Greetings, and welcome to the Checkpoint Software Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kipp E Meiser, Head of Global Investor Relations. Thank you.
You may begin.
Thank you. I'd like to thank all of you for joining us today to discuss Checkpoint's second quarter 2018 financial results. Joining me today on the call are Gil Founder and CEO, along with our CFO and COO, Tal Payne. As a reminder, this call is webcast live on our website 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 contact Investor Relations by emailkipcheckpoint.com.
Before we begin, management's presentation, I'd like to highlight the following: During the course of the presentation, Checkpoint'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 21E of the Securities And Exchange Act of 1934. Include, but are not limited to, statements related to Checkpoint's expectations regarding business, financial performance and customers, the introduction of new product programs and the success of those products and programs. The success of our sales and marketing efforts, the environment for security threats and trends in the market our strategies and focus areas, demand for our solutions and our business and financial outlook, including our guidance, for Q3 2018. Because these statements pertain to future events, they are subject to various risks and uncertainties.
Actual results could differ materially from Checkpoint's current expectations and beliefs. Factors that could cause or contribute to such differences are contained in Checkpoint's release, press issued on July 25, 2018, 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 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 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 second quarter. Revenues for the second quarter increased by 2 percent to $468,000,000 towards the high end of our guidance, and our non GAAP EPS grew by 8 percent to $1.37 exceeding the top 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. Now let's take a look at the financial highlights for the quarter. Product and security subscription revenues were $258,000,000. Our security subscription revenues continued to be strong with 12% growth year over year. Reaching $132,000,000.
Our software update and maintenance revenues increased to $210,000,000. Representing 4% growth year over year. Deferred revenues as of June 30, 2018 reached $1,158,000,000, a growth of $94,000,000 or 9 percent over June 30, 2017. Revenue distribution by geography for the quarter was as follows, 48% of revenues came from Americas, 36% of revenues came from Europe, and the remaining 16% came from Asia Pacific Japan, Middle East and Africa region. From a deal size perspective, this quarter, we had 58 customers with transactions over $1,000,000.
This quarter, the total value of these transactions increased by over $60,000,000 and included some large multiyear contracts. That were not fully invoiced and hence are not part of the deferred revenues. Transactions greater than $50,000 were 76% of total order value. Non GAAP operating margin for the quarter was 63% similar to the previous quarter. We continued to invest in our sales force and marketing efforts.
This investment increased our headcount and compensation in line with our plan. Effective non GAAP tax rates for this quarter was 17% similar to the previous quarter. GAAP net income for the second quarter of 2018 was $198,000,000 or $1.24 per diluted share an increase of 10% from the second quarter of 2017. Non GAAP net income for the quarter was $218,000,000, or $1.37 per diluted share, an increase of 8% from the second quarter of 2017. And exceeded the top end of our guidance.
Our cash balances as of June 30 were $4,040,000,000. Operating cash flow was $213,000,000 compared to $226,000,000 in the second quarter of 2017. This quarter, we had strong collection from customers as well as reduction in the tax advance paid to the authorities compared to last year. We hedge our balance sheet against currency fluctuations. The hedge affects our cash flow with a minimal effect on our P and L as intended During the quarter, the dollar strengthened against most currencies in the world, resulting in a hedge cost of approximately $14,000,000 in our cash flow with no effect on Our operating cash flow excluding the hedge effect increased by 5 to implement our share buyback program during the quarter and repurchase approximately 2,500,000 shares for a total cost of approximately $250,000,000.
We believe that our market leadership and long term growth prospects make this an effective time to further utilize our cash to increase shareholder value. As such, we have announced today, doubling our buyback plan to $2,000,000,000 and increase the quarterly repurchase by 30% up to $325,000,000 a quarter. The quarterly amounts may vary. Now let's turn the call over to Gil for his comments.
Hi, everyone, and thank you, Sal. I'm pleased to report that we completed the 2nd quarter with better results than our plan. This is a reflection of solid execution by our global sales force, which delivered nice results out of the U. S. And Europe.
As you are aware, our business model is becoming increasingly more annuity and subscription based. In the second quarter, this trend continued with nice growth in annuity deals. Reflected in increased Sandbus threat prevention cloud subscriptions. Our vision of providing 5th generation cyber security solution continues make headway in the marketplace. We continue to promote our vision with additional field activities.
In this quarter, we realized a significant increase in our marketing indicator double digit growth in meetings, conferences and our web traffic. About the execution challenges in our U. S. Sales force. In the second quarter, we saw a good level of activity and results total business volume in the U.
S. Last quarter was very good, but 1 quarter may not indicate a full turnaround. It is a good to see The changes we've made in our U. S. Salesforce have began delivering healthy results.
