Greetings, and welcome to the Check Point Software 2018 First Quarter Financial Results Conference Call. At this time As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kip E Meitzer, Head of Global Investor Relations. Thank you. You may begin.
Thank you, Donna. I'd like to thank all of you for us today to discuss Checkpoint's first quarter 2018 financial results. Joining me today on the call are Gil Shwed, Founder and CEO along with our CFO and COO, Tal Payne. As a reminder, this call is webcast live on our website and is recorded for replay to access the live webcast and replay information, please visit the company's website at checkpoint.com. For your convenience, the conference call replay will be available through 82nd.
If you'd like to reach us after the call, please contact Investor Relations by email at kippcheckpoint.com or by phone at +16 50,628,000. 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 And Exchange Act of 1933 and the Section 21E of the Securities And Exchange Act of 1934 include, but are not limited statements related to Checkpoint's expectations regarding business, financial performance and customers, the introduction of new products and programs and the success of those products and programs, the environment for security threats and trends in the market, our strategy and focus areas for 2018 demand for our solutions and our business and financial outlook, including our guidance for Q2 2018 full year 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 earnings press release issued on April 25, 2018, which is available on our Web site and other factors risks, including those discussed in Checkpoint's annual report on Form 20 F, for the year ended December 31, 2016, which is file with the Securities And Exchange Commission. Checkpoint assumes no obligation to update information concerning its expectations or beliefs as required by law. Ciliation of such results as well as the reasons for our presentation of non GAAP information. Now, it's my pleasure 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. Before I proceed further into the numbers, let me mind you that our GAAP financial results include stock based compensation charges and motivation of acquired intangible assets, and acquisition related expenses as well as the related tax effects. Keep in mind that there's applicable non GAAP information is presented excluding these items. Now let's take a look at the financial highlights for the quarter.
Revenues for the quarter increased by 4% year over year to $452,000,000, in line with our projections. Products and security subscription revenues increased this quarter by 3% over the same quarter last year. Reaching $245,000,000. Our security subscription revenues continue to be strong with 14% growth year over year, reaching $127,000,000. Our software update and maintenance revenues increased to $207,000,000, representing 5% growth year over year.
Last quarter, we launched the Infinity Total Protection Our Infinity Total Protection solution offers the entire checkpoint solutions in a simple financial model priced per user per year. We already closed few multi year deals in several millions, and we see a strong pipeline of the deal. The pipeline is from organizations from all geographies, verticals and all sizes. From accounting perspective, as majority of Checkpoint solutions are offered as a security subscription, a small portion of the deals is and will be recognized as products, while majority of the deal is recognized as recurring revenues over the life of the contract. Some of it is subscription and some of it is a support update and maintenance.
Deferred revenues as of March 31, 2018 reached $1,166,000,000, a growth of 103000000 dollars or 10% over March 30 1, 2017. Revenue distribution by geographies for the quarter was as follows: 47% of revenues came from the Americas 36% of revenues came from Europe and the remaining 17% came from Asia Pacific, Japan, Middle East and Africa region. From a deal size perspective, this quarter, we had 44 customers with transactions over $1,000,000, transactions greater than $50,000 were 71 percent of total order value, similar to last year. Gross margin increased this quarter, mainly as a result of changes in the mix of revenues and products. Non GAAP operating margin for the quarter was strong at 53%.
Effective non GAAP tax rate for the quarter was 7 percent similar to last year and in line with our expectations. GAAP net income for the first quarter of 2018 was $187,000,000 or $1.16 per diluted share, an increase of 7% from the first quarter of 2017. Non GAAP net income for the quarter was $210,000,000 or $1.30 per diluted share, an increase of 9% from the first quarter of 2017 and was at the top end of our guidance range. Our cash balances as of March 31 were $4,000,000,000 compared to the $3,800,000,000 in December last year. Operating cash flow was very strong and showed an increase of 18% from $355,000,000 last year to $497,000,000.
During the quarter, we had a large tax refund relating to prior year, for $45,000,000. Net of the tax refund of our cash flow from operations increased by 5%. We continue to implement our share buyback program during the quarter and repurchased approximately 2,400,000 shares for a total cost of approximately $249,000,000. Now let's turn the call over to Gil for his comments.
Thank you, Tal. I just heard from Tal, our results for the first quarter were reported revenues at the midpoint of our projection and earnings per share at the top of our projection. We started the year with a new and unique strategy with aims to bring the world into the 5th generation of cyber protections. Before I elaborate on that, let's provide you with a little perspective. This past year has been quite significant for everyone in cyberspace.
