Greetings. Welcome to the Check Point Software third quarter 2019 earnings conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I will turn the conference over to Kip Meintzer, Head of Global Investor Relations. Mr. Meintzer, you may begin.
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 fourth. 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 at 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 31, 2018, which is on file with the Securities 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 the reconciliation of such results, as well as the reasons for our presentation of non-GAAP information. It's my pleasure to turn the call over to Tal Payne for a review of the financial results.
Great. Thank you, Kip. Good morning, 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. Our non-GAAP EPS reached $1.44. Our revenues were slightly above the midpoint of our guidance. 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. Let's take a look at the financial highlights for the quarter. Revenues for the quarter came $1 million above the midpoint of our guidance. Products and security subscription revenues were $272 million, a 6% increase year-over-year.
Our subscription revenues continue to be strong with 13% growth, reaching $154 million. Our software update and maintenance revenues increased to $219 million, representing 3% growth year-over-year. The growth in our subscription revenues is driven by our advanced solutions, mainly Next-Generation Threat Extraction Protection, CloudGuard solutions, and Infinity. Deferred revenues as of September 30, 2019, reached $1,242 million, 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 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 margins for the quarter were 50%, same as the previous quarter and in line with our plans. Effective non-GAAP tax rates for this quarter was 19%, similar to the last quarters. Please note that in the fourth quarter, we expect the tax rate to be around zero, as the lapse of statute of limitation expected to occur by the year-end.
Our expected tax rate for the year remains around 40% as predicted in the beginning of the year. 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. Collections from customers continue to be strong. Our cash payments increased in line with our continued investment in sales and marketing. During the quarter, we utilized nearly the maximum quarterly buyback authorized and purchased 2.9 million shares for $323 million at an average price of $112. Let's turn the call over to Gil for his comments.
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 and transformation as we continue to focus on elevating our customer security environment into the fifth generation of cyber protection. This means that we have taken upon ourselves quite an ambitious goal of preventing the most advanced cyberattack, and providing an integrated cyber solution for all elements of the modern IT infrastructure, networks, data centers, endpoint, mobile, cloud, and IoT. We continue to extend our cybersecurity solution consolidation efforts with the Infinity architecture. As you can see from the numbers, we had quite a good success with our cloud solution.
Yet we continue to aim for much higher growth rates across our business. We're still in the period of transformation, moving from a traditional product business into more of an annuity model. We aim to drive our sales execution across all of our business areas. We continue to expand our global field management and conduct more in-field and marketing activities around the world. Naturally, we would like to see higher growth rates sooner, but it does take time, and we remain focused on making that happen. We place a lot of emphasis on the cloud, and we believe we have the most comprehensive architecture to secure cloud environments. As a result, we've seen nice successes. Cloud business results continue to be healthy. Growth % 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. 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, endpoint, 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 a 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 take hours with the competition simply take minutes with Check Point. Overall, they felt the Check Point has a better architecture with much better TCO. This is quite typical of what we learned from the marketplace. In both the qualitative and quantitative research we conduct, we see three main reasons that customers choose Check Point. First is the real-time threat prevention, second is the management capabilities, and third is the completeness of our security architecture. Here is a real-world example of a customer experience that has just happened this quarter. The potential customer is starting 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. That's where the story turned interesting. Our SandBlast technology, embedded into the CloudGuard product, caught a file that contained some command and control malware that could have leaked very confidential information. This malware infected a file that was sent from their account to their banker's account. If that file would have gone through, you can just imagine the potential damage to the customer and the investment bank. Many solutions could have been deployed to handle this incident. By using almost any average 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. 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 the hundreds of thousands of dollars or more in real damages. These 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 incident response team is seeing an increase in incidents that have significant impact, which could have been eliminated if the organization had been using our 5th-generation threat prevention solution. Turning the subject to some of the new products we launched in recent months. We continue to upgrade our security appliance family. In July, we launched the 16 and 26,000 security appliance family. These high-end and data center-grade models provide threat prevention performance in the range of 12 to 30 gigabits per second.