As for Europe, internal metrics were very good, pretty much across the board, which makes me even more pleased with the results. We believe our 2nd quarter results started to benefit from the increased sales and marketing activities where top revenues only grew slightly behind the scenes, we experienced solid execution, especially with our subscription. In terms of product segments, we've continued to see healthy growth in both private and public clouds, key customers in many sectors have adopted our cloud solutions. We also had a good quarter with our enterprise and super high end 40k and 60K Series Security Solutions. The World Cup attracted worldwide attention last quarter, and as you would expect, there was plenty of malicious activity around the games, fishing websites that attracted World Cup audiences allowed malware to be downloaded onto the victims there was mobile malware hidden inside world cup up, all provided us with an opportunity to demonstrate our multi vector prevention capabilities.
The World Cup infrastructure also generated huge volumes of traffic and with them a very high volume of attacks. I'm proud to report that our super high end products were used to protect some of the most critical World Cup infrastructure. We've continued to elevate our level of customer facing activities by increasing the number of C level meetings and promoting the Infinity Architecture I believe that Infinity is the only architecture available today in our marketplace that provides prevention capabilities against all 5 generation of cyber attacks. In surveys, we have conducted only 3% of enterprises believe that they are ready for the 5th generation of cyber attacks. Quite an astonishing fact that 97% are not preferred by their own admission.
We've continued to see our pipeline for Infinity Total Protection Solution Build, as we spoke about last quarter, these deals typically take longer to bring to fruition. During the second quarter, we continued to see further customer adoption of the various elements of the infinity architecture. Ranging from local companies in the transportation business all the way to some of the world's largest telecommunication and system integrator. This success is very exciting and we continue to see increasing numbers of opportunities in almost every segment and verticals. Our sales execution remains the key to unlocking the full potential of our security offerings in the marketplace.
Overall, the 2nd quarter internal metrics and execution were better than I anticipated, which leads me to our projection for the first quarter. You know my regular caveats, the future is always hard to predict. There may be upside and obviously the potential for downside. Remember, the 3rd quarter can be challenging with its summer vacation and seasonal fluctuation. With that in mind, here are the 3rd quarter ranges we are targeting.
We expect revenues between $454,000,000 to $474,000,000 non GAAP EPS in the range of $1.30 to $1.40. GAAP EPS is expected to be approximately $0.50 $0.15 lower. There is no change to our full year projection. Now I'd like to open the call for your insightful question and feedback Thank you very
Our first question today is coming from Fatima Boolani of UBS. Please go ahead.
Good morning. Thank you for taking the question. Maybe a question for Tal, as you think about investments and the pace of investments for the rest of the year, maybe just around sales productivity trends that you've seen as you lap some of the heavy hiring from the middle of last year and sort of your expectations for hiring for the remainder of the year?
So we continue to we're meeting our plan of headcount recruiting. We still have growth to do as part of our plan as we discussed before. So we are in line in terms of sales metrics. We measure them regularly. You know us, we have metrics and measurements for everything.
We measure their in the pipeline, different stages in the pipeline. We see the pipeline is growing. So all in all, I would say we see good indication in terms of improvement there and there's still a way to go. That's why we continue to invest in that area.
Thanks, Talena. Just a very quick one Gill on the pricing strategy around Infinity. I wanted to understand with 1 full quarter in and it almost two full quarters and what the customer response has been around the per user model and how that's making its way through the channel partner community because it's just fundamentally different way of selling your portfolio. And that's it for me. Thank you.
The early feedback is quite positive we haven't seen any objections and I think the pricing is catching up. I think it's too early to say if it's really a success or not because there's only a small number of deal it's too early to say. But overall, it's received quite well.
Next question.
Our next question is coming from Brad Zelnick of Credit Suisse. Please go ahead.
Thanks very much. Nice to see things begin to stabilize. I've got two questions. First for Tal, the margin, I think this is the first time I can remember in a long time you're seeing operating income decline year on year, which I appreciate the investments that you're making in sales and marketing. And the time that that will then take to yield returns.
But you also mentioned in your remarks that in the quarter, it included some large multiyear deals that were not invoice, which I think is a new way of going to market for you. Can you just talk a little bit about that and the extent to which you pay commissions upfront or defer those commissions over time?
So actually, again, it depends on the type of transaction, but in general, we pay for the 1st year. There's a general comment with some bonus for the extra years. You're right in the sense that if we sell Infinity as an example or subscription, it can carry with these larger deals, which is a nice thing and also longer in terms of the period. That's why you see a significant increase in which we really don't disclose. You just thought it will be an thing data point for you.
