And welcome to the Checkpoint Software First Quarter 2019 Conference Call. At this time, all participants are in a listen only mode. A question and answer As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kip Meintzer, Head of Global Investor Relations for Point Software. Please go ahead, sir.
Thank you. I'd like to thank all of you for joining us today to discuss Checkpoint's first 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.
Your convenience, the conference call replay will be available through April 26. If you'd like to reach us after the call, please contact Investor Relations by email at Kipp at Checkpoint. Dotcom. Before we begin with management's presentation, I'd like to highlight the following, due to 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 the Securities Act of 1933 and Section 21E of the Securities And Exchange Act of 1934 include, but are not limited to, statements related to checkpoint expectations regarding business, financial performance and customers, the introduction of new products programs and the success of those products and programs, the environment 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 team.
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 differences are contained in Checkpoint's earnings release issued on April 18, 2019, which is available on our website and other factors and risks, including those discussed in Checkpoint's annual report on Form 20 F for the year ending December 31, 2017, 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 representation of the non GAAP information. Now I'd like to turn the call over to Tal Payne for a review of the financial results.
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 first quarter. Revenues for the quarter increased by 4% year over year to $472,000,000 and our non GAAP EPS grew by 2% to one $0.32, both slightly above the mid of our guidance. Find 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 that as applicable, non GAAP information is presented excluding these items. Now let's take a look at the financial highlights for the quarter. Product and security subscription revenues were $257,000,000 Our subscription revenues continue to be strong with 13% growth year over year, reaching $144,000,000, Our software updated maintenance revenues increased to $215,000,000, representing 4% growth year over year. The growth in our subscription revenues samblas 0 day threat prevention and mobile. Infinity consolidated solution also started to flow into the revenues and show nice trends.
During the quarter, we had Infinity deals in variety of industries, including finance, manufacturing, software and defense with a significant portion coming from new customers. We continue to see an increase in customer's annual run rate in Infinity deals ranging from 10 to 100 of percentage increase, which is a great result. From an accounting perspective, a small portion of the deals is recognized as product revenues, while majority of the deals is recognized as recurring revenues over and the remainder as support update and maintenance. Deferred revenues, as of March 31, 2019, reached SEK $1,312,000,000, a growth of $146,000,000 or 13 percent over March 31, 2018. Revenue distribution by geography for the quarter was as follows: 45% of revenues came from Americas 44% of revenues came from Europe, Middle East and Africa region, and the remaining 11% came from Asia Pacific.
Please note, since the beginning of 2019, Middle East and Africa are part of Europe region, while before it was part of Asia Pacific region. The revenue distribution by geography for Q1 last year after the reclassification would have been 47 percent of revenues from Americas, no change, 42% of revenues came from Europe, Middle East and Africa regions after the reclass and the remaining 11% came from Asia Pacific. Those were the numbers for Q1 last year after the reclass. From a deal size perspective, this quarter, we had 47 customers transactions over $1,000,000 compared to 44 dollars were 71 percent of total order value similar to last year. Non GAAP operating margin for the quarter were 50% as we planned.
We continue to invest in our sales force and marketing in order to execute management and consolidation of security. In addition, this quarter includes the full effects of our recent acquisitions both of Dom9 and ForceNOC. Our financial income for the quarter reached $19,000,000. The increase is in line with the higher interest rate levels in the U. S.
Financial income expected to be around $20,000,000 to $21,000,000 a quarter in the remainder of the year. Effective non GAAP tax rate for this quarter was 19% as planned again, 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 yearend. GAAP net income for the first quarter of 2019 was $180,000,000 or $1.15 per diluted share. Non GAAP net income was $205,000,000 or $1.32 per diluted share, an increase 2% from the first quarter of $2,000,000,000 compared to $4,000,000,000 in December 31, 2018. Operating cash was $379,000,000, which includes part of ForceNOC acquisition payment of $2,000,000.
Collections continue to be very strong. During Q1 last year, we had $45,000,000 tax refund. Excluding this item, our operating cash flow increased by 2%. During the quarter, we purchased shares for $305,000,000 at an average price of $115 a share. This quarter, we implemented a new accounting standard ASC 842, which changed the recording of long term operating leases in the financials.
Accordingly, we recorded assets of $30,000,000 against liabilities reflecting the value of these leases. There's no significant impact on the income statement. Now let's take the turn the call over to Gil for his comments.
