Greetings. Welcome to Check Point Software Technologies' second quarter 2019 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Kip Meintzer, Head of Global Investor Relations. Thank you. You may begin.
Thank you. I'd like to thank all of you for joining us today for Check Point's second 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 July 31st. If you'd like to reach us after the call, please contact Investor Relations by email at kip@checkpoint.com. Before we begin with management's presentation, I'd like to highlight the following. During the course of the presentation, Check Point's 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 21 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 and programs, and the success of those products and programs, the environment for security threats and trends in the market, our strategy and focus areas, demand for our solutions, our business and financial outlook, including our guidance for Q3 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 July 24, 2019, which is available on our website, and other risk factors, which are included in Check Point's annual report on Form 20-F for the year ended December 31st, 2018, which is on file with the Securities and Exchange Commission. Check Point assumes no obligation to update information concerning its expectations or belief 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. Now, with that, I'd like to turn the call over to Tal Payne for a review of the financial results.
Thank you, Kip. Good morning, good afternoon to everyone joining us on the call today. I'm pleased to begin the review of the second quarter. Revenues for the quarter increased by 4% year-over-year to $488 million, and our non-GAAP EPS reached $1.38, both slightly above the mid 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. Products and security subscription revenues were $270 million, a 5% increase year-over-year. Our subscription revenues continue to be strong with 13% growth, reaching $149 million.
Our software update and maintenance revenues increased to $218 million, representing 4% growth year-over-year. The growth in our subscription revenues is driven by our advanced solutions, mainly SandBlast Zero Day Threat Prevention, Cloud, and Infinity solutions. Deferred revenues as of June 30, 2019, reached $1,286 million, a growth of $128 million or 11% year-over-year. Revenue distribution by geography for the quarter was as follows: 48% of revenues came from Americas, 40% of revenues came from Europe, Middle East, and Africa region, and the remaining 12% came from Asia Pacific. Since the beginning of the year, I remind you, Middle East and Africa is a part of the 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 Q2 last year after the reclassification would have been 48% of the revenues from Americas, 41% of revenues from Europe, Middle East, and Africa region, and the remaining 11% from Asia Pacific. You can see all region had a growth this quarter. 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 at 50%, same as previous quarter, Q1, and in line with our plan. Our financial income this quarter reached $21 million. Since the beginning of the year, we see a change in trend with a decrease in our portfolio yield as a result of lower interest rate expectations in the U.S. Our financial income for the next quarter is expected to be around $20 million.
Effective non-GAAP tax rate for this quarter was 19%, similar to the first quarter of this year. GAAP net income for the quarter was $186 million, or $1.21 per diluted share. Non-GAAP net income for the quarter was $211 million, or $1.38 per diluted share, $0.02 above the midpoint of our guidance. Our cash balances as of June 30, 2019, were $4 billion and $110 million, compared to $4 billion and $42 million last year. Our operating cash flow was $233 million, compared to $213 million in the second quarter of 2018, a 9% increase year-over-year. Collection from customers continues to be very strong. Our operating cash flow includes tax and balance sheet hedge transactions, which can fluctuate from quarter-t o- quarter. Excluding these items, our operating cash flow increased by 4%. During the quarter, we utilized the maximum quarterly buyback authorized and purchased 2.8 million shares for $325 million.
Now let's turn the call over for Gil for his comments.
Thank you, Tal, and hello everyone for joining us today. I'm pleased with our second quarter financial results. We were just above the midpoint of our projection, but more importantly, our execution and transformation continue to improve. When I speak about transformation, I'm addressing the modernization of IT security environments, protecting the IT infrastructure against Gen V attacks and expanding the security coverage into the cloud mobility and IoT spaces. In the second quarter, we made good progress around IT modernization. Our cloud business has grown quite significantly, more than doubling in size this quarter. We've introduced new solution for security data analysis with the new CloudGuard Log.ic security solution that takes information from cloud providers and process that into meaningful insights and action. In the first quarter, we introduced Maestro solution, enabling cloud-like elasticity for customer security environments using our hyperscale technology.
In the second quarter, Maestro demonstrated solid traction with many new projects. We've continued to modernize and upgrade our core product line with the introduction of the mid-range 6500 and 6800 security appliances in the first quarter, and continued in the second quarter with the introduction of the high-end 16000 and 26000 security appliances. These security appliances are optimized for Gen V security operation. Today, we're launching our highest-end model of the 26000 series that delivers performance of over 300 gigabits of raw firewall and 30 gigabits of Gen V security, a 50% increase from previous models. The 16000 and 26000 security appliances are powered by our latest version of security software, R80.30, which features many new and unique capabilities, including advanced threat prevention for web-downloaded content and the ability to process SSL security with higher levels of security and performance.
