Greetings, and welcome to Check Point Software Fourth Quarter and Full Year 2018 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

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

Thank you. I'd like to thank all of you for joining us today to discuss Check Point's 2018 fourth quarter and full year financial results. Joining me on the call today are Gil Shwed, Founder and CEO, along with our CFO and COO, Tal Payne. As a reminder, this call is webcast live on our website and is recorded for replay.

To access the live webcast and replay information, please visit the company's website at checkpoint.com. For your convenience, the conference call replay will be available through February 6. If you'd like to reach us after the call, please contact Investor Relations by 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 representatives may make certain forward-looking statements.

These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 include, but are not limited to, statements related to Check Point's expectations regarding business, financial performance and customers; the introduction of new products and programs and the success of those products and programs; the environment for security threats and trends in the market; our strategy and focus areas, demand for our solutions, our expectations regarding the acquisitions of Dome9 and ForceNock, our business and financial outlook, including our guidance for Q1 and full year 2019.

Because these statements pertain to future events, they are subject to various risks and uncertainties. Actual results could differ materially from Check Point's current expectations and beliefs.

Factors that could cause or contribute to such differences are contained in Check Point's earnings press release issued on January 30, 2019, which is available on our website; and other factors and risks, included in those discussed in Check Point's Annual Report on Form 20-F for the year ended December 31, 2017, which is on file with the Securities and Exchange Commission.

Check Point assumes no obligation to update information concerning its expectations or beliefs except as required by law. In our press release, which has been posted on our website, we present GAAP and non-GAAP results, along with a reconciliation of such results as well as the reasons for our presentation of non-GAAP information.

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

Thank you, Kip. Good morning and good afternoon to everyone joining us on the call today. I’m pleased to begin the review of the fourth quarter and the full year.

Revenues for the fourth quarter increased by 4% year-over-year to $526 million, towards the high end of our guidance and our non-GAAP EPS grew by 6% to $1.68, exceeding the high end of our guidance.

Before I proceed further into the numbers, let me remind you that our GAAP financial results include stock based compensation charges, amortization of acquired intangible assets and acquisition related expenses as well as the related tax effects. Keep in mind that as applicable, non-GAAP information is presented, excluding these items.

Now, let's take a look at the financial highlights for the quarter. Product and security subscription revenues were $307 million. Our security subscription revenues continued to be strong, with 13% growth year-over-year, reaching $147 million this quarter.

Our software update and maintenance revenues increased to $218 million, representing 4% growth year-over-year. The growth in our subscription revenues is driven by our advanced threat protection solutions, the SandBlast and our CloudGuard business.

During the quarter, we closed an impressive Infinity deal with variety -- in variety of industries, including large information and data corporation and a retail company. Deferred revenues, as of December 31, 2018, reached $1.338 billion, a growth of $151 million or 13% over December last year.

The deferred revenue growth is a reflection of the strength in our security subscription and support. Revenue distribution by geography for the quarter was as follows. 45% of revenues came from the Americas, 39% of revenues came from Europe, the remaining 16% came from Asia Pacific, Japan, Middle East and Africa region.

From a deal size perspective, this quarter, we had 102 customers with transactions over $1 million. The total value of this transaction continued to increase. Non-GAAP operating margin for the quarter was 53%, similar to the previous quarter, Q3. Effective non-GAAP tax rate for this quarter was 11%.

This quarter, similar to last year and as expected, our tax expenses included tax benefits from lapse of statutory [ph] limitations on certain provisions. GAAP net income for the quarter, for the fourth quarter of 2018 was $238 million or $1.51 per diluted share, an increase of 4% from the fourth quarter of last year.

Non-GAAP net income for the quarter was $264 million or $1.68 per diluted share, an increase of 6% from the fourth quarter of 2017. EPS exceeded the top end of our guidance. Our cash balances were $4.039 billion as of year-end. Operating cash flow was $249 million, similar to last year. Collections from customer continued to be very strong.

This quarter, part of Dome9 acquisition payment is presented in operating cash flow according to the accounting rules. Excluding this payment, the operating cash flow increased by 7%. During the quarter, we purchased 2.8 million shares for $305 million at an average price of $111 per share. Now, let's take a look into our 2018 full year highlights.

