oppenheimer and Company. Please proceed. Q –Shaul Eyal: One for Gil, one for Tal. Gil the new Check Point reward plan any preliminary views, how was it being viewed by the salesforce, by the channel partners it is somewhat different from what some of your competitors are doing. So just interest in understanding how it’s being perceived out there.

Okay, so just recap with we launched last quarter and 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 with done through and up. sales rep of the partners collects points by doing sales activities like marketing activities like meeting with customers and through the point systems just like in airlines we can reward and give more points to think that to activities that we feel are more important. I think that’s a quite a unique approach. I haven’t seen lot of similar things in our marketplace.We’ve just started with it. But I can tell you that 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 applications. We’re seeing activity level like except for the issue when you launch some new, like how do you set the reward target, how many points you give, how to estimate, how many activities people are actually doing. So, we’re 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 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. If we’ll do the right activity, if we’ll work together with our partners then we will achieve the results together. Q –Shaul Eyal: Got it and one for Tal or 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, it really varies in the region of the world as the rep sales team we’re bringing within set of connection that is already involved. Many in the type of account, so for a global account, it can take by the way global accounts in general the sale cycle can be multiple years for smaller transaction it can be three months. So I would say that the average is around six months but it really big that was a big variance between the person, the type of accounts and the specific situation like, if somebody stepping in into region which is, we’ve held the activity and everything works well, it picks up where the previous rep left and somebody stepping in into a region when the previous rep wasn’t doing good job or 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 six months. Q –Shaul Eyal: Understood. Thank you very much.

Our next question is from Phil Winslow with Wells Fargo. Please proceed. Q –Phil Winslow: A question to Gil first, just on the pricing environment if you think actually by tiers of customers kind of Telco’s large enterprise, mid-sized business anything that you would want to call out that from pricing environment, but also from a demand perspective too that would be great.

I think the pricing environment and the whole environment remains competitive. We haven’t seen any major trends in the discounting environment in all of that, it remains quite stable which is a good sign because for years it did change and I think now it’s a little bit more stable. Q –Phil Winslow: Got it and then also if you think about just the [indiscernible] environment sort of across the tiers two and anything you kind of highlighted especially another work six month through the year versus last year, any changes?

No really, I think, 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 with world class quarter and new leader for global Telco activities with [indiscernible] team because we think with much higher potential in Telco’s even though we’re doing quite well with some Telco’s but I think the potential is really much higher, but on the same time I can say that with single sector that I would say they 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. Q –Phil Winslow: Great, thanks guys.

Our next question is from Shebly Seyrafi with FBN Securities. Please proceed. Q –Shebly Seyrafi: Thank you. So, I saw that your billings growth was flat year-over-year it decelerated for the past two 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 then the first half of last year we had a few very, very, large transactions. We talked about some of them. You can see in Q2 we had two large transaction last year of tens of millions of dollars which typically do not repeat, it’s a multi-year typically. I always say that when it’s a multi-year you need to look at the year-over-year. So, when you look at the deferred revenue growth. The year-over-year you see 11% and when you look at the implied booking which again, we do not report booking because it can be big variation between implied booking and booking in revenues because of the multi-year which is the math you just based. Multi-year has a huge effect on booking in our industry and last year we had a few very large multi-years transaction which obviously they were assigned in Q2 last year, now for two years we will not see. So, for example if you had a $50 million or $60 million multi-year for three years than you got last year big pick and this year, you’ll see minus 20 basically from the potential. So, I would be cautious with looking at the implied booking. Q –Shebly Seyrafi: 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 headwind [indiscernible] back half of this year?

Actually, to admit I don’t remember if we had in the back half. I need to go and look into the number. I know clearly about Q2 just because when we analyzed the numbers we saw two very large transactions that were tens of millions and obviously created our pressure on the booking this quarter naturally.

And of course, there’s nothing embedded in this transaction. It just skews the measurements year-over-year. Q –Shebly Seyrafi: Okay. Separate ways, it looks like according to my map your EMEA revenue growth decelerated to 2% roughly from 9% in Q1. So, you did well in Asia, but what happened in Europe.