While our progress this quarter primarily reflects technology advancements for the cloud and network environment, we also made good progress with our execution in the field. For example, in Asia Pacific, we had a terrific quarter with double-digit growth, and we've substantially increased field and marketing activities. This success can be largely attributed to our new APAC leader that joined us at the beginning of the year. In the U.S., we saw quite healthy trends this quarter. Product growth in the U.S. resumed, and the majority of regions demonstrated healthy growth rates. We've also significantly increased our marketing activities. In the first quarter, we had almost 10,000 participants at our free global CPX 360 conferences across Asia, America, and Europe. In the second quarter, we took the Check Point Experience program locally with 37 events in different cities around the world, tripling the number of participants to almost 11,000.
Our headquarters hosted many Chief Information Security Officers, including two large events each attended by over 100 CISOs, including major global Fortune 100 companies. Our research team continued to generate breakthrough findings regarding malware and vulnerabilities in mobile and cloud. In the mobile space, we found a vulnerability in Xiaomi mobile devices that may affect over 100 million devices. We also found malware named Agent Smith that actually affected hundreds of applications and over 25 million Android users. Additionally, we discovered a vulnerability in Electronic Arts' Apex Legends game that could have affected over 300 million online users. Another vulnerability that is a result of the security challenges associated with cloud infrastructure. Our research team is exposing a lot of vulnerabilities, enabling customers and vendors to fix them and stay out of trouble.
There are many other cases where enterprises don't secure themselves that well, and the quality of security does matter. To make things worse, in addition to the cost of business operation, technology, confidence, and reputation that are part of being breached, companies are now being fined pretty hefty amounts by regulators. Just in the past few weeks, more than $1 billion in combined fines were given out to three companies that suffered major breaches. I believe that these cases could have been prevented in real time by using the right technology at the right place, instead of being detected months after the damage has already occurred. We have a big mission to educate the market that real-time prevention of cyber attacks is possible.
Our Infinity architecture is unique in that sense and can really make a difference. Overall, I'm quite pleased with the progress we made in the second quarter. We've produced good financial results and are on track to improve our operation and potentially generate even better results. We continue to bolster our management team with the addition of new leadership for Telco initiatives. We intend to further augment our management team. For the third quarter, my usual caveats continue to hold true, that predicting the future is always a challenge and there may be surprises, lower or higher. With that in mind, I'd like to share the forecast for the third quarter. Revenues are expected to be between $480 million to $500 million. Non-GAAP earnings per share are expected to be between $1.36 to $1.44. GAAP EPS is expected to be approximately $0.19 lower.
Now, we are happy to take your insightful questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. 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. Our first question comes from Brad Zelnick with Credit Suisse. Please proceed.
Great. Thanks so much for taking my question. My first one is for Gil, and I've got a follow-up for Tal. Gil, it seems your commentary would suggest you're seeing evidence of improvement in sales execution, but at the same time, it would also seem you're growing a bit less than the overall market. I know you generally always tell us that the environment for cybersecurity spending remains robust, but is there any reason to believe that if we look at it today or in Q2 versus Q1 or perhaps even a year ago, that there's been a change in the spending backdrop in the category?
I don't know if there's any change in the overall spending. I think the market is healthy now. It's not a market which shows signs of weaknesses. There are many changes in the marketplace, and I think we're very well equipped to handle them from a technological perspective. From a field perspective, we definitely need to go through some changes, and we are going, and we are investing in them, and I think it shows. We're going higher up in the organization to cover a broader spectrum of solutions. We are selling more architectural approaches that requires sometimes people that are trained differently, different sales cycles, and I think we're making all the right investments. You can see that in our sales and marketing spend, but it's not just the spend.
It's really the change and the education and the expertise that we are learning, that we are bringing to market. When I'm saying that I'm optimistic, I think it's because I'm seeing a lot of internal trends in activities, in other managerial measurements that I'm very focused on. I think that in the first half of this year, and definitely in the second quarter, we saw some big internal changes.
Thanks very much, Gil. Tal, just to follow up, we're seeing Check Point step up its sales and marketing investment this year, which given the market opportunity and your strong technology, seems a very rational move. I know you think more in dollars than percentages, but we've seen op margin tick down, even if slightly, again this quarter. Where should we expect it to inflect? Perhaps asked differently, how are these investments beginning to pay off versus your original plan heading into the year?