Thank you, Tal, and hello to everyone joining us today. I would like to begin today with a review of the highlights of what we witnessed during first quarter and provide a little more color on our business beyond the numbers that Tal just shared. Our first quarter was a big quarter in terms of event, We hosted our global checkpoint experience 360 conferences for employees, partners and customers around the world. This year's CPX 360 conferences set a new record for the number of participants and generated a high level of audience interest and enthusiasm. We had 30% more customers and almost 30% more partners attending the conference.
During CPX, focused on our Gen Five and upcoming Gen Six Security Architecture. As we've highlighted before, the vast majority of enterprises have security to address 3rd generation cyber attacks, which means that they are almost 10 years behind the current threat. And only 3% believe that they are protected against 5th generation attacks, which we are facing every day. This step brings to light how vulnerable the world infrastructure is today and the potential for catastrophic damage. If enterprises don't take measures to protect themselves against the current generation of attacks.
During the last number of years, we seen an almost 3x increase in the number of vulnerabilities discovered in the world's technology infrastructure. Operating systems, hardware, software, servers, critical infrastructure, etcetera. Last year, we were over 16,000 reported vulnerabilities with 800 in mobile operating systems and on. The 5th generation of attacks are usually multi vector attacks. It can be an up download on your mobile, but still your cloud credential and from there get into your internal data of the company, it can be a file that arrives through email and creates chain attack like that.
Dynamic payloads are used in most attack tools today and can potentially turn every computer into an asset in a global cyber warfare. The escalation in Gen Five attacks means that we have a huge challenge ahead of us and an even larger opportunity. While a big part of our marketplace still relies on the refresh of Gen 2 and Gen 3 customer environment, the real challenge and opportunity is in upgrading these customers to Gen Five Cyber Protection and consolidating their security infrastructure. During our CTX Conferences, we've also revealed more details on the 6th generation of our cyber security solution. One that we believe will revolutionize how security systems work.
We believe it will evolve how people think about security architecture by changing the way they are constructed. Today, security architectures rely on monolithic C that includes the delivery and the security technology in one big piece of software or hardware. These consume a lot of resources and are slow to adapt the evolving threats. We intend to separate the security service and delivery by turning it into a cloud based architecture that enables nano agents to bring the latest security innovation to every cloud app or IoT device and of course, to all the utterance elements of our network. These nano security agents, combined with a smart cloud security brain, will be the essential pieces of our Gen 6 security architecture.
During the first quarter, we introduced a number of new technologies beginning with the new 6000 appliance series, with improved price performance and optimized for Gen Five Advanced Threat Prevention. We also delivered Maestro, a revolutionary security solution for scalable network that delivers performance that couldn't be achieved before at a fraction of Maestro achieved these results by changing by changing multiple security appliances together to deliver an almost linear improvement in performance. This hyperscale technology provides cloud grade resiliency and elasticity. Unlike our solution that are only targeting the super high end of the market, Maestro can start at a medium business budget and scale all the way up to the performance needed by the largest networks in the world. Therefore, it opens a much broader marketplace with previous super high end solution, and enable cloud security innovation of the year award at the latest cloud award.
The recognition was for its comprehensive software platform for public cloud security and compliance or traces. In addition, Checkpoint Sandglass agent earned NSS Labs recommending rating in 2019 Advanced Endpoint Protection Sunbus Agent detected 100% of HTTP and email threat and 100% of malware using sophisticated evasion technique. While providing 0 force positive. You may have also noticed the recent Homeland Security announced in As we have spoken about in the past, our biggest differentiator is the level of security we provide to our customers and our focus on prevention and protection. Needless to say, the checkpoint product was highlighted as a product that is secure and doesn't suffer from any of those vulnerabilities.
On the sales front, we've been putting a lot of emphasis on winning new customers, consolidating the security infrastructure with a focus on cloud security and our Gen 5 Infinity Total Solutions. Infinity deals also generated nice results this quarter with new customers ranging from a few 100 users to over 10,000 users and from the construction industry to high-tech company. We've seen some good signs of success in increasing new customer wins, especially in Europe. Once we are able to achieve a similar type of uplift in the U. S.