There has been a change in the cyber threat landscape with attacks that are becoming increasingly sophisticated. This attack These Gen 5 attacks are in many cases, multi vector attacks, polymorphic and attackers are utilizing the most sophisticated attack tools. While the level of attacks are at the 5th generation, we believe that the vast majority of enterprises are still using security tools that are somewhere between the 2nd and third generation of cyber protections. 2nd generation attacks are focused on penetrating network, and we believe that our firewalls provide the best protection against this type of attacks, 3rd generation attacks are focused on exploiting vulnerability in application inside the network, an application that are accessing or are accessible from the Internet. We lead the markets for integrated intrusion prevention in the network security infrastructure, which is the key element in Genfree security.
However, 4th and 5th generation attacks, describe themselves well in network traffic and especially in content aisle. 5th generation attacks at the multi vector element and in many cases, can utilize cloud and mobile to deliver themselves into their target. Bridge the gap between the 1st generation of attack and the 5th generation of attack isn't an easy task. Customers are investing heavily in many technologies and increasingly more vendors, yet our service indicates that only 3% believe that they are ready for the 5th gen operation, 97% are simply not there. This is a huge challenge and a tremendous opportunity.
I believe that Checkpoint is uniquely positioned to close this gap. Checkpoint offers a broad solution that can address Gen Five cyber security challenges in a holistic way. Our solution are designed to prevent 0 day attacks across the traditional and new attack vectors, including cloud and mobile, GEL5 architecture is focused not only on speed and feeds of the firewalling capabilities, but encompasses many other areas of security that have been developed in checkpoint and are unique in the marketplace. Real time Fred Sharing, 1st time Prevention Technologies cloud security enforcement and mobile threat prevention are a few examples. On top of it, truly manage this type of security architecture customer must have a unified security management platform where Checkpoint has always been way ahead of the market.
Some of the above may sound too technical for many of you, but just to illustrate the differences, most of our industry has been putting very focus on detecting different families of attacks. This is simply not enough. I believe that attacks can and should be prevented, and we are demonstrating it every day at checkpoint. We introduced the Gen Five strategy in the first quarter at our Checkpoint Experience 360 Conferences in Europe, U. S.
And Asia. We had record attendance and the highest level of customer ratings for our conference and strategy in our history. Since that our message is addressing the 5th generation of cyber threat is well received by our target audiences. Every discussion that I have with Chief Information Security Officers and with key IT leaders, they all agree that their challenge are but their challenges are at Gen Five, yet their staff is still focused on managing their Gen 2 and Gen 3 technologies. And powering customers to make this big step forward is a great privilege, but not a simple task.
In the first quarter, we already delivered a few wins where customer purchased a full gen 5 security solution using our Infinity Total protection security offerings. This deal demonstrated how the conversation is shifting from transactional products purchases into strategic security architecture, which carry more value. A value that's recognized financially over a longer period given that these deals based on annuity models. We continue to enhance the cloud capabilities of our infinity architecture. We launched the CloudGuard family of products addressing both infrastructure cloud security and software as a service or SaaS security.
In the area of cloud security for the infrastructure, we saw very high percentage increase in sales this past quarter. This quarter, we will start shipping our cloud cloud saas technologies. To execute on Infinity And CloudGuard, we invest not only in research and development, we also continue to refine our go to market strategy. Key elements what we are making changes is a focus on being much more proactive in approaching new customers, and in reaching higher level in our customers' organizations. The CISOs and others have the ability to see the bigger picture and update their overall security architecture to fish generation protection.
We have elevated the level of our marketing activities and will continue to do so. Yet the task of changing the behavior of our productive sales force takes time. We're asking them to learn new sales techniques reach much higher in the organization and learn new tactics in approaching new customers and opportunities. At the same time, changes and the Gen 5 initiatives. For example, a financial customer attended the Cpx conference in February, so the Gen 5 and Infinity Total Protection the home and said, that's what I want.
Within a month, it resulted in a 5 year multimillion dollar deal. We've ever early success in the Infinity space in multiple customer segments and geographies, U. S. Europe And Asia Pacific. These early successes demonstrate the huge potential ahead of us.
However, with the positives of these early successes, there are also some other implication. Changing sales execution takes longer than what I'd like. And while these deals are much bigger than a typical product deal, they take longer to show they come in and use and UAT. In other cases, they can lead to longer sales cycles. Therefore, while I'm pleased the first quarter revenues and EPS, our overall sales are softer than what I would be having hoped to see.