It's actually completely in line with our plan. We said our margin will be this year around 49%-50%, it's in line with our plan. The main expense is a result of a continued increase in our headcount, a continued increase in our marketing efforts. Just as an example, Gil provided the CPX. Historically, we used to have three CPXs. Now we had more than 40. We had 40 CPXs, locally and globally. We are stepping on the gas when it comes to digital marketing, event marketing, and we start to see results and leads coming out of that. That's nice to see. It takes longer. It's not one-quarter investment and then the quarter after you see it. It's over time, you should see the fruits of that translating into growth in the revenues.
Remember also that the trend of the move from product into subscription, from product into cloud, all of those cloud is also subscription for us, creating a lot of pressure on the product line. At the end of the day, it should translate into our growth in the booking and in the revenues.
Thank you so much for taking the questions.
Our next question is from Michael Turits with Raymond James. Please proceed.
Hey, guys. Good morning, good afternoon. Quickly, Gil and Tal, you didn't comment on the full-year guidance. Is the preceding, the prior full-year guidance, still in place?
Yes, we're keeping the guidance. Absolutely.
Thanks, Tal. I wonder if you could be specific at all about some of the trends relative to the hiring and productivity of the sales force. Where are you in terms of sales attrition, if we just say 2017, 2018, and 2019? Where are you over that three-year period in terms of the % of the sales force that's at full quota productivity? Just so we can get a sense of where we are in terms of the transition.
First timeline, it's hard to deduct from attrition if it's good or bad. I think attrition this year was lower than previous years. Depends where in the world, especially in the U.S. Some of it is very good. Some of it we should do more attrition to handle cases where we need to improve. Overall, it's stable with some positive trends around that.
Okay. Can you comment on the level of productivity? In other words, what % of your sales force was at full productivity this year, where it might bottom, and when you expect that to improve?
Actually, remember that productivity is a result of a target provided. We provide targets that is not easy to reach. I'll say productivity is probably similar to last year. Think about it, the way we look at it is in order to see at the end of the day, the booking, it starts with much earlier measurements. There we start to see a significant improvement. It starts from meeting customers, meeting new customers, all the way to building pipeline, moving it from pipeline to best case, from best case to commit, and commit to booking. That's the whole cycle. As the more complicated the transactions are and more holistic, then the longer it takes to close the deal. We're tracking those trends when it comes to meetings and pipeline, before you get into the booking. There we start to see a nice improvement.
Okay. Thanks, guys.
Our next question is from Shaul Eyal with Oppenheimer & Co. Please proceed.
Thank you. Good afternoon, everybody. One for Gil, one for Tal. Gil, the new Check Point reward plan, any preliminary views, how is it being viewed by the sales force, by the channel partners? It is somewhat different from what some of your competitors are doing. Just interested in understanding how it's being perceived out there.
Okay. Just to recap what we launched last quarter, a new partner program, called Engage. I think a big part of the partner program is to base the rewards and all of that on activity levels. It's done through an app. Sales rep of the partners collect points by doing sales activities like marketing activities, like meeting with customers. Through the point system, just like in airlines, we can reward and give more points to activities that we feel are more important. I think that's quite a unique approach. I haven't seen a lot of similar things in our marketplace. We just started with it. I can tell you that a nice percentage of our partners have already signed up and are using the app.
The top partners that we have, the real top tier of partners, more than 70% of the companies have signed up for the program and have started using the application. For the reps that are using the application, we're seeing activity level like we expected. There's an issue when you launch something new like that, how do you set the reward target? How many points you give? How to estimate how many activities people are actually doing? We are seeing good activity level, but it is just the beginning. I think that we will have a lot of learning during the implementation of it because it is a novel approach that at least we didn't try before. I think it is based on my belief that what we should focus on is on the activity.
If we'll do the right activities, if we will work together with our partners, then we will achieve the results together.
Got it. One for Tal, and maybe Gil, if you want to comment about it and maybe also building on Brad and Michael's prior productivity-related question. If you're bringing today, if you're hiring a new sales rep, whether you brought him from a competitor or from another organization, how many quarters does it take until he or she are up and running and already providing revenues and hence, commissions?