New customer wins, I believe we will see an acceleration in our growth rate. In the U. S, we continue to make further improvements to our sales force. We brought senior leadership to our channel organization, We launched Checkpoint Engage a new global channel program focused on joint sales activities between our partners and our people The program feeds their checkpoints, a reward program that measures sales activities at the individual level and rewards them points for their checkpoint sales activities. The program will be rolled out gradually starting this month and we intend to utilize the program as the basis for our partner business model next year.
Overall, looking at our global sales structure, we've seen areas with great improvements and we've seen areas where improvements leads to be realized. I believe that the opportunity ahead of us is much bigger than what we've seen before, I'm happy with the progress we are making in some areas, our growth rate should be higher than what we've seen. This is a good time to address our projections for the second quarter You know my regular caveat, projecting future results is very challenging, but it's always a high level of uncertainty results can be better or worse than our projection. With that in mind for the second quarter, revenues are expected to be in the range $474,000,000 to $500,000,000 and non GAAP EPS in the range of $1.32 to $1.40. GAAP EPS is expected to be approximately $0.17 lower than that.
Thank you.
You.
For questions. Our first question today is coming from Michael Turits from Raymond James. Your line is now live.
Hey guys, good afternoon. One for Gil, one for Tal. Gail, you mentioned Gen 6 as cloud delivered security. Does that mean that you're going to try to approach things from in terms of cloud delivered security, the security from the cloud similar to what some of your competitors that are doing secure web gateway from the cloud are doing? Is that a direct competition?
I think we will have some of these components, but the answer is no. The short answer is no. I think our architecture will be a little bit different. I don't believe in routing all your traffic to the cloud. We slow down things.
Companies don't want to do it for their internal traffic. And it's not going to work in a fully scalable to bring security everywhere. What our architecture is based on is having this global threat cloud that queries can be made to understand if if any transaction, a new connection, an up transaction, or anything basically that we want to test, is something that should work or shouldn't work. It does a lot of effects. I mean, from the standpoint that we can apply all security technologies to every query like that.
And it brings a lot of controls back to the security professional that's supposed to the people who are in charge of the or not the people who are exposed to the manufacturers of the equipment or the developers of application software, but it will have very positive effects on the on the overall performance on the fact that data doesn't have to leave the enterprise. Data will remain in its point and that's the whole concept of what we call the nano agents. Okay.
Thanks, Gil. And Tal, you're aggressive your product is being impacted by the shift to subscription and to Infinity, but you had been having, moderating declines in product revenue those worsen this quarter got steeper again. Should we expect that you could go to either flat or positive product this growth in 1 of the quarters this year?
I think I'm not projecting right now. We gave the guidance for the full year and it does split between the line. The total guidance are taking that into account. If there will be a more than expected quicker shift into Infinity, While it's great news, it can affect bigger on the product. But in general, if the product, I don't expect it at that short time to become on a positive note, I expect this to continue and grow.
Okay. Thanks, Karl. Thank
you. Our next question is coming from Brad Zelnick from Credit Suisse. Your line is now live.
Great. Thank you so much. I've got one for Gil and 1 for Tal as well. Gil, it sounds like there's a lot of exciting things happening in terms of new products. And we're hearing more optimism from the channel.
And as you said in your comments, there's still improvement to come as you're making changes, especially here in the Americas. So what indicators are you looking at that give you the confidence to continue investing? And how long do you think it will take for Checkpoint to return to market growth rate?
I think the indicators that I'm looking at mainly are the level of activities. How many new customers are we meeting? How many C level people are we meeting? Of course, we look at our measures like the pipeline and the and things like that. But for me, the most important one is our own execution.
How many of these activities are we making? And by the way, how many are the partner or channel partners are making? And by the way, that's why we designed the new channel program, the Engage program to work on that instead of measuring the result after the fact measuring every week every day, how many of these activities, marketing, sales and so on are we conducting? My belief from everything I know that we have more capacity, we can do more and we can generate much more results that way.
Great. Thank you. And Tal, I know Gil gave us the updated guidance on Q2, but we didn't hear any update as it relates to the full year. Is it fair to assume that your full year guidance that you gave us last quarter still stands?
Yes, definitely. The full year guidance stand, it's a I gave you a bit more color this quarter just to make sure that you see which lines it coming from, you can see our sales and marketing are higher than some of your models, while the financial income is higher, so you can balance between the 2, but the results the annual results expected to be the same.
