Check Point Misses 2Q Estimates

Zacks

Check Point Software Technologies Ltd. (CHKP) exited second quarter 2012 with adjusted earnings of 71 cents per share, missing the Zacks Consensus Estimate by a penny. The adjusted earnings per share exclude one-time items, but include stock-based compensation expense. Check Point received healthy subscription from the increased adoption of annuity software blades. Shares closed at $48.75, up 6.86% from the previous day’s price. The share price appreciation indicates a decent quarter as well as the expanded share repurchase program announced.

Revenue

Check Point reported revenue of $328.6 million in the second quarter, up 9.3% from $300.6 million in the year-ago period. The quarter’s result was at the lower end of company’s guidance range of $324.0–$336.0 million and was below the Zacks Consensus Estimate of $332.0 million. The year-over-year improvement can be attributed to a 3.2% growth in Product and Licenses revenue. Moreover, Check Point witnessed a total 13.3% year-over-year growth in its Software Updates, Maintenance and Services revenues.

Geographic contributions also remained stable with Americas contributing 44% of revenues, Europe 39%, and Asia-Pacific and Japan, Middle East and Africa region contributing the remaining 17%. Nevertheless, the quarter was a bit affected by currency headwinds.

Overall, revenue improvement was driven by the growing demand for Check Point’s network security appliances and annuity software blades, as well as new product launches. Management also reported strong performance in terms of the number of large deals, which doubled from the year-ago quarter.

Operating Results

Reported gross profit increased 12.6% year over year to $290.7 million. Gross margin increased 260 basis points from the year-ago quarter to 88.5%. Cost control measures led to improved margin expansion.

Operating income came in at $180.5 million, up 20.3% year over year. Operating margin increased 500 basis points year over year to 54.9%. The improvement in operating results was driven by strong revenue growth that offset the 1.9% rise in operating expenses. Cost control was evident from the year-over-year drop in research and development (R&D) expenses.

The quarter’s GAAP net income was $150.0 million or 71 cents per share, up from $128.0 million or 60 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP net income was $151.0 million or 71 cents a share compared with $137.0 million or 64 cents in the year-earlier quarter. Apart from cost control measures, strength in dollar value also supported the profit boost.

Balance Sheet & Cash Flow

Check Point exited the quarter with cash, cash equivalents and marketable securities of approximately $1.37 billion, down from $1.40 billion in the prior quarter. Trade receivables were $249.2 million. Cash flow from operations was $157.5 million, down from $275.3 million in the previous quarter. Capital expenditure decreased to $1.28 million from $2.42 million in the prior quarter.

Enhanced Share Repurchase Program

During the quarter, Check Point repurchased 1.4 million shares for a total consideration of $75.0 million. Also, the company received approval from the board of directors to expand the current authorization up to $1.0 billion. Under the expanded plan, Check Point will be allowed to repurchase the outstanding common shares during the next two years.

Currently, Check Point has roughly 204.8 million shares of common stock outstanding.

Third Quarter Outlook

Management sees revenue in a range of $316.0 million to $345.0 million, and earnings (excluding one-time items) in the range of 74 cents to 81 cents per share. The Zacks Consensus Estimates for the third quarter and fiscal 2012 are pegged at 74 cents and $3.01 per share, respectively. GAAP earnings per share would be 7 cents less than the non-GAAP figure.

Concurrent with third quarter outlook, Check Point cautioned that the quarter could be somewhat challenging due to the persisting economic backdrop. But at the same time, the company assures that it is ready to face the challenges with renewed strength buoyed by new product launches and increase in market share. This justifies such wide revenue and earnings per share projections.

Our Take

Check Point delivered an impressive second quarter in terms of year-over-year comps, but missed the Zacks Consensus Estimates both in terms of top and bottom lines. We think that investor sentiment will be in Check Point’s favor as shareholders remain encouraged by its market share gains from the tech giant Cisco Systems Inc. (CSCO) and Juniper Networks Inc. (JNPR). Check Point continues to benefit from strength at the high end of the market and increased demand for its blade solutions. Moreover, the company’s continuous product launches are encouraging.

Also, the enhanced share buyback back program reflects a sound cash position as well as favorable earnings growth potential, which could delight investor sentiment.

However, limited margin expansion potential (over dependence on indirect sales model), uncertain economic environment competitive pressures, currency headwinds and Check Point’s significant European exposure are concerns.

Currently, Check Point has a Zacks #3 Rank, implying a short-term Sell recommendation.

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