To understand that sometimes what you see in the balance sheet is no you don't see what's happening behind the scene relating to what Gil said internal metrics. So when you have this type of transaction invoicing can happen quarterly or monthly or annually, while the contracts and the commit man is for 2 or 3 or 4 years. That's why I gave this color. Another thing that I can say, we talk about investing ahead of the growth, which is the investment in the headcount and in the marketing, which is expected to see is some reduction in the margin. I have to say the margin is higher than we expected and planned.
So you can see at the end, our operating profit and EPS are higher. We did have a small negative effect from the currency, probably about as a result of the currency effects of on the P and L.
Very helpful color. And for Gil, Gil, more than ever, I think we're hearing every software company talk about security as priority. Microsoft in recent weeks announced Azure firewall, Amazon has guard duty to what extent are you seeing customers comfortable with some of the native controls that are available in various clouds and other software platforms. Relative to coming to a company like Checkpoint for specialized protection? Thank you.
In the general marketplace, I mean, I think as have definitely adopted the security company to secure their businesses. In the cloud, there's definitely some room for the native controls. And in the cloud, as we can see, the world is not protected. We've seen some of the biggest information leakage over the last years. Almost all of them were results of reaches to cloud infrastructures.
And in general, I wouldn't, I mean, our job, both checkpoint and few other companies in our industry, is to add a level of security on top of every whatever native product is doing in the marketplace. And I don't know. Fortunately or unfortunately, no matter how we look at that, we have plenty of work to do. The world that we are living in is more vulnerable to Dave than ever.
Thanks.
Thank you. Our next question is coming from shaul Eyal of Oppenheimer. Please go ahead.
Thank you. Good afternoon, guys. Congrats on my end as well. Two quick questions. Gil, with respect to sales and marketing and hiring, part of those investments Have you been taking any different actions with respect to channel relations, investing more in that respect
Okay. So
the answer is yes. And again, it's very where you were talking about the channel. We did the investor little bit in analyzing the status of the channel and how are we doing and what we should improve. It varies by different regions. There are regions of the world when we're doing very well and we continue the same pace.
In the U. S, specifically, we need to improve the work that we are doing with the channel. And we had some changes also in the management of the channel channel in the U. S. Just at the end of the quarter.
So it will still take time until we do that. There's definitely much more potential in the U. S. To do more with our channel partners and to get more value from this relationship that we have for so many years.
Understood. And maybe on the decision to double the buyback, so I think most of us here, no checkpoint strategy with respect to acquisitions and dividends. And I think looking at the way you have been increasing your buybacks over the years, this one stands out a little bit. Like doubling it. And I know maybe it has some sort of an indefinite timeframe, but talk to us about the decision to double the buyback?
I think it's based on feedback that we received from from shareholders. I mean, Talend, Kippen, I mean, our IR team is doing a lot of work to really get quantitative data to serve investors about large preferences. I think we do, we do see that there is a potential create the buyback. We've also analyzed the economical effect on that and we see that they were positive. So I think overall, it's a good decision.
I think we have the resources. I think we have the upside potential. So hopefully, we will have positive effect moving forward. It doesn't impact our ability or our motivation to execute some acquisitions. And I hope that we will find the right companies and we will execute some of these acquisitions.
Even though in the amount of, universe that we are and in the innovation that we have internally in checkpoint, it's not easy to find the right acquisition. And right now, by the way, I'm seeing plenty of innovation coming from within Checkpoint to the marketplace.
Thank you.
Our next question is coming from Andrew Nowinski of Piper Jaffray. Please go ahead.
Great. Thanks for taking the questions. So I know you talked about this last quarter that Infinity was delaying some product refreshes, but I was hoping to get more color on it again. If we look at your product and subscription revenue, it only grew about 0.6%. And I realized the comps are tough, but they did get a little easier in Q2.
So yet your growth further decelerates. I wonder if you just give any updates on the product and subscription growth deceleration and the impact from Infinity?
So remember that what you've seen in revenues is usually the effect of the booking of the last two quarters because it takes time to translate into the P and L. So we discussed it in length. That's the reason why we lowered the guidance in the previous quarter. This quarter, we actually had a strong booking when it came to the subscription and those items, but it takes time to translate. Product is lagging behind.
Okay. And then on the Americas, I know you said that the volume improved this quarter but it looks like growth in essentially still flat. I guess, how long do you think it'll take to get growth back in the Americas to accelerate again?