Thank you. Our next question is coming from shaul Eyal from Oppenheimer. Your line is now live.
Hi, good afternoon guys. I actually want to start with a question hasn't been asked in some time now regarding the competitive arena. Do you believe that Checkpoint is actually re gaining market share?
I think it depends how you look at I think overall our growth numbers should be higher and we're aiming at that. I think with Infinity, we're actually capturing new land We're getting to new spaces and we are taking full architectures at few customers. The number of these customers right now is still small, but it's growing nicely and the first quarter was a great indicator for that. The dollar volumes on that can be significant and we are seeing a mix of customers, some are small and small here is 100 of 1000 of dollars, which is kind of large in our arbor escape and some are multimillion dollar contracts, which are a good investment. And the main value that, but we actually give these customers the full security to combat the cyber security challenges that they've got.
And believe me, is needed.
Understood. And maybe one for Tal. So good work on deals greater than $1,000,000. My question is, were there any Dome9 and Infinity related transactions part of this I think you had 40 I think 44 or 47 this quarter, if I'm not mistaken.
We had 47 I will say no, but some of Infinity deals are part of those deals. And in it, you have also the cloud solutions, of course.
Got it.
So the answer is yes on Infinity and Infinity includes also Dome9. Are there standalone Dom9 9 in that category? I'm not sure.
Got it. Okay. Thank you so much.
Thank you. Our next question is coming from Phil Winslow from Wells Fargo. Your line is now live.
Hey, thanks guys for taking my question. Just have one on the pricing front. Just curious what you're seeing in the just on pricing environment out there, starting the year then also you're focusing and obviously specifically on Infinity too. Any sort of color there? Obviously, the pricing and packaging there is very different, but any sort of color feedback you're getting from customers on Infinity and it's go to market pricing would be great.
Thanks.
Yes, I can talk a bit about the Infinity deals that we saw. So like we spoke before, I'm following each one to see the trends there. And I continue to see what we talked about in the previous quarter. We see deals like Gil said from customers that have 100 users customers that have more than 10,000 users, which is very nice to see that it's fitting small companies and very large companies. We see in terms of the the customer's significant portion is new customers, which is actually something which is nice to see.
This quarter, it was even more than the previous quarter. So we it helping us more and more with new customers penetration. Again, small number, but a nice phenomena which hopefully will be a consistent trend. And we do see that the run rates are increasing significantly. So if it's a customer that maybe had only firewall before, then once they buy Infinity, the increase in their run rate can be 100 of percentage.
And if it's a customer that's already had NGTX and maybe cloud, then the increase is only 10s of percentage. But it's still increasing the run rate, increasing the satisfaction, which is very nice to see. So that's the color. Revenue is very, very slow. Revenue recognition.
Actually, remember the deals that we see are on average probably 3 years deal. You don't see it in the balance sheet. Most of them, you don't even seeing the deferred revenues because it's annually invoiced. So it's a backlog that you don't see as part of the deferred revenues. And you see it in the revenues, the subscription and the support over the life of the contract, majority of it is subscription, unlike a typical regular customer that doesn't buy Infinity, that's why we will see a strong shift over there over time.
And smaller portion going to the product. And the product is recognized only once the customer is actually pulling the product.
Got it. Great. Thanks. And then also just a follow-up for Gil on Dome9, you gave some commentary earlier on that. Now that you've own that for a couple of quarters there.
Now what's the feedback been from customers and prospects? And how do you think about doing about Dome9 competitively out there?
I think the feedback is actually very positive. We're seeing a nice activity in the field. It's in the very early stages because the field now needs to learn the whole new Dom9. We've made a drastic shift in the go to market from a small sales force of of a handful of people to a large sales force with hundreds of people that basically starts from 0 and need to learn the whole concept. But when I'm looking at, again, the activities in the field.
What I sampled, I saw a lot of activity around Dome9. In CPX, we got a lot of positive feedback to Dome9. So I think it will take us some time to ramp up, but the feedback so far is terrific.
Great. Thank you.
Thank you. Our next question is coming from Fatima Bellina from UBS. Your line is now live.
Good morning. Thank you for taking the questions. I have one for Gil and one for Tal. Gil, maybe a bigger picture question for just with regards to the overall demand environment for perimeter based controls and perimeter based security, I think year in, year out, we continue to hear sort of mixed messages on where customers are actually focusing their cyber security energies and dollars as it relates to product investments. So I wanted to get your take on, how the customer view on network security and perimeter based security like firewall solutions is evolving?
