Check Point Software Technologies Ltd. (CHKP) Q4 2018 Earnings Conference Call Transcript

Check Point Software Technologies Ltd (CHKP -1.65%)
Q4 2018 Earnings Conference Call
Jan. 30, 2019, 08:35 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Greetings and welcome to the Check Point Software Fourth Quarter 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. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. 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.

Kip E. Meintzer -- Head of Global Investor Relations

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 & 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 6th. If you'd like to reach us after the call, please contact Investor Relations by email at [email protected].

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 acquisition 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 31st, 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'd like to turn the call over to Tal Payne for a review of the financial results.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

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 full year.

Revenues for the fourth quarter increased by 4% year over year to $526 million, toward 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 stop base compensation charges and monetization 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 including these items.

Now, let's take a look at the financial highlights for the quarter. Products and securities subscription revenues were $307 million. Our security subscription revenues continue to be strong with 13% growth year over year, reaching $147 million this quarter. Our software updates 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 Solution, the SandBlast, and our CloudGuard business.

During the quarter, we closed an impressive Infinity deal in a variety of industries, including a large information and data corporation and a retail company. Deferred revenues as of December 31, 2018 reached $1,338,000,000, a growth of $151 million or 13% over December of 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 Euro, the remaining 16% came from Asia-Pacific, Japan, Middle East, and Africa regions.

From a deal side perspective, this quarter we had 102 customers with transactions over $1 million. The total value of these transactions continues 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 statutes of limitations on certain provisions.

GAAP net income 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 or $1.68 per diluted share, an increase of 6% for the fourth quarter of 2017. EPS exceeded the top end of our guidance.

Our cash balances were $4,039,000,000 as of year-end. Operating cash flow was $249 million, similar to last year. Collections from customers continue 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 in to our 2018 full year highlights. Revenues for the year was $1,916,000,000, an increase of 3% from last year. During the year, subscriptions 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 this cloud license is sold as annual subscriptions while before we sold it as a perpetual license.

On the Infinity front, in the transaction that was closed during the year, we have seen an increase of 10s to 100s of percentage in the annual run rate. This is great news. The product portion reduced since the allocation to subscriptions is quite large. This is due to the inclusion of all of our available services in the Infinity offering

Non-GAAP operating margins for the year were strong at 53%. We continue to invest in our sales forces and marketing efforts. The full effect for both, the head count 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 rates for the year of 16%. For 2019, we expect the tax rates for the year to be approximately 14%; around 18%-19% in Q1-Q3 and around 0% in Q4 as the lapse of statute of limitation is 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 earnings per share grew by 7%. Non-GAAP 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 $1,130,000,000 compared to $1,019,000,000 in '17. During the year, the company repurchased approximately 10.3 million shares at a total cost of $1,104,000,000 at an average price of $107.

For now, I will turn the call over to Gil for his comments and such.

Gil Shwed -- Founder and Chief Executive Officer

Thank you, Tal, and hello everyone joining us today. As you've seen in the fourth quarter, our business results were better than our projection. Key drivers to our success and growth this past quarter were our Advanced Security Technologies, primarily our Cloud and Advanced Threat Prevention solutions. These are subscription-based solutions and their continued success is shifting our business in to more of an annuity business model.

During the year, we made progress on all our key areas of focus. We introduced and pushed our 5th 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 GA to secure public and private cloud, and CloudGuard SaaS which secures software as a service application and prevent malware or account hijacking from penetrating in to this environment.

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 fits very well in to our cloud security offerings.

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 for our Asia-based customers and partners in Bangkok last week and was a great success. We had 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 Gen6 Infinity platform, which 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 work loads 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 1 threat to our privacy and security nowadays.

Overall, I believe that the amount of assets we will need to secure will increase by 10-fold in the coming three to five years. But it is more than just the amount of assets we will need to secure. If we take an attack method, 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, etc. I can easily count nine different attack vectors in which a file can be delivered. Multiply that by the number of technologies that are needed to prevent the different types of malware that can be imbedded in a single file, at least eight for best measure, you'll get the complexity of 72 different combinations that needs to be resolved and secured.

Take it to the next level and look at the entire spectrum of security and you'll easily get 16 attack vectors and 26 technologies, over 400 combinations that needs to be addressed. There is no security expert in the world that can manage this complexity and get it resolved and secured. 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 our vast collection of security technologies to all these attack vectors and to support millions of assets. It will rely on cloud architecture that is self-updateable and provides vast amounts of services to many non-security agents which will reside 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 their class. These are matched by one of the more interesting products we launched called Maestro. Maestro is designed to provide cloud grade scalability to network security. It provides organization with almost unlimited network security elasticity by chaining network security appliance in a very simple way and turning them into a giant security powerhouse with capability, resiliency, and performance which 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 a 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 prospect customers.