Revenues for the year was $1.916 billion, an increase of 3% from last year. During the year, subscription continued to be the main growth driver. The subscription revenues include majority of our new products and services, including our cloud and mobile solutions.

Bear in mind that cloud license is sold as annual subscriptions, while before we sold it as a perpetual license. On the Infinity front, in the transaction that closed during the year, we have seen an increase of tens to hundreds of percentage in the annual run rate. This is great news.

The product portion reduced since the allocation to subscription is quite large. This is due to the inclusion of all of our available services in the Infinity offering. Non-GAAP operating margin for the year was strong at 53%.

We continued to invest in our sales force and marketing efforts, the full effect for both, the headcount and the compensation increase will be reflected next year. Also 2019 will include the full effect of both of our acquisitions, Dome9 and ForceNock. Hence, we expect our margins to be around 50%. Effective non-GAAP tax rate for the year was 16%.

For 2019, we expect the tax rate for the year to be approximately 14%. Around 18%, 19% in Q1 to Q3 and around 0 in Q4, as the lapse of statute of limitation expected to occur in the fourth quarter as we've seen in the last few years. GAAP net income for the year was $821 million or $5.15 per diluted share. GAAP earning per share grew by 7%.

Non-GAAP net income for the year was $911 million or $5.71 per diluted share, reflecting an increase of 7% as well. For the year, cash flow from operation increased by 4%, reaching $1.130 billion compared to $1.090 billion in ’17.

During the year, the company repurchased approximately 10.3 million shares at a total cost of about $1.104 billion at an average price of $107. So now, I’ll turn the call over to Gil for his comments and such..

Thank you, Tal and hello everyone joining us today. As you've seen in the fourth quarter, our business results were better than our projections. Key drivers to our success and growth this past quarter were advanced security technologies, primarily our cloud and advanced threat prevention solutions.

These are subscription based solutions and their continued success is shifting our business into more of an annuity business model. During the year, we made progress on all our key areas of focus. We introduced and pushed our fifth generation security platform, Infinity and made headway in providing it as a platform to customers.

We introduced a new family of cloud security products, the CloudGuard family. It includes CloudGuard IaaS to secure public and private cloud and CloudGuard SaaS with secured software as a service supplication and prevent malware or account hijacking from penetrating into business environments.

The newest addition to our cloud security family is the Dome9 acquisition, which was completed in the fourth quarter and focuses on managing and enforcing security across multi-cloud, public cloud environments. It's a great product to get control over public cloud security implementation and speaks very well to our cloud security offering.

We started 2019 with our CPX 360 Sales, Partners and Customers Conference CPX 360 is held in three different locations. The first one was held in our Asia based -- for our Asia based customers and partner in Bangkok last week and was a great success. We had a higher participation than ever before.

We received excellent feedback on the content and we used it to launch some new initiatives and products for 2019. We’ve talked about the future of cyber security and our Gen 6 Infinity platform that is under development.

Today's IT environment secure primarily endpoints and networks and rely on highly sophisticated software, which is operated in relatively few points on the network. Future IT environments will include much more workloads which needs to be secured.

In the cloud, we will have new types of assets, virtual servers, containers, web and cloud services and computerless computing, such as cloud functions. Future IT environment will also need to secure many IoT devices that are starting to surround us.

Not to mention the mobile devices, which I believe are the number one threat to our privacy and security nowadays. Overall, I believe the amount of assets we will need to secure will increase by tenfold in the coming 3 to 5 years, but it's more than just the amount of assets we will need to secure.

If we take an attack, let's take a malicious file for an example. A malicious file can come from multiple attack vectors, email, file download, file server, mobile messaging app, et cetera.

I can easily count 9 different attack vectors in which a file can be delivered, multiply that by the number of technologies that are needed to present the different types of malware that can be embedded in a single file, at least 8 for that matter, you'll get the complexity of 72 different combination that needs to be resolved and secured.

Take it to the next level and look at the entire spectrum of security, as you'll easily get 16 attack vectors and 26 technologies over 400 combination that needs to be addressed, with no security experts in the world that can manage risk complexity and get it resolved and secure.

There is no other way to secure this entire environment without simplifying and consolidating security. Our future Infinity platform is built to support and provide a robust collection of security technologies to all these attacks vectors and to support millions of assets.

