Product Demand Aids Check Point 1Q

Zacks

Check Point Software Technologies Ltd. (CHKP) exited first quarter 2012 with flying colors. Adjusted earnings of 69 cents per share marginally surpassed the Zacks Consensus Estimate of 68 cents. The adjusted earnings per share exclude one-time items, but include stock-based compensation expense. Check Point witnessed strong network security product sales across all geographical regions.

Shares closed at $60.76, down 5.14% from the previous day’s price. Despite a modest beat, the share price deceleration indicates investors’ unhappiness about a weak revenue and earnings guidance for the upcoming quarter. Investor sentiments were also hurt by the company’s decision to leave the fiscal outlook unchanged.

Revenue

Check Point reported revenue of $313.1 million in the first quarter, up 11.3% from $281.3 million in the year-ago period. The quarter’s result was at the higher end of company’s guidance range of $305.0–$315.0 million and was roughly in line with the Zacks Consensus Estimate of $313.0 million. The improvement can be attributed to a 4.7% year-over-year growth in Product and Licenses revenue. Moreover, Check Point witnessed a total 15.3% year-over-year growth in its Software Updates, Maintenance and Services revenues.

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. The growth in demand was largely due to a general customer pattern of upgrading security levels. Management also reported strong performance regarding the number of large deals, which doubled from the year-ago quarter.

Operating Results

Reported gross profit increased 3.7% year over year to $274.6 million. Gross margin increased 180 basis points from the year-ago quarter to 87.7%. Cost control measures led to improved margin expansion.

Operating income came in at $172.9 million, up 22.3% year over year. Operating margin increased 500 basis points year over year to 55.2%. The improvement in operating results was driven by strong revenue growth that blew past the 1.6% rise in operating expenses. Cost control was also noticed with the year-over-year drop in R&D expenses.

The quarter’s GAAP net income was $143.6 million or 68 cents per share, up from $122.1 million or 57 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP net income was $147.5 million or 69 cents a share compared with $130.2 million or 61 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 $1.40 billion, up from $1.36 billion in the prior quarter. Trade receivables were $243.4 million. Cash flow from operations was $275.3 million, up from $173.2 million in the previous quarter. Capital expenditure increased to $2.42 million from $1.72 million in the prior quarter. During the quarter, Check Point repurchased 1.29 million shares for a total consideration of $75.0 million.

Second Quarter & Fiscal 2012 Outlook

Management sees revenue in a range of $324.0 million to $336.0 million, and earnings (excluding one-time items) in the range of 74 cents to 77 cents per share. For fiscal 2012, Check Point still expects revenue of $1.345–$1.395 billion and earnings per share ex-items of $3.10–$3.20. The Zacks Consensus Estimates for the second quarter and fiscal 2012 are pegged at 72 cents and $3.01, respectively. GAAP earnings per share would be 7 cents less than the non-GAAP figure.

Our Take

Check Point delivered an impressive first quarter, beating the Zacks Consensus Estimate with respect to bottom line and matching with respect to top line. 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. Considering all these, we believe that the second quarter and fiscal guidance are quite conservative.

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

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

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