And then I have a follow-up for Tal.
I think we're seeing a good level of demand. I think, I mean, I think people are still refreshing their infrastructure. Some companies are still building a new data center. So I think the challenge is not there. I mean, the demand is healthy.
I think the challenge is how do we elevate the level of security and not how we compete on the things that were relevant for 10 years ago. It is a competitive marketplace. And that is a challenge. But I think overall, there is a healthy demand. I don't see that the challenge is there right now.
Fair enough. And Tal, maybe for you, just a quick housekeeping. On the reclassification of the geographic revenue, Was there any organizational change that prompted you to do that or it was just sort of a mechanical thing? Then, more specific question on your, blade subscription and maintenance revenues, they did decline sequentially. So I did want to understand some of the drivers that would have those subscription and recurring revenue line items down sequentially.
And that's it for me. Thank you.
Okay. I'm not sure I understood the second part, but let's first take the first one. So structurally we changed. Africa and Middle East is reporting to Europe now. It's now called EMEA.
So it's back if you remember, 10 years ago, that's exactly how it was. And we moved it back to EMEA. So now it's called EMEA. And we moved those percentage obviously, it's a smaller region, but it's moved to report into the Europe, Middle East and Africa structure versus APAC, Asia Pacific. So as we change it, structurally, then we also reclass the revenues in the P and L, of course.
And I think it's just a internal managerial issues. And mainly if you look at the geography, especially we are in Israel and we are part of the Middle East, geographically, we're in Asia, but in terms of Timothy, we're much closer in the distance. We are 1 third of the distance to Europe, and we are to the headquarters in Asia. So it's So I mean, there's always these 2 balances, yes.
That makes sense. And just to clarify the second question around the sequential decline in blade subscription, and maintenance and support revenue in the quarter. Just wanted to understand some of the dynamics that would have those recurring revenue line items down sequentially whether a few whether you can shed light on renewal rates or blade subscription package renewal rates and any dynamics there? Thank you so much.
It's actually not relating to renewal rate. It's relating to the fact that in the even in the subscription line accounting wise, you have some blades that are recognized like products. The revenue recognition is like product. It's just one portion, but in Q4, you can see a tick up when there's more like you have more product revenues, you have more of those type of blades and then you can have an uptake in Q4 and then it's going back to regular rates in Q1. So that's the generic comment.
It has nothing to do with the renewal. Renewals are pretty much consistent even slight increase there's some quarters. So in general, it's just some subscriptions that are recognized immediately.
Got it. Thank you.
Thank you. Our next question is coming from Ken Talanian from Evercore ISI. Your line is now live.
Hi, thanks for taking the question. You mentioned putting more emphasis on acquiring new customers was wondering if you could expand on the changes you're making to the sales incentives for both direct sales and the channel and how they compare to the prior model?
I think it's mainly about the activity management. It's making sure that people go out and do these kinds of meetings. It's the weekly measurement. It's a weekly focus on kind of these things. First of course, some bonuses and some MBOs and so on in terms of getting to these activities.
But the key is around, But the key is about being trained and actually going out and doing those meetings.
Okay, great. That's helpful.
And also, I was wondering if you could give us a sense for how the pipeline is building around the Maestro products and the 6000 series of appliances?
I think it's building up quite well. I mean, we've seen in Maestro a nice number of deals already in the first quarter, even though it's a revolutionary concept. And I think I don't know if we have a specific pipeline for the 6000 series because it's in line with the general core business that we do, but we are seeing that they get more and more into the marketplace. People are enthusiastic about that. Need to place them correctly in terms of the price performance and so on.
And I think it's working okay.
And I would just add that we don't reveal the numbers, obviously, but C and I transition. It's been launched only 2 months ago, like end of January, beginning of February. And it's already let's say more than 10, more than 20% transition. So it's quite well.
Great. Thanks very much.
Thank you. Our next question today is coming from Andrew Nowinski from Piper Jaffray. Your line is now live.
Great. Thank you very much. Just two questions. First, why do you think your growth in Europe continues to outperform the Americas?
I think it's execution, management and focus on the right thing. I think it's also better alignment with the channel partner, but I think works well in Europe. And I think we continue to focus on executing on both areas because I think we have far more potential in both places.