From my meeting with CIOs and CISOs, Chief Information Security Officers, I can say that there is a great level of interest in our approach and platform. We are 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 it delivered some major headline. In the fourth quarter, researchers identified the major shift of known and unknown campaigns toward the use of file less techniques. Our new set of SoundBlast technologies were able to uncover and prevent these campaigns despite their highly invasive nature. These included the Gand group Krab ransomware, Ursnif banking trojan, and the 109 crypto jacker.

Furthermore, our researchers uncovered several critical vulnerabilities in popular applications and services, including the ability to penetrate drones through the DGI cloud control infrastructure. And for those of your who play Fortnite, or have kids that do, we protected you by finding a vulnerability in the Fortnite cloud that allowed account hijacking. Both DGI and Fortnite were fixed.

We often talk about the use of automated tools in Ai cybersecurity. We utilized 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 projection for next year.

Revenues for the full year of 2019 are expected to be between $1,940,000,000 up to $2,040,000,000. Non-GAAP EPS for the full year is expected to be between $5.85 to $6.25. 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 to $480 million, an 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

Thank you. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate you have arrived in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the * keys. Please ask one question and one follow-up question.

Our first question is from Michael Turtis with Raymond James. Please proceed with your question.

Michael Turits -- Raymond James -- Analyst

Hey, guys. Good afternoon. Two questions. One, this looked like a very good quarter, 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 the second question is margins into next year, as you have them going down a bit again. Maybe you could walk through what's flowing through from this year and what the incremental investments are into next year.

Gil Shwed -- Founder and Chief Executive Officer

So, I think for the quarter we had a good quarter. Things were as we expected, pretty much. We did win bills from all types, and all types of customers; new customers, renewal customers. Again, we continue to see the shift toward subscription, but we still have a decent number of product sales. I think this quarter, for the first time, you'll notice that our subscription revenues surpassed the product revenues, which I think is a good sign for us and reflect that we're safe 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 thankful since we went public almost 23 years ago. But 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 also 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 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 are 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.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

And I will just add, remember there is also the acquisition of Dome that almost had no effect in 2018 because we purchased it toward the end of the year and it's going to have the full year effect in the expenses next year, and the smaller acquisition of ForceNock as well. So, all in all, I would say the effect of the acquisitions and majority of the increase of the headcount of last year, which we will see the full effect of it next year. And you will already see it in Q1. The reduction to those margins you will see in Q1 already.

Michael Turits -- Raymond James -- Analyst

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?

Gil Shwed -- Founder and Chief Executive Officer

I think we are doing fine, but I think we need both. The number one, I believe, is quality and not quantity. I always believed in that. So, we are working on how we address C-level, about how we address new customers. That's 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 percent reliance on partners. These days, I think we've taken more ownership of 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 hired a new Head of Global Partners at the beginning of this year, and I think we tend to invest more, also, in partnerships.

Michael Turits -- Raymond James -- Analyst

Okay. Thanks, guys.

Operator

Our next question is from Brad Zelnick with Credit Suisse. Please proceed with your question.

Brad A. Zelnick -- Credit Suisse -- Analyst

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 CISOs 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?

Gil Shwed -- Founder and Chief Executive Officer

I think that can definitely happen. On one hand, everybody's talking about cyber is a top priority and about they want to invest more in cyber. On the other hand, IT budgets are under pressure and every IT department and every purchasing agent is looking to reduce costs with every venture. Nobody is just throwing money. They are all renegotiating their contracts and trying to reduce their costs, which is very understandable. 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 project at the higher level and consolidating many things in the customer environment. That is 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 what I said 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.

Brad A. Zelnick -- Credit Suisse -- Analyst

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 to the model? I mean, you mentioned it in your caveated 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?

Tal Payne -- Chief Financial Officer and Chief Operating Officer

Yes. The second statement is correct. We assumed like it will continue at this pace 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 in to 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 great, 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 to 150,000 or to 300,000, depends on the customer and what was the opening point, which means in all cases it's a great business deal because we increased in 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 a majority of those are in a subscription line. Hence, the discount rates for the product is increasing, right? Because more dollars are going into the services, less dollars are going into the product. And that's what I alluded to when I said it's putting pressure on the product growth but can increase the subscription line. So, we took that at the midpoint of what we expect. And if it will be faster, 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 for the future, it looks like really good transactions. Good deals for the customers and for us.