So first, I did mention that in terms of our internal metrics, we actually had a pretty decent volume of total business in the U. S. And I think as Taljas said, what you see now is a reflection of what we had in previous quarters, not just in mid quarter, especially because we've increased subscription, that are actually will be reflected only in this quarter, in future quarters. Now I don't want to be a so if I take the trends that seen in the second quarter, I should be very optimistic, but I don't think that 1 quarter is a good indication of a full turnaround. So I'll be watching Quark, closely what will happen in the third quarter and in 4th quarter.
And hopefully, we'll have things in the stabilize and get to continue the trend that we've started this scene. But Q1 and Q2 were not We're not similar at all in terms of the behavior of the of our results in the U. S.
Thank you. Our next question is coming from Michael Turits of Raymond James. Please go ahead.
Hey guys, Michael Turits. Thanks a lot. First, can you comment on discounting both in general, on maintenance in particular and on whether or not there was any discounting required in those multiyear deals?
Actually, LTEs is not necessarily the hardest deals, right? It's not the the discounts are affected by competition on this specific account. So we compete on a new customer, for example, then you see a larger discount. If you have competition in that account, you see larger ones. So the trend didn't change.
What is competitive, we see much more pressure. Some players are leading with price, probably related to differentiation in product. Differentiation is the quality of the product. Some player differentiation is pricing. So when you when it comes to pricing, then it affects the discount.
So nothing new there. I can tell you if I'm looking at the last few quarters, I will say as a generic comment, continued pressure on the discounts on the product and some stabilization in the subscription and the support discounts.
And then speaking of product, this was a slight beat to expectations or consensus on license, but still down. Is there some point where you feel that we could be stabilizing that decline and moving back towards positive growth in product?
I think the answer is yes, but I will just put the caveat and remember there's a few things that are moving. So if we penetrate to more new customers and expand installers in existing is naturally, we should move to their positive. So but remember, if customers out all these solutions that all of them are sold by a as a subscription from CheckOne, and therefore, it will be part of the subscription.
Okay. Thanks, Tal. Thanks, Gil. Thank
you. Our next question is coming from John DiFucci of Jefferies. Please go ahead. Thank
you. First question, I think it's Tal, but maybe Gil, These are solid results, especially given what you had been posting last few quarters. And as Gil said, this was the the strength was especially or the solidness was from subscription. I realize it's still early, but I'm just wondering how much Infinity Total Protection had on had with that? Because that's truly a subscription or was it simply improved results for more traditional subscriptions that you're selling?
I realize it's really for ITP.
Right now, this quarter, most of the results are affected by the more traditional subscription, not but all of them are traditional. Again, the sun blast, some of we had some very nice mobility installations in the quarter, more tens of 1000 of, of a mobile clients for one large customer. So I mean, we had some nice, so we had some nice changes and nice successes in deployments and sales during the quarter. And I think we continue to see that part of the business threatening. We definitely need to do more on other aspects of the business than we will.
I will just add one thing. I will say, remember that many times when you discuss with a customer, you can talk about Infinity, and then he ends up buying the three items out of the 10 that's going to be included. So it's a great way to discuss with the customer, the potential of the roadmap and what we have to offer, and a deal like that can end up with subscription of a sun blast and not necessarily a full infinity.
Got it. Okay, great. And if I could, somebody mentioned in an earlier question that the results are certainly improved. And you really haven't, at least I don't know of any, product cycle benefit you're seeing in the quarter. And it's still difficult comp.
So I guess because you called it out, Tal, the deferred revenue, all every metric was better than we were looking for, except for long term deferred. I mean, you called out that, Hey, listen, we did some long term, some multiyear deals that are not on the balance sheet. But I would expect that that would probably be like that every quarter or is this you would certainly called it out. So is it, was it somewhat of an anomaly this quarter? And, I guess, the next question is why would that happen if that's not normal?
Remember, I always say that booking and that's why it's not one of the metrics that we share with you typically. I always say that booking can fluctuate between quarters and can move between quarters. That's why we don't provide it. And we look at the consistency of the deferred of the revenues. Having said that, you're right, this quarter was significantly high booked, but an invoiced amount.
And that's why I just gave you a feel to it.
Okay. Fair enough. Thank you very much.
Thank you. Our next question is coming from Greg Moskowitz of Cowen And Company. Please go ahead.
Okay. Thank you very much. Gil, you referenced the improved global sales force execution, but have you noticed any change in the network security spending environment over the past few months?
Haven't seen a big change in the network security in the spending environment that much. I think it's still a relatively positive environment that we're in. I think we are shooting now very high on the more overall cyber security. And I have more and more meetings with CEOs, CIOs, CISOs, promoting that vision of looking at the bigger picture and not just updating and upgrading their old network security infrastructure. Again, that vision will take time to, to come to fruition, but I think that's the future, not just the future for checkpoints as a vendor, but if customers in our world wants to keep ourselves guarded from the frets out there, all the generation of frets, we must take a different approach Just the approach of making slightly stronger security to the existing mechanism that we have is not enough.