It will also slightly reduce our projection for the remainder of the year. With that, I would like to provide my projection for the second quarter and update some of the full year numbers. As you know, my usual caveats predicting the future will always carry a high level of uncertainty. Whereas risks and various potential upside. With that in mind, I'd like to share some of the numbers.
For the second quarter, revenues are expected to be in the range of $445,000,000, to $475,000,000 and non GAAP EPS in the range of $1.25 to $1.35. GAAP EPS is expected to be approximately $0.15 lower. For the full year, I'd also like to update our projections by approximately 2% to 3% to reflect the changes we are making. Full year revenues are expected to be between $1,850,100,000 $1,930,100,000. Non GAAP EPS in the range of $5.45 to $5.75.
GAAP EPS is expected to insightful question and looking forward for your great feedback on our strategy.
You. Our first question is coming from Jonathan Ho of William Blair. Please go ahead.
Hi. Good morning. Just wanted to maybe start out with some of the sales execution challenges Can you maybe talk about where we are in that process, maybe what's worked, what's continued to be challenging? And maybe the timeframe that you see for that to be corrected at this point?
I think there are many things that doing and there's no, it's not one thing that we're doing, and it simply takes time. And again, as I said, a little bit more than I would hope to change. There are some things like we appointed, we promoted a new sales leader for our U. S. Organization, but the main issue is really about teaching our sales people how to approach hiring the organization, how to reach the C level how to go to cross department and cross project.
Again, our people have great relationship and great success with usually we've with the network security people within the organization, we really need to expand that. And again, especially for a very productive sales force like we have, it's hard to adopt to this challenge. When we talk about Infinity, again, in the past, it was, here is a product, take the product, maybe check its performance. I think one of the most successful sales strategies that we have is doing what we call checkup report We come to a customer. We analyze their network.
We give them a report. We've seen tremendous success on that. It can be in a small organization. It can be in some the largest banks in the world when we carry that checkup situation and almost always they result in in them adopting a broader strategy and understanding the superiority of the checkpoint technology, we've kicked, by the way, many competitive products when they saw that their network is unprotected with this checkup report. So these are all things that we're making and changing and they simply simply take time.
Got it. And then just with regard to Infinity Total Protect, can you maybe give us a sense of what the impact has been on product revenue versus subscription. I know it's relatively early days, but there's clearly some shifts that are going to happen between those lines. And can you give us a little bit more color in terms of maybe what's happening with that?
Sure. Like you said, it was a very but we had already a few deals. And when I'm looking forward, it's obvious that there is a shift that you experience just like when we historically sold IPS as a product and then we moved into the subscription. So I'll just give you an example. If you typically sell appliances and all of it is in the product line.
And then you might have a touch of subscription, which might be depends on the package, but it can be, let's say, 15% to 30% of that value. And then you have updated maintenance, let's say, 20%. In the typical itty deal, the product portion is going to be significantly lower of that pie. Probably around 80% is going to be subscription and support portion and around 20% will go to the product line. So it's quite a significant shift.
Thank you.
Thank you. Our next question is coming from Saket Kalia of Barclays. Please go ahead.
Hey, good morning guys and thanks for taking my questions here. First, maybe for you, Gil, clearly a nice early success on Infinity Total Protect. And you've talked a little bit about kind of the how it attacks, or handles Gen 5 attacks But in your conversations with customers, how are they responding to sort of the very different pricing model with the chance for more usage?
I think the pricing model we actually like that the challenge is not there. The pricing model we like because it makes their life simple because it's because it's a predictable model. I think it's very fair model. The deals that we closed were all at the price that I mean, it's our the price that we came up with, there wasn't much price pressure there on that. So I think from that perspective, it's going very well.
The bigger challenge is actually to get them to consolidate their review. Today, customers are especially large customers, looking at these technologies in many different silos in different places, in different organizations. And it's really, really hard for them to to see how to consolidate, to take the bigger picture, and to take that bigger view. Infinity, by the way. In general, selling a more architectural sale.
That makes sense. And then for my follow-up, maybe for you, Tal, just thinking about the kind of historical kind of subscription packages that we've sold, we're a couple of quarters now past the anniversary date for that big pricing change you made last time. Can you just talk about qualitatively how renewal rates have trended on subscription packages over the last couple of quarters?
Pretty, remember, I was told that they're moving between packages. So that's why we don't provide it. But in general, renewal rates are pretty steady. The installed base is steady. The renewal rates is steady.
