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Check Point Software Technologies Ltd (NASDAQ:CHKP)
Q3 2019 Earnings Call
Oct 28, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Check Point Software Third Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded.

At this time, I will turn the conference over to Kip E. Meintzer, Global Head of Investor Relations. Mr. Meintzer, you may begin.

Kip E. Meintzer -- Head of Global Investor Relations

Thank you, Rob. I'd like to thank you all for joining us today to discuss Check Point's third quarter 2019 financial results. Joining me today on the call are Gil Shwed, Founder and CEO; along with our CFO and COO, Tal Payne. As a reminder, this call is webcast live on our website and is recorded for replay. To access the live webcast and replay information, please visit the company's website at checkpoint.com. For your convenience, the conference call replay will be available through November 4. If you'd like to reach us after the call, please contact Investor Relations by email at kip@checkpoint.com.

Before we begin with management's presentation, I'd like to highlight the following; during the course of this presentation, Check Point representatives may make certain forward-looking statements. These forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 include, but are not limited to, statements related to Check Point's expectations regarding business financial performance and customers. The introduction of new products, programs and pricing models, and the success of those products, programs and pricing models. The environment for security threats and trends in the market; our strategy and focus areas; demand for our solutions; our business and financial outlook, including our guidance for Q4 2019, because these statements pertain to future events, they are subject to various risks and uncertainties, actual results could differ materially from Check Point's current expectations and beliefs.

Factors that could cause or contribute to such differences are contained in Check Point's earnings press release issued on October 28, 2019, which is available on our website and other risk factors, including those discussed in Check Point's Annual Report on Form 20-F for the year ended December 31st, 2018, which is on file with the Securities Exchange Act 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 reasons for our presentation of non-GAAP information.

Now it's my pleasure to turn the call over to Tal Payne for a review of the financial results.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

Great, 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 third quarter. Revenues for the quarter increased by 4% year-over-year to $491 million and our non-GAAP EPS reached $1.44. Our revenues were slightly above the midpoint of our guidance and the non-GAAP EPS was at the top end of our guidance.

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

Now let's take a look at the financial highlights for the quarter. Revenue for the quarter came $1 million above the midpoint of our guidance. Product and security subscription revenues were $272 million, a 6% increase year-over-year. Our subscription revenues continue to be strong, with 13% growth, reaching $154 million [Phonetic]. Our software update and maintenance revenues increased to $219 million, representing 3% growth year-over-year. The growth in our subscription revenues is driven by our advanced solutions, mainly next generation Threat Extraction protection, CloudGuard Solutions, and Infinity. Deferred revenues as of September 30, 2019 reached $1.242 billion, a growth of $94 million or 8% year-over-year.

Revenue distribution by geography for the quarter was as follows; 46% of revenues came from Americas, 42% of the revenues came from Europe, Middle East and Africa region, and the remaining 12% came from Asia-Pacific. Since the beginning of 2019, Middle East and Africa parts are part of Europe, Middle East and Africa region, while before it was part of Asia-Pacific, Middle East and Africa region. The revenue distribution by geography for Q3 last year for comparison purposes, after the reclassification would have been, 47% of revenues came from Americas; 41% of revenues came from Europe, Middle East and Africa region; and the remaining 12% came from Asia-Pacific.

We continue to invest in our sales force and marketing in order to execute our growth strategy. As a result, non-GAAP operating margin for the quarter were 50%, same as the previous quarter and in line with our plans. Effective non-GAAP tax rate for this quarter was 19%, similar to the last quarter. Please note, that in the fourth quarter, we expect the tax rate to be around zero, as the lapse of statute limitation is expected to occur by the year end. Our expected tax rate for the year remains around 40% as predicted in the beginning of the year.

GAAP net income for the quarter was $188 million or $1.25 per diluted share. Non-GAAP net income was $217 million or $1.44 per diluted share. Our cash balances as of September 30, 2019 were $4.055 billion compared to $4.072 billion last year. Operating cash flow was $244 million. Collection from customers continue to be strong. Our cash payments increased, in line with our continued investment in sales and marketing. During the quarter, we utilized nearly the maximum quarterly buyback authorized and purchased 2.9 million shares for $323 million, at an average price of $112.

