Greetings, and welcome to Checkpoint Software 4th Quarter Full Year 2018 Financial Results Call. At this time, As a reminder, this conference is being recorded. I would now like to turn the conference over to your Hope host, Keith E. Matzer, Head of Global Investor Relations. Thank you.
You may begin.
Thank you. Like to thank all of you for joining us today to discuss Checkpoint's 2018 fourth quarter and full year financial results. Joining me on the call today 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 February 6. If you'd like to reach us after the call, please contact Investor Relations by email at kipcheckpoint.com. Before we begin with management's presentation, I'd like to highlight the following. During the course of the 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 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 are strategy and focus areas, demand for our solutions, our expectations regarding the acquisitions of Dome9 and ForceNOC our business and financial outlook, including our guidance for Q1 and full year 2019, because these statements pertaining to future events they are subject to various risks and uncertainties. Actual results could differ materially from Checkpoint's current expectations and beliefs.
Factors that could cause or contribute to such differences are contained in Checkpoint's earnings press release issued on January 30, 2019, which is available on our website. And other factors and risks included in those discussed in Checkpoint's annual report on Form 20 F for the year ended 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 presentation of 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 fourth quarter and the full year. Revenues for the fourth quarter increased by 4% year over year to $526,000,000, towards the high end of our guidance. And our non GAAP EPS grew by 6 percent to $1.68, exceeding the high end of our guidance.
Before I proceed further into the numbers, let me remind you that our GAAP financial results include stock based compensation charges, amortization of acquired intangible assets and acquisition related expenses as well as the related tax effects. Keep in mind 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 securities subscription revenues were $307,000,000. Our security subscription revenues continued to be strong with 13% growth year over year, reaching $147,000,000 this quarter.
Our software update and maintenance revenues increased to $218,000,000 representing 4% growth year over year. The growth in our subscription revenues is driven by our Advanced Threat Protection Solution, the Sunblast, and our cloudguard business. During the quarter, we closed an impressive Infinity deal with variety in variety of industries, including large information and data corporation and a retail company. Deferred revenues as of December 31, 2018 reached $1,338,000,000, a growth of $151,000,000 or 13% over December last year. Strengths in our security, subscription and support.
Revenue distribution by geography for the quarter was as follows: 40 5 percent of revenues came from the 16% came from Asia Pacific, Japan, Middle East and Africa region. From a deal size perspective, This quarter, we had 102 customers with transactions of $1,000,000. The total value of this transaction continued to increase. Non GAAP operating margin for the quarter was 53% similar to the previous quarter, Q3. Effective non GAAP tax rate for this quarter was 11%.
This quarter, similar to last year, and as expected, Our tax expenses included tax benefits from lapse of statute of limitations on certain provisions. GAAP net income for the quarter for the fourth quarter of 2018 was $238,000,000, a $1.51 per diluted share, an increase of 4% from the fourth quarter of last year. Non GAAP net income for the quarter was $264,000,000, or $1.68 per diluted share, an increase of 6% from the fourth quarter of 2017. EPS exceeded the top end of our guidance. Our cash balances were $4,39,000,000 as of year end.
Operating cash flow was $249,000,000 similar to last year. Collections from customer continued to be very strong, This quarter, part of Don9 acquisition payment is presented in operating cash flow according to the accounting rules. Excluding this payment, the operating cash flow increased by 7%. During the quarter, we purchased 2,800,000 shares for $305,000,000 at an average price of $111 per share. Now let's take a look into our 2018 full year highlights.
Revenues for the year was During the year, subscription continued to be the main growth driver. The subscription revenues include majority of our new products and services including our cloud and mobile solution. Bear in mind that cloud license is sold as annual subscription while before we sold it as a perpetual license. On the Infinity front, in the transaction that closed during the year, we have seen an increase of 10 to 100 of percentage in the annual run rate. This is great news.
The product portion reduced Since the allocation to subscription is quite large, this is due to the inclusion of all of our available services in the Infinity offering. Non GAAP operating margin for the year was strong at 53%. We continue to invest in our sales force and marketing efforts, The full effect for both, the headcount and the compensation increase will be reflected next year. Also 2019 will include the full effect of both of our acquisitions, Dome9 and ForceNOC. Hence, we expect our margin to be around 50%.