It's the challenge to move up into the levels and sell additional solutions. So if you store in our offer, if a customer had next generation firewall, you moved in and offered even higher value with next generation mentioned. And then we bundle the next generation threat prevention and the upsell was to move into next generation threat extraction now, which is Advanced Red Protection. Now you have to go all the way up to Infinity and telling the entire total solutions in one price to be implemented all around the organization. And that will be majority of it in those subscription and the updated maintenance lines.
Got it. Thanks very much.
Thank you. Our next question is coming from Sterling Auty of JP Morgan. Please go ahead.
Yes, thanks. Hi guys. Just curious and you talked about sales execution, but what were win rates like during the quarter on a competitive? How are you sure that it's not a technology and a competitive issue?
I think the competitive win rates were the same. We had many cases when we kick out kicked out competitors from account all over the world. As I mentioned with our checkup report, we've seen cases, even again, in the most sophisticated and largest accounts in the world, not just accounts that are have limited staffs on them. So some huge banks sold deals when we did the checkup report and they were shocked to see how many malware they have on their network that penetrated what they were thinking is a good security solution. And again, we started, especially in the very large one, we started the early process of replacing them.
So, I mean, I don't think that our issue today is in technology quite the contrary. And again, I mean, if you remember last quarter, there was the NFS report that shows the breach prevention system report, the first NSS test that we did that actually really tested advanced threats and the ability to prevent them, we scored a clean 100% ratio on that we were, by the way, the only vendor that, that even got to be assessed with a single gateway and not with a host of 5 or 6 different technologies If you would have buy, if you would add to that, by the way, our other systems, we'd keep the 100% but Again, it can't be getting any better. And that's, by the way, we got to the test with the simplest system out of our vendors and still got the highest rank. So I'm pretty sure about the capabilities of our technology. Got it.
And then as a follow-up with the promotion for the head of sales in North America, is there additional changes that you feel that need to be made underneath, or it's more just a training and experience issue at this point?
I think we will keep making changes. And I think there is a lot of places that we have to build and we have to change. And especially augment where we are. We are hiring, especially in the Americas. We have a lot of open positions and we encourage ourselves people to add the people in the right places.
And I think we will add people all over the place, both at the top and then and then the people that actually doing the work.
Our next question is coming from shaul Eyal of Oppenheimer. Please go ahead.
Thank you. Good afternoon guys. Maybe building on Sterling's prior question. So, Gil, on the sales and marketing front, I think all of us, taking United Airlines flight over the course of the past few weeks have seen the checkpoint commercials, but as it relates to Salesforce hiring, Can you maybe quantify for us how many sales people were added during the first quarter? And maybe the second question, in that respect, a very competitive landscape right now, both in Israel and without a doubt, you mentioned the U.
S. How can Checkpoint drove top talent and when you draw talent, where are you bringing this talent from?
I don't have in front of me the number of people we hired and so on, but I think it is a nice number. But as I said, we have many open headcounts. So we are we can still hire more, especially in the U. S. In terms of growing talent, again, it is a competitive market.
It is hard to recruit people But, but I think we're able to do that. It's very, very different when you speak about the Salesforce in the U. S. Or in the rest of the world. And by the way, U.
S. Rest of the world and Israel are very, very different in most countries, I think, checkpoint is a quite an attractive, you know, leading vendors for new people to join in most Countries in Asia and so on. So I think there, we can attract very, very good talent. In the U. S, I think we're also a very attractive vendor in the cyber security And by the way, we see that we see that people that left Checkpoint 2, 3 years ago to move to other vendors in the security space sometimes even to our competitors, or by the way, many people that leave us for competitors.
So but even some of these people, are asking to come back and some did came back. Some we did recruit back. And I think what they all called is not just It's not just the work atmosphere, but the fact that they like to work with the best technology and they like to stand in front of the customer knowing that what they sell is a credible story with the leading technology. In Israel, it's very it's quite different because first that we have tried to get developers, researchers, and so on. The market here is competitive, but here, I think we're definitely considered one of the most prominent companies that come people want to come and learn and grow in.
In Israel, we mainly recruit people in the early stage not even early stage of their career. Before we start their career, most of the people we recruit are during very second and third years in university. May become interns and then during the university studies and then when they graduate, we can pick the best one to stay here. I can give you one an example of a program that's really unique that we've done last year. We call it the Checkpoint security academy, which trained really the top top talent of security searchers.
Usually, most companies are looking for people with prior experience in that. And there aren't that many people that have prior experience from that. We understood that at the macro level, there's a limit of how many we can try and recruit. And we simply created our own program we got the 1st round of people in vet program and they are amazing. 1 of the graduates of that program that again came with no prior experience Fresh out of the program within a month, found one of the most significant vulnerabilities in Microsoft Office, for example.
