Check Point's 1Q Earnings: A Mixed Bag

Zacks

Check Point Software Technologies Ltd. (CHKP) reported first quarter 2013 adjusted earnings of 73 cents per share, which matched the Zacks Consensus Estimate.

Revenues

Check Point reported revenues of $322.7 million in the first quarter, up 3.1% from $313.1 million in the year-ago period. The quarter revenues were below the Zacks Consensus Estimate of $330.0 million and at the lower end of the company’s guidance range of $320.0–$332.0 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.

Improvement in Software Updates, Maintenance and Services revenues was mainly due to higher subscription for its annuity blade solutions (threat prevention blades). However, lower sales of high-end appliances doomed Product revenues. The company noticed a decline of $5.0 million in high-end deals.

Geographic contributions also remained stable with Americas contributing 45.0% of revenues; Europe 38.0%; and Asia-Pacific and Japan, the Middle East and Africa region contributing the remaining 17.0%.

Check Point launched a new version of its high-end appliance. The 21700 appliance is the next iteration of 21000 and is expected to boost data center capabilities. The company also launched a low-end 1100 appliance, which can be deployed in small branch offices or remote offices, to get an enterprise-like service at an affordable price.

Operating Results

Reported gross profit increased 4.0% year over year to $285.7 million. Gross margin increased 80 basis points from the year-ago quarter to 88.5%. Cost control measures primarily led to the margin expansion.

Operating income came in at $177.0 million, up 2.4% year over year. Operating margin decreased 40 basis points year over year to 54.8%. Total operating expenses increased 6.9% 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 $148.0 million or 73 cents per share, up from $143.6 million or 68 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP net income was $148.8 million or 73 cents a share compared with $147.5 million or 69 cents in the year-earlier quarter.

Balance Sheet & Cash Flow

Check Point exited the quarter with cash, cash equivalents and marketable securities of approximately $1.39 billion, down from $1.50 billion in the prior quarter. Trade receivables were $276.2 million. Cash flow from operations was $331.4 million, up from $202.5 million in the previous quarter.

During the quarter, Check Point repurchased 2.64 million shares at a total cost of $131.6 million.

Second Quarter Outlook

Management forecasts second quarter 2013 revenues in a range of $320.0 million to $350.0 million and non-GAAP earnings per share in the range of 76 to 84 cents per share. GAAP earnings per share are expected to be approximately 8 cents less than the estimated range.

The Zacks Consensus Estimates for the second quarter and fiscal 2013 are pegged at 78 cents and $3.23, respectively.

Our Take

Check Point delivered modest first-quarter results with the bottom line matching the Zacks Consensus Estimate and the top line missing the same. However, year-over-year comparisons were decent. Geographical contributions were good but lower number of high-margin had an adverse effect on the results. The company provided cautious second quarter guidance, reflecting macro uncertainty in the European region and capped spending by customers.

The company is also benefiting from strength at the high end of the market, increased demand for its blade solutions and continuous product launches. 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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