Greetings. Welcome to the Checkpoint Software Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow Please note this conference is being recorded. At this time, I'll turn the conference over to Kipp E Meinzer, Global Head of Investor Relations.
Mr. Meinzer, you may begin.
Thank you, Rob. I'd like to thank you all for joining us today to discuss Checkpoint'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 dotcom.
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 kipcheckpoint.com. Before we begin with management's presentation, I'd like to highlight the following: During the course of this presentation checkpoint representatives may make certain forward looking statements. These forward looking statements within the meaning of Section 27A of Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 include, but are not limited to, statements related to Checkpoint's expectations regarding business 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 Checkpoint's current expectations and beliefs. Factors that could cause or contribute to such differences are contained at Checkpoint's earnings press release issued on October 28, 2019, which is available on our website and other risk factors, including those discussed in Checkpoint's annual report on Form 20 F for the year ended December 31, 2018, which is on file with the Securities And Exchange Commission. Checkpoint assumes no obligation to update information concerning its expectations or beliefs, except as required by law. In our press release, which has been posted on our website, we present GAAP and non GAAP results along with a reconciliation of such results, as well as the reasons for our presentation of non to Tal Payne for a review of the financial results.
Great. Thank you, Keith. 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 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 acquisitions 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 1,000,000 above the midpoint of our guidance Product and security subscription revenues were $272,000,000, a 6% increase year over year. Our subscription revenues continued to be strong with 13% growth, reaching $154,000,000.
Our software update and maintenance revenues increased to $219,000,000, 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 Infinitus. Deferred revenues as of September 30, 2019 reached $1,242,000,000, a growth of $94,000,000 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 percent of revenues came from Americas, 41 percent of revenues came from Europe, Middle East and Africa regions, 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 rates for this quarter was 19% similar to the last quarters.
Please note, in fourth quarter, we expect the tax rate to be around 0. 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 $188,000,000, or $1.25 per diluted share. Non GAAP net income was $217,000,000, or $1.44 per diluted share.
Our cash balances as of September 30, 2019 were $4,550,000,000 compared to $4,072,000,000 last year. Operating cash flow was $244,000,000, collection from customers continued 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 2,900,000 shares for $323,000,000 at an average price of $112. Now let's turn the call over to Guido 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 first quarter results. As you've heard from Tal, we continue to deliver healthy financial results in the first quarter. We're still in the period of change and transformation as we continue to focus on elevating our customer security environment into the 5th 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, data centers, endpoint, mobile cloud and IoT We continue to expand our cybersecurity solution consolidation efforts with the Infinity Architecture. 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 products business into more of an annuity model. We aim to drive our sales and 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's business results continue to be healthy. Growth percentage remains quite high Some recent example of nice wins in the cloud space include 2 of the world's largest accounting firms, 2 of the world's largest consulting firms, 1 of the world's largest business media firms, 2 of the world's largest retail franchises, 2 of the world's largest stock exchanges, And the list goes on with many of the world's top companies, including shipping, financials, telcos, and governance.
Our recent success didn't just focus on the cloud. We have won many projects with our advanced threat prevention for network and point in mobile. One example for such a win is a new customer, an energy company in America. We asked them what made them choose Checkpoint. We quoted few major reasons.
While it not only checkpoint has real time threat prevention, the competition simply lacks these capabilities as their threat analysis work in the background and don't stop the attacks. 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, they felt that checkpoint 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 customer choose checkpoint. 1st is the real time threat prevention second is the management capabilities and third is the completeness of our security architecture. Here's a real world example of a customer experience this was just happened this quarter. The potential customers starting testing our CloudGuard product. The 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 SunBlase technology embedded into the CloudGuard product called the file that contains 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 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 100 of 1000 to 1,000,000 of dollars. By using the checkpoint product, the file was cleaned by our freight extraction engine, alerts were recorded and no damage occurred.
The cost of this incident to the customer was 0 instead the 100 of 1000 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 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 quarters in recent months.