We have some very, very nice wins in that.
Thank you. Our next question is coming from Greg Moskowitz of Cowen. Please go ahead.
Okay. Thank you very much. And hi guys. Question, Tal, just on software updates and maintenance because the revenue did decline by 2% sequentially and by our estimates that does represent the biggest sequential decline that we've seen in the last decade or so. It sounds like you're not seeing any change in win rates, but with that being the case, does this reflect any change in pricing on maintenance contracts or is there some other factor that you would attribute it to?
Typically between Q4 and Q1, there's a reduction. It depends how much you don't have only updated maintenance, the recurring. You also have their training. You have installations. You have professional services.
Sometimes you have more in Q4 as a result of implementation of large projects. So nothing dramatic. No.
Okay. Thank you. And then, just getting back, Gil, briefly to the go to market changes that that you've discussed on this call and previously, do you guys have a line of sight into when things will be back on track? Thrilled sale, that Infinity entailed. And obviously that, that has a lot of promise, but it does also introduce more complexity.
And I'm just kind of curious you know, when you sort of think you may get to that point of, returning to better execution.
I think we will see changes that we will see some effect already this quarter and some improvement compared to some of the internal metrics that we have over the first quarter. Even in the internal, in the first quarter, we saw improvement in some metrics that we are starting to track and starting to work on. The overall impact on the revenues, I think it can take time, because it's we're talking here really about different phenomenals that it for us to estimate. Like, large deals, I really like us to penetrate more strategic, large deals these deals by definition are very long sales cycles. So if we win them, it will take time.
If we don't win them, I don't consider that even an option. Put it that way. Small deals that are more architectural and so on with, with smaller customers, these deals can come can come faster in some cases, but the overall impact is hard to mitigate. And again, talk about these architectural deals, the revenue recognition would call the revenues to come a little bit later. So it's a little bit hard to predict that.
Yes, I'm very, very optimistic about what we have and the acceptance of the new messages that we have in the marketplace.
Okay, great. Thank you very much.
Thank you. Our next question is coming from Andrew Nowinski of Piper Jaffray. Please go ahead.
All right. Thanks a lot guys. And maybe just starting with a clarification, you look like product and license sales declined about 6.5% year over year, which sounds like it's just due to that mix shift from the Infinity program. I guess in light of your lowered annual outlook, are you able are you still expecting product and license growth in the second half of twenty eighteen or is that no longer on the table?
I think if you look at the guidance, you will see that in our midpoint, it doesn't assume that. So we and there's 2 I just want to clarify. There's 2 things. It's not that the Infinity takes longer to recognize in his revenues, which is obviously a significant effect, but what Gil was relating to is also the length of the time it takes to close such deals on architecture bring up in the hierarchy in the large organizations, getting the right people in order to get the big picture and purchase and infinity. While we see a very nice pipeline, we estimate it to take longer to close it.
So on the one hand, it delays product refreshes because now you can get into the Infinity. So you see an effect on the product revenues. And then it takes the time, A, to close the deal, and B once you close it to recognize it into the revenue.
All right. Thanks. And then last quarter you had talked about making progress winning new customers, but we're not really seeing that showing up in billings, which were flat again, despite even a higher duration. I guess is Infinity driving any new customer growth? Are you seeing Infinity driving really more sales to your existing customer base?
Maybe just because we started with the accounting. So I didn't discuss it at all back and just say, not that Infinity is made over, like, annually, which means you won't even see it in the deferred revenues unless it's a customer that decided to pay everything upfront. So just take that also into consideration. All
right. Thank you.
In terms of customers, we have a mix of both existing and U. Think it's a potential for both. And we're working on both opportunities. I can give you one example of the customer that we want that, where we actually received 5 vendors with the Infinity solution, and that's a great that's a great solution. And we did win over some of our key prominent competitors in that deal, and again, kicked out of the account 5 hour vendors of the solution is really, really comprehensive.
Thank you. Our next question is coming from Ann Meissner of Susquehanna Financial Group. Please go ahead.
Yeah, hi, everyone. Thanks for taking my question. I just wanted to dig into the description gross deceleration a little bit, more that's beyond what we've been modeling for deceleration. So this is maybe a bit of a follow-up to Saket's question. But is there any further color you can provide on pricing of the subscription bundle renewals?
You did say the renewal rates were good, but maybe there's some pricing going on there? And then any commentary you can provide on subscription attach rates on new business?