Brad A. Zelnick -- Credit Suisse -- Analyst

Thank you so much.

Operator

Our next question is from Shael Eyal with Oppenheimer and Company. Please proceed.

Shaul Eyal -- Oppenheimer & Company -- Analyst

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 two 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 qualitive 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?

Gil Shwed -- Founder and Chief Executive Officer

I think what we've seen between, I think what Tal says, between 50% to --

Tal Payne -- Chief Financial Officer and Chief Operating Officer

Ten!

Gil Shwed -- Founder and Chief Executive Officer

To doubling or even tripling the annual expense that the customer does with us once we shift to Infinity. I think, some of it comes by getting more security, some of it comes by consolidating and getting things that other people have done. Not necessarily our direct competitors, but from the growth security space that we are consolidating into security. So, I think that's kind of what we are 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 on 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, like every vendor by the way, when we are offering a product by product approach, it's a very different level than we speak to when we speak about Infinity. Infinity is where the CIO, and in some cases even the CEOs, CIOs and CISOs are listening. They are open to that approach. Sometimes they are going on that approach, in which case we gain the immediate deal. Sometimes they're not ready to roll their entire infrastructure into this program, but that opens the door to many, many other products which we have.

So, I think, from what I get from the field and the customers and the channel, is 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 projects or these better functions and features." So, I think that's the two roles that Infinity plays in right now.

Shaul Eyal -- Oppenheimer & Company -- Analyst

Got it. And then maybe a follow-up for you, Gil, or for Tal. I think we understand the investments Check Point has been pursuing throughout fiscal '18 and 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? I know you've addressed the need to reinvest within the segment, but anything changes on that front, on channel compensation? And maybe even for Tal, on the growth margins, should we expect growth margins to remain stable, for the most part, throughout 2019?

Gil Shwed -- Founder and Chief Executive Officer

So, from a channel perspective not much has changed last year. This year we are investing in a new channel program. And I think the full effects of that will actually be... The main economic effects of that, if there will be any, I don't know yet, will be in 2020. So, we are starting with some new approaches for 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 time will tell.

About growth margins, Tal, I don't know if you want to say anything?

Tal Payne -- Chief Financial Officer and Chief Operating Officer

No, growth margin pretty much is, also, it remains in the same area. I always say the same for operating margin and growth 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.

Shaul Eyal -- Oppenheimer & Company -- Analyst

Thank you so much.

Operator

Our next question is from Andrew Nowinski with Piper Jaffray. Please proceed with your question.

Andrew Nowinski -- Piper Jaffray -- Analyst

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

Tal Payne -- Chief Financial Officer and Chief Operating Officer

Yeah. So, I think part of this 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 in the short-term deferred revenue. If I recall, it was 12%. So, it's pretty strong. The reason is it's Q4 versus Q4. So, it's not an effect of the sequential period. We just had a strong quarter. We have it for two or three quarters. The main reason is that if we see growth in the subscription the majority of that number, well all deferred revenues or substantially all is in subscription. Both of them are showing a healthy growth.

Andrew Nowinski -- Piper Jaffray -- Analyst

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?

Tal Payne -- Chief Financial Officer and Chief Operating Officer

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

Gil Shwed -- Founder and Chief Executive Officer

But I don't know if you noticed. This year we started the year, last week we launched two new appliance models more in the midrange; the 6500 and the 6800. They are providing double the performance in their class compared to other models. I think this is going to be something quite exciting this year. And I also mentioned Maestro. I think this can be a big change in the marketplace by being able to chain many, many of these to achieve almost unlimited performance in cloud like operation with resiliency, scalability, flexibility that's never been seen before.

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

Andrew Nowinski -- Piper Jaffray -- Analyst

Okay. Thank you.

Operator

Our next question is from Gabriela Borges with Goldman Sachs. Please proceed with your question.

Gabriela Borges -- Goldman Sachs -- Analyst

Great. Good afternoon. Thank you for taking my question. Gil, I wanted to follow-up on your earlier commentary on overall demand trends. I just want to make sure I understood 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 you can give on specific geographies or verticals like government or carrier for the go forward would also be really helpful. Thank you.

Gil Shwed -- Founder and Chief Executive Officer

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 not in general. People are very open to investing in cyber. At 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 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 target. 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 6th generation of cyber-attacks. 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 breached. By the way, that's the reason why so many attacks happen, and everything is so vulnerable. If we're protecting against Gen3 and a Gen5 attack comes, it's no wonder it's a successful attack.