Okay, very good. And then on with regard to billings, it was up about 3.4% off off arguably an easier comp from last year, which looks like it may have been a bit below the market growth rate I know you launched a number of new appliances over the last few quarters, including the 6500 and 6800. So I'm wondering, Is that lower growth rate maybe simply due to the Infinity sales model? Is there another reason why your new appliances are not driving, translating to better growth in billings? Thanks.
So I think you're related to that. I mean, we don't talk about the billing, but you're right. When you calculate the implied booking, you're around 4%. Remember, some of the deals are off balance sheet, but in general, we said that Europe did well and America still needs to improve.
Thank you.
Thank you. Our next question is coming from Greg Moskowitz from Mizuho. Your line is now live.
Okay. Thank you. The first question is just on Infinity. So for the customers where you are seeing a big uplift in other a 100% uplift or more, are those customers actually displacing third party technologies, or is there a deployment additive to what they previously had?
Any? I think both, I think they are displacing and they are also using technology that we didn't have before, which is most of the Gen Five capabilities. And by the way, remember, we've said that this quarter, we've actually had a very nice contribution to Infinity from brand new customers which case, they basically displace their entire security infrastructure with a checkpoint solution, which is great to see.
Okay. Thanks, Gil. And then a few months ago, you brought on a new channel head and you did touch on some channel changes a little bit in your prepared remarks, but What changes should we expect to see over the course of 2019?
Think the main, the main change, but I mean, there's actually 2 changes. 1 is the day to day way we work with partners and the other is the programs that needs to support that. So in terms of the program, I've spoke about the Checkpoint Engage Partner Program, again, it is designed to work on the activity level, partners actually collect points for every activities that they do, a meeting conference and so on. And they can see every time it's their activity, how are they scoring on their activity level and what level of attainment they've got to. And this is driven, I think, this is kind of a way to encourage to gamify and and to support the day to day activity in the field, which is designed around the exact same thing.
If we go out together, if we pitch together, If we go to customers, I believe that we will win a lot more.
Thank you. Our next question is coming from Shibley Sarafi from FBN Securities. Your line is now live.
Yes. Thank you very much. So I want to talk about the gross margin, which declined year to year by 0.4 percentage points year to year. It looks like the product side declined more. Is that correlated with, the hiring of Frank Rauch as the new channel head.
We're hearing from our channel checks that Israel is allowing North America with Frank leading it in the channel to make more pricing decisions on its own. And I'm wondering if that's leading to more price aggression and therefore a decline in the product gross margin.
Really, I think if you look at the numbers, the total gross margin has actually moved up. I think it's more relating to the mix. You're right, that there's, in general, price pressures for the last few years, there's a price pressures. I think it's the mix of the product. Sometimes ships with a few not even percentage, less than a percent, but 1% up, 1% down.
It's nothing material change in the U. S. Versus the other regions and the same with the policies. I mean, that can compete in effective way anywhere on the globe.
And I mean, I'm glad to hear that feedback that people feel better about about the changes and the authority that people have. We're definitely trying to make that happen and to support the people in the field and make it easier for them. The success of us will be determined not by the way we manage the gross margin at the end, but the way we manage the top line. So I'm So I mean, that should be our focus and that is our focus.
Okay. And you also stated that you're not happy with growth and I think you elaborated with Americas growth in particular. What do you think are the key factors driving that disappointment? Is it increased competition from Palo Alto and Fortinet, but what are the other factors?
I think the main factor though our own execution is what we do in the go to market, the level of activities that we do, whether we address the right targets. I think we have an amazing set of people in the field. I think we have a very good set of customers, but I think in many cases, for example, we are working with the same people on the same projects. So what we need to do is to aim higher at the C level and find you new projects and that's true for existing customers. And of course, the most important element for me is going to new customers.
Again, it's not easy to change the salesperson behavior on that because with the existing customer, we always find a place with the higher win rate because it's an existing customer with a bigger project, again, because we already have a large installed base. So to get into this more challenging market of the greenfield of new customers, it's always more challenging. But again, as I said, I think that we are adding the capacity, I think our people do have that capacity and it's a matter of training, it's a matter of focus, it's a matter of activities, marketing and so on. And I think we're we've made all the investment. We have more people and we've done more marketing and we are doing far more of all of that.