Effective non GAAP tax rate for the year was 16%. For 2019, we expect the tax rate for the year to be approximately 14%. Around 18%, 19% in Q1 to Q3, and around 0 in Q4 as the lapse of statute of limitation expected to occur in the fourth quarter, as we've seen in the last few years. GAAP net income for the year was $821,000,000 or $5.15 per diluted share. GAAP earnings per share grew by 7%.
Non GAAP net income for the year was $911,000,000, or $5.71 per diluted share, reflecting an increase of 7% as well. For the year, cash flow from operation increased by 4%, reaching $1,130,100,000 compared to $1,090,000,000 in 2017. During the year, the company repurchased approximately 10,300,000 shares at a total cost of about $1,104,000,000 at an average price of $107. So now I'll turn the call over to Gil for his comments and thoughts.
Thank you, Tal, and hello, everyone joining us today. As you've seen in the fourth quarter, our business results were better than our projections. Key driver to our success and growth this past quarter were a non security technologies, primarily our cloud and advanced threat prevention solutions. These are subscription based solution, and their continued success is shifting our business to more of an annuity business model. During the year, we made progress on all our key areas of focus.
We introduced and pushed our 5th generation security platform, Infinity, and made headway in providing it as a platform to customers. We introduced a new family of cloud security products, the cloudguard family, it includes cloudguard Diaz to secure public and private cloud, and cloud guards us that secured software as a service application and prevent malware or account hijacking from penetrating into business environments. The newest addition to our cloud security families, the Dom9 acquisitions, which was completed in the 4th quarter and focuses on managing and enforcing security across multi cloud public cloud environments. It's a great product to get control over public cloud security implementation and fits very well to our cloud security offering. Sales partners and customers conference.
CPX 360 is held in 3 different locations. The first one was held in our Asia based costs for our Asia based customers and partnering Bancoq last week and was a great success. We had the higher participation whenever before, We received excellent feedback on the content, and we used it to launch some new initiatives and products for 2019. We've talked about the future of cybersecurity and our Gen 6 Infinity platform that is under development. Today's IT environment secure primarily endpoint and networks and rely on highly sophisticated software that is operated in relatively few points on the network.
Future IT environments will include much more workloads that needs to be secure. In the cloud, we will have new types of assets, virtual servers, containers, web and cloud services and computerless computing such as cloud functions. Future IT environment will also need secure many IoT devices that are starting to surround us, not to mention the mobile devices, which I believe are the number one threat to our privacy and security nowadays. Overall, I believe that the amount of assets we will need to secure will increase by 10 fold in the coming 3 to 5 years. But it's more than just the amount of assets we will need to secure.
If we take an attack method, let's take a malicious file for an example. A malicious file can come from multiple attack vectors, email, file download, file server, mobile messaging app, etcetera. I can easily count 9 different attack vectors in which a file can be delivered. Multiply that by the number of technologies that are needed to prevent the different types of malware that can be embedded in a single file, at least 8 for that matter, You'll get the complexity of 72 different combination that needs to be resolved and secured. Take it to the next level and look at the entire spectrum of accuracy, and you'll easily get 16 attack vectors and 26 technologies, over 400 combination that needs to be addressed.
There's no security expert in the world that can manage this complexity and get it resolved and secure. There is no other way to secure this entire environment without simplifying and consolidating security. Our future Infinity platform is built support and provide a robust collection of security technologies to all these attack vectors and to support millions of assets. It will rely on cloud architecture that is self updatable and provide vast amount of services to many nano security agents that will reside everywhere security is needed and at every performance level. While it may sound futuristic, we are making progress quite rapidly.
This month, we introduced some new platforms that apply some of these values into our daily business. We introduced 2 new appliances that are optimized for threat prevention performance and doubled the performance we provide in Veri class. These are matched by one of the more interesting products we launched called Maestro. Maestro is designed to provide cloud grade capability into network security. It provide organization with almost unlimited network security elasticity by changing network security appliance in a very simple way and turning them into a giant security powerhouse with scalability scalability, resiliency and performance that is hard to match.