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 450 megabits-660 megabits of threat prevention performance. These models show the strength and the scale of our architecture and the ability to provide the most comprehensive security architecture at all price and performance levels. A new addition to our family of products was the CloudGuard Connect and CloudGuard Edge solutions. CloudGuard Connect allows the utilization of the same security architecture through a 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 simplifying 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 appliance is provided in a basic configuration, and the support and security subscription are bundled into a single offer with 3 levels. The first year and the following years looks the same, and there are fewer and simpler choices to make. All customers receive access to 7 by 24 support services. This new model shifts even more revenues into the annuity part of our business model. It's too early to measure the effect of these business model changes. We will only see the full impact of these changes in the future.
Talking about business models makes a nice transition to speak about our projection for the next quarter. You know my regular caveat, it's hard to predict the future. There are many promising deals, and there is also a lot of unknowns that can impact results. With that said, our revenues for the fourth quarter are expected to be between $527 million-$557 million. Non-GAAP EPS is expected to be between $1.93-$2.04. GAAP EPS is expected to be approximately $0.19 lower. Thank you, and now we'd be happy to answer your questions.
Thank you. At this time, we'll now be conducting a question and answer session. That we may address questions from as many participants as possible, we ask that you please limit yourself to one question and one follow-up. If you'd like to ask a question today, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. First question is from the line of Brent Thill with Jefferies. Please proceed with your question.
Thank you. If you could just comment on some of the increased investments in sales and some of the productivity enhancements that you're seeing, particularly in North America, it would be helpful.
In North America, we continue to invest in the sales and marketing organization, 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. He had a lot of experience in our industry and with our channel. We've also hired a few other people in the telco space, in the channel space for the Americas. I think this new high-level appointment should take us a long way and should provide a lot of leadership and support for our field people in the Americas.
Our next question.
Brent, Jefferies.
Our next question's from the line of Michael Turits from Raymond James.
Hi, Gil and Tal. To the extent you can you comment on overall demand for security and what you're seeing, any weaknesses in any geos, Europe, anything on the telco service provider side?
I think overall demand remains stable, remains healthy. I think our market enjoys a very high level of demand, enjoys, I think, a very high level of strategic view. On the other hand, suffers from a lot of fragmentation and a lot of confusion and a lot of competition in all aspects and in all sizes. Overall, I think demand is quite healthy, and I haven't seen any specific issues around that.
Okay. If I can get a follow-up, as I 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. 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?
I think first, we have people that are doing a very good job. Again, this quarter, I was very pleased to see with many wins that we've seen all around the world. I think what we'd like to do is to first get more new customers. That's a big focus. By the way, this quarter, we did see a nice increase in the number of new customers. We'd like to see more emphasis on the new strategic areas of the market, like mobile, advanced threat prevention, and the cloud. Again, we've seen nice successes in all these areas. The cloud business was very healthy this quarter, so that's quite a good sign from that perspective. I think we can do much better on the product business, on the traditional product business, more gateways to more companies, more refreshes, and more new customers.
That is an area that even though consists a big part of our business and we were doing well with it, we can do much better with that. 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. I think I've captured a very broad picture, but I think for two minutes, I think it's a very broad picture for what we're doing.
Thank you very much, Gil and Tal.
The next question is from the line of Shaul Eyal with Oppenheimer. Please proceed with your question.
Thank you. Good afternoon, guys. One for Gil, one for Tal. Gil, this is something I've asked about last quarter. With respect to the Engage plan, the frequent flyer type of plan, we would like to hear about any new updates you can share with us from a customer's perspective, also from the channel.
I think the Engage plan is the new plan that we created with our partners to really engage the partners in Check Point activities rather than, usually when you discuss things with partners, there's a lot of discussion about margins, about financial, which are all fine, but they don't drive the daily work in the field. I think what we'd like to do is drive the daily work in the field, and that's where we created the Engage app and the Engage program that will incentivize our channel partners at the sales rep level to do more work with us and go to customers. I think it's being received well. I don't have a specific update about the usage and so on, but from what I hear, it's coming up quite nicely.