We continue to upgrade our security appliance family. In July, we launched the 16,026,000 security appliance family. These high end and data center grade models provide threat prevention performance in the range of 12 to 30 gigabit per second. On the other side of the scale, we launched the 1500 series of appliances earlier this month with the starting price under $1000 and the performance between 4.50 to 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. Cloudbird Connect allows the utilization of the same security architecture through cloud service, connecting branch of is 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 bundle 1 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 2nd year, they had to renew both. With the new modules, we are simplifying the process. The appliance is provided in the basic configuration and the support and security subscription are bundled into a single offer with free levels. So the 1st year in the following years looks the same and there are fewer and simpler choices to make. All customers receive access to 7 by 24 in 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 model makes a nice transition to speak about our projection for the next quarter. Know my regular caveat, it's hard to predict the future.
There are many promising deals and there's also a lot of unknown that can impact results. With that said, our revenues for the fourth quarter are expected to be between $527,000,000 to $557,000,000. 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'll be happy to answer your questions.
Thank you.
At this time we'll now be conducting a question and answer session. So that we may address questions. 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 would be helpful?
In North America, we continue to invest in the sales and marketing 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 Kanlan. You 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, but I think this new high level appointment should take us a long way and should provide a lot of leadership and the and support for our field people in the Americas.
Our next question Our next question is from the line of Michael Turits from Raymond James.
Hi, Gil and Tal. To the extent you can, can you comment, make 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 and joys, I think, a very high level of strategic view on the other end 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. And then if I can
get a follow-up, as you said, you mentioned, Chris Scanlon. There's been a lot of changes in sales management in general. Frank Raj came in, I don't know, something like a year ago. And there have been other changes 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 we want to, 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, is to 1st 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. We'd like to see more emphasis on the new strategic areas of the market, like mobile advanced threat prevention in the cloud.
And 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. So that is an area that even consists a big part of our business and they were 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 capture the very broad picture, but I think in for 2 minutes, I think it's a very broad picture for what we are doing.
Thank you very much, Gilberto.
The next question is from the line of shaul Eyal with Oppenheimer. Please proceed with your question.
Thank you. Good afternoon, guys. 1 for Gil, 1 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, we would like to hear about any new updates you can share with us from customer's perspective also from the channel?
I think the Engage Plan is a new plan that we created with our partners. To really engage the partners in checkpoint 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. And I think what we'd like to do is drive the daily work in the field and that's where we created the engage up 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 next year partner levels 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 2 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 that and now we can see it based on their level.
Understood. And Gil Orteil, 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 now in the road? In other words, could we be seeing Checkpoint embedding, I don't know, more ASIC cycle more hardware in its appliances to accelerate throughput and performance down the road?
And I think it's a response 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 base performance through hardware acceleration. But what we're seeing more and more is that the big challenge is actually in in the more advanced threat prevention capabilities and in being flexible and agile to the changes in the front landscape. And I think that's not a stable environment. That's not an environment when we set the road map.
That's an environment that deflects in our world are setting the road map. 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 that test our product in that see the superiority of security and we hear it from almost every customer that have gone in-depth to the analysis. And what we've found over time with order to do that, the right architecture is an open architecture in ASICs that can do a good job in in accelerating very simple operation, simply fail when it comes to advanced advanced capability that security needs.
So 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.
Great. Thanks for taking the questions. This is Ray McDonough on for Brad. My first question is for Gil. Last quarter, you announced a new high end appliances and while it's still early on in the product lifecycle.
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?
So I think we're seeing a good, a good acceptance for the new appliance model, both the 16,000 and the 26,000 And 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 at the beginning of the year. And it's already actually starting to gain share and get into the market in the 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 experiencing good traction of that.
Right now, I'm 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 appliance subscription model. Try to help invest that the basic appliance may go maybe slightly lowering price with the new appliances, but the subscription somehow compensate for that and give the customers a simpler and easier way to account for that and annuity side of business. What I also like to comment on Vetsuo, 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.
Mean, 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 3 months to 9 months and sometimes even more to get the newer to new model into the sales cycle. Many times, there's an RFP already with the older model, many times customer needs certification. And then I've and so I mean, the cycling is slightly slower than what they'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. And 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?
In Q3, we both in Q2 last year and in Q3, last year, we had a large deals, large deals, it means over 50,000,000. 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 $50,000,000 in Q4.