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

Gil Shwed -- Founder & Chief Executive Officer

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

We continue to expand our cyber security solution consolidation efforts, with the Infinity architecture. As you can see from the numbers, we had quite a good success with our cloud solutions. Yes, we continue to aim for much higher growth rates across our business. We're still in the period of transformation, moving from a traditional product business into more of an annuity model, we aim to drive our sales execution across all of our business areas. We continue to expand our global field management and conduct more in-field and marketing activities around the world. Naturally, we would like to see high growth rates sooner, but it does take time, and we remain focused on making that happen.

We place a lot of emphasis on the cloud, and we believe we have the most comprehensive architecture to secure cloud environments. As a result, we've seen nice successes. Cloud business results continue to be healthy, growth percentage remains quite high, some recent example of nice wins in the cloud space includes two of the world's largest accounting firms, two of the world's largest consulting firms, one of the world's largest business media firms, two of the world's largest retail franchises, two of the world's largest stock exchanges, and the list goes on with many of the world's top companies, including shipping, financial, telcos and government.

Our recent success didn't just focus on the cloud. We have won many projects with our advanced threat prevention for network, endpoints and mobile. One example for such a win is a new customer, an energy company in America. We asked them what made them choose Check Point? They quoted, few major reasons; one is that only Check Point has real time threat prevention. The competition simply lacks these capabilities as their threat analysis work in the background and don't stop the attack. The second reason was the superiority of our management. Our interface is more comprehensive and much easier to use. Things that takes hours with the competition, simply takes minutes with checkpoint. Overall we felt that Check Point has a better architecture, with much better TCO.

This is quite typical of what we learned from the marketplace. In both the qualitative and quantitative research we conduct, we see three main reasons that customers choose Checkpoint. First, is the real-time threat prevention. Second is the management capabilities; and third is the completeness of our security architecture.

Here is a real world example of a customer experience that just happened this quarter. The potential customers started testing our CloudGuard products. A week after starting trial, they had enough confidence to turn on the real-time prevention mode. They were in the middle of an IPO process, and that's where the story turned interesting. Our SandBlast technology embedded into the CloudGuard product caught a file which contained some command and control malware, that could have leaked very good [Phonetic] financial information. This model infected a file which was sent from their account to their bankers account. If that file would have gone through, you can just imagine the potential damage to the customer and the investment bank.

Many solution could have been deployed to handle this incident, by using almost any other solution in the marketplace, the cost of the investigation, forensic, collection and remediation of this incident could have been enormous, between hundreds of thousands to millions of dollars. By using the Check Point product, the file was cleaned by our Threat Extraction Engine, alerts were recorded and no damage occurred. The cost of this incident to the customer was zero, instead of the hundreds of thousands of dollars or more in real damages. This kind of incidents happen many times every day, in most cases we don't even hear the story, simply because the effectiveness of the real-time prevention solution. Unfortunately, our incidence response same is seeing an increase in incidents with a significant impact, which could have been eliminated, if the organization had been using our fifth generation threat prevention solution.

Turning to the subject to some of the new products we launched in recent quarters -- in recent months. We continue to upgrade our security appliance family. In July, we launched the 16,000 and 26,000 security appliance family. These high-end data center great models provide threat prevention performance in the range of 12 to 30 gigabits per second. On the other side of the scale, we launched the 1500 series of appliances earlier this month, with the starting price under $1,000 and the performance between 456 megabits to 660 megabits of threat prevention performance. This model show the strength and the scale of our architecture and the ability to provide the most comprehensive security architecture at all price and performance levels.

A new addition to our family of products was the CloudGuard Connect and CloudGuard Edge solutions. CloudGuard Connect allows the utilization of the same security architecture through cloud service. Connecting branch office directly to the cloud with no on-premise equipment. It opens the door to many new opportunities and is fully integrated into the same policies and management tools used by our customers.

