Check Point Earnings In Line, Revs Beat

Zacks

Check Point Software Technologies Ltd. (CHKP) reported second quarter 2013 adjusted earnings of 76 cents per share, which matched the Zacks Consensus Estimate.

Revenues

Check Point reported revenues of $340.2 million in the second quarter, up 3.5% from $328.6 million reported in the year-ago period. The quarter revenues came just above the Zacks Consensus Estimate of $339.0 million and toward the higher end of the company’s guidance range of $320.0–$350.0 million. The year-over-year revenue growth was aided by the increase in Software Updates, Maintenance and Services revenues, partially offset by weak Product and Licenses revenues. However, the revenue growth was solid compared to the prior quarter mainly due to increased sales of higher-end products. The data centre appliances, which combine both hardware and software, constitute the company's high end product line.

Improvement in Software Updates, Maintenance and Services revenues was mainly due to higher subscription for its annuity blade solutions (threat prevention and application control technologies). However, lower sales of high-end appliances doomed Product revenues.

Geographic contributions also remained stable with Americas contributing 47.0% of revenues; Europe 37.0%; and Asia-Pacific and Japan, the Middle East and Africa region contributing the remaining 16.0%.

Check Point launched a new version of its high-end appliance. The 13500 appliance is the next iteration of 13000 and is expected to boost data center capabilities. The company also launched a low-end 1100 series and 600 series of appliances, which can be deployed at small branch offices or remote offices, to get an enterprise-like service at an affordable price.

Operating Results

Reported gross profit increased 3.5% year over year to $285.7 million. Gross margin decreased 10 basis points from the year-ago quarter to 88.4%.

Operating income came in at $183.3 million, up 1.5% year over year. Operating margin decreased 100 basis points year over year to 53.9%. Total operating expenses increased 6.7% year over year as the company continued to invest in business and hiring for research and development, sales and marketing and technological support.

Reported net income was $151.0 million or 76 cents per share, up from $150.0 million or 71 cents in the comparable quarter last year. One times were negligible.

Balance Sheet & Cash Flow

Check Point exited the quarter with cash, cash equivalents and marketable securities of approximately $1.24 billion, down from $1.39 billion in the prior quarter. Trade receivables were $263.7 million. Cash flow from operations was $204.7 million, down from $331.4 million in the previous quarter.

During the quarter, Check Point repurchased 2.9 million shares at a total cost of $142.8 million.

Outlook

Management forecasts third quarter 2013 revenues in a range of $330.0 million to $350.0 million and non-GAAP earnings per share in the range of 80 to 86 cents per share. GAAP earnings per share are expected to be approximately 6 cents less than the estimated range.

For fiscal 2013, revenues are expected in the range of $1.36-$1.41 billion and non-GAAP earnings per share in the range of $3.33-$3.46. GAAP earnings per share are expected to be approximately 27 cents less than the estimated range.

The Zacks Consensus Estimate for the third quarter and fiscal 2013 are pegged at 80 cents and $3.20 per share, respectively.

Our Take

Check Point delivered decent second-quarter results with the bottom line matching the Zacks Consensus Estimate and the top line surpassing the same. However, year-over-year comparisons were modest. Geographical contributions were good and growing acceptance of Check Point’s high-end products was encouraging. Despite expectations of an increase in sales volume during the second half, the company provided cautious third quarter guidance, reflecting macro uncertainty in the European region and capped spending by customers.

But we are positive on strong support from the acceptance of data center appliances and believe that continuous enhancements in the data center product lines will provide adequate support to revenue growth.

However, stiff competition from Cisco Systems Inc. (CSCO), Juniper Networks Inc. (JNPR) and Palo Alto Networks Inc. (PANW); an uncertain economic environment, competitive pressures, currency headwinds and Check Point’s significant European exposure are concerns.

Currently, Check Point has a Zacks Rank #3 (Hold).

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