Sure. I just reminded when we discussed it last quarter, I said to expect some deceleration in the in the subscription as a result of the de acceleration last year. Some of it was relating to bundling in 2016 of the NGTP into the appliances, which created pressure on the product, but then acceleration in the subscription of, close to the entire year last year, which means this year, you see some of the deceleration back to normal rates.
Okay, great. And then, quick follow-up. So considering your strong cash balance strong cash flow still and, you're kind of going through a bit of a sluggish period for sales. Is there any thoughts, I guess, on just increasing your stock repurchase beyond the $1,000,000,000 per year that you've been doing?
It's something that we can, that we should, which we can consider. It's an option. Again, I don't even have a strong position for a gate. What we usually by the way, on these things. Of course, it's a board decision and a board decides that.
And usually, we collect feedback from shareholders before we make, may decisions in that space.
And I'll just add that typically once the old program is coming out to an end, then we have a discussion. We bring all the data and based on that making a decision.
Okay, perfect. Thank you very much.
Thank you. Our next question is coming from Ken Talanian of Evercore ISI. Please go ahead.
Guys. Thanks for taking the question. I was wondering if you could frame how your renewal pipeline compares for the remainder of the year versus this time last year.
Wow. Should be the same, slightly up since our subscription is the same. And slightly up versus last year.
It's a little bit bigger.
It's a little bit bigger. So the opportunity should be slightly higher. So In that area, there's no, no, I would say, not much drama, right? Like, it can fluctuate between quarters just depends on long term contracts. But when you talk about the regular potential regard.
If you put aside multi years, then it's pretty much the same.
And I guess as a follow-up, do you expect there
it into big, multi year deals. It's always a struggle with the sales force that in many cases wants to make these multi year deals. I may, I'm actually not pushing for that, because I think there's no reason to sacrifice future revenues and give higher discounts for that. But again, it varies. And if somebody comes up with a great proposal, then of course, we accept the booking.
Great. Thank you very much.
Thank you. Our next question is coming from Phil Winslow of Wells Fargo. Please go ahead.
Hey guys, thanks for taking my question. Just to give you on Infiniti, obviously, it's a big change not only from a technology platform perspective, but just pricing and packaging, not just for you guys, but really relative to the industry. So you're curious as what you're seeing competitively the response being from from the others in the market to Infini whether it be pricing promotion, just any sort of competitive response that you're seeing would be great.
I think there are some responses. I'm not that familiar with the detail, but I think realistically they can do that because they don't have the full archit sector. Our competitor don't have the management to manage a holistic security. Most of our competitors don't even have the manage to manage just the network security SD WAN unit. They don't have the mobility portion of that.
They lack on the cloud and definitely on it or does full prevention at this point. And that's, I think, and again, people hardly miss that because they take benchmarks on bits and pieces of technology capabilities. But to do first time prevention, that's really, really unique to us.
Got it. Thanks guys.
Thank you. Our next question is coming from John DiFucci of Jefferies. Please go ahead.
Hi, this is Julian Serafini on for John. So big picture question, I guess, for Gil, you talked about multi vector attacks. And I'm thinking about the endpoint in I know some of your competitors are pushing more into the endpoint. I know Checkpoint offers the SAMBLAF solution on Endpoint, but realistically, Checkpoint hasn't been considered a large Endpoint player. Guess, how do you consider that market in terms of
market I think you see more?
Can you push into more
in the future? How do you think about it?
Very good question. And I apologize, by the way, if there's noise, it started an amazing rain year. Is there done typical for sale in the spring. And so I think first we do have excellent endpoints week that we can keep on customer networks. And I think it's very integrated.
It has all the capabilities and especially on the Atlantic basic features of an endpoint it was in the network security space and we have the best AV engines and so on. But and on the advanced capabilities, we really have very, very unique capabilities on that. But at the end, at the real big story at which is very, very good for the security story and the architecture, but I don't think that most customers would replace very existing endpoints
to it from advances in Mexico and many of
the other endpoints vendors that are out there. Think that the endpoint business, again, I think that the impact we can have, we are in such a bank check point. The network security companies can have on the endpoint is very, very limited. It's very hard to replace a full endpoint suite. And what we can do is augment that with the advanced technologies.
And there, I think we have a lot to offer from our Advanced Sound Plus A and the advanced capabilities to the browser extension that we have, which is a very, again, unique to us all your extensions, let's say, we'll check all
the download which we're doing when we're ready.
Thank you. Our next question is coming from Walter Pritchard of Citi. Please go ahead.