One change we've also implemented with the new appliance model, is simplify the subscription process. As we discussed previously with the old models, every appliance included a bundled one year, next generation threat prevention subscription, and the customer could choose to upgrade it. In addition, the customer had to choose the support level they required, and in the second year, they had to renew both. With the new models we're simplifying the process. The appliances provided basic configuration and the support and security subscription are bundled into a single offer with three levels. So the first year and the following year looks the same, and there are fewer and simpler choices to make.

All customers receive access to 7/24 support services, with new models shift even more revenues into the annuity part of our business model. Still early to measure the effect of these business model changes, we will only see the full impact of these changes in the future. Talking about business models, makes a nice transition to speak about our projection for the next quarter. You know my regular caveat, it's hard to predict the future. There are many promising deals and results over lot of unknowns that can impact results.

With that said, our revenues for the fourth quarter expected to be between $527 million to $557 million, and non-GAAP EPS is expected to be between $1.93 to $2.04. GAAP EPS is expected to be approximately $0.19 lower.

Thank you. And now we'd be happy to answer your questions.

Questions and Answers:

Operator

[Operator Instructions]. First question is from the line of Brent Thill with Jefferies. Please proceed with your question.

Brent Thill -- Jefferies LLC -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

North America, we continue to invest in the sales and marketing organization, and one big change that we've conducted last quarter is the appointment of a new leader. We hired a new President for the Americas, Chris Scanlan. We had a lot of experience in our industry and with our channel. We've also hired few other people in the telco space, in the channel space, for the Americas. But I think this new high level appointment should take us a long way and should provide a lot of leadership and support for our field people in the Americas.

Operator

Our next question is from the line of Michael Turits from Raymond James.

Michael Turits -- Raymond James & Associates -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

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

Michael Turits -- Raymond James & Associates -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

I think we want to -- I think, first, we have people that are doing a very good job. And again, [Indecipherable] I was very pleased to see with many -- with many wins that we've seen all around the world. I think what we'd like to do is, to first get more get more new customers, that's a big focus. By the way, this quarter we did see a nice increase in the number of new customers. I would like to see more emphasis on the new strategic areas of the market, like mobile, advanced threat prevention and the cloud. And again, we've seen nice successes in all these areas. The cloud, the business was very healthy this quarter. So that's quite a good sign from that perspective. I think we can do much better on the product business, on the traditional product business, more gateways to more companies, more refreshes and more new customers. So that is an area that even consists a big part of our business and there we're doing well with it. We can do much better with that.

And last but not least, is enhancing our relationship and doing better with our partners in all places and all segments, both with our traditional channel partners, renewed energy for the telco sector, system integrators, and even adding new partners that will help us get to more customers and especially in the new areas like cloud places. So I think I have captured a very broad picture, but I think in -- for two minutes, I think it's a very broad picture for what we're doing.

Michael Turits -- Raymond James & Associates -- Analyst

Yes, thank you very much, Gil and Tal.

Operator

The next question is from the line of Shaul Eyal with Oppenheimer. Please proceed with your question.

Shaul Eyal -- Oppenheimer & Co. -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

I think the Engage plan is a new plan that we created with our partners, to really engage the partners in Check Point activities, rather than -- usually when you are discussing with partners, there's a lot of discussion about margins, about financials, which are all fine. But they don't drive the daily work in the field. And I think what we like to do, is drive the daily work in the field, and that's where we created the Engage app and the Engage program that will incentivize our channel partners at the sales rep Level, to do more work with us and go to customers.

I think it's being received well. I don't have a specific update about the usage and so on, but from what I hear, it's coming up quite nicely. I think we will base next year partner level on -- in big part on the Engage program and I think, again, we've heard good feedback about that. And I think in the next two months, we will see more about how it shapes up and which partners gain level, because we've been active and because they were going to more activities, and which partners may need some more push and -- and now we can see it, based on their activity level.

Shaul Eyal -- Oppenheimer & Co. -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

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

Shaul Eyal -- Oppenheimer & Co. -- Analyst

Thank you so much for that.

Operator

Our next question is from the line of Brad Zelnick with Credit Suisse. Please proceed with your questions.