It would rely on cloud architecture that is self-updatable and provides vast amounts of services to many nano- security agent which will reside to everywhere security is needed and at every performance level. While it may sound futuristic, we are making progress quite rapidly.

This month, we introduced some new platforms that applied some of these values into our daily business. We introduced two new appliances that are optimized for threat prevention performance and double the performance we provide in various classes. These are matched by one of the more interesting products we launched called Maestro.

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

In the coming weeks, we will continue our series of CPX 360 conferences in the US and Europe. We expect to see record level of attendance in both conferences. But beyond technology, in 2018, we've made some significant changes to our sales force, focusing on new customer acquisition and going to the C-level of our current and prospective customers.

From my meeting with CIOs and CISOs, Chief Information Security Officers, I can say that with a great level of interest in our approach and platform. We're making great progress, but have a way to go to see the full impact of these changes.

Last year, we appointed a new Chief Customer Officer, we started 2019 with a new head of global partners and a new head for our Asia sales organization. So clearly, we continue to invest in our sales organization. Our technology and sales efforts are designed with one thing in mind, to be at the forefront of cybersecurity.

Our research team is one of the strongest in the world and last year delivered some major headlines. In the fourth quarter, our researchers identified the major chief of known and unknown campaigns towards the use of fileless techniques.

Our new set of some of those technologies were able to uncover and prevent these campaigns, despite their highly evasive nature. These included the [indiscernible].

Furthermore, researchers undiscovered several critical vulnerabilities in popular application and services, including the ability to penetrate drones through the DJI cloud control infrastructure and for those of you who play Fortnite or have kids that do, we protected you by finding a vulnerability in the Fortnite cloud, which allowed account hijacking.

Both DJI and Fortnite were fixed. We often talk about the use of automated tool in AI cyber security. We utilize some of these techniques and our engines were able to find 50 different vulnerabilities in an Adobe Reader in 50 days, highlighting the vulnerability of every piece of software and infrastructure around us.

Overall, it looks like the activity in cyberspace isn't slowing down and we'll have plenty of work ahead of us. So, this is a good time to talk about the 2019 projection. We expect to see a gradual change in our business model, as we continue to move more revenues into subscriptions.

And you know my regular caveat, it's hard to predict the future, results may vary, there are many factors that can help us achieve better results and many other factors that can cause worse results. With that in mind, let me share the projections for next year.

Revenues for the full year of 2019 are expected to be between $1.940 billion, up to $2.040 billion. That’s 1940 to 2040. Non-GAAP EPS for the full year is expected to be between $5.85 to $6.25, again 585 to 625. GAAP EPS for the full year is expected to be approximately $0.70 less.

For the first quarter, revenues are expected to be in the range of $460 million to $480 million and EPS in the range of $1.28 to $1.34. GAAP EPS is expected to be approximately $0.16 less. Thank you for all your support and we’ll be happy to open the lines for your insightful questions..

[Operator Instructions] Our first question is from Michael Turits with Raymond James..

Two questions. One, this looks like, a, a very good quarter or a better quarter for products on a sequential basis, even with the move to subscription. So, I was wondering if you could talk about what drove that.

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

So, I think for the quarter, we had, I think, a good quarter. I think, things were as we expected pretty much. We did win deals from – of all types on all types of customers, new customers, renewal customers. Again, we continued to see the shift towards subscription, but we still have a decent number of product sale.

I think this quarter for the first time, you'll notice that our subscription revenue surpassed the product revenue, which I think is a good sign for us and reflects what we're saying for a long time. As for the second time about margins for next year, I think first, our margins are very high and they’ve always been very high.

So I'm always saying for -- since we went public almost 23 years ago, that my focus is not managing the margin, but managing the effectiveness of the business, managing the growth and managing the technologies. Last year, I think our headcount grew by about 11%.

So as we move into 2019, that will be reflected in additional expenses, we only saw some of the expenses in 2018 and we will see all of it in 2019. We still expect to hire more people in 2019. We still expect to invest more in sales and marketing.

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

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

And I would just add that remember that also the acquisition of Dome almost had no effect in 2018, because we purchased it toward the end of the year and it's going to have a full year effect in the expenses next year and the smaller acquisition of ForceNock as well.