I think we will base next year partner levels in big part on the Engage program, and I think, again, we've heard good feedback about that. I think in the next two months, we will see more about how it shapes up and which partners gain level because they've been active and because they were going to more activities, and which partners may need some more push, and now we can see it based on their activity level.
Understood. Gil or Tal, as you further think about the ongoing shift, as you've indicated, of the business model towards an annuity-driven one, would there be any architectural changes to your appliances down the road? In other words, could we be seeing Check Point embedding, I don't know, more ASIC-like or hardware in its appliances to accelerate throughput and performance down the road?
I think at this point, that wouldn't be our focus, and I'll explain why. 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 threat landscape. I think that's not a stable environment. That's not an environment when we set the roadmap. That's an environment where the threats in our world are setting the roadmap. I think on that front, we've seen a lot of success with the open architecture that we are utilizing. We have the most agile software.
I think we demonstrate, again, customers that test our product in-depth see the superiority of security. We hear it from almost every customer that have gone in-depth to the analysis. What we've found over time that in order to do that, the right architecture is an open architecture. ASICs that can do a good job in accelerating very simple operation simply fail when it comes to advanced capability that security needs. Most of our focus is going to remain on the open architecture that we are developing.
Thank you so much for that.
Our next question is from the line of Brad Zelnick with Credit Suisse. Please proceed with your questions.
Great. Thanks for taking the questions. This is Ray McDonough on for Brad. My first question is for Gil. Last quarter, you announced new high-end appliances, and while it's still early on in 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?
I think we're seeing a good acceptance for the new appliance model, both the 16,000 and the 26,000. Another one, by the way, that adds a lot of value to the market is what we call the Maestro Orchestrator. The Maestro is actually quite revolutionary. Maestro, we came in earlier in the year, at the beginning of the year, it's already actually starting to gain share and get into the market in nice volumes. 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, with what we call cloud-like performance, very high level of flexibility and very high level of resiliency. I think we're seeing good traction of that. Right now, I'm not seeing a lot of downshift for appliances.
I think, by the way, that's also some of the changes that we've made to the appliance subscription model, try to help it, that the basic appliance 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 and the annuity side of business. What I also like to comment on that, all the things I've 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.
I'd expect when we come up with a new model, when I'm the consumer, I like to move to the new model the next day. 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 RFP already with the old model. Many times customer needs certification. The cycle is slightly slower than what I'd like it to be, when I'd like to see all the new customers, all the new deals coming with the new appliances.
Great. Thanks. That was really helpful. A follow-up for Tal, if I could. Can you just remind us if there were any large deals that impacted billings last year, as you were facing tough comps, on a year-over-year basis, and can you remind us if there was anything in Q4 that we should be paying attention to? Thanks.
In Q3, both in Q2 last year and in Q3 last year, we had large deals. Large deals, it means over $50 million. Yeah. There were large deals in both Q2 and Q3, which did not happen and 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.
Okay. Thank you.
Thank you. The next question is from the line of Fatima Boolani with UBS. Please proceed with your question.
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 CASB, 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. I have a follow-up for Tal.
I think you are right. We are seeing good traction with the cloud product. It's actually a broad family with a lot of details. 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. Overall, we're seeing very good traction on that, both on securing the cloud with our technology, also on the cloud management and the cloud compliance side of business. We're seeing a good traction. Also for the newer technologies like the CloudGuard SaaS that secure SaaS applications and Office 365 and so on. We don't intend to break the revenue down based on the specific family. It's simply too small. Some of the families are too small.
In terms of bundling that, first, we do offer one strategic value, which is part of the Infinity model that we have. In the future, I think we will see, I'm not sure if I'll call it bundling, I think we will see some new and creative business models around the cloud, because I think we want to offer much more revolutionary architectures and technologies around the cloud.
Fair enough. Tal, for you, just looking at deferred revenue, I don't think we've seen this type of seasonality, or sequential down tick in deferred revenue growth since at least 2012, based on my model. What are some of the things that we should consider here that could potentially be weighing on the growth of this metric?