Ryan MacDonald -- Credit Suisse -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

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

I think we're really seeing good traction of that. Right now, I am not seeing a lot of down shift for appliances. I think, by the way, that's also some of the changes that we've made to the Applied subscription model, try to help invest at the basic appliance may go -- may be slightly lower in price with the new appliances. But the subscription somehow compensates for that, and give the customers a simpler and easier way to account for that in the annuity side of business. But I also like to comment compared to [Indecipherable] have said so far was on the positive side of the new appliances, which I think is being received quite well. The only thing that I would say is that, we see that for large projects and large customers, it actually takes a long time to move to a new model. And I'd expect, when we come up with a new model from -- when I'm the consumer, I like to move to the new model the next day. What I'm seeing in the sales cycle to big enterprises, that it takes between three months to nine months, and sometimes even more, to get the new model into the sales cycle. Many times there's an RSP already with the old model. Many times customer need certification and the -- and so I mean the cycle is slightly slower than what I'd like it to be, when I would like to see all the new customers, all the new deals coming with the new appliances.

Ryan MacDonald -- Credit Suisse -- Analyst

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

Unidentified Speaker

In Q3 -- both in Q2 last year and in Q3 last year, we had large deals. Large deals, it means over $50 million. So yes, there were large deals in both Q2 and Q3, which did not happen and we didn't expect to happen in Q2 and Q3 this year. Q4, I'm trying to think if there was very large one. I don't remember this size like over $50 million in Q4.

Ryan MacDonald -- Credit Suisse -- Analyst

Okay, thank you.

Operator

Thank you. The next question is from the line of Fatima Boolani with UBS. Please proceed with your question.

Fatima Boolani -- UBS Equities -- Analyst

Good morning. Thank you for taking the questions. Gil, I have one for you, and Tal, one for you as well. Gil, we've seen the cloud security portfolio at Check Point expand pretty nicely over the last year. You're doing TAS, that you're doing Cloud Workload Protection, Cloud Security Posture Management. I'm wondering if you can speak to, if you have any bundles associated with these cloud capabilities and to the extent, you'd be willing to or would start breaking out cloud specific revenue in the financial model? And then I have a follow-up for Tal.

Gil Shwed -- Founder & Chief Executive Officer

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

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

Fatima Boolani -- UBS Equities -- Analyst

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

Tal Payne -- Chief Financial Officer and Chief Operating Officer

So it's basically billing, that's what you see in the deferred. If you look year-over-year it was, if I recall, if you look at the short-term growth in deferred revenues, it was around 8%, if I remember, and I think if you look historically, like in 2018 and 2019, you had some quarter with 7%, 8%, 9%, 11%, 10%, 8%. So I will say it's pretty much in the same vicinity. The long-term did change. So if you look year-over-year, long-term contracts or long-term deferred revenue this quarter increased year-over-year, again by 9% and if you look, last year, both in Q2, Q3 and Q4, and even this year you've seen 11%, 15%, 16%. So obviously we're seeing less billing with the long-term deferred revenues, which is affecting the total growth in the deferred revenues.

Fatima Boolani -- UBS Equities -- Analyst

Fair enough. Thank you.

Operator

The next question is from the line of Gregg Moskowitz with Mizuho. Please proceed with your question. Gregg, your line is open for question?

Gregg Moskowitz -- Mizuho Securities USA -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

I think both areas remains very, very promising. The potential in the Americas is very high. The potential in Europe is also very high. We are far from reaching the potential of the market. I think the same is true for our execution. We can do better and we can generate better results on the -- on both sides of the Atlantic Ocean. I'm pleased with some of what you've seen in Europe. As I said -- I mean we said I think we are investing more and more in the Americas. And by the way the Americas is not one size fits all, when I analyze it, I'm seeing -- by the way, its true both in Europe and in the Americas. We analyze our region in both places. I see regions that have done tremendously well this quarter, and I see region that were struggling a little bit. And that's true in Europe and that's true in the U.S. And actually what I was pleased to see because I've done a lot of in-depth analysis this quarter, is seeing some of the regions in the U.S. that are starting to show signs of good recovery, good wins and the right level of execution that I expect.