Hey, a question for Gil, just on on sales and marketing, I'm wondering if you think from a multi year perspective, given the industry remains pretty competitive Do you expect to have to increase sales and marketing as a percentage of revenues we go out not necessarily this year, but in now years? It just seems like the industry is kind of not let up in its spending. I'm wondering if you have to respond in that way.
I think we will increase slightly the sales and marketing expense then But I think overall, the issue is not just increasing the spend. The issue is doing its market. So now this year, yes, we're doing three times more marketing activities. And when I'm talking about increasing marketing activities, it's really really high percentages. You can see that the impact on the financial is hard to spot.
Can we do more? Yes. Will we do more probably yes? But if we will do more, I also expect revenues to come in return to that.
Great. And then Tal, you referenced mix shift in gross margins, can you talk about mix shift in product and especially address what you're seeing on the virtual series, which is all software?
Yes. No, what I meant is if you see, you see our gross margin slightly moved up. And I always say, the gross margin can move up 1% or move down 1% depends on the product mix. So this product, when you look at that product, product was lower and the growth came subscription, subscription costs, higher margins, hence, the improvement on the margin. So and on the Visa, it's a software, so you understand that anything that has to do with virtual software mobile, anything within the cluster in the gross margin is like 98 margins, right?
The cost is actually in the R and D expenses.
Thank you. Our next question is coming from Brad Zelnick of Credit Suisse. Please go ahead.
Good morning. It's actually Willan on behalf of Brad. Thanks very much for taking our question. I wanted to ask when we think about segment of the business in terms of low, medium and high end. So I guess Branch, SMB, Enterprise and the data center, it would be really interesting to know where you're seeing the most momentum and perhaps any color you can share around discounting
every quarter and there's no direct pattern. Right now, we think strength is the low end in the mid size and in
the super high end when when I softness reduction in the in the
large
large products, but not the super high. The super high we see that and
the client base will be able to
see a big strength. We've seen very nice growth on the cloud sales, the infrastructure cloud sales, and that the trend continues now for more than a year.
Just to give you guys some insight on the noise, hearing. This is golf ball sized hail something that doesn't happen in Tel Aviv. Very, very rarely I think is the way to look at him. So we apologize for the sound but proceed with the questions.
Thank you.
Our next question is coming from Keith Weiss of Morgan Stanley. Please go ahead.
Excellent. Thank you for the question. And, Gil, congratulations on that. Israel price is definitely a big honor and really a testament to what you guys at Check 1 have done in the overall security industry. My question was kind of along the lines of that, the investment debt.
With the with the changes that are going on with the sales organization, we did see sales and marketing expense up like 11% this quarter. Should we expect that investment to continue or do sort of the new leaders have to come into place and sort of get their efforts into place before you sort of hire on additional kind of resources under them?
Sorry, the noise here is very hard for me to hear. Can you repeat the last part of the question?
So the general gist of the question was with changes in sales leadership going on in the Americas, do you have to pause the investment in the Americas while you're making those changes or does the investment continue, with the new leadership?
No, we actually need to accelerate what we're doing. And the new leader that we promoted, she's been a checkpoint veteran for many years, so she knows the, so she knows our market, she knows our people, she knows, I mean, she's an internal promotion, which is always better. And I think will push all the people inside to a ramp up to where they need.
Got it. And then on the cloud side of the equation, In the press release, you talked a lot about cloudguard and the sort of ability to protect those cloud based environments. Can you talk a little bit about sort of virtual firewalls and sort of the adoption you're seeing of those virtual firewalls in cloud based environments. Has that started to pick up? Is it becoming a more significant part of your business today?
It is a small part, but it is very good ramp up significantly, almost doubled this quarter take into consideration that this is also sold today mostly an annuity model. So the fact people purchase software wireless than one time forever price basically now with the cloud, this is actually also moving into a price which in the long run is good in the short run, you'll see again a shift from the product revenue to the subscription revenue.
Got it. Excellent. Thank you very much guys.
Thank you.
Our next question is coming from Fatima Boolani of UBS. Please go ahead.
Good morning. Thank you for taking the question. Tom, a question for you and just want to better understand the sequential decline in subscription revenue, I can appreciate some of the changes that are happening on the product side, which you characterize kind of being dehydrated, but subscription revenues being down sequentially is the first time in seeing that since you started breaking it out. So can you help me better understand what the driver would be for that to happen and what the trajectory for growth for the subscription line looks like for the rest of the year?
Sure. So when we talked about the guidance in the beginning of the year, I said we expect it to go back to the levels of 13%, 14% to 6%. It's actually quite expected. I think that the process of subscription is built in layers. So when moved from NGFW to NGCPs and it's created an uplift and acceleration.