So all in all, I will say the effects of the acquisitions and majority of the increase of the headcount of last year which you will see the full effect of it next year and you will already see it in Q1. I mean, the reduction through those margins, you will see in Q1 already..

If I -- you talked about adding more headcount, but if you really think about what needs to be more effective for you in going to market and being competitive, is it just more salespeople or do you need a different approach, something that would make you, let’s say, more aggressive from a sales and marketing perspective?.

I think we’re doing fine, but I think we need both. I think it's -- the number one, I believe, is quality and not quantity. I always believed in that.

So I think that's a -- so we are working on how we address C level, about how we address new customer versus the majority of the investment, but in terms of coverage, yes, we can have more coverage and we can cover more customers, more areas, more accounts. And I think one last thing, which is very, very important is working with partners.

We are investing in working better in our partners, if you remember, our legacy, our business was with 100% reliance on partners.

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

I think that's why we hire the new head of global partners at the beginning of this year and I think we intend to invest more also in partnerships..

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

Great. Thanks so much for taking the question and congrats on another quarter of billings growth at market rates or thereabouts. I've got a question for Gil and then a follow up for Tal.

Gil, from all your meetings with CSOs and other tech executives, how are you thinking about the overall spending environment for security into 2019, because some are calling for a period of digestion and as you think about it, how does the environment factor into the 2019 outlook that you've provided?.

I think this can definitely happen. On one hand, everybody's talking about cyber as a top priority and about -- they want to invest more in cyber. On the other hand, IT budgets are under pressure and every IT departments and every purchasing agent is looking to reduce cost with every vendor and nobody is just throwing money.

They're all renegotiating [indiscernible] and reducing their -- trying to reduce their cost, which is very understandable. And I believe the key to our growth will come not from people throwing money and not from a hyper growth in the market and the market is growing, but it's not growing in crazy rates right now.

I think it will come from really penetrating more projects at the higher level and consolidating many things in the customer environment. That's a challenging task. But that’s I think the future of what we need to invest in, because that will be the real solution for security.

It’s not just a matter of business model, it's not just a matter of practicality, it’s a matter of what can really make the world secure.

I described in my -- in what I’ve earlier, the complexity of security, there is no other way to obtain security than to consolidate and move into a new type of platform and we are now building the platform that I believe can really provide cybersecurity for the next generation..

Excellent. Thanks, Gil. And Tal, now that we've got another quarter under your belt, selling Infinity, can you talk a bit about the impact of the model.

I mean, you mentioned it and you caveated the full year guidance to say that you're assuming some portion of the business is taking Infinity, but can you maybe quantify for us what those assumptions are and is it fair to say that if Infinity adoption is greater than expected, it can be a headwind to revenue, how should we think about that..

Yes. The second statement is correct. We [indiscernible] to continue in this space which we see more Infinity deals and we will see more in the future, but it takes time. We didn't expect anything over excessive here. So we took that into account in the model, but the range is exactly relating to items, like that for example.

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

If you have a run rate of 100,000 with a customer and it’s going up 150000 or to 300,000, depend on the customer and what was the opening point, which means in all cases, it's a great business deal, because we’re increasing the run rate and it’s great for the customer because it's getting much more secure.

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

So because it's more dollars are going into the services, less dollars going into the product and that's what I alluded to and I said, it's putting pressure on the product growth, but it can increase the subscription. So we took that at the midpoint is what we expect and if it will be faster, then it will have a greater effect on the product.

And if it will be slower, it will have slightly less. So that's a general comment about Infinity. But from a business perspective, which is what we are interested about and our run rate the future, it looks like really good transactions, good deals for the customers and for us..

Our next question is from Shaul Eyal with Oppenheimer and Company..

Thank you. Good afternoon, guys. Congrats on the solid sets of results. Gil, still sticking on the Infinity topic. So I think it's been right now about 18 months, probably less than maybe 2 years or so, feedback on the channel is quite encouraging.

I don't know whether it's too early to gauge a quantitative view, but from a qualitative perspective, can you talk to us about the incremental revenue opportunity you might be seeing from customers migrating to this platform, even on the expense of the product..

I think what we've seen is between, I think what Tal says between 50%, -- between – to doubling or even tripling the annual spend that a customer does with us, once we shift to Infinity, I think some of it come by getting more security, some of it come by consolidating and getting things that other people have done, not necessarily our direct competitors, but some -- the broad security space that we are consolidating into security.