It's basically billing. That's what you see in the deferred. If you look year-over-year, it was, if I recall, if you look at the short-term growth in deferred revenues, it was around 8%, if I remember. I think if you looked historically, like in 2018 and 2019, you had some quarter with 7%, 8%, 9%, 11%, 10%, 8%. I'll say it's pretty much in the same vicinity. The long term did change. If you look year-over-year, long-term contracts or long-term deferred revenues this quarter increased year-over-year again by 9%. If you look last year, both in Q2, 3 and 4, and even this year, you've seen 11%, 15%, 16%. Obviously, we're seeing less billing with the long-term deferred revenues, which is affecting the total growth in the deferred revenues.
Fair enough. Thank you.
The next question is from the line of Gregg Moskowitz with Mizuho. Please proceed with your question. Gregg, your line is open for a question.
Thank you very much, 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. On the face of it, that was, I would say, perhaps a little surprising, just given some of the caution I think many of us have been hearing overseas. Conversely, your North America revenue declined roughly mid-single digits on a sequential basis and was probably a little weaker than I think many would've thought. I'm just kind of wondering if you could comment on both of these regions, just from a demand perspective, or more specifically, if you're seeing any changes at all in the competitive landscape.
I think both areas remain very promising. The potential in the Americas is very high. The potential in Europe is also very high. We're far from reaching the potential of the market. I think the same is true for our execution. We can do better, and we can generate better results on both sides of the Atlantic Ocean. I'm pleased with some of what you've seen in Europe. As I've said, I think we are investing more and more in the Americas. By the way, the Americas is not one size fits all. When I analyze it, by the way, it's true both in Europe and in the Americas. We analyze our region in both places. I see regions that have done tremendously well this quarter, and I see regions that were struggling a little bit.
That's true in Europe, and that's true in the U.S. 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.
Yeah, that's helpful. Thanks, Gil. 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.
I think first we have a terrific offering, and I've tried it. It's actually very easy. You can just go on the web, get up and running, connect a branch office or connect few users very easily with really few minutes, no training. Really simple onboarding process, which is what people expect from a cloud solution like that to ease all that process. I think there were two big differentiators in what we have. I don't know, by the way, if the competitive landscape is that easy or that simple to turn on. It would be very hard to compete with what I've seen with our product. What I definitely can say is two things that differentiate ours is, one is the level of security. We provide much higher level of security, much higher level of threat prevention.
Second is the ability to tie into the overall enterprise management and enterprise set of rules, really being part of the same enterprise solution. We've built our solution to support that, to be part of that, and we're seeing some nice demand of that. I don't have very high expectation from immediate results that we'll see because I think some of the target markets that we have are the large customers, and they're very well interested, but it takes them time to onboard and to shift infrastructure, but it's definitely a promising area that we have.
Great. That's helpful. Thank you.
Next question is from the line of Karl Keirstead with Deutsche Bank. Please proceed with your question.
Thank you. Gil, 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 end of support date in September. It can sometimes be hard for us on the outside to determine whether a big OS migration like this is a catalyst to upgrade or a reason perhaps to hesitate. I'd love if you could share your thoughts about what you're seeing with that migration issue in 3Q and how you expect it to play out in 4Q. Thank you.
First, I mean, it's a very good point. Again, what we are 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 our customer heads. I think what I'm pleased to see is that the majority of our customers now are on R80. That's very good. There's still a portion, a minority, but still an important portion that haven't migrated to R80. We are supporting them. We are supporting both what we're doing now, and we'll 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.
I'm seeing some customers that it would help them if some of these things were easier. I'm seeing other customers when it's a no-brainer, and they like the situation that we are in and that we are with. I can say, I can't put right now, it's very hard for me to quantify that impact at this point.
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, and many times when they finish the refresh, it can create an opportunity to buy new products when they finish to upgrade their software system. I'm less concerned about the end of life of the software, I think it's a non-issue completely. If they need a bit more time, we can always provide more time. That's not a problem. It's completely in our hands. 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 the product sale portion.