It started as a bundle which the way we do it, we put it as a bundle and then the next year it renew and you enjoy a very nice growth. Then we move add solutions So we moved to advanced threat protection. We added NGT and then we added NGTX. Again, the 1st year of the bundling It creates a pressure on the product and then a year after you see a very nice accelerated growth. This year, in is that next phase, meaning now we see people, but Infinity is not bundled.
Remember that. So actually Infinity, you need to to the market, the more Infinity transactions you will have, you will see more pressure on the product, but 3, 4 quarters later, you will start well, 2nd quarter later, you will start to see revenue recognition and again acceleration in the subscription the more you succeed, the 1st year, you see a pressure on the product and the 2nd year, you start to see an acceleration on the subscription. And that's what we were 18 too. And that's also part of the effect of the Infinity, the cycle of closing the deals in 1 close if you will see it over time in the revenue.
That's helpful. And maybe a question for Gil. I know you've spent sort of a lot of times talking through the sales cycle elongation associated with Infinity and some of the go to market changes you're making to empower your sales people around Infinity. Can you speak to the efforts you have around your partner community and your channel community and how, and what sort of investments are going in that distribution avenue to help with Infinity and improving the sales velocity there? And that's it for me.
Thank you.
So first, if our partners are very, very important in the cycle. And when I talk about Cpx360 conference. For example, that's the perfect example. This is the first time we're doing that conference as a conference for all our sales force, all our partners and our customers. This is why this conference has became very, very big.
And for the first time, by the way, that's why, by the way, we moved from the second quarter to 1st quarter because we combine that with our sales kickoff meetings. And I think overall, we need to do more and work well with our partners to explore that opportunity to get to them. By the way, still 100% of our business is fulfilled and is done jointly with the partners. So our business remains 100% joint business with the partner. An absolute yes, we need to invest more in doing it with partners.
There are some, by the way, large nice opportunities around that, like working with a large system integrator to give the customer a full integrated approach for security. And in many cases, the system or not just the local resellers can help us address that. And there's plenty of opportunities with our channel and resellers at all levels that can promote these values.
Thank you. Our next question is coming from Matt Hedberg of RBC Capital Markets. Please go ahead.
Hey guys, thanks for taking my questions. Maybe a first one with your exposure to Europe. I'm curious with GDPR going live next month, is that impacting sales at all? I mean, are you seeing a positive benefit, there? Is it coming up in customer conversation?
Just sort of curious any other color there.
I think GDPR definitely raises the conversation and it's a good way to speak to some executive in the marketplace. So far, I haven't seen a big impact on sale. Again, it's a way to bring people to activities to do seminars to educate people. People are very interested. We have some material and white papers and so on about GDPR and what you should do in terms of security to comply to that.
And by the way, I think that we have plenty of technologies in our products and technology that can help customers in that, things in the spaces of data leak prevention and and then the over the document security encryption and so on, but they're really, really helpful for customers if they if they need to comply to GDPR regulation.
That's great. And then, and maybe a quick one, as somebody asked earlier about, the potential for increased buyback. I'm curious with I believe you have about $4,000,000,000 in cash. Thoughts on incremental M and A at this point, obviously, you're spending more on sales and marketing, but curious on sort of R and D and or M and A. How do you kind of think about that?
We continue to look for attractive companies for acquisition. I think we really look for unique breakthrough technologies and it's not that easy to find a because I'm very, very confident about the technology and innovation that comes from within checkpoints so far. But there are promising ideas and promising things outside. And I think we're trying to look at them as more intensity.
Thank you. Our next question is coming from Karl Keirstead of Deutsche Bank. Please go ahead.
Thank you, Tal. I apologize if this
has been asked, I dropped for a second. But on
the last earnings call, you mentioned that you had a high level target to hit a $1,000,000,000 in operating cash flow in 2018. Just in light of the investments that you and Gil have discussed, are you still comfortable with that or are now?
Yes, in general, I don't expect changes there, right. So in general, any can happen. But when you look at it, it's pretty much in line with what we see in the operating income with the delay of a quarter, right? In general, taking into account operating cash flow. So we should be I think it can be slightly more or slightly less, but yes, I think I feel comfortable at this point of time with 1,000,000,000, yes.
That's, that was our last question. Thanks for working through the adversity with the Hale with us today. And we look forward to speaking to all of you throughout the quarter. And we'll look for your calls coming in later today. Thanks, and have a great day.
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.