We need to make the leap forward and get an overall consolidated architecture. And that's what I'm trying to promote these days.
Okay. That's helpful, Gil. And then just in terms of insanity, I realize it's early, but do you see this as being as it unfolds as being primarily geared towards new customers or winning net new business or very much towards existing as well? Thanks.
I think the answer is both. We have some new customers that threat model is attractive for them and we want some of those deals. And the existing customer definitely can see the benefit of, say, of more security, more consolidation And then, and the new business model, which makes it an easier, an easier thing to procure and to live with. I think when I look at the pipeline, it's we have both opportunities, and by the way, it's definitely a very good door opener for discussion. I think Tal mentioned that not every time we offer Infinity, we will win the deal, especially the bigger the customer the more difficult and getting us to places that we haven't been before.
Thank you. Our next question is coming from Sakat Kalia of Barclays. Please go ahead.
Hey guys, thanks for taking my questions here. Tom, maybe for you, I think you touched on this before, but I just wanted to ask the question directly Can you just talk about how billings terms on Infinity deals differ if at all versus traditional checkpoint billings terms now. I mean, clearly, Checkpoint, does the vast majority of deals are 1 year unlike a lot of your competitors So I imagine that there won't be much of a difference, but for the larger deals that are 2 or 3 years in duration, for example, what's been the trend in some of the early Infinity deals in terms of opting for 100% paid upfront, annually in advance, quarterly payments, what have you, what are you sort of seeing in terms of changing billings in terms of Infinity, if at all?
Thanks thinking, A, we had only a few deals and only so in a few colors even on those, but I would say the default theoretically is annually. Some choose to pay it in advance, but majority will pay the annual amount. So it by definition says if you signed a contract of $1,000,000 for 4 years, 2 50 a year, then you will see in the deferred only the invoice amount, which in most cases will be the 250,000 in my example. So it will be the annual amount. If you will decide to pay it in advance, naturally you will see the full amount.
And in the revenues, it will take you over 4 years to see it.
Got it. That's helpful. Maybe for my follow-up, assuming that the multi year contracts that you signed, that were not yet invoiced in Q2, assuming that those are traditional checkpoints sort of paid upfront Can you just give us a sense for kind of what the aggregate dollar amount is that's maybe moved from Q2 into Q3 just to maybe have a sense for how the billing seasonality might change at all?
Not even sure I I think first, they are not, I think they are not build yet because they are not, they will not necessarily be paid upfront, but we'll we paid annually, even though the customer has committed to multiple years, more than 1 year. So that's, I think, the main reason, the reason that we are saying that the deal we received It's a commitment. It's a multiyear commitment, but it's not invoiced because the payment is annual.
Got it. Very helpful. Thanks guys.
Thank you. Our next question is coming from Ann Meiser of Susquehanna Financial Group. Please go ahead.
Hi, thanks for taking my question and nice quarter. Tom, just to follow-up on the multi year deals, fully invoiced not to beat a dead horse here, but I had a slightly different question. Are you going to be providing any metrics around your off balance sheet backlog. I'm not sure how it works for checkpoints since you're not a domestic filer, but the other companies are actually providing that as part of the performance obligation disclosure that's related to 606. So, and that's typically in their 10 Q.
So I'm just wondering if you would expect to share any of those specific metrics on your remaining performance obligation?
Sure. Whatever we need to disclose will be disclosed as part of the 20F, definitely. Okay.
So it would be in an annual filing and not in a quarterly. Obviously, you don't do quarterly. But, okay. That's fair. So a quick follow-up for Gil.
Gil, I know you've talked about focusing more on new business and selling higher into the higher up in the organization as you make the go to market changes. Is there any additional detail you can share on specifically how you're structuring the sales compensation plans And particularly as it relates to new business versus renewal business for purposes of quota retirement, any, just be curious to know if there's any change in the strategy there?
First, we are working very hard with the Salesforce mainly to change the behavior. And I think the change in there is not driven by compensation, it's driven by training, by focus, by many, many other things. The sales people do get a nice portion of very compensation at the bonus that's driven by meeting the objectives and not just by the booking amount. So actually now we're in the middle of the year and the half of the I mean, the portion that half of the annual bonus will be paid based on meeting these criteria of meeting with new customers, winning new customers, getting to a higher level in the organization and so on. So sales plan that we have right now is not 100% commission.
It involves both commission and NBOs.
Perfect. Thank you.