It really varies in the region of the world that the rep himself is he bringing with him a set of connections that is already involved, and mainly in the type of the account. For a global account, by the way, global accounts in general, the sales cycle can be multiple years. For a smaller transaction, it can be three months. I would say that the average is around six months, but there's a big variance between the person, the type of accounts and the specific situation. If somebody's stepping in into a region with healthy activity and everything works well, it picks up where the previous rep left. If somebody's stepping in into a region when the previous rep wasn't doing a good job or when there wasn't a previous rep and they need to build everything from scratch, it will take longer.
I don't think that there's a clear answer, but I would say the average is somewhere north of six months.
Understood. Thank you very much.
Our next question is from Phil Winslow with Wells Fargo. Please proceed.
Yeah. Thanks, guys, for taking my question. A question to Gil first, just on the pricing environment. If you think of it actually by tiers of customers, kind of telcos, large enterprise, mid-size businesses. Anything that you'd want to call out there from a pricing environment, but also just from a demand perspective, too, that'd be great.
I think the pricing environment and the whole environment remains competitive. We haven't seen any major trend in the discounting environment, in all of that. Remains quite stable, which is a good sign because for years it did change, and I think now it's a little bit more stable.
Got it. Also, if you think about just the demand environment sort of across the tiers 2, anything you'd kind of highlight, especially now that we're 6 months through their year versus last year, any changes?
Not really. I think that we have plenty of opportunity. I think we're not missing opportunity. I think a lot of it is up to us, to our execution. For example, I mentioned that we brought last quarter a new leader for global telco activities. We brought him because we think that there is a much higher potential in telcos, even though we're doing quite well with some telcos, I think the potential is really much higher. On the same time, I can't say that there is a single sector that I would say is kind of saturated. We have plenty of opportunities, we have plenty of new customers to win, and we have plenty of existing customers where we can expand.
Great. Thanks, Gil.
Our next question is from Shebly Seyrafi with FBN Securities. Please proceed.
Yes, thank you. I saw that your billings growth was flat year-to-year. It decelerated for the past two quarters. Can you talk about the strength of your pipeline going forward?
It's actually not really relating to the pipeline. The pipeline actually grew, especially when we talk about the product pipeline, which is very important to us as well. It's really relating to the fact that in the first half of last year, we had a few very large transactions. We talked about some of them. You can see in Q2, we had two large transactions last year of tens of millions of dollars, which typically do not repeat. It's a multi-year, typically. I always say that when it's a multi-year, you need to look at the year-over-year. When you look at the deferred revenue growth, year-over-year, you see 11%.
When you look at the implied booking, which again, we don't report booking because there can be a big variation between implied booking and booking and revenues because of the multi-year, which is the math you just did. Multi-year has a huge effect on booking in our industry. Let's say we had a few very large multi-year transaction, which obviously if they were signed in Q2 last year, now for two years, we will not see. For example, if you had a $50 million or $60 million multi-year for three years, then you got last year a big peak, and this year you will see -20 basically from the potential. I would be cautious with looking at the implied booking.
Okay. Just to be clear, you didn't have those large transactions in the back half of last year, so are you suggesting that headwind goes away in the back half of this year?
Actually, to admit, I don't remember if we had in the back half. I need to go and look into the numbers. I know clearly about Q2, just because when we analyzed the numbers, we saw two very large transactions that were dollars tens of millions, and obviously, it created a lot of pressure on the booking this quarter, naturally.
Of course, there's nothing bad in this transaction. It just skews the measurements year-over-year.
Okay. Separately, it looks like according to my math, your EMEA revenue growth decelerated to 2% roughly from 9% in Q1. You did well in Asia. What happened in Europe?
Actually, Europe had the strongest one in Q1. Sometimes you need to look at the year to date in order to see the full effect. You're right. Europe had a weaker quarter this quarter, and they had a very strong quarter in the previous one.
It's just lumpy is what you're saying?
Yep. It can happen.
Okay. Thank you.
Our next question is from Andrew Nowinski with Piper Jaffray. Please proceed.
Great. Thank you. I was just wondering if you could provide any color on how you think Check Point is positioned in security for cloud-based applications relative to Palo Alto's GlobalProtect cloud services and Zscaler.
I think it's many different ways. I think first, this area is an area that we are addressing. We are building the solution, and I think we'll see some nice solutions there. I think overall, when you look at the overall cloud service that we provide, we have a much more integrated and comprehensive approach to cloud security. Again, what you asked about is one aspect of security, about remote access and some small branch offices, which is an area which is right now not the key focus of what we did, but I think we are addressing it, and we'll have some nice solutions to that.