So it's a matter of taking the time to see all of that happening. And by the way, daily execution challenges that our people are dealing. We're going to think we're dealing with it very well. The last sampling that I did showed that there are real changes happening. Now As I said, in Europe, they already produced some good results in the first quarter.
So that's very encouraging. In the U. S, what I've seen so far is that there are changes in the behavior and the activities and the results still needs to come.
Okay. Lastly, for me, force knock, what is the expected revenue contribution this year?
None, really. It's more technology than we acquired. As part of our Gen 6 future products.
Thank you. Thank
you. Our next question is coming from Walter Pritchard from Citi. Your line is now live. Thanks.
Just wanted to kind of trace back the narrative we've heard here in the last, say, 3 or 4 quarters. It felt like first half of last year was a little bit challenging. And then Q3 sort of hit this inflection, talked about bookings improving and Q4 was really strong coming through on the P and L. Like this quarter took a little bit of a step back with the results being back in the midpoint of the guide. Was there I'm curious if there was sort of like deal slippage or Anything that was kind of seasonal factors that you might just expect in Q1?
Or is it truly just, sort of execution some of the things you talked about that just need to ramp up in the Americas?
I think 1st Q1 is always the seasonal weak quarter. People try to finish the year with the biggest project, with flushing the budget, customers have new budget. Our people are are basically starting from a very low level of pipeline. During the year, they build the pipeline. And again, it reaches the the top in Q4 and again reaches the bottom or the beginning of the pipeline in Q1.
Also remember that we've all the marketing activities that we've talked about the checkpoint experience conferences and so on. People are not at the office all the time. People are building their plans for the year. So Q1 is always the quarter that's challenging. With that in mind, by the way, I think we've done quite well in the first quarter.
I think as the year goes, we're building more and more into that. And again, my expectation is that there is a lot of upside, whether it will come Q2, 3, 4 or 2020, I think time will tell. So I think right now, we have a balanced expectation from ourselves. And I think there's a lot that we need do that we need that we can and we should improve. But again, I'm not sure when it will come.
Great. And then Tal, just a quick clarification. I didn't quite catch what you said on tax rate. For Q4, Q4, the GAAP tax rate was really low in 2018. You said near 0 in 4Q of this year?
Yes. Just reminded you what we said in the annual that I said expect around 19% in Q1, two and three and in Q4, zero. And I just reiterated that that was the guidance.
Okay. Thank you.
Thank you. Our next question is coming from Karl Keirstead from Deutsche Bank. Your line is now live.
Thanks. Just back to the go to market, I had 2 more specific questions. In terms of accelerating the new logo acquisition in the U. S, is there a plan to meaningfully accelerate sales rep hiring through year end. The fact that you're reaffirming, I think the 50% operating margin for the full year suggests not, but I just want to ask.
And then secondly, as part of the channel changes, are you thinking about altering the economics or margins to the channel partners?
In terms of the hiring, we still have a plan to grow hiring in the field. But again, right now, the focus is not on more people, but the productivity the activities of the existing people. I think that's where we will especially this year, that's where we will see the results and that's where we will see the most of the investment. In terms of the channel partner economics, I think we want to align it with the new program. I think we want to make it attractive to partners, especially to partners that invest in our active around promoting our solutions.
And I think that's what we want to align it not based on partner size, but based on the actual investment and the activity that the partner is doing with us.
Thank you.
Question is coming from Dan Ives from Wedbush Securities. Your line is now live.
Yes, thanks. So my question is obviously now that we're through 1Q, in terms of budgets where you deploy your going after in terms of cyber security, especially within the U. S, does it feel incrementally bigger than maybe we saw a year ago, just given cloud and some of the secular shifts. Maybe you could just talk about that in terms of what the overall pie that you're going after this year versus maybe years past?
I think customers do have a lot of focus on the cloud. On the other hand, on cloud, we don't always figure out exactly what we want to spend on security and other things. It's a new field and many customers, by the way, are not don't have any run rate or don't have any specific plans for what the spend on security should be in the cloud. But again, since we're starting from a small base, that shouldn't be the major the major factor for us at this point. I think overall what the message that we are giving to customers is you need to look at security at the top level.