And so I think that's kind of what we’re seeing. I think Infinity has two major effects right now. One is the immediate one with which we provide customers more security.

We get more stickiness into the environment and we get more revenues for that for the, in an annuity basis, so it's not affecting the individual quarter, but in the foreseeable future, it increases our run rate by again big percentages, which is the immediate effect. The second effect is the mind share.

When we're struggling with just, like every vendor by the way, when we're offering a product by product approach, it's a very different level than we speak to when you speak about Infinity. Infinity is where the CIO, in some cases, even the CEOs, CIOs, CISOs are listening, they are open to that approach.

Sometimes, they're going on that approach, in which case, we gain the immediate deal, sometimes, they’re very much ready to really roll their entire infrastructure into this program, but that opens the door to many, many other projects that we have.

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

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

And maybe a follow up for you Gil or for Tal, so I think we understand the investment Check Point has been pursuing throughout fiscal ‘18 and I think the ones that you will be pursuing during 2019 and my question is, aside from the recent hiring and future hiring, has anything changed in terms of channel compensation and I know you've addressed the need to reinvest within the segment, but anything changed on that front, on channel compensation and maybe even for Tal, on the gross margins, should we expect gross margins to remain stable for the most part throughout 2019?.

So from a channel perspective, not much have changed last year. This year, we are investing in a new channel program.

And I think the full effect of that will be actually be -- the main economical aspects of that, if there will be any, I don't know yet, will be in 2020, so we need – we’re starting with some new approaches to channel and it's more about working together, managing the activities and so on less about touching the economics.

I think this program will result in also some changes to the economics in 2020. I hope for the good, but I mean time will tell. About gross margins, Tal, I don’t know if you want to say anything..

No. Gross margin pretty much is also -- it remains in the same area. I always say the same for operating margin and gross margin, taking everything into account, it can be 1% higher, 1% lower. This is acceptable ranges, but I don't expect any material change there..

Our next question is from Andrew Nowinski with Piper Jaffray..

Okay. Thank you and congrats on the nice quarter.

I was -- you had very strong growth in billings this quarter, despite the average duration remaining essentially unchanged and I know Q4 is typically a strong renewal period, so I was wondering if you could talk about the impact from new renewals this quarter and if that contributed to the strong growth in billings?.

Yes. So I think it's – part of it is a reflection, because as you said, it's not about long term contracts, because long term is presented separately, and you can see the deferred revenues also grew very healthy, also in the short term deferred revenue, so we call it what 12%. So it’s pretty strong.

And the reason is that Q4 versus Q4, so it's not an effect of sequential period. We just had a strong quarter, we have it for 2, 3 quarters. The main reason is that if we see growth in the subscription, the majority of that, well, all deferred revenues or substantially all is -- and subscription, both of them are showing a healthy growth..

That's great. And then last quarter, you launched the new 23900 appliance. I was just wondering if you could give us any color on the initial traction of that appliance that you saw in Q4 and heading into 2019..

Remember, this is a high end unit. So, it's great, it started great, but remember, we're not talking about thousands or hundreds. It’s top end of the appliances. So it’s doing what we expected, it’s doing that..

But I do want to notice, this year, we started the year, last week, we launched two new appliance model, more in the mid-range, the 6500 and the 6800. They are providing like double the big performance in their class compared to our models and I think this is going to be something quite exciting this year.

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

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

Our next question is from Gabriela Borges with Goldman Sachs..

Great. Good afternoon. Thank you for taking my question.

Gil, I wanted to follow up on your earlier commentary on overall demand trends, just want to make sure I understood this basically your comments, is your base case assumption that there is more pressure this year on overall security spending relative to last year and any color that you can give on specific geographies or verticals like governmental carrier for the go forward, would be really helpful? Thank you..

I don't think that there is any major change, not according to what I see. I'm just saying these are the general trends in security, specifically in IT in general. People are very open to investing in cyber. On the same time, when you have a contract that's being renewed, any purchasing department is trying to reduce the cost to negotiate it down.

That's one end. The other hand, that is that companies are really, really confused about what to do with cyber. They want to do more, they really don't know what will be effective and what's the first priority. Sometimes, they're addressing the right targets, sometimes, they don't.