But still, the reason customers are not jumping is not just because they are uninformed or conservative in their approach, which happens too. It's also because if they will now start to address all the hundreds of combinations of things they need to secure, they get really, really confused and they don't know what to do. I think it will take time until our approach will catch up and until we'll be able to show and demonstrate how effective is 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 just a real-world example of what a security team of six people can do with Infinity, a security team of 30 people with seven or either different products can not achieve. So, this is huge effectiveness and savings that companies can achieve.

Gabriela Borges -- Goldman Sachs -- Analyst

That's helpful. Thank you. The follow-up, if I may, is on the longer-term way to think about margins and the models 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? Thanks.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

I'll give you a generic answer because we don't plan the next five years ahead in the margin, as you can see. 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. I don't expect it to be materially different. For example, you find something very interesting, new market. You want to grow. You want to expand. You have a new investment in the cloud. You find another company, and so on. Things can change. But in general, I think it's a reasonable area.

Gabriela Borges -- Goldman Sachs -- Analyst

That's very helpful. Thank you.

Operator

Our next question is from John DiFucci with Jefferies. Please proceed with your question.

John DiFucci -- Jefferies -- Analyst

Thank you. I have a question for Gil and a follow-up for Tal. So, Gil, you mentioned the new 6500 and 6800 appliances and some of that technology looks really interesting. I'm just curious, are these entirely new appliances or do they improve upon existing offerings in the enterprise category? I guess what I'm trying to figure out is will they displace existing products or are they just sort of a new thing supplementing your portfolio?

Gil Shwed -- Founder and Chief Executive Officer

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

John DiFucci -- Jefferies -- Analyst

Okay. Great. 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?

Tal Payne -- Chief Financial Officer and Chief Operating Officer

I think because you're looking at the percentage. And that can be confusing because remember the Q4, because the revenues are so high, then in the percentage you see a reduction. But if you look at the actual expense, you see it increase. And that's why I make sure you pay attention to it because in Q1 you will see the same expense and more. That's why your margin will drop already in Q1.

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

John DiFucci -- Jefferies -- Analyst

Okay. Just to make sure I understand that. You've said similar things in several previous quarters. But are we just seeing in this quarter the revenue being better than perhaps the margin expectation would been with a little bit lower revenue and you sort of out performed so we're just seeing that go to the bottom line? Is that kind of what we're seeing here?

Tal Payne -- Chief Financial Officer and Chief Operating Officer

Sure. Well, sure. If the revenues are higher than you expected, then obviously it helps your volume. That's one thing. And, also, remember that this year we got some headwind? Tailwind?

Kip E. Meintzer -- Head of Global Investor Relations

Tailwind.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

Tailwind of the dollar versus the other currencies. So, the dollar got stronger against the other currencies. It helped the EPS this year. Next year I don't see it happening. So, take that also into account.

John DiFucci -- Jefferies -- Analyst

Perfect. Thank you very much.

Operator

Our next question is from Saket Kalia with Barclays. Please proceed with your question.

Saket Kalia -- Barclays -- Analyst

Hey, guys. Thanks for taking my questions here. Tal, maybe for you. You know, Gil had mentioned a new product, Maestro, and that architecture that enables some elasticity in network security. Maybe specifically in Maestro, Tal, can you talk about how that solution is priced? Is that a product type of solution or is that subscription? And then, what are the metrics that a customer is going to pay for when they adopt a Maestro type of solution?

Tal Payne -- Chief Financial Officer and Chief Operating Officer

So, the idea is that the Maestro is enabling you to link a 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 1-52 appliances. So, it's enabling 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. Do you recall the specific price of Maestro?

Gil Shwed -- Founder and Chief Executive Officer

We may be offering it right now with 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 can actually be quite high because today most customers buy security in pairs for high availability. So, they buy two, they pay for two, but they get the performance of one. If they buy Maestro, they'll actually buy two or buy three but will 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.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

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

Saket Kalia -- Barclays -- Analyst

That's great. That's great. Maybe just a 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 year, 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 into our customer base in terms of C-level. How are you changing in comp model, if at all, in '19 to sort of encourage that sort of behavior?

Gil Shwed -- Founder and Chief Executive Officer

The short answer is every year we make small tweaks. Our plan for 2019 is not revolutionary compared to 2018. It's using the same principles. If you want me to expand on that, I would say that what I'm 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 bonus, which will be based on 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 with -- When you get to the results, 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 with our salespeople, 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.

Saket Kalia -- Barclays -- Analyst

Very helpful. Thanks, guys.

Operator

Our next question is from Sterling Auty with JP Morgan. Please proceed with your question.

Sterling Auty -- JPMorgan -- Analyst

Yeah, 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?