Overall, in the cloud, I think we're making great progress in cloud security management, in building the future cloud architecture with what we call Infinity 2.0, that will provide a very robust and comprehensive cloud security architecture, one that I think nobody has and nobody's actually building at the moment. I think that in general, on the overall cloud, we are positioned quite nicely.
Okay, thank you. I just had a question on your product revenue growth or lack thereof. You had some new product launches this quarter at the high end. I know you said you're going through a big mix shift to subscriptions, but I'm just wondering when do you think product revenue will perhaps return to growth given some of the new appliances you launched? Thanks.
It's a very good question. I think first, this quarter, we had some positive trends around that. Internally, the metrics that I'm seeing is actually quite positive. I did mention in my comments that in the U.S., for example, when we had the challenge with product growth, we did see a product growth this quarter, which is a very good sign. I think overall, I would say that my main focus is looking at the business growth overall. I think moving to subscription is a very positive thing, I think that's part of the business is growing and is steady, and we're developing more and more methods to understand, to analyze, to understand the real impact of that. Sometimes it can be confusing, like when you sign a multi-year deal, it looks like subscriptions are growing, but they're not really growing.
We've actually have good metrics for that, and they are positive this quarter. From everything I've analyzed and I've seen, the trends are positive. Hopefully, if we do the right thing, then also product growth will be stronger and when all of that comes together, we will have even better results.
I would just add, though, when you look at the longer term, our goal is to grow in products, naturally. We focus on it. We have a lot of focus on that. We saw, like Gil said, nice trend this quarter. I will say, when you look at the long-term trend, it's clear that the entire industry, and we cannot ignore it in the background, is putting a lot of pressure on product by choice and moving all of it into subscription support type of revenues, which is recurring. Infinity is recurring model, cloud is recurring, virtual licensing now is a recurring revenues, also in subscription. All the new products are being launched as a subscription. Now, historically, you had the gateway as a product and all the add-on security solutions as subscription.
Even the product itself, which is the license for the firewall, if you want to call it that way, is a bit on the cloud or as a virtual in the private cloud, is now being sold as subscription as well from two years ago. It's naturally putting a lot of pressure on that line that is called product, and that's why our focus is on the total growth.
Understood. Thank you very much.
Our next question is from Dan Ives with Wedbush Securities. Please proceed.
Yeah, thanks. To the prior question, when you think about cloud and the dynamics going on there, do you continue to think you can get there organically, building out sales and obviously the product portfolio? Just maybe talk about M&A. I know obviously you've done some M&A. Just maybe talk about that philosophically, how you're thinking about cloud organically versus M&A.
We've already made a couple of acquisitions in the cloud, so it's not a theoretical question. We do think that we can use our technologies, the Dome9 is an example, the ForceNock that we made at the beginning of the year is another example. I think overall, my belief that the strength of what we provide, and not just the strength of what we provide, but the real value of security is not having a supermarket of a few dozen products, each one addressing a slightly different niche of security from a different standpoint, but sold from the same vendor. The value of security is really combining it to one architecture. At this point, from what I see in the marketplace, we remain the only vendor that is actually implementing this approach. Our competitors are not doing well in terms of providing unified architecture.
The ones that are expanding are doing it with, again, many different fragmented solutions that don't really connect to each other and don't provide one high level of security for all the different needs. I think in the long run, I'm a big believer that that approach is a must and will win. I think the combination of one, what we have, the ThreatCloud, one set of technologies that are very strong in security and multiple delivery methods, delivery on the cloud, delivery on the network within the cloud, delivery for IaaS, SaaS, cloud application, and so on and so forth, is critical. That's the only way to deliver the security level that the world need, and that's what we have today, and that's what we are expanding and building.
Thank you.
Our next question is from Gregg Moskowitz with Mizuho Securities. Please proceed. Gregg, please check and see if your line is muted.
Thanks very much. Good afternoon, guys. Gil, I didn't hear much commentary on Infinity in your prepared remarks this quarter. Just wondering how demand for Infinity is tracking relative to your expectations thus far.
Actually, we're doing fine with Infinity. Revenues from Infinity were better this quarter, basically because we've got deals both from this quarter and previous quarters. New deals, we signed pretty much the same amount of deals that we signed in the first quarter, which is good. Much more than, of course, what we've done in the previous years when we just started. The overall pipeline in Infinity keeps growing and keeps growing in pretty big numbers. I think overall, I'm pleased with what we're doing with Infinity. The potential is high. The execution actually, the nice thing is to see that it scales from small businesses to medium businesses to few, even very large deals. We have potential in all the different market segments. I think we're making good progress on that.