I think we've been saying -- I think that was a big thing that we talked about in 2018, we're facing now the fifth generation of cyber-attacks, most of your organization, most of the organizations in the world are still defending only against the third generation of cyber-attack. This is a huge gap that needs to be bridged.

And by the way, that’s the reason why so many attacks happen and everything is so vulnerable, if we’re protecting again Gen 3 and Gen 5 attacks come, it's no wonder which is a successful attack. But still the reason customers are not jumping is not just because they're uninformed or conservative in their approach, which happens too.

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

And I think it will take time until our approach will catch up and until we will be able to show and demonstrate how effective with this approach and believe me, it's extremely effective.

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

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

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

Is it right to think about the 50% for this year as being a little bit of a floor or is there a scenario where you would consider maybe dipping below 50% for a short period of time, based on how you’re thinking about the longer term lifetime value of the customer?.

I think – I’ll give you generic answer, because we don't plan like 5 years ahead to margin. As you can see and as Gil said, we don't really manage the margins. What we're trying to manage is the growth and the profitability of the company, which we've been doing very well and the fact on the, I don't expect it to be materially different.

It just is, for example, you find something very interesting, new markets, you want to grow, you want to expand, you have a investment in the cloud, you find another company and so on, things can change, but in general, I think it's a reasonable area..

Our next question is from John DiFucci with Jefferies..

I have a question for Gil and a follow up for Tal. So Gil, you mentioned the new 6500 and 6800 appliances and they -- some of the technology looks really interesting. Just curious, are these entirely new appliances or do they improve upon existing offerings in the enterprise category.

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

I think we will displace existing models. I think they are kind of priced and positioned right in the middle between several different models and I think because they provide much better price performance and extension of almost everything, we will replace some models that we currently have..

And Tal, margins remain very strong, which is nice to see and we've been expecting sales and marketing expense to sort of ramp up and we're not really seeing that, is this partly because of ASC 606 or IFRS 15 and the deferral of commissions on subscriptions, because as you pointed out, you're seeing more of a mix shift to subscriptions and even some initial maintenance or is there something more operational happening here, you're just not?.

I think because you're looking at the percentage and that can be confusing, because remember that Q4, because the revenues are so high, the percentage, you see a reduction, but if you look at the actual expenses, you see it’s increased and that's why I made sure you pay attention to it, because in Q1, you would see the same expense and more, that's why your margin will drop already in Q1.

So the answer is we’re investing a lot more and you will see, that's why it's already headcount that we have, that are already here, it’s just that in Q4, in percentage, you don't fill it, because the revenues are much higher..

Okay.

So just to make sure I understand, you've said similar things in several previous quarters, but are we just seeing like in this quarter, just seeing the revenue being better than perhaps the margin expectation would have been with a little bit lower revenue and you sort of outperformed, so we're just seeing that go to the bottom line, is that kind of what we're seeing here..

For sure, revenues are higher than you expected and obviously it helps your margin, that's one thing. And also remember that this year, we got some headwinds -- tailwinds on the dollar versus other currencies.

So, the dollar got stronger against the other currencies, it helped the EPS this year and next year, I don’t see it happening, but so take that also into account..

Our next question is from Saket Kalia with Barclays..

Hi, guys. Thanks for taking my questions here.

Tal, maybe for you, Gil had mentioned that new product Maestro and that architecture that enables some elasticity and network security, maybe specifically in Maestro Tal, can you talk about how the solution is priced, is that a product type of solution or is that subscription and what are the metrics that a customer is going to pay for one day adopt the Maestro type of solution..

So the idea that Maestro is enabling you to link many different -- large number of appliances, it's also an appliance, so it's priced the same, it's an appliance that you sell and you can buy a 6500 or you can buy the 6800 and just link it to Maestro, which is the orchestrator and then you can have one to 52 appliances.

So it enables you to scale very quickly and to get much more performance. In terms of the pricing, you can see it very clearly in our pricing and website, you'll recall that specific price of Maestro..

We’re mainly offering it right now with like selling a cluster of three or more appliances, which is actually priced quite competitively.

So it’s no big premium to that because we want people to deploy that technology and also the effect is actually -- can be quite high because today, most customers buy security in peers for high availability, so we buy two, we pay for two, but we get the performance of one.