Okay. Thanks very much.
The next question is from the line of Ken Talanian with Evercore ISI. Please proceed with your question.
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.
The pricing model, you mean what Gil was referring to. I'll say, first, of course, we checked with customers and partners before. It simplifies significantly for them the universe. I'll give you an example. Like before, when they purchase an appliance, at that point of time, we gave them the NGTP incorporated, so they didn't have much of an option to choose if it's NGFW or NGTP. On the other hand, they could have upgraded to NGTX if they chose to. They had to make a decision what level of support they want. 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. They had many options for just buying that appliance. Now it's much simpler model. It's basically they choose the appliance.
It doesn't integrate in it the subscription, so it's cheaper in a sense or lower price when you come to the base model. That, like Gil said, can hurt our product revenues. We understand that. The benefit is for the customers and for us that now we have an ability to choose one of three layers, options, NGFW, NGTP, or NGTX package, including the support, which is 24 seven. There's only three options, and you can choose that, and then in the second year, just renew it and continue. Customers love it because it gives them much more flexibility. If they choose not to have NGTP and they 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. It's not a price that is a fixed price, and this fixed price can be similar historically between small appliance and maybe 1 level above it appliance. Now it's a percentage of the base, so it's very easy for them to understand the pricing model, and therefore, they should like it.
Understood. I guess as part of that, have you seen a greater inclination to move to the higher pricing of those three?
As I said, I think it's too early to say because what I've seen that especially on the higher-end models, it takes customers a little bit longer time to simply shift the model. I haven't seen enough cases to see.
Now, I will say this one. 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. 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.
Great. Thank you very much.
The next question is from the line of Walter Pritchard with Citi. Please proceed with your question.
Hi. Thank you. Tal, just to follow up on that question you just had there. I guess in the past, you've had these shifts where more of the business has gone from product to annuity. Any way 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?
First, remember that when they buy the new appliance, they have to choose one of the packages. All of them, when they buy an appliance, they will have a subscription portion and of course, a support portion. The lowest they can go is NGFW, but they can go up to NGTX, including the premium. It's included in all of these options, or majority of them, there will be an uplift in the subscription. The short-term price is in the product line.
Okay. Just a quick one on DSO. I think actually, probably the lowest DSO you've seen in a number of quarters here dropped into the fifties. Just wondering, anything around how the quarter progressed or large deal impact that influenced that number? Thanks.
No, it probably was slightly less back and loaded, but it's 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 basically remains the same in general. If you look at it by month, because we calculate by month, it's the same DSO.
Great. Thank you.
Sure.
Our next question is from the line of Sterling Auty with JP Morgan. Please proceed with your question.
Yeah. Thanks. Hi, guys. Gil, wanted to go back to the CloudGuard Connect commentary. You talked about solution being more secure. In those large enterprises, I think both security and performance are the key issues. Can you comment to kind of the architecture that you're using in that product 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?
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-based inspection capabilities, more than any other vendor in the marketplace. All of that put our security level in a much, much higher level. The fact, by the way, that when you talking about processing files and things that I've described, I think we're the only vendor that actually offer all these things in a mode that prevent mode, that you don't get what's called patient zero is going to be caught, and not first you get infected, and then hours later, you need to deal with the consequences because it was detected. This stands for the way we do the level of security that we provide.
In terms of the architecture, I think we are providing each customer with a more private environment. It's still a cloud environment. Every customer gets an instance of where data is more safe, is more secure, it's not shared with others, and the specific policy that this customer has is applied to their data. It's much less, from like a consumer service that you get a secure pipe to a highly secured pipe with your level, with your privacy, and your level of management and your policy. Much more in what our customers like to see, that's, by the way, why the main, the number one target that we have is for small branch offices that would like to enjoy this kind of capability.
Got it. 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? In other words, which bundles, which products are driving the growth?
It consists from all the subscription, but specifically the main growth coming from the Cloud, Infinity and NGTX, or the SandBlast Zero-Day Protection. That's the main one. Remember, by the way, that Q4 have usually an effect also from the DLP and the compliance, that some of them come in Q4, and that can change sometimes the growth to slower or to faster, depends what happens. It's very hard to predict.