Okay. Thanks, Gil. You also talked about R80.30. I know it has enhanced SSL inspection as well as threat extraction and some other capabilities. Do you see R80.30, though, as something that can drive incremental revenue per customer on a go-forward basis? How are you thinking about that?
I think with every version that we come, there's a potential for more revenues, more customers, more potential with the new features that customers need. At the same time, keep in mind, and not that I'm saying that there's any other option, at the same time, when you come with a new version, that means that the customers are yet to spend their time upgrading and investing in the upgrade process itself, which sometimes slows them down from expanding. Upgrade in our marketplace is still, especially by the way, the large customers, for them, doing an upgrade cycle is a very long and resource-intensive process.
Overall, I think in our market, the right thing to do and what we must, and I think we are the strongest in one, is upgrading the customer base, bringing them all the time with the best security, with the highest level of security. I think that's where we excel. From an operational standpoint, upgrades are time-consuming for everyone.
Okay. Thank you very much.
Our next question is from John DiFucci with Jefferies. Please proceed.
Thank you. I have a two-part question. I think the first one's sort of a follow-up to Shebly's. Tal, I think even the short-term or current billings were a little bit below our expectations. They were up less than 1% year-over-year. I guess, can you provide any more commentary on that? That's not affected by duration. Perhaps the product launches at the end of the quarter could have delayed some purchases, I'm thinking. It sounds like sales execution has seen some progress. That's the first part. The second part is what follow-through have you seen after those launches over the last, it's only been three and a half weeks since the end of the quarter. Especially, as Gil said, that you've announced the highest-end 26000 series model launch today.
Just kind of trying to get a sense here, because the business looks stable, but it just feels like it could be doing a little better.
Sure. First, I'll say, when you calculate the implied booking, it also affect you the multi-year, even in the short run. If you would've got each year on the right time, the deal of that year, then you would have saw the growth because the deal that was signed last year was not just a renewal, it was a significant growth. You missed that growth in the calculation of the implied this year. Putting that discussion aside, you're absolutely right when you talk about the launch of the new product. Typically, when you have a new product line, then it takes time for the customers to check it. When you talk about the high-end, then high-end need to get an approval for these new products, what you call certify the new product, and that can delay some transactions.
Remember that the launch of the high-end was towards the end of the quarter, it still didn't reflect in the numbers almost. Also remember that when you launch a new product, you can have some cannibalization between families. When people get much more throughput in a new product, they can choose to go one level down, get more throughput, and pay less. It's a short-term bad phenomenon, it's good for the business because it increase the throughput of the customers, when they have more throughput, they can adopt new technologies and new subscription in a later stage. It's good for the long run, sometimes in the short run, it creates pressure it definitely creates pressure, yes.
Any commentary over the last three and a half weeks? That's a very short time, I know, since the end of the quarter, but we sort of expect to see some benefit after the launch of these products.
I haven't seen the updated numbers. The quarter started strong and very well, which we never say, but even if I say it doesn't matter. Some quarters start strong and end weak. Some quarters start weak and end strong. I'm just saying, I've looked this morning on my dashboard, all the lights were green and I was very happy, but it's not an indication to how we will end the quarter, just to be clear.
Okay. We like to hear when you're happy, Gil. Thanks a lot.
Our next question is from Walter Pritchard with Citi. Please proceed.
Thanks. I guess, Tal, just to clarify on the comment before on the product side, it sounds like it's too early to tell the impact of the new products. Any sense as to whether or not some of those impending product launches impacted negatively product sales in Q1 and Q2, just given customers knew those were probably coming and might've been waiting and not purchased in front?
It's absolutely impossible to calculate it. We can theoretically see what was things that were in commits or in best case and didn't happen and been delayed to a quarter after. It's too theoretical to calculate. It's obvious, though, because we've been doing these refreshes for a while. We know when we come with a new product line, the market is evaluating it. It takes time to go through the channel. Many times, their partners want to sell the old until they learn about the new. It takes time, right? The high-end, what I recall from the last family, the high-end typically takes slightly longer because it's a very large customers, and it require internal certification from their end.
I would also add that we use the new product to make some more changes than just replacing a model with a faster model. We did use that opportunity to make slight changes to the business model. For example, how we do subscription for the new model. We are trying a new model for subscription, which we think is very competitive, and Again, any change like that can have positive effects and can have some negative effects because it changes business behavior. That's for the models that we launched, the 16000 and 26000. We are applying the same changes now for the 6500 that we introduced in the first quarter. Again, there we also did some changes to how we conduct business.