If they buy Maestro, they will actually buy two, or buy three, but will get 3x the performance, they will get 2x the performance from the same cluster. So it works in load balancing and not just in high availability mode, which is a great benefit as you scale up..

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

That's great. Maybe just quick follow-up for you Gil. The question was asked before about channel compensation. I'm curious about whether anything with the sales force in terms of compensation here can change in 2019.

Obviously, we've got a new Chief Customer Officer and other kind of senior changes in the organization and we're trying to sell higher in our to customer base in terms of C level, how are you changing the comp model, if at all in ’19 to sort of encourage that sort of behavior..

I would say, the short answer is, every year we makes more tweaks. Our plan for 2019 is not revolutionary compared to 2019. It’s using the same principle.

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

So we will reward more of the employees on going to new customers and objectives like that, because I think the change needs to start. When you get to the result, that’s not the problem. When you achieve the results, you're happy and everything is fine.

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

Our next question is from Sterling Auty with JPMorgan..

Thanks. Hi guys.

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

You didn't hear it, because we didn't say. But I would say because we can’t split it now, right, it's all consolidated together with our product with the CloudGuard, we’re selling it through our entire field.

So when we acquired them, there was very minimal revenues and for next year, I hope it will be very large together with our sales force and our CloudGuard and our CloudGuard SaaS and IaaS, so it's all going to be combined..

Plus the Dome9, the second one, the ForceNock is really small technological approach [Technical Difficulty] no revenues now, and it would be part of the sixth generation platform that we are developing, I think it will be an essential component there to secure a web application, and API and things that are in the cloud..

Great. And then one follow up, have you made any changes or do you plan any changes on pricing for support and the software blades here for 2019..

Nothing material..

For what?.

For the software blade?.

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

We always do a few changes. We see what we can do that is benefiting to the customers and to us. So we’re saying in general, I don't see anything dramatic at this point of time. Bear in mind that the biggest change in subscription is the fact that it’s – all of Check Point products are included in Infinity.

So when you think about Infinity, the ultimate package of software blade and appliances, right. So it’s all together and that change already been made in last year..

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

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

Wondered if you can provide just some more detail on what you saw this year, especially as obviously you just changed the dynamic with Infinity, just sort of what you're seeing out there in the market would be great?.

I would say in general, the market was and remain very competitive. You have the players that play only on price and that's always a challenge, where you win is where you provide the value, value is Infinity, value is the quality of your solutions, value is your catch rates and so on.

So some players are fighting only on price, some players are fighting through a very expensive marketing. Some players fight through technology and quality of the solution. We believe this is ours. We invest much more in sales and marketing to combat those others.

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

Got it.

And then also just from a vertical perspective, anything stand out in terms of strength or weakness or and then as you look 2019, some of the things, I mean, others have called out, I mean, for example, service provider market being a little slower, just any sort of color you could provide on the vertical side would be great?.

On the vertical side, nothing major. I think we remain strong in financials, all the other vectors, we’re seeing all over, from all the different verticals are there.

There are verticals that we can invest more and will invest more, like telcos and others that I think they present, I mean, we’re selling a lot with – to them, but still where the potential is much, much higher. So I think there is nothing major here at this point..

And others, I don't know if still there is, but there was a lot of discussion about government and the government in the US, regarding budgets. Remember, we are not dependent on the government, so that's an advantage I think for Check Point. So we don't see anything dramatic in any of our verticals in general..

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

Just a question on cloud.

Are conversations toward any change with customers in terms of the move to cloud on the security side and now that you guys have been more acquisitive, feels that you go more in the offense, so maybe you can just walk through from a high level, how conversation you're changing in terms of the move to cloud and where Check Point fits there..

So the answer is yes. Every customer is interested in cloud, that comes up in every conversation. I think still early stages, but last year, we saw healthy revenues, healthy sales and I think growth of more than 100% in cloud.

We're clearly growing there and that's starting to be a real business for us, not anymore, very small numbers, the numbers are starting to be meaningful. Hopefully, 2019, it will be slightly more..

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks..

Thank you for joining us today. We look forward to speaking to you after the call. If you'd like a call back, please just send me an email and we’ll follow up with you. And other than that, we will see you at the conferences over the next quarter. Thank you and have a great day guys. Bye-bye..

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