Tal Payne -- Chief Financial Officer and Chief Operating Officer

You didn't hear because we didn't say. Because you can't split it now, right? It's all consolidated together with our product, with the CloudGuard, with selling it to 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. Yeah, so it's all going to be combined.

Gil Shwed -- Founder and Chief Executive Officer

That's Dome9. The second one, the ForceNock is really small technological approach with no revenues now, and it will be part with the 6th 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.

Sterling Auty -- JPMorgan -- Analyst

Great. And then one follow-up. Have you made any changes, or do you plan any changes on pricing or support and the Software Blades here for 2019?

Tal Payne -- Chief Financial Officer and Chief Operating Officer

Nothing material.

Gil Shwed -- Founder and Chief Executive Officer

For what? For the...

Tal Payne -- Chief Financial Officer and Chief Operating Officer

For the Software Blade.

Gil Shwed -- Founder and Chief Executive Officer

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

Tal Payne -- Chief Financial Officer and Chief Operating Officer

That's not the Software Blade subscription. We always do a few changes. We see what we can do that is benefiting to the customers and to us. I would say, in general, I don't see anything dramatic at this point in time. Bear in mind that the biggest change in subscriptions is the fact that all the Check Point products are included in Infinity. So, when you think about Infinity as the ultimate package of Software Blades and appliances, right? So, it's all together. And that change has already been made in the last year.

Operator

Our next question is from Phil Winslow with Wells Fargo. Please proceed with your question.

Philip Winslow -- Wells Fargo Securities, LLC -- Analyst

Hey. Thanks, guys, for taking my question. I just wanted to focus back in on just the pricing environment. I wonder if you could just provide some more detail on what you saw this year, especially as, obviously, you just changed the dynamic with Infinity. Just what you're seeing out there in the market would be great.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

I would say, in general, the market was and remains 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 very extensive marketing. Some players fight through technology and quality of the solution, we believe this is us. We invest much more in sales and marketing to combat those others. And in general, I would say I didn't see anything changing except for the fact the market was and remains very competitive.

Philip Winslow -- Wells Fargo Securities, LLC -- Analyst

Got it. And, also, just from a vertical perspective, anything stands out in terms of strengths or weakness? As you look in 2019, similar thing, others have called out for example the service side of market being a little slower. Just any sort of color you could provide on the vertical side would be great.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

On the vertical side?

Gil Shwed -- Founder and Chief Executive Officer

Nothing major. I think we remain strong in financials. All the other vectors we're seeing all over. All the different verticals are there. There are verticals that we can invest more and will invest more, like Tel Corps, we're selling a bunch to them. But still, the potential is much, much higher. So, I think there is nothing major here at this point.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

I don't know if there still is, but there was a loud 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.

Philip Winslow -- Wells Fargo Securities, LLC -- Analyst

Awesome. Thanks, guys.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

Thank you.

Operator

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

Daniel Ives -- Wedbush Securities -- Analyst

Yeah, thanks for letting me in. Just a question on cloud. Are conversations starting to change with customers in terms of the move to cloud on the security side? And, obviously, you guys have been more inquisitive. It feels like you're going more on the offense. 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 sits there. Thanks.

Gil Shwed -- Founder and Chief Executive Officer

So, the answer is yes. Every customer is interested in cloud. It comes up in every conversation. I think it's still early stages, but last year we saw healthy revenues, healthy sales, and I think growth of more than 100% in clouds. We are clearly growing there, and that's starting to be a real business. For us, they are small numbers. The numbers are starting to be meaningful. Hopefully, 2019 it will be slightly more.

Daniel Ives -- Wedbush Securities -- Analyst

Thanks.

Operator

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.

Kip E. Meintzer -- Head of Global Investor Relations

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'll see you at the conferences over the next quarter. Thank you and have a great day, guys. Bye-bye.

Operator

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

Duration: 51 minutes

Call participants:

Kip E. Meintzer -- Head of Global Investor Relations

Tal Payne -- Chief Financial Officer and Chief Operating Officer

Gil Shwed -- Founder and Chief Executive Officer

Michael Turits -- Raymond James -- Analyst

Brad A. Zelnick -- Credit Suisse -- Analyst

Shaul Eyal -- Oppenheimer & Company -- Analyst

Andrew Nowinski -- Piper Jaffray -- Analyst

Gabriela Borges -- Goldman Sachs -- Analyst

John DiFucci -- Jefferies -- Analyst

Saket Kalia -- Barclays -- Analyst

Sterling Auty -- JPMorgan -- Analyst

Philip Winslow -- Wells Fargo Securities, LLC -- Analyst

Daniel Ives -- Wedbush Securities -- Analyst

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