We, for example, came up with models that are more competitive and have much better price performance, so we try to limit the level of discounting that are given to them. I think it was successful. Again, it sometimes delays things and sometimes causes some disruption. It's not just technical changes in the product. We're using the new product launches to try some new business changes that hopefully, in the long run, will have a positive effect.
Tal, on the sales investments, can you talk about as you move into the second half and then looking at next year, how are you determining and especially how could we, in terms of us looking at the financial statements, get a sense as to whether or not it makes sense for you to be investing incrementally more into sales and marketing in 2020?
I think it's way too early. You know, everything happens in Q4. I think we don't look at that yet. We need to see how the year is closed. We need to look at the productivity. We need to look at everything in Q3 and specifically in Q4 in order to make the plan for 2020. Typically, we start our planning in Q3, but we stand there and wait until the results of Q4, and after that we have the final budgeting. It's a bit early to talk about it now.
Okay, great. Thanks for taking the questions.
Our next question is from Ken Talanian with Evercore ISI. Please proceed.
Hi. Thanks for taking the question. First off, I was wondering, were there any changes to your renewal rates on either maintenance or software blades?
Not really, no.
Okay. Are you seeing any sales cycles extend as Infinity is presented as a purchase option?
Can you repeat the question, please?
Are you seeing sales cycles extend as Infinity is presented as a purchase option to customers?
Infinity by definition, it basically offers the customer the entire product portfolio, from the network to the endpoint, to the cloud, to the mobile. When customer is interested in that, it can take longer time. Having said that, I saw some transaction that closed really fast, and I saw some transaction that closed longer than we thought. It really depends on the size of the customer and his readiness.
Maybe as a quick follow-up to that, are you giving an incentive to sales reps or channel partners to push Infinity? Are they getting an extra benefit if they're able to close a deal there?
Yes, they do. Again, it's more think about the customer. The customer is the one who's supposed to take all these technologies and implement them over the next few years. The answer is yes, we give more incentive, but it's an incentive that is in proportion to the potential for us and the growth opportunity for us.
By the way, there's an inherent incentive because Infinity deals are much, much larger than point product deals. Still, I think the main value is not, especially on a strategic deal for the customer, the customer is the one to determine, and they need to get convinced, and they need to do due diligence. By the way, in many cases, they need to combine different forces from different sub-departments of security, networking, operation to make that decision. Yeah.
I understand. Thanks very much.
Our next question is from Keith Bachman with Bank of Montreal. Please proceed.
Hi. Thank you. I had two related questions I'll ask concurrently. The first is, per the previous question, I just want to try to clarify, do you believe that you're seeing an impact, or the market impact from offload capabilities like Zscaler? Is that impacting firewalls in your judgment? The second is, as you think about today, you've talked about the move to subscriptions and Infinity, but as you think about your portfolio.
Yeah.
How much do you think, or could you give us some estimation about how much your revenues are non-firewall today, and how do you think about that over the next 2 - 3 years? How do you feel like you want to or seek to diversify your revenue streams? Thank you.
First, I don't think that right now, technologies like what Zscaler has, is much impact or direct competition with what we're doing. There is maybe a marginal one, but not in the mainstream market, and we don't see a lot of real head-to-head competition between the two areas. It's definitely an area for expansion for us, at least. As for how to classify the revenue, that's a very interesting question. It really depends what you classify as firewall, what you classify as non-firewall. For example, take all our subscription revenues. This is advanced technology. This is way beyond the basic firewall, and that's today bigger than the basic firewall sales. That's one example.
I think I don't have the number from the top of my head, but if I look at beyond maintenance and support that we sell, the portion of advanced technologies, advanced security technologies and capabilities today is probably bigger than the basic network firewall proportion of our sales.
I would've said as a rule of thumb, it's exactly what Gil said, in the sense that what you have right now in the product line, and that's why it's such a tough line to grow, is basically the appliance or the initial license, which includes the architecture and the firewall and everything else is in the line of the subscription, meaning the antivirus, anti-spam, advanced threat protection, and next-generation threat protection, our SandBlast, our cloud licensing, and our mobile, and the endpoint. Majority of the rest, which is the add-on technologies, is not all, but in a high level, I would say is in that line. And as you can see, even if you look at this quarter, you will see that the product and license was $122 million, and the subscription was already $149 million. It's bypassed that.
Okay. All right. Thanks very much, team.