Gregg Moskowitz -- Mizuho Securities USA -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

I think, first, we have a terrific offering and I have tried it, it's actually very easy, you can just go on the web, get up and running, connect the branch office or connect few users very easily with -- with really few minutes, no training. Really simple on-boarding process, which is what people expect from a cloud solution like that, [Indecipherable]. I think the very two big differentiators in what we have, I don't know by the way, if the competitive landscape is that easy or that simple to turn on, it would be very hard to compete with what I've seen, with our product. What I definitely can say is, one is -- two things that differentiate ours, is what is the level of security? We provide much higher level of security, much higher level of threat prevention. And second is the ability to tie-in into the overall enterprise management and enterprise set of rules, I mean really big part of the same enterprise solution. So we've built our solution to support that, to be part of that, and we are seeing some nice demand of that. I don't have very high expectation from immediate results that we'll see, because I think that some of the targets market that we have are the large customers, and they're very well interested. But will take some time to onboard and to shift infrastructure. But it's definitely a promising area that we have.

Gregg Moskowitz -- Mizuho Securities USA -- Analyst

Great, that's helpful. Thank you.

Operator

Next question is from the line of Karl Keirstead with Deutsche Bank. Please proceed with your question.

Karl Keirstead -- Deutsche Bank -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

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

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

Tal Payne -- Chief Financial Officer and Chief Operating Officer

I would just say that the good news is the majority passed, the better news is that while, we have still a small portion that needs to move. While they move, it can help us increase, because when you buy the new appliances, then many times when they need to refresh, it can create an opportunity to sell -- to buy new product, when they finish to upgrade their software system. So I'm less concerned about the end of life of the software. I think it's a non-issue completely, because we know, if they need a bit more time, we can always provide more time. That's not a problem, it's completely in our hands. But it's more, I think an opportunity that when the more transition happens, the more an ability for us to help them refresh their install base and increase their product sales portion.

Karl Keirstead -- Deutsche Bank -- Analyst

Okay, thanks very much.

Operator

The next question is from the line of Ken Talanian with Evercore ISI. Please proceed with your question.

Kenneth Talanian -- Evercore ISI Institutional Equities -- Analyst

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

Tal Payne -- Chief Financial Officer and Chief Operating Officer

The pricing model, you mean what Gil was referring to, solid-state? First, of course we checked with customers and partners before, is simplify significantly for them, the universe. I'll give you an example, before when the pressure is on appliance, at that point of time, we gave them NGTP Incorporated. So they didn't have much of an option to choose if its NGFW or NGTP. On the other hand, they could have upgrade to NGT, if they chose to. Then they had to make a decision, what level of support they want? And they have different level of support, it can be the standard, the premium, the diamond they can choose on-site support, non-on site support and so on. So they have many-many options for buying that appliance.

Now it's a much simpler model. It's basically they choose appliance. It doesn't integrate in it, the subscription. So it's cheaper, in a sense or lower price when you come to the base model. That like you said, can hurt our product revenues, we understand that. But the benefit is, for the customers and for us, it now he has an ability to choose one of three layers--options, NGT, NGFW, NGTP or NGTX Package, including the support, which is 24-7. So there is only three options, and they can do that. And then in the second year, just renew it and continue. So customers love it, because it gives them much more flexibility. So if they choose not to have NGTP and just want NGFW, they can. If they want NGTX, they can still go with NGTX of course. But now they have the support embedded in it, in a very simple pricing model, because it's a percentage of the base price of the appliance. So it's not the price that is a fixed price, and this price can be similar historically between small appliance and may be one level above with the appliance. Now, it's the percentage of the base. So it's very-very easy for them to understand the pricing model, and therefore they should like it.

Kenneth Talanian -- Evercore ISI Institutional Equities -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

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

Tal Payne -- Chief Financial Officer and Chief Operating Officer

Now, I will say it for you. From the one that brought the new appliances, we see some that moved down, some that moved up. But remember that the percentage now is compensating for that. So we took it into account in the pricing. We know that on the product, it will be lower. But over time, we should see more in the subscription.

Kenneth Talanian -- Evercore ISI Institutional Equities -- Analyst

Great, thank you very much.

Operator

The next question is from the line of Walter Pritchard with Citi. Please proceed with your question.