Thank you. Our next question is coming from Philip Winslow of Wells Fargo. Please go ahead.
Hi, guys. Thanks for taking my question. Actually a couple of questions here. First, Gil, one of you just talk about the competitive environment with the traditional firewall players here and just sort of what your win rates look like and pricing. And then also, one of the questions I get from a lot of investors is the potential competition with the secure web gateway vendors, whether they be traditional appliance vendors or those in the cloud, how do you think about sort of your positioning versus the secure web gateway players, especially when you think about sort of appliance based versus in the cloud?
Thanks.
I think we're doing okay in terms of the competition in our traditional market. We few displacement of our traditional competitors like Palo Alto and so on, and it's good to see that customers realize the difference in security And the difference between, you know, hype and the reality, and the differences are huge, by the way. Mean, it's, I mean, we are the only products that actually prevents attacks from getting into the network when most of our competitors will allow Gen Five malware to get inside the network and only later we'll give you, an alert that something went wrong, it's ridiculous to see that some of our competitors' product actually under load will let connections come in Malicious connection come in and won't block them when our product will stay protected no matter what load there is on the product. So there are a lot of differences and that's more towards the regular competitors that we have in the marketplace. A secure web gateway I don't see the tricaw as the competitor.
So I mean, it's not, I mean, theoretically I can speak about the difference as what we are doing we are doing, where is the overlap. But in terms of the recometition, it's not that I can say that we won over them or they won over us. It's right now too complimentary solutions. Our
next question
is coming from Sterling Auty of JPMorgan. Please go ahead.
Wondering if you could give some commentary to the performance in Asia Pacific. What did you see that was kind of market related versus execution?
So I think in all areas, in terms of our internal metrics, we had a good result with positive results this quarter. Asia Pacific was a little bit mind and there are countries there that performed well, but there are a few countries that we did see some slowdown and we're working on that. It's been for a few years, a nice growth engine right now. Last quarter wasn't as good, and I think we'll work on that.
Do you think that it will require some additional headcount changes or are the people in place and it's more just about training and programs?
First, I don't, and I don't think it's fair to give my comments on the internal performance of our people in public call. I think, but I think if I'll answer in more generic way, the process of management is a constant process of First, coming up with the right program, educating, improving the execution and the existing people. And if things don't work out also replacing some of existing people. So I'm saying that. So I don't want any person, again, inside checkpoint or outside checkpoint thing that I have any specific comment on that.
That's the general process of management, and we do it all over the world in the U. S, in Europe, in Asia, everywhere in the world. And I think we do have a lot to do because I think we can unlock a lot of potential in the execution of our, of our Salesforce. I think we have rates people, but I think we have much, much higher potential than what we are getting to right now.
Understood. Thank you.
Thank you. Our next question is coming from Walter Pritchard of Citi.
Hi. Question for Gil, just as it relates to investing for growth, can you help us understand, are you looking to invest to grow at the market rate or are you looking to invest them? We're trying to understand sort of the maybe the optimal rate to grow in terms of level of investment that checkpoints looking to get input in the business. And then just had a follow-up question for Gil on or for Cal on cash flow.
I think right now, we have a we still have a lot of work to do in order to grow in the right space that we should be growing. I don't think that the key to that is hiring, even though we do have nice number of opening in our sales force. So it's not that we are exhausted our headcount and we're now thinking about the next stage for investment. We still have enough people that we can hire. And I think in sales, it's actually quite simple.
Whenever we see what we have is working and working well, we shouldn't have any problem to invest and hire more people. I mean, our people are profitable. They generate nice amount of business and its productivity is becoming good. We of any issue in terms of our resources as a company or business model to invest even more.
Great.
And then Tal, for you, on the cash flow, it seems like you were pointing out that there was about a swing of $25,000,000 year over year as it related to hedging Does that encompass all the FX related impacts on cash flow? And can you help us understand what the impacts on cash flow if FX rate stays at these levels, what the FX impact on cash flow may be for the rest of the year?
That's actually the only thing that you can't predict because let me remind you what's the goal. The goal is that if you have a asset minus liabilities in local currencies, In our case, we have more liabilities in local currencies versus assets because all of our assets, including account receivables in dollars. So what you do, if we don't hedge, then the fluctuation in the currencies will hit the P and L. So the way to prevent a hit in the P and L if we would have hedged this quarter, we would have got 8 and the other quarters will get income. So what you do is you hedge the balance sheet exposure.
That means the effect in the P and L will be 0 because the hedge will abilities in the balance sheet. The goal is to have that effect being 0ed. The only place you will see the effect is in the cash flow. The size of the effect depends on what happened to those currencies during the quarter. And because we don't know, that's exactly why we had I can tell you, you're absolutely right this quarter.