Okay. Thank you.
Thank you. The next question is from the line of Fatima Bellani with UBS. Please proceed with your question.
Good morning. Thank you for taking the questions. Gail, I have one for you and Tal, one for you as well. Gail, 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. And then I have a follow-up for well.
I think we are right. We are seeing good traction with the cloud product. It consists of actually a broad family with a lot of details. And by the way, cloud in general is one of the more sophisticated than you can even 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 cloud guard SaaS with secure SaaS applications and not 365 and so on. We're not in turn we don't intend to break the revenue down based on the specific family, it's simply too small some of the the families are too small, some. And in terms of bundling that, first, we do offer 1 or not bundling 1, 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 a much more revolutionary architectures in technologies around the cloud.
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?
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, I think if you looked If you look historically, like in 2018 2019, you had some quarter with 7%, 8%, 9% 11 108. So I'd say it's pretty much in the same vicinity.
The long term details, if you look year over year, long term contracts our long term deferred revenues this quarter increased year over year again by 9%. And if you look last year, both in Q2, three and four. And even this year, you've seen 11%, fifteen percent, 16%. So obviously, we see less billing with the long term deferred revenues, which is affecting the total growth in the deferred revenues.
The next question is from the line of Greg Moskowitz with Mizuho. Please proceed with your questions. Greg. Your line is open for question.
Thank you very much. And hi guys. A follow-up on Michael Turits. This question, if I may, your revenue growth in EMEA 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 was 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 seeing any changes at all in the competitive landscape?
I think both areas remains very, very promising. The potential in the America 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 the Atlantic Ocean.
I'm pleased with some of what you've seen in Europe. As I've been said, I think we are We're investing more and more in the Americas. And by the way, the Americas is not one size fits all. When I analyze it, I seeing, and 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 we're struggling a little bit, and that's true in Europe, and that's true in the U. S. And actually what I was pleased because I've done a lot of in-depth analysis this quarter. We're 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.
Okay, that's helpful. Thanks, Gil. And then just a follow-up on, CloudGuard Connect, you talked about in your prepared remarks, one of your close competitors has been doing quite well here. Another competitor recently announced plans 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 the branch office or connect few users very easily with a with really few minutes, no training. Really simple onboarding process, which is what people expect from a cloud solution like that to resolve that process.
I think the very 2 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 2 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 into the overall enterprise management and enterprise set of rules, I mean, really being part of the same enterprise solution. So 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 the some of the targets market that we have are the large customers and they're very well interested, but we take some time to onboard and to shift infrastructure, but it definitely a promising area that we have.
Great. That's helpful. Thank you.
The next question is from the line of Karl Keirstead with Deutsche Bank. Please proceed with your question.
Thank you. Gil Ortali, the R77 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.
First, I mean, it's a very good point. And again, 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 and a lot of technical details that are on our customer head. I think what we what I'm pleased to see is that the majority of our customers now are on our 80. That's very, very good. We're still a portion, a minority, but still important portion that haven't migrated to our 80.
We are supporting them. We will do a we are in we are supporting both what we are doing now and we'll support Vain 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 it was some, these things were easier, I'm seeing other customers when it's a no brainer and they and they like the situation that we are in and that we are with. So it's 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.
I would just say that the good news is the majority pass 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 when you buy the new appliances and many times when they finish the refresh, it can create an opportunity to sell to buy new products when they finish to upgrade their software them. So I'm less concerned about the end of life of the software. I think it's a non issue completely. Because we can always if they need to be 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 they the more transition happens, the more an ability for us to help them refresh their install base and increase the product sales portion.
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 then the anecdotes you might have from customers on that?
The pricing model, you mean what gear was referring to. So I will say, 1st, it's, 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 the purchase and appliance at that point of time, we gave them the NGP Incorporated. So they didn't have much of an option to choose if you NGFW or NGT.
On the other hand, they could have upgrade to NGTX 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 that's many, many options for just buying that appliance.
Now it's much simpler model. It's basically the subscription. So it's a it's a 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 that now he has an ability to choose 1 of 3 layers options, NGFW and GPP or NGT package, including the support, which is 20 fourseven.