360 conferences in the U. S. And Europe. We expect to see record level of attendance in both conferences. But beyond technology, in 2018, we've made some significant changes to our Salesforce.
Focusing on new customer acquisitions and going to the C level of our current and prospects customers. From my meeting with CIOs and CISOs, Chief Information Security Officers, I can say that there is a great level of interest in our approach and platform. We're making great progress, but have a way to go to see the full impact of these changes. Last year, we appointed a new Chief Customer Officer, started 2019 with a new head of global partners and a new head for our Asia sales organization. Clearly, we continue to invest in our sales organization.
Our technology and sales efforts are designed with one thing in mind. To be at the forefront of cybersecurity. Our research team is one of the strongest in the world and last year delivered some major headlines. In the fourth quarter, our researchers identified the major shift of known and unknown campaigns towards the use of file less techniques. Our new set of cell based technologies were able to uncover and prevent these campaigns, despite their highly evasive nature.
This included, again, Graeme, ransomware, UR SNP Banking, Trojan, Trojan, and the 1 of mine crypto Jacker. Furthermore, our researchers uncovered several critical vulnerabilities in popular application and services. Including the ability to penetrate roles through the DJI cloud control infrastructure. And for those of you who play Fortnite, or have kids that do, we protected you by finding a vulnerability in the Fortnite cloud that allowed account hijacking Both DJI and Fortnite were fixed. We often talk about the use of automated tool and AI in cyber security, utilized some of these techniques, and our engines were able to find 50 different vulnerabilities and then a dog a reader in 50 days.
Highlighting the vulnerability of every piece of software and infrastructure around us. Overall, it looks like the activity in cyberspace is isn't slowing down, and we'll have plenty of work ahead of us. So this is a good time to talk about the 2019 projection. We expect to see a gradual change in And you know my regular caveat, it's hard to predict the future. Results may vary.
There are many factors that can help us achieve better results and many other factors that can cause worse results. With that in mind, let me share the projection for next year. Revenues for the full year of 2019 are expected to be between $1,940,000,000 up to $2,000,000,000 $40,000,000. That's $1940,000,000 to 2040. Non GAAP EPS for the full year is expected to be between $5.85 again, $5.85 to $6.25.
GAAP EPS for the full year is expected to be approximately $0.70 less. For the first quarter, revenues are expected to be in the range of $460,000,000 to $480,000,000, and EPS in the range of $1.28 to $1.34. GAAP EPS is expected to be approximately $0.16 list. Thank you for all your support, and we'll be happy to open the lines for your insightful questions.
Thank
session. Our first question is from Michael Turtis with Raymond James. Please proceed with your question.
Two questions. 1, this looked like a very good quarter or a better quarter for products on a sequential basis, even with the move to subscription. Was wondering if you could talk about what drove that? And then second question is, margins into next year, if you could, as you have them going down a bit again, maybe you could walk through what's flowing through from this year and what the incremental investments are into next year?
I think for the quarter, we had, I think, a good quarter. I think things were, as we expected, pretty much, We did win deals from all types and all types of customers, new customers, renewal customers. Again, we continue to see the shifts towards subscription. But we still have a decent number of product sales. I think this quarter, for the first time, you'll notice that our subscription revenues surpassed the product revenues, which I think is a good sign for us and reflects what we are seeing for a long time.
And as for the second time about margins for next year. I think 1st of our margins are very high and they've always been very high. So I'm always saying for since we went public, almost 23 years ago, but my focus is not managing the margin, but managing, the effectiveness of the business, managing the growth and managing the technologies. Last year, I think our headcount grew by about 11%. So as we move into 2019, that will be reflected in additional expenses.
We only saw some of the expenses in 2018, and we will see all of it in 2019. We still expect to hire more people in 2019, We still expect to invest more in the sales and marketing. Even if I take this first quarter when we have the free CPX, 360 Conferences. We have more attendance than last year, and that means a bigger expense, which is a huge project as one example of things that we are doing. And I think Tal can speak more about the numbers, but I think the the spending is going up and we are investing more in our operations.