Walter Pritchard -- Citi -- Analyst

Hi, thank you. Tal, just to follow up on that question you just had there, I guess, in the past, you've had -- you've had these shift spread more of the business that have gone from product to annuity. Anyway to quantify in terms of how much that shift may be under a base scenario, and how that might compare to shifts that you've seen in the past?

Tal Payne -- Chief Financial Officer and Chief Operating Officer

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

Walter Pritchard -- Citi -- Analyst

Okay. And then just a quick one on DSO, I think actually probably the lowest DSO you've seen in a number of quarters here drop into the 50s. Just wondering, anything around how the quarter progressed or a large field impacted that influenced that number? Thanks.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

No, it probably was slightly less back-end loaded. But in general, nothing dramatic. Collection remains the same. It's a good sign, DSO, but this time it came from the levels of the booking. So it's not -- it basically remains the same, in general. If you look at it by month, because we calculate by month, its the same DSO.

Walter Pritchard -- Citi -- Analyst

Great, thank you.

Tal Payne -- Chief Financial Officer and Chief Operating Officer

Sure.

Operator

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

Sterling Auty -- JP Morgan -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

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

For -- in terms of the architecture, I think we are providing each customer with a more private environment. It's still a cloud environment, but every customer get an instance. So data is more safe, is more secure, it's not shared with others and it -- and the specific policy what this customer has. is applied toward data. So it's much less, I mean from -- like a consumer service that you get, the secure pipe to a highly secured pipe, we've -- at your level, with your privacy and your level of management and your policy, much more in what our customers like to see, and based by the way, why they remain the number one targets that we have, is for small branch offices, but would like to enjoy this kind of capability.

Sterling Auty -- JP Morgan -- Analyst

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

Tal Payne -- Chief Financial Officer and Chief Operating Officer

So, it consists from all of the subscription. But specifically, the main growth coming from the Cloud, Infinity and NGTX or the SandBlast Zero Day protection. So that's the main one. Remember by the way, that Q4 has usually an effect also from the DLP in the compliance, and some of them come in Q4, and that can change sometimes the growth to slower or to faster, depends what happens. So it's very hard to predict.

Sterling Auty -- JP Morgan -- Analyst

Thank you.

Operator

Our next question is from the line of Shebly Seyrafi with FBN Securities. Please proceed with your questions.

Shebly Seyrafi -- FBN Securities, Inc. -- Analyst

Yeah. Thank you. I'm trying to gauge the comparison in billings in Q4. In Q4 of '18, your deferred actually accelerated from Q3 of '18. But you didn't call out large deals in Q4 of last year, which suggest the billings comparison is easier. So I'm trying to understand, do you think that the comparison with billings on a year-to-year basis is easier or harder in Q4?

Tal Payne -- Chief Financial Officer and Chief Operating Officer

I'm not sure. I followed you. Regarding the Q4, I was asked before, if I remember, a very large deal, I admit I didn't -- from the top of my head, I don't remember a very-very large deal, but Q4 is a huge quarter for support and subscription, and so its very hard to predict it. In general, I don't think we -- based on that number, that it's an easy compare, just because, if I recall, it was quite a large number. Q4 grows...

Shebly Seyrafi -- FBN Securities, Inc. -- Analyst

[Speech Overlap] quickly. There were large deals in Q2 and Q3 of last year, were there potentially large deals in Q4 of last year?

Tal Payne -- Chief Financial Officer and Chief Operating Officer

So I said, I don't recall. I don't have it in front of me, so I don't want to throw it on the top of my mind. But I remember it was very high growth. If I remember Q4 growth year-over-year, it was about 13%. So that was a huge number. So I would define it is a tough compare.

Shebly Seyrafi -- FBN Securities, Inc. -- Analyst

Okay, that's it. Thank you.

Operator

Our next question is from the line of Dan Ives with Wedbush Securities. Please proceed with your questions.

Daniel Ives -- Wedbush Securities Inc. -- Analyst

Thanks. Gil going into next year, I mean obviously you are not giving guidance. But just in terms of overall spending on security. I mean, is your sense out of your customer conversations, that spending, especially in the move to the cloud is actually increasing, flat, decreasing -- I'm just interested from your perspective? Thanks. On overall security.