The effect was an expense or a payment in our cash flow of $14,000,000 versus an income of $11,000,000 that we had in Q2 last year. Net 25,000,000, that's what I said. The effect is actually the cash flow was positive and increased in 5%. How much will be next quarter? I really don't know.
That's why I will have the hedge.
I guess just to be clear there though, if FX rates stay the same as they are today, does that continue to be an FX or a cash flow headwind for the rest of the year? Thanks.
No, not at all, not at all, because you roll them every month, right? So if the rates will stay stable, they should have a zero effect.
Thank you.
Thank you. Our next question is coming from Karl Carirstead of Deutsche Bank. Please go ahead.
Thanks. Gil, I haven't heard you mention the R-eighty architecture in a while. If I have my facts straight, I think already released 2 just when G. A. And I'm just curious whether you think that has the potential to be any kind of an upgrade catalyst for checkpoint in the second half or in 2019?
And then for Tal, Tal, if I take the midpoint of your 3Q revenue guide and your full year revenue guide. It implies that in 4Q, a growth goes from, call it, plus 2% to negative 1%. And I just wanted to ask whether you'd call out anything or is this just you being a little conservative given the the variables that Gil talked about in terms of the sales turnaround? Thank you.
So 1st, RA18 generally is in the marketplace and it's default version and many people are using it even though we do have some customers that are still on our 77.30, which is also a great release, very stable and again, giving more security than any other product in the marketplace. R80 to 20, the second or maybe actually 3rd version of R80 is yet out. It's expected, hopefully, this quarter to be out. It will give a lot of benefit and will give a lot of boost to our performance. As well as to several other security capabilities.
I think people expect it. It's in early access with many customers. And we are and the management part of it is, I think, in the more production grade, the gateway side of it, again, expected this quarter. And we are working hard to release it shortly, again, this quarter.
And to your question regarding the guidance, I mean, I mean, Gail alluded to that, we don't change the guidance during the year unless there's something material. So we keep the guidance and understand that the numbers, if you take out Q3, then the track number is Q4, but we have see Q3 in order to know what will happen in Q4. So it's more like the math of taking out Q2 and Q3 and seeing what Q4 will do. So it's not that I see anything different. It's just that the numbers are the guidance that we provided.
We need to wait and see what happened in Q3. And then see and give you a guidance for Q4 specifically.
Thank you. Our next question is coming from Ken Talanian of Evercore ISI. Please go ahead.
Hi, thanks for taking the question. Was wondering if you could give us a sense for the trends on your software blade net retention rate?
It's actually quite good. So we don't provide it. I'll explain many times why, but I can just say that it's very good, it's stable in some areas increasing, but in general, stable and doing well, including the new blades that are the sun blast blade for Advanced Threat Protection.
And as we look forward, what should we think of as the primary drivers to potentially expand that net retention rate?
I have to say it's been that way very stable for the last probably 2 years. We started very low and it improved and reached to those those levels that we have now, hopefully over time, as people will adopt more Infinity, Infinity can be a driver in the sense that if people purchase Infinity, That means they're interested in moving from Gen 2, 3 to Gen 4 and 5 in protection. That means higher adoption utilities if people are adopting and utilizing these capabilities and renewals should increase.
Thank you. Our next question is coming from Gabriela Borges of Goldman Sachs. Please go ahead.
Either for Gil or for Tal on Infinity Total Protection. I'm hoping you can frame for us a way to think about the upside that you're able to extract as customers move from the traditional model to Infinity Total Protection. Maybe based on the early deals that you've closed or the way you've thought about the price points, how much logic could the deals be on the Infinity Total Protection when you look over a 305 year period versus a traditional model?
Thanks.
Well, when you look at the total, it can be significantly higher, like 100 of percentage, of course. But when we try to look at it in terms of the size annually, then also that can grow significantly, meaning annual comparison depends on where the customer was before he moved to Infinity. So an example, a new customer, obviously, it's all growth. So that's nice. Existing customer, if it's an customer that was maybe only on Gen 2 and is now taking Infinity moving to Gen 5, it could be a very significant very high terms of percentage increases, right?
If he already had some blast and he now just adopted the mobile and the cloud, then it can be lower increase. So it depends where he was at the starting point.
The potential is very, very high, and I think it depends on the type of customers and the amount of consolidation that we do. And the real bit economic, again, the benefit for the customer is not the economic. The benefit for the customer is the level of security and the fact that we can jump 10 years forward in terms of our security architecture. Economically, it really varies maker consolidate from our products. What we've seen in the past is that, customers have consolidated 4, 5 vendors into our one solution when they move the Infinity Total Protection.