And I would just add that remember that also the acquisition of a Dom almost had no effect in 2019, 2018, because we purchased it towards the end of the year, and it's going to have a full year effect in the expenses next year and the smaller acquisition of ForceNOC as well. So all in all, I will say the effect of the acquisitions and majority of the increase of the headcount of last year, which you will see the full effect of the net and you will already see it in Q1. I mean, the reduction to those margins, you will see in Q1 already.
If I you talked about adding more headcount, but if you really think about what needs to be more effective for you in going to market and being competitive, is it just more salespeople or do you need a different approach, something that would make you, let's say more aggressive from a sales and marketing perspective?
I think we will I think we're doing fine, but I think we need both. I think it's, the number one I believe is quality and not quantity. I always believed in that. So I think That's a so we are working on how we address C level about how we address a new customer that That's the majority of the investment. But in terms of coverage, yes, we can have more coverage and we can cover more customers, more areas, more accounts.
And I think one last thing which is very, very important is working with partners. We are investing in working better in our partner remember, our legacy, our business was, we've 100% reliance on partners. These days, I think we've taken more ownership of, say, directing our business. And we've done an amazing job in that in the last few years, but I think it's time to reinvest in our partners and do both and, and get the bigger leverage for our business. I think that's why we hired a new head of global partners at the beginning of this year.
And I think we intend to invest more also in partnerships.
Okay. Thanks guys.
Our next question
is from Brad Zelnick with Credit Suisse.
Great. Thanks so much for taking the question and congrats. On another quarter of billings growth at market rates or thereabouts. I've got a question for Gil and then a follow-up for Tal. Gil, from all your meetings with CISOs and other tech executives, how are you thinking about the overall spending environment for security into 2019?
Because some are calling for a period of digestion and And as you think about it, how does the environment factor into the 2019 outlook that you provided?
I think that can definitely happen. On one hand, everybody's talking about cyber as a top priority and about they want to invest more in cyber. On the other hand, IT budgets are under pressure and every IT department and every purchasing agent is looking to reduce costs with every vendor. Nobody's just throwing money They are all renegotiating their contract and reducing their, trying to reduce their costs, which is very understandable. I believe the key to our growth will come not from people throwing money and not from a hyper growth in the market and the market is growing, but it's not growing in crazy rates right now.
I think it will come from really penetrating more projects at a higher level and consolidating many things in the customer environment. That's a challenging task. But that's, I think that's, I think, the future of what we need to invest in because that will be the real solution for security. Not just a matter of business model. It's not just a matter of practicality.
It's a matter of what can really make the world secure. I described in my, in what I've said earlier, the complexity of security, there's no other way to obtain security than to consolidate and move into a new types of platform. And we are now building the platform that I believe can really provide cyber security for the next generation.
Excellent. Thanks, Gil. And Tal, now that we've got another quarter under your belt selling Infinity, can you talk a bit about the impact to the model? I mean, you mentioned it and you caveated full year guidance to say that you're assuming some portion of the business is taking Infinity, but can you maybe quantify for us what those assumptions are? And is it fair to say that if Infinity adoption is greater than expected, it can be a headwind to revenue.
How should we think about that?
Yes. The second statement is correct. We have some likely to continue in this space, which we see more Infinity deals and we will see more in the future, but it takes time and we didn't expect anything over excessive here. So we took that into account in the model, but the range is exactly relating to items like that, for example, since when you think about it, On the one hand, the run rate is growing, which means from a business perspective, it's great deal. If you have a run rate of 100,000 with the customer and it's going up to 150,000 or to 300,000, depends on the customer and what was the opening point.
Which means in all cases, it's a great business deal because we're increasing the run rate and it's great for the customer because it's getting much more secure. When you talk about the allocation, The location is by definition, a lot of it is going into subscription, not all of it, but a lot of it because we offer everything that checkpoint can offer and majority of those are in the subscription line. Hence, the discount rate from the product is increasing, right? So because it's more dollars are going into the services, less dollars going into the product. And that's what I alluded to when I said, is putting pressure on the product growth, but we can increase the subscription line.