So there's only 3 options. And you can choose that. And then in the 2nd year, just renew it and continue. So customers love it because they give them much more flexibility. So 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 their clients. So it's not a price that is a fixed price. And this fixed price can be similar historically between small appliance and maybe one level above it appliance. Now it's a percentage of the base.
So it's very, very easy for them to understand the pricing model and therefore they should like
it. Understood. And I guess as part of that, have you seen a greater inclination to move to the higher pricing of those 3?
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 it
No, I would say that 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.
Great. Thank you very much.
The next question is from the line of Walter Pritchard with Citi. Please proceed with your questions.
Hi, thank you. Tal, just a 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?
So firstly remember that when they buy the new appliance, they have to choose 1 of the packages. So all of them, when they buy an appliance, they will have a subscription portion and of course, a support portion. So the lowest they can go is NGFW, but they can go up to NGTX, including their premium. It's included in all of these optional majority of them, there will be an uplift in the subscription. The short term price is in the product line.
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 dropped into the 50 just wondering anything around how the quarter progressed or large deal impacted that influence that number? Thanks.
No, it's probably was slightly less back end 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's not it's basically remains the same in general. If you look at the 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 JPMorgan. Please proceed with your question.
Yes, thanks. Hi, guys. Gil, I want 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 architect sure 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 that both the higher security as well as what kind of performance expectations you have out of it?
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. It's a cell inspection. We have more and more web inspection capability is 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're talking about process things 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 mods. That you don't get what's called patient 0 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. So this sells for the, 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 gets an instance of our data is more safe, is more secure it's not shared with others and it and the specific policy that this customer has is applied to word data. So it's much less, I mean, from a 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. And based, by the way, why the remain the number one targets that we have is for small branch offices that would like to enjoy this kind of capability.
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 to the growth in that line. So in other words, which bundles, which products are driving the growth?
So it consists from all the subscription, but specifically the main growth coming from the cloud, Infinity, and, NGT X or the sun blast 0 day protection. So that's the main one. Remember, by the way, that Q4 have 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.
Thank you.
Our next question is from the line of Shelby Safery with FBN Securities. Please proceed with your questions.
Yes, thank you. I'm trying to gauge the comparison and 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 comparisons 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?
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 it's very hard to predict it in general. I don't think we based on that number that it's an easy compare.
Just because it was if
I recall, it was quite a large number. Q4 growth. Yes, Q4.
I'm just dropping quickly there were large deals in Q2 and Q3 of last year. Were there potentially large deals in Q4 of last year?
So 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 13%. So that was a huge number. So I would define it as a tough compare.
Our next question is from the line of Dan Azis with Wedbush Securities. Please proceed with your questions.
I mean, Gil, going into next year, I mean, obviously you're not giving guidance, but just in terms of overall spending on security, I mean, is your sense in the out 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. 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 budgets that are, that they can spare. So 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 going to be and it is, by the way, a big place where customers are investing and customers are putting their budget. So we need to be there. We need to make it secure. By the way, it's I think that the importance of cloud security is also very, very high.
We feel almost all the cases of data leakage in recent year, results 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 a few horror cases like that from the last quarter that I've seen, how really a small mistake, but inside the company would even be noticed it 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's how we get the customers to adopt the checkpoint architecture in its entirety. That's the high level solution and on the technical level winning in many as many product segments as we can, including the core gateways that we have, but still a big opportunity that's still there and we can capture an even bigger market share there.
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 and A perspective in terms of valuations, maybe more sort of digestible with a lot of private companies and consolidation. Emerson, is there any change in the M and A landscape, especially on smaller private companies? Thanks.
Because the fragmentation of the market, I think there's many opportunities, obviously, at 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 that may be a good fit. So 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 are you 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.
I think it remains very competitive. I haven't seen big changes on that, but, some I don't tell if you have anything to add on that?
No, in general, you know, we see, I don't see something specific in telco telcos. You know, they're always very competitive, especially in pricing. We're creating a focus on the telcos, you know, because we believe there's a nice opportunity for there, but we'll 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 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.