Gil Shwed -- Founder & Chief Executive Officer

I think with overall security -- I mean all the customers at the high level are willing to invest in security. Also, all the customers have their budget under control. So I don't think that anyone has huge additions to their budget that are -- that they can spare. So we are looking somehow to balance between the new investment. We are going to invest a lot in the cloud space. I think it is going to be important, and it is going to be -- and it is by the way, a big place, where customers are investing and customers are putting their budgets. So we need to be there, we need to make it secure. By the way, I think that the importance of cloud security is also very-very high. We've seen almost all the cases of data leakage in recent year, result from weaknesses in the cloud. I mean -- I'm seeing it every day. When you make a small mistake on the cloud, it's being exploited within minutes. I have few horror cases like that from the last quarter that I've seen, how really a small mistake inside the company wouldn't even be noticed and wouldn't create any damage in the cloud, creates a damage within minutes.

So I think the cloud investment is going to be important. Overall, I think our challenge is not the overall spending environment, it is how we is -- how we get the customers to adopt the Check Point architecture in its entirety. That's the high level solution, and on the technical level, winning in as many product segments as we can, including the core gateways that we have. That's it's still a big opportunity that's still there and and we can capture an even bigger market share there.

Daniel Ives -- Wedbush Securities Inc. -- Analyst

Great and just tangentially, in terms of like -- in terms of private security deals, are you seeing more and more assets out there, that, from an M&A perspective, and in terms of valuations, maybe more sort of digestible, with a lot of private companies, in consolidation. I am just interested, is there any change in the M&A landscape, especially on smaller private companies? Thanks.

Gil Shwed -- Founder & Chief Executive Officer

Because the fragmentation of the market, I think there is many opportunities. Obviously some parts of the market valuation are getting out of control. But at the same time, we also see a lot of companies with really really cool technology that can fit our portfolio and, but may be a good fit. So I think there is no one answer to that. We do see some opportunities, and I think hopefully, we will be able to do more with that.

Daniel Ives -- Wedbush Securities Inc. -- Analyst

Thank you.

Operator

Thank you. We've reached the end of our question-and-answer session. It's time for one final question, which would be coming from the line of Phil Winslow with Wells Fargo.

Philip Winslow -- Wells Fargo Securities -- Analyst

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

Gil Shwed -- Founder & Chief Executive Officer

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

Tal Payne -- Chief Financial Officer and Chief Operating Officer

No. In general, we see -- I don't see something specific in telco. Telco, as you know, they are always very competitive, especially in pricing. We are creating a focus on the telco, as you know, because we believe there is a nice opportunity for us there. But we see nothing dramatic this quarter versus the previous quarter.

Philip Winslow -- Wells Fargo Securities -- Analyst

Great, thanks guys.

Operator

Thank you. I will turn the floor back to management for closing remarks.

Kip E. Meintzer -- Head of Global Investor Relations

Thank you guys for joining us this quarter. We look forward to seeing you out on the road at conferences and such. if you guys have any questions, please reach out to us after the call and we'll do our best to address any of those questions. Thank you and look forward to seeing you guys. Take care, bye-bye.

Operator

[Operator Closing Remarks].

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 & Chief Executive Officer

Unidentified Speaker

Brent Thill -- Jefferies LLC -- Analyst

Michael Turits -- Raymond James & Associates -- Analyst

Shaul Eyal -- Oppenheimer & Co. -- Analyst

Ryan MacDonald -- Credit Suisse -- Analyst

Fatima Boolani -- UBS Equities -- Analyst

Gregg Moskowitz -- Mizuho Securities USA -- Analyst

Karl Keirstead -- Deutsche Bank -- Analyst

Kenneth Talanian -- Evercore ISI Institutional Equities -- Analyst

Walter Pritchard -- Citi -- Analyst

Sterling Auty -- JP Morgan -- Analyst

Shebly Seyrafi -- FBN Securities, Inc. -- Analyst

Daniel Ives -- Wedbush Securities Inc. -- Analyst

Philip Winslow -- Wells Fargo Securities -- Analyst

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