So we took that as a at the midpoint that what we expect. And if it will be faster, then it will have a greater effect on the product and it will be slower, it will have slightly less. So that's the general comment about Infinity. But from business perspective, which is what we are interested about in our run rates of the future that look like really good transactions, good deals for the customers and for us.
Thank you so much.
Our next question is from shaul Eyal with Oppenheimer And Company. Please proceed.
Thank you. Good afternoon, guys. Congrats on the solid sets of results. Gil, still sticking on the Infinity topic. So think it's been right now about 18 months, probably less than maybe 2 years or so.
Feedback on the channel is quite encouraging. I don't know whether it's too early to gauge a quantitative view, but from a qualitative perspective, can you talk to us about the incremental revenue opportunity you might be seeing from customers migrating to this platform even on the expense of the product.
I think what we've seen is, between, I think what Tal says, between 50% to a between to doubling or even tripling the annual spend that the customer does with us once we shift to infinity. And I think some of it come by getting more security, some of it come by consolidating and getting things that other people have done, not necessarily our direct competitors, but some the broad, the broad security space that we are consolidating into security. And so I think that's kind of what we're seeing. I think Infinity has 2 major effects right now. 1 is the immediate one, which we provides customers more security.
We get more stickiness into the environment and we get more revenues for that for the, I mean, in an annuity basis, so it's not affecting the individual quarter, but in the foreseeable future, it's increases our run rate by, again, big percentages, which is the immediate effect. The second effect is the mindshare. When we're struggling with just like every vendor by when we are offering a product by product approach, it's a very different level than we speak to when we speak about Infinity. Infilities where the CIO, in some cases, even the CEOs, CIOs, CIOs are listening. They are open to that approach.
Sometimes they are going on that approach, in which case, we gain the immediate deal. Sometimes they are not ready to really roll over the entire infrastructure into various program, but that opens the door to many, many other projects that we have. So I think from what I get from the field and the customers and the channels is that Infinity is both a very good tool sell, but it's also a great door opener because we have something at a much higher level that differentiates us that takes us to the next level of discussion beyond just we have these better products or these better functions than features. So I think that's the 2 roles that Infinity plays in right now.
Got it. And maybe a follow-up for UGill or for Tal. So I think we understand the investment Check 1 has been pursuing throughout fiscal 2018. And I think the ones that you will be pursuing during 2019. And my question is, aside from the recent hiring and future hiring, has anything changed in terms of channel compensation?
And I know you've addressed the need to reinvest within this segment, but anything changed on that front on channel compensation? And maybe even for travel on the gross margins, should we expect gross margins to remain stable for the most part throughout 2019?
So from a channel perspective, not much have changed last year. This year, we are investing in the new channel program. And I think the full effect of that will be actually be We are the main economical aspects so that if there will be any, I don't know yet, will be in 2020. I mean, it's we're starting with some new approaches for channel, and it's more about working together, managing the activities and so on, less about touching the economics. I think this program will result in also some changes to the economics in 2020.
I hope for the good, but I mean, time will tell. About gross margin style, I don't know if you want to say anything.
No, gross margin pretty much itself. So it's remains in the same area. I would say the same for operating margin and gross margin, taking everything into account. It can be 1% higher, 1% lower. This is acceptable ranges, but I don't expect any material change there.
Our next question is from Andrew Nowinski with Piper Jaffray.
Okay. Thank you and congrats on the nice quarter. I was you had very strong growth in billings this quarter despite the average duration. Remaining essentially unchanged. And I know Q4 is typically a strong renewal period.
So I was wondering if you could talk about the impact from renewals this quarter. And if that contributed to the strong growth in billings?
Yes. So I think it's part of it is a reflection because as you said, it's It's not about long term contract because long term is presented separately. And you can see that deferred revenues also grew very healthy also in the short term deferred revenues. Recall, it was 12%. So it's pretty strong.