That's helpful. Thank you. And follow-up, if I may, Gil, you mentioned during the prepared remarks, some of the indicators that you look to as forward indicators, double digit increases in meetings, conferences, web traffic. I'm just curious, how did those indicators compare to maybe a year ago or a quarter ago?
So I think they are a double digit growth compared to a year ago and also actually compared to last quarter in both cases. I think we're investing much more in sales and marketing. Again, some of it you see in the dollar spend, but most of it is not the dollar spend. It's the focus, the execution as well we do. And it's really, really nice to see, in some cases, I mean, the growth here is really nice.
In some cases, it's 30% increase. In some cases, it's 60%, even 80% increase, more engagements, more activities and even more leads that we are getting from
Thank you. Our next question is coming from Jonathan Ho of William Blair. Please go ahead.
Good morning. I just wanted to maybe dig a little bit more into your endpoint solution. You talked about some recent success there. And I just wanted to get a sense for how meaningful of a contributor that is to revenue and whether you're going to be making additional investments in endpoint?
So I think first, I mean, what we've been surprised and even overheld by the success of our endpoint products over the last year. I don't know particularly on the last quarter, but over the last year, we've seen great success there. The last quarter, we received some really nice reviews and analyst reports all around the success of our endpoint. Which, by the way, shows the innovation and the creativity and the power of our architecture because there are so many next generation endpoint companies and yet our development team was able to produce products that are missing many of these products in the marketplace. And again, you see it from the reviews we just received in the last quarter.
Having said all of that, my main focus is not in turning the endpoint into our into us becoming a big endpoint vendor in the marketplace, very good established vendors in that marketplace. It's very hard to displace them. And there are also many startups with innovation around that place. I think the role that we should play is within the infinity architecture when a customer wants to consolidate their whole solution, when they want to get a holistic approach to security, we can supply them with all the relevant components. And again, looking at the success that we have and the reviews that we're getting for the product, it seems that we do have, the best of breed next generation endpoint solution in our portfolio.
Got it. And then relative to the sales execution challenges that you mentioned, can you talk about maybe which improvements have had the most impact on the business and maybe where we are in terms of those impacts being shown through?
I think it's too early to say. As I said, we've seen very good indicators in the last quarter and we're very happy with the total business volume in the U. S. And almost all the parameters in Europe that's been very positive. I can't say at which initiative we're doing real initiatives, most of the initiatives that we have started around new customers, around C level and so on will still need to bear fruit in the future.
What we're seeing now is the Salesforce executing and the motivated and working on what we should be working.
Thank you.
Thank you. We're showing time for one additional question Please go ahead.
Hey guys, thank you for taking my question. Gil, on the competitive environment for the Infinity architecture, 2 kind of questions on that. 1, other vendors are talking to us about sort of broader or more holistic approach to security and consolidating a lot of functionality, whether it be semantic or Palo Alto Networks Are you seeing them in any of these discussions or any of these competitive situations around a more holistic approach to security? Number 1 and number 2, It might be early days, but have you guys seen any examples or are there any instances where you actually are displacing some of the legacy vendors like a legacy endpoint vendor? When you're deploying Infinity?
So, I mean, first, I think our approach and how the Infinity architecture is by far a broader and more realistic approach to security. I don't think that you can take any of the vendors that you mentioned solution and get full security for an entire enterprise and definitely not to environment like mobile and others. That's very, very unique to what we are doing. I think if you look at the security benefits, again, being the only vendor that does first time prevention on every connection by default, making it prevention and no detection later on after the attack has happen. And guys, I mean, we may underestimate the level of threats that we have, but believe me, when you take a room full of people, at least one of your at least one of the mobile phones in the room is infected with malware and that malware can proliferate the entire network.
So we're talking about mobility as an example. Are we seeing other vendors pitching on that vision? Not as much. Think we are probably approaching different customers, because while we do compete with, some of the ventures that you mentioned, the competition on the overall architecture is not something that we see often in these accounts. And I mean, the good news is that we did have displacement over the last quarter's displacements of Palo Alto, some also of Symantec, even though again, I won't look Symantek as my direct competitor, I'd like to I think in general, we are more complimentary and more partners of ours than competitors.
Excellent. Thank you guys.
Thank you. At this time, I'd like to turn the floor back over to management. For any additional or closing comments.
Thank you guys for attending the call today. It was a little less noisy than our last call. And we'll look forward to seeing you throughout the quarter. Also look forward to hearing from you right after the call. Thank you.
And Have a great day. Bye bye.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.