Actually, Europe highlighted the strongest one 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 the weaker quarter this quarter and they had a very strong quarter in the previous one. Q –Shebly Seyrafi: So, it’s just lumpy, is what you’re saying.

Yes, it can happen. Q –Shebly Seyrafi: Okay, thank you.

Our next question is from Andrew Nowinski with Piper Jaffray. Please proceed. Q –Andrew Nowinski: I was just wondering if you can provide any color on how you think Check Point is positioned in security for cloud-based applications relative to Palo Alto GlobalProtect Cloud Services and Zscaler?

I think its many different ways. I think first this area is an that we’re addressing, we’re building the solution and I think we’ll see some nice solutions. 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’re asking 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’re 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 with what we call Infinity 2.0 which 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’re positioned quite nicely. Q –Andrew Nowinski: Okay, thank you and then I just had a question on your product revenue growth or lack thereof. You had some new product in the 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. Thanks.

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 comment that in the US for example when we had the challenge with product growth, we did see 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 very positive thing and then I think that part of the business is growing and its 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 the multi-year deal it looks like subscriptions are growing, but they’re not really growing. So, we’ve actually a good metrics for that and we’re positive this quarter from everything I’ve 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. We focused on it. We have a lot of focus on that, then we saw like – you said nice trends this year. but I will tell when you look at the long-term trend it’s clear that the entire industry and we cannot ignore in the background is putting a lot of pressure on product by choice and moving all of this into subscription to put type of revenues which is recovering, Infinity is recovering model, cloud is recovering, virtual, licensing now is recovering revenues also in subscription. So, all the new products are being launched as a subscription.Now historically you have the gateway as a product and all the add-ons security solutions and subscription. Now even the product itself which is the license for the firewall if you want to call it that way is, be it on the cloud or as virtual in the private cloud is now being sold to subscription as well from two 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. Q –Andrew Nowinski: Understood. Thank you very much.

Our next question is from Dan Ives with Wedbush Securities. Please proceed. Q –Dan Ives: To the prior question, when you’re seeing that cloud and the dynamics going on there. Do you continue to think you can get there organically building out – 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 ForceNock that we’ve made at the beginning of the year is another example. I think overall my belief that the strength of what we provide and not that the strength of what we provide, but the real value of security is not having a super market of few dozen product each one addressing slightly different mission security from a different standpoint, but solved from the same vendor. The value of security is really combining it to one architecture it responds from what I see in the market place will remain the only vendor that is actually implementing this approach, our competitor 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 of the different needs. And I think in the long run I’m a big believer that threat approach is a must and win-win. And I think so the combination of one what we have 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 SaaS cloud application and so on and so forth is critical. But the only way to deliver the security level of world need [ph] and that’s what we have today and that’s what we’re expanding and building. Q –Dan Ives: Thank you.

Our next question is from Gregg Moskowitz with Mizuho Securities. Please proceed. Gregg, please check and see if your line is muted. Q –Gregg Moskowitz: Gil, I didn’t hear much commentary on Infinity and 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 we’ve got deals both from this quarter and previous quarters and new deals we sign pretty much the same amount of deal that we sign 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 Infinity, it 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 a small business 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. Q –Gregg Moskowitz: Okay, thanks Gil 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 and how are you thinking about that?

I think [indiscernible] potential for more revenues, more customers, more potential with the new feature that customer needs. On the same time keep in mind and not that I’m saying that there’s another option. On the same time when you come with a new version that means that the customers are here to spend their time upgrading and investing in the upgrade process itself. It sometimes slows them down from expanding because upgrading 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 wise thing to do and what we must and I think we’re the strongest in one is upgrading the customer base, bringing them all the time with the best security with the highest level of security I think that’s where we excel. From an operational standpoint, upgrades are time consuming for everyone. Q –Gregg Moskowitz: Okay, thank you very much.