And the reason is that Q4 versus Q4, so it's not an effect of the sequential period. We just had a strong quarter. We have it for 2, 3 quarters. The main reason is that if we see growth in the subscription, the majority of that number where all deferred revenues or substantially all is supported in subscription. Both of them are showing a healthy growth.
That's great. And then last quarter, you launched the new 23900 appliance I was just wondering if you could give us any color on the initial traction of that appliance that you saw in Q4 and heading into 2019?
Oh, it's actually remember, this is the high end unit. So it's great. It started great, but remember, we're not talking about 1000 or 100 it's the top end of the appliances. So it's doing what we expected. It's doing nice.
I don't know, if you notice, this year, we started the year last week. We launched 2 new appliance model more in the mid range, the 6500 and the 6800. They are providing like double the performance in Veri class compared to other models. And I think this is going to be something quite exciting this year. And I also mentioned Maestro, that is the real, I think this can be a big change in the marketplace by being able to chain many, many of these to achieve, almost unlimited the performance and the cloud like operation with resiliency scalability flexibility that's never seen before.
So I think we started the year with some new and exciting products that will hopefully have some traction in the marketplace.
Okay. Thank you.
Our next question is from Gabriela Borges with Goldman Sachs. Please proceed with your question.
Great. Good afternoon. Thank you for taking my question. Gil, I wanted to follow-up on your earlier commentary on overall demand trends. Just want to make sure I understood this based on your comments, is your base case assumption that there is more pressure this year on overall security spending relative to last year?
And any color that you can give on specific geographies or verticals like government or carrier for the
go forward? What else would
be really helpful? Thank you.
I don't think that there's any major change, not according to what I see. I'm just saying these are the general trends in security, specifically in 2019 general. People are very open to, investing in cyber. On the same time, when you have a contract that's being renewed, any purchasing department, trying to reduce the cost and negotiate it down. That's one end.
The other hand that is that companies are really, really confused about what to do with cyber. They want to do more. They really don't know what will be effective and what's the first priority. Sometimes they're addressing the right target. Sometimes they don't.
I think we've been saying, I think that was a big thing that we talked about in 2018. We're facing now the 5th generation of cyber attacks, most of your organization, most of the organizations in the world are still defending only against the 1st generation of cyber attack. This is a huge gap that needs to be breached. And the and by the way, that's the reason why why there are so many attacks happen and everything is so vulnerable if we're protecting again Gen III and a Gen Five attack scam, it's no wonder if it's the successful attack. But still, the reason customers are not jumping is not just because they are, uninformed or conservative in their approach, which has happened to.
It's also because if they will now start to address all the hundreds of combination of things they need to secure. They get really, really confused and they don't know what to do. And I think it will take time until our approach will catch up and until we'll be able to show and demonstrate our effective with this approach. And believe me, it's extremely effective. If you look at real world cases, if we take the Infinity approach and the consolidation approach, We can get much, much higher level of security and reduce.
I mean, real world examples is what a security team of 6 people can do with Infinity as security team of 30 people with 7 or 8 different products cannot achieve. So this is huge effectiveness and savings that companies can achieve.
That's helpful. Thank you. And the follow-up if I may is on the longer term way to think about margins in the model for EBIT. Is it right to think about the percent for this year as being a little bit of a floor? Or is there a scenario where you would consider maybe dipping below 50% for a short period of time?
Based on how you're thinking about the longer term lifetime values to customers? Thanks.
I think it's a generic I'll give you generic answer because we don't plan like 5 years ahead of margin you can see, and as Gil said, we don't really manage the margins. What we're trying to manage is the growth and the profitability of the company, which we've been doing very well. And the effect on the model, I don't expect it to be materially different. It just is, for example, you find something very interesting, new markets, you want to grow, you want to expand, you have a new investment in the cloud, you find another company and so on, things can change. But in general, I think it's a reasonable area.
That's very helpful. Thank you.
Our next question is from John DeFucci with Jefferies. Please proceed with your question.
Thank you. I have a question for Gil and a follow-up for Tal. So Gil, you mentioned that the new 6500 and 6800 appliances and they some of the the that technology looks really interesting. I'm just curious, are these entirely new appliances or do they improve upon existing offerings in the enterprise category? I guess, I'm trying to figure out, will they displace existing products or are they just like sort of a new thing supplementing your portfolio?