You need to consolidate And this way, you can achieve a much better ROI on your investment and mainly much better security to your enterprise. And I think for example, when you look at the Infinity program, we give the customers the full flexibility, we give customers the full capabilities to implement security on premise, on the cloud for end users, for mobile, all of that is included. So the customer doesn't have to worry whether it should be more on prem or cloud or all the other factors that exist. It comes all included because I think that's what customer needs.
Thank you.
Our next question is coming from John DiFucci from Jefferies. Your line is now live.
Thank you. Just if I could go back for a quick question on sales and marketing, and you've talked about it increasing than it did. And Gil's talked about focusing on winning new customers. I'm just curious because your new business metrics are at least the way we calculate them actually moderated this quarter. It's still better than it was prior to the last two quarters, but sort of fell off a little bit from the last two quarters.
I'm just curious, is there because of the increased expense, do you have like more unproductive salespeople at this point right now? Or is it just the marketing spend you just talked about relative to the new business signings in this quarter?
I think the way I view it is we invested basically before the growth. So we invest now and we hope and expect and plan to see the growth coming later on. Now we have 2 growth drivers when we look at the increase in our sales and market which is where the main growth is. 1 is the headcount. We increased the headcount.
We talked about it and you mentioned it's the majority of the growth is actually already from Q4. It's just that you see the full effect in Q1. That's one effect. We continue, of course, to increase the headcount, but not in the rate that we saw last year. That's one.
2nd, we invest a lot in marketing. We talked about it that when we start to invest in marketing, we see things starting to be according to plan, we've got to increase our investment in marketing and we do I'll give you 2 examples, CPXs. Historically, we used to have 3 global CPXs, which we had a huge increase in the presence there this year, over 30% increase. So that's one example of CPXs in Q1 that is significant increase in the expense there. And we are doing local CPXs across the U.
S, across Europe, across Asia, which also will increase the marketing expenses. We increase presence in third party events in sellers. So we do increase headcount and investment in marketing, in events, checkpoint events, or third party events.
Okay. Okay. Thanks. And I guess maybe just one other question, but just this sort of dust off an old one. And the question has to do with virtual firewalls in the public cloud.
Has there been any change in adoption or even discussion? I realize it's early But, some of the work survey we've done says that customers plan once they do start to move more aggressively enterprises anyway, to the public cloud, they plan to use same vendors that you're using on prem. But customers change their mind all the time. Right? And I know there's different kinds of security that have to test these in the cloud, but I'm just curious in your virtual firewall, than your products.
Is there any change in demand or any change in discussion with your customers?
That's actually the parts doing very well in the cloud. I mean, there are other parts in the cloud that are doing well, but our virtual firewall sales in the cloud are actually growing quite nicely. Again, and there's much more much more potential there, but growing nicely. We also have a nice growth rate for our SaaS solution which is a completely new field in that regard. So definitely, we have a lot.
And again, we have at least 3, 4 elements today just in the potential on the cloud. And I think it's going well overall.
Okay, great. Well, thank you.
I would just add that the cloud when we look at the part in the subscription is actually becoming quite nice. It's it's it's I can't give you the number right now, but I can tell you it's growing quite high. The growth is over 70% and it's growing and it's no longer it's a few tens of 1,000,000 a year, probably going to be by theendoftheyear. So it's becoming quite significant less.
Our final question today is coming from Sterling Auty from JP Morgan. Your line is now live.
Hey guys, not to mention of new customers. And Gil, you mentioned both augmentation and displacement. I'm curious if there's any in terms of where you're seeing those win rates either by geography, by industry, by size of customer or even by use case?
In terms of industry, it's all over. I think I mentioned that we've seen basically everything from construction to technology and everything in the middle, finance manufacturing and so on. Geography Q1 was very strong in Europe, and I think we've talked about it a number of times. Europe at least this quarter got it right and is showing a nice growth rate in new customers in the U. S.
I'm seeing a nice change in the activity levels. And I hope that that will be translated to the actual results later on.
Okay. And then one follow-up Did you guys make any changes to your pricing for either software blades or support for 2019?
Nothing, nothing German. We have here, we have tweaks in the pricing, but no, nothing dramatic, I think.
Okay. Thank you.
Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.
Thank you everyone for joining us today. We look forward to seeing you throughout the quarter. If you do have any calls that you'd like to have with us, please send us an email and we'll try to get back to you as quickly as possible. Thank you, and have a great day. Bye bye.
You. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.