Our next question is from John DiFucci with Jefferies. Please proceed. Q –John DiFucci: I’ve a two-part question and I think the first one is a sort of follow-up to Shelby’s. So, Tal, I think even the short-term or current billings were a little bit below our expectations they were up less than a 1% year-over-year. I guess can you provide any more commentary on the excess is not affected by duration. And perhaps the product launches at the end of the quarter could have delayed some purchases I’m thinking, but it sounds like sales execution it seems in progress 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 well its 3.5 weeks since the end of the quarter especially as Gil said, you’ve announced the highest end 26000 series model launch today. So just because trying to get a sense here business looks stable but it just feels like could be doing a little better.

First, when you’re talking about the implied booking it also affects you in the multi-year, even in the short run because if you would have got each year and the right time. The deal of that year then you would have – well you saw the growth because the deal that we’ve signed last year was not just a renewal, it was a significant growth. So, you missed that growth in the calculation of the implied this year. 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 this new product, what you call certify the new product and that can delay some transactions. Remember the launch of the high end was towards 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 and then they can choose to go one level down, get more throughput and pay less. It’s a short-term bad phenomenon but it’s good for the business because it increases the throughput of the customer so 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. Q –John DiFucci: Any commentary over the last three and half weeks, 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 high. I haven’t seen the updated number. The quarter started strong and very well, which we never say but even if I say it doesn’t matter, some quarter starts strong and end weak, some quarter start weak and ends strong. So, I’m just saying I’ve 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’ll end the quarter, just to be clear. Q –John DiFucci: Okay, but we like to hear when you’re happy Gil, so thanks a lot.

Our next question is from Walter Pritchard with Citibank. Please proceed.

Tal, just clarifying 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 in pending 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. If you can theoretically see what – things we’re in commit. In best case, it didn’t happen and being delayed to quarter after but it’s too theoretical to calculate. It’s obvious though because we’ve been doing this refreshes for a while, we know when we come with a new product line. The market is evaluating. It takes time to go through the channel. Many times, the partners want to sell [indiscernible] it takes time, so it’s typically. But the high end when I recall from the last time the high end typically takes slightly longer because it sometimes requires, it’s a very large customer and it require internal certification from their end.

And I would also add, that we use the new product to make some more changes than just replacing a 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’re trying a new model for subscription which we think is very competitive and can have – again any change like that can have positive effect and can have some negative effect because it changes business behavior that’s for the model that we launched the 2016 and 26000 we’re trying to -- we’re applying the same changes now for the 6500 introduced in the first quarter and again, where 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 try to limit the level of discounting that are given to them I think it was successful. But again, it sometimes delays things and sometimes constant disruption, so it’s not just technical changes in the product. We’re using the new product launches to try some new business changes that hopefully in the long run will have a positive effect.

And then Tal on the sales investments, can you talk about as we 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 marketing in 2020.

I think it’s way too early. I mean you know everything happens in Q4. So, I think we don’t look at that yet, we need to see how the Q [ph] is closed. We need to look at the productivity, we need to look at everything in Q3 and specifically in Q4 in order to make the plan for 2020. Typically, we start our planning in Q3, but extend there and wait, until the results of Q4 and after that we have the final budgeting. So, it’s a bit early to talk about it now.

Okay, great. Thanks for taking the questions.

Our next question is from Ken Talanian with Evercore ISI. Please proceed.

First off, I was wondering where there any changes to your renewal rates on either or 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 as presented as a purchase option 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 customers interested in that, it can longer time. Having said that, I saw some transactions that close really fast and I saw some transaction that close 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? Are they getting an extra benefit of they’re able to close the deal there?

Yes, they do, but again it’s more think about the customer. The customer is the one who’s supposed to take all these technologies and implement them over the next few years. So, the answer is yes, we give more incentive but its’ 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 their due diligence and by the many cases they need to combine different forces from different sub department of security, networking, operation to make that decision. So yes.

Thanks very much.