Thank you.
Our next question is from the line of Shebly Seyrafi with FBN Securities. Please proceed with your questions.
Yeah. Thank you. I'm trying to gauge the comparison in billings, in Q4. In Q4 of 2018, your deferred actually accelerated, from Q3 of 2018, but you didn't call out large deals in Q4 of last year, which suggests the billings comparison's easier. 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?
I'm not sure I followed you. Regarding the Q4, I was asked before if I remember a very large deal. I admit, from the top of my head, I don't remember a very, very large deal. Q4 is a huge quarter for support and subscription. It's very hard to predict it. In general, I don't think based on that number, that it's an easy compare. Just because if I recall, it was quite a large number. Q4 growth-
It was.
Yeah. Q4 growth.
Let me stop you quickly. There were large deals in Q2 and Q3 of last year. Were there potentially large deals in Q4 of last year?
I said, I don't recall. I don't have it in front of me, so I don't want to throw it from the top of my mind, but I remember it was very high growth. If I remember, Q4 growth year-over-year was about 13%, so that was a huge number. I would define it as a tough compare.
Okay. That's it. Thank you.
Our next question is from the line of Dan Ives with Wedbush Securities. Please proceed with your questions.
Yeah, thanks. Gil, going into next year, I mean, obviously you're not giving guidance, but just in terms of overall spending on security, is your sense in a lot of your customer conversations that spending, especially in the move to the cloud, is actually increasing, flat, decrease? I'm just interested from your perspective. Thanks. On overall security.
I think with overall security, all the customers at the high level are willing to invest in security. All the customers have their budget under control, so I don't think that anyone has huge additions to their budgets that they can spare. We're 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, by the way, a big place where customers are investing and customers are putting their budget. 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 years result from weaknesses in the cloud. I'm seeing it every day.
When you make a small mistake on the cloud, it's being exploited within minutes. I have a few horror cases like that from the last quarter that I've seen, how really a small mistake, that inside the company wouldn't even be noticed and wouldn't create any damage, in the cloud, creates damage within minutes. I think the cloud investment is going to be important. Overall, I think our challenge is not the overall spending environment, it's 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 still a big opportunity that's still there, and we can capture an even bigger market share there.
Great. Just tangentially, in terms of private security deals, are you seeing more and more assets out there from an M&A perspective, in terms of valuations, maybe more sort of digestible with a lot of private companies and consolidation? I'm just interested, is there any change in the M&A landscape, especially on smaller private companies? Thanks.
The fragmentation of the market, I think there is many opportunities. Obviously, at some parts of the market, valuation are getting out of control. At the same time, we also see a lot of companies with really cool technology that can fit our portfolio, and that may be a good fit. I think, there's no one answer to that. We do see some opportunities, and I think, hopefully, we will be able to do more with that.
Thank you.
Thank you. We've reached the end of our question and answer session. We have time for one final question, which will be coming from the line of Phil Winslow with Wells Fargo.
Hey, thanks guys for taking my question. Gil, just a question for you. Curious just what you're seeing in the pricing environment out there. Particularly, if you could maybe talk through sort of the enterprise versus the telco space, which I know has been a growing focus for you guys.
I think it remains very competitive. I haven't seen big changes on that. Tal, if you have anything to add on that?
I would say in general, I don't see something specific in telco. Telcos, they're always very competitive, especially in pricing. We're creating a focus on the telcos, because we believe there's a nice opportunity for us there. I would say nothing dramatic this quarter versus the previous quarters.
Great. Thanks, guys.
Thank you. I will turn the floor back to management for closing remarks.
Thank you guys for joining us this quarter. We look forward to seeing you out on the road, at conferences and such. If you guys have any questions, please reach out to us after the call and we'll do our best to address any of those questions. Thank you, and look forward to seeing you guys. Take care. Bye-bye.
This concludes today's conference. You may disconnect your lines at this time. Thank you.