I think we will displace existing models. I think they are kind of priced and positioned right in the middle between several different models. And I think because they provide much better price performance and the expansion of almost everything, we will replace some models that we have currently had
Okay, great. And Tal, margins remain very strong, which is nice to see. And we've been expecting sales and marketing expense to sort ramp up and we're not really seeing that. Is this partly because of ASC 606 or IFRS 15 in the deferral of commissions on sub as you pointed out, you're seeing more of a mix shift to subscriptions and even some initial maintenance. Or is there something more operational happening here?
You're just not
I think because you're looking at the percentage and that can be confusing because remember that Q4 Because the revenues are so high, then in percentage, you see a reduction. But if you look at the actual expense you see it's increased, And that's why I made sure you pay attention to it because in Q1, you will see the same expense and more. That's why your margin will drop already in Q1. The answer is we're investing a lot more and you will see it. That's why it's already headcount that we have.
They're already here. It's just that in Q4, in percentage, you don't fill it because the revenues are much higher.
Okay. So and just to make sure I understand that, because you've said similar things in several previous quarters. But are we just seeing like in this quarter, just seeing the revenue being better than perhaps the margin expectation would have been with a little bit lower revenue and you sort of outperformed. So we're just seeing that go to the bottom line. Is that kind of what we're seeing here?
For sure. If revenues are higher than you expected, then obviously it helps your margin. That's one thing. And also remember that this year, we got there some headwind, tailwinds, tailwinds, tailwinds, the dollar versus the other currencies. So the dollar got stronger against the other currencies.
It helped the EPS this year. Next year, I don't see it happening, but so take that also into account.
Perfect. Thank you very much.
Thank you.
Our next question is from Saket Kala with Barclays. Please proceed with your question.
Hey guys, thanks for taking my questions here. Tall, maybe for you, Gil had mentioned that new product Maestro and that architecture that enables some elasticity and network security maybe specifically in Maestro Tal, can you talk about how that solution is priced? Is that a product type of solution or is that subscription? And what are the metrics that a customer is going to pay for when they adopt a Maestro type of solution?
So the idea is that the Maestro is enabling you to link many different a large number of appliances. It's also an appliance. So it's priced the same. It's an appliance that you sell. And you can buy a 6500 or you can buy the 60800 and just link it to Maestro, which is the orchestrator.
And then you can have 1 to 52 appliances. So it's enabling you to scale very quickly and to get much more performance. In terms of the pricing, you can see it very clearly in our pricing and website. Do you recall the specific price of Maestro?
We are mainly offering it right now with like selling a cluster of free or more appliances, which is actually priced quite competitively. So it's not no big, no big premium to that because we want to, people to deploy that technology. And also the effective actually can be quite high because today, most customers buy security in pairs for high availability. So we buy 2 They pay for 2, but they get the performance of 1. If they buy Maestro, they'll actually buy tour, buy free, but we'll get 3x the performance.
We'll get 2x the performance from the same cluster. So it works in load balancing and not just in high availability mode, which is a great benefit as you scale up.
And it should make us very competitive in the appliance area as well.
That's great. That's great. Maybe just quick follow-up for you, Gil, The question was asked before about channel compensation. I'm curious about whether anything with the sales force in terms of compensation here can change in 2019. Obviously, we've got a new Chief Customer Officer and other kind of senior changes in the organization.
And we're trying to sell higher into our customer base in terms of C level, how are you changing the comp model if at all in 2019 to sort of encourage that sort of behavior?
I would say on the short answer is every year we make small tweaks. Our plan for 2019 is not revolutionary compared to 2019. It's using the same principle. If I want, if you want me to expand on that, I would say that what I'm actually trying to change is not the model in terms of more commissions and so on, but actually shifting some of the compensation to bonus, which will be based on activity. So we will reward more more of the employees on going to new customers and objectives like that because I think the change needs start.