Our next question is from Sterling Auty with JPMorgan. Please proceed.
Hi, guys. This is Matt on for Sterling. Thanks for taking the question. I know someone had asked previously about the Europe performance. I just wanted to ask, if there were any changes happening in the sales force similar to what was done in the U.S., and if there were other factors that contributed to the result. Thanks.
No, I think in Europe we're quite stable. Management structure is good. We did have a very good Q1. I think Q2, things continued to happen, but wasn't as strong as Q1. Hopefully, again, we'll see few more quarters that are strong there later in the year.
Great. Thanks.
Our next question is from Karl Keirsted with Deutsche Bank. Please proceed.
Oh, thank you. I just had two clarifications. Gil, your comment that product growth resumed in the U.S. I thought was interesting and encouraging. Just to put it in context, when was the last time you saw U.S. product growth? Was it the first half 2017 when Check Point's overall product growth was last positive? Then I've got a follow-up.
I don't remember exactly, but I think you're in pretty much the right time frame. Your calculation, I think, are in the right framework.
Okay. Helpful. The second clarification, again for you, Gil. In response to a previous question, you used the phrase that there were "big internal changes" at Check Point. You mentioned in Q1 and especially in 2Q. Just to be super clear, what were you referring to? Assuming you were referring to leadership changes, were there one or two that were particularly significant? I just want to be clear on what you meant by that. Thanks a lot.
I think first, I'm doing a lot of changes in getting, not just me, I mean, the entire team here, focused on a lot of changes in inflecting sales measurements, sales disciplines, and being much more clear and about the activity levels of people in the field. In terms of management changes, we're also filling a lot of positions and sometimes replacing a lot of places we think that we can have more potential and maintenance. I mentioned telco as one. I think we are making more and more changes in the U.S. sales leadership, and you will see some more changes around that pretty soon. We're doing a lot of training for people in the field.
At the beginning of the year, we brought a new leader for channels worldwide, a position we didn't have for, I don't remember when was the last time we put so much emphasis on working with the channel and doing it in a global level from the highest level to the lowest level. I mentioned the new leader for Asia that we brought in the beginning of the year. Again, if I'm trying to recall from my memory, we are doing a lot of changes. We just promoted somebody internal to run sales enablement and sales planning, and promoted somebody else to take her position in another department. There are a lot of changes. We are okay. Most of these are not big revolutions that affects things negatively. It's growth. It's few new people from the outside.
I think the most important one is I think we're very focused on the things we're trying to achieve. Activity management, new customers, working with the partners, and the whole going higher level in the food chain, Infinity consolidation, and all this family of attributes that I think are one big focus area.
Okay. Thank you, Gil. That's very helpful.
Our next question is from Saket Kalia with Barclays. Please proceed.
Hi, guys. Thanks for fitting me in here and taking my questions. I'll just keep it to one, just in the interest of time. For you, Tal. Tal, can you just give us a quick refresh on ITP and its impact to billings? Specifically, can you just remind us if these deals are largely annual in advance for multiyear commitments? How do you sort of think about how we should look at billings as that business grows? Because it clearly sounds healthy. I wonder if billings is really capturing all of that as that billings kind of duration changes.
The answer is the opposite. The billing doesn't catch it because it's typically a multiyear deal, and typically, let's say the customer signs for three years, he has a commitment for three years. You see in the billing, typically only the first year, because they pay annually, unless they chose to pay everything in advance. In many of the cases, they pay annually. It hurts your billing, although I got the bookings, which you can't see. That's one point. It can be quite large deals that you can't see through the implied booking. The second, I would say the accounting, you're absolutely right. When you look at those deals, it's split between all the lines, product, support, and subscription.
A small portion of the deal is recognized as product revenues, while the majority of the deal is recognized as recurring revenues over the life of the contract. Because the way the deals are is that the customer gets everything Check Point can offer. He gets all the subscription, all the endpoint, all the mobile, he gets everything. When you do a fair value split of the deal, majority of the dollars are being sucked into the subscription line, although you can get quite a lot of product, but in the product, you will see a smaller portion. It will be all the lines, but majority will go to the recurring and specifically to the subscription.
That's very helpful. Thanks very much.
Thank you.
We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.
Thank you all for joining us today. Obviously, we'll catch up with you throughout the quarter. If you guys would like to talk after the call, please send me an email and we'll fit you in. If not, we'll catch up with you during the quarter at the conferences or on the road during an NDR. Thanks. Have a great summer if we don't talk to you. Bye-bye.
Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.