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

I’ve two related questions. I’ll ask concurrently. The first is, for the previous question. I just want to try to clarify. Do you believe that you’re seeing an impact – elsewhere the 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 how much revenues are non-firewall today? And how do you think about that over the next two to three years? How do you feel like you want to or seek to diversify your revenue streams? Thank you.

So, first, I don’t think that right now technologies like what Zscaler has is much impact or direct competition. What we’re doing maybe a marginal one, but not in the mainstream market and we don’t see a lot of I mean, real head-to-head competition between the two 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 depends 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 from the top of my head, but if I look at beyond maintenance and support that we sell, the portion of advanced technologies, advance security, technologies and capabilities today is probably bigger than the basic network firewall portion of our sales.

I would have said, is rule of thumb is 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 of the initial license which includes the architecture and the firewall and everything else is in the line of the subscription, meaning the anti-virus, anti-spam, advance threat protection and next generation threat protection, our SandBlast, our cloud licensing and our mobile and the Endpoint. So majority of the rest which is the add on technologies not all, but in a high level I will tell is in that line and as you can see, even if you look at this quarter you’ll see that the product and license was $122 million and the subscription was already $149 million, so it’s bypassed that.

All right. Thanks very much team.

Our next question is from Sterling Auty with JPMorgan. Please proceed.

This is Matt on for Sterling. Thanks for taking the question. So, I know someone who asked previously about the Europe performance. I just wanted to ask, if there were any changes happening in sales force similar to what was done in the US and if there were other factors that contributed to the results. Thanks.

Well I think in Europe we’re quite stable. Management structure is good. We did have a very good Q1. I think Q2 fix 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.

Great. Thanks.

Our next question is from Karl Keirstead with Deutsche Bank. Please proceed.

I just had two clarifications. Gil your comment that, product growth resumed in the US. I thought it was interesting and encouraging, just to put in context. When was the last time you saw US product growth? Was it 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 timeframe. 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 one or two that were particularly significant. I just want to be clear on what you meant by that. Thanks a lot.

I think first I’m doing a lot of changes in getting not just me – I mean the entire team here focused in a lot of changes inflecting sales measurements, sales discipline and being much more clear and about the activity levels of people in field. In terms of management changes, we’re also filling a lot of positions and some things replacing a lot of places we think which we have more potential and I mentioned Telcos as one.I think we’re making more and more changes in the US sales leadership and we’ll 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 the new leader for Asia that we’ve brought in the beginning of the year. So again, if I’m trying to recall from my memory, we’re doing a lot of changes. We just promoted somebody internal to run a sales enablement and sales planning and promote somebody else to take her position in another department. Overall a lot of changes, they’re okay which is not big. Most of which are not big resolution but affects being negatively. 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’re trying to achieve; activity management, new customers, working with the partners and the whole going high level in the food chain, Infinity consolidation and whole this family of attributes that I think are one big focus area.

Okay, thank you Gil. That’s very helpful.

Our next question is from Saket Kalia with Barclays. Please proceed. Q –Saket Kalia: Thanks for fitting me in here and taking my questions. I’ll just keep it to one just in the interest of time. For you Tal. Tal can you just give us a quick refresh on ITP and its impact to billings? Specifically, can you just remind us of these deals are largely annual and advanced for multi-year 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.

The answer is, they all persists. The billing doesn’t catch it because its typically a multi-year deal and it typically – let’s say the customer signs for three years. He has a commitment for three 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, its versus your billings 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 to the implied bookings.The second I will say, the accounting you’re absolutely right when you look at those deals. It 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 recovering revenues 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 we do serve value split of the deal majority of the dollars have been sucked into the subscription line, although it can get a quite a lot of product, but in the product, you’ll see a smaller portion. So, it will be all the lines, but majority will go to the recurring and specifically to the subscription. Q –Saket Kalia: That’s very helpful. Thanks very much.

We’ve reached the end of our question-and-answer session. I would like to turn the conference back over 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 and if not, we’ll catch up with you during the quarter at the conferences or on the road during an NDR. Thanks, and have a great summer, if we don’t talk to you. Bye.

Thank you, this concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.