I mean, when you get to the results, that's not the problem. When you achieve the results, you're happy and everything is fine. I think it's where we need to drive change general, with our salespeople, with the channel, is the behavior at the beginning of the process, and to encourage them to do the right thing, which is going to C level going to new customers and so on.
Our next question is from Sterling Auty with JPMorgan.
Yes, thanks. Hi, guys. I know the 2 acquisitions are small, but I didn't catch, what are you including in the guidance in terms of revenue contribution from those deals?
You didn't hear because we didn't say, but I will say, because we can't split it now, right? It's all consolidated together with our product, with the cloud guard. We're selling it to our entire field. So when we acquired them, there was very minimal revenues. And for next year, I hope it will be very large together with our Salesforce and our cloud card and our cloud card something.
Yes. So it's all going to be combined.
That's the domain. The second one, the ForsNOC is really small technological approach. No, I think it will be part with no revenues now and it will be part of the 6th generation platform that we are developing. I think there will be an essential component there to secure web application and API and things that are in the cloud.
Great. And then one follow-up. Have you made any changes or do you plan any changes on pricing or support and the software blades here for 2019?
Nothing material for the soft blade?
We might make some changes with with the 2 new appliances to the pricing model.
Changes, we see what we can do that is benefiting to the customers and to us, I would say in general, I don't see anything dramatic at this point of time. Bear in mind that the biggest change in subscription is the fact that it's all of Checkpoint products are included in Infinity. So when you think about Infinity, the ultimate package of softer blades and appliances, right? So it's all together. And that change already been made in the last year.
Okay. Thank you.
Our next question is from Phil Winslow with Wells Fargo. Please proceed with your question.
Thanks guys for taking my question. I just wanted to focus back in on the just the pricing environment. I wonder if you could provide just some more detail on on what you saw this year, especially as obviously you just changed the dynamic with Infinity. Just sort of what you're seeing out there on the market would be great.
I would say in general, the market was and remained very competitive. You have the players that play only on price. And that's always the challenge, where you win is where you provide the value, value is infinity, value is the quality of your solutions, values your catch rates and so on. So some players are fighting only on price. Some players are fighting to a very extent in marketing, some players fight through technology and quality of the solution.
We believe this is our us, invest much more in sales and marketing to combat those others. And in general, I would say I didn't see anything changing except for the fact the market wasn't remained very competitive.
Got it. And then also just from a vertical perspective, anything you stand out in terms of strength or weakness? And then you look in 2019, some other thing, I mean, others have called out, for example, the service provider market being a little slower. Just any sort of color you could provide on the vertical side would be great.
On the vertical side?
Nothing major. I think we are remains strong in financials. All the other vectors we are seeing all over, you know, all the different verticals are there. There are verticals that we can invest more and we will invest more like telcos and others that I think they present, I mean, we're selling a lot of these, to ramp, but still where the potential is much, much higher. So I think there's nothing, nothing major here at this
And I know there's a there was I don't know if it's still there is, but there was a lot of discussion about governments and the government in the U. S. Regarding budgets, remember, we are not dependent on the government. So that's an advantage, I think, for checkpoints. So we don't see anything dramatic in any of our verticals in general.
And our last question will be from Dan Ives with Wedbush Securities. Please proceed with your question.
Yes, thanks for letting me in. Just a question on cloud. Are conversations starting to change with customers in terms of the move to cloud on the security side? And Obviously, you guys have been more acquisitive, feels like you're going more in the offense. And maybe you can just walk through from a high level, how conversation you're changing in terms of the move to cloud and where Checkpoint fits there?
Thanks.
So the answer is every customer is interested in cloud that comes up in every conversation. I think it's still early stages, but last year, we saw healthy revenues healthy sales and I think growth of more than 100% in cloud. So we're clearly growing there and that's starting to be a real business. For us, not on not anymore, you know, very small numbers. The numbers are starting to be, meaningful, hopefully 2019.
Will be slightly more.
Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the call back over to management for closing remarks.
Thank you for joining us today. We look forward to speaking to you after the call. If you'd like a callback, please just send me an email and we'll follow-up with you. And other than that, we'll see you at the conferences over the next quarter. Thank you, and have a great day, guys.
Bye bye.
Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.