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Check Point (CHKP) Down 4.1% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Check Point Software (CHKP). Shares have lost about 4.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Check Point due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Check Point  Reports Q2 Results

Check Point reported second-quarter 2019 results wherein the bottom line beat and the top line matched the Zacks Consensus Estimate.

The company’s non-GAAP earnings per share of $1.38 beat the consensus estimate by a penny. The figure came within the company’s guidance of $1.32-$1.40 and climbed 0.7% year over year, driven mainly by higher revenues and lower share count.

Revenues came in at $488 million, up 4% year over year. The figure came within the company’s guidance of $474-$500 million.

Growth in security subscriptions revenues, including advanced threat prevention and CloudGuard suite of products boosted the top line.

Quarter Details

Security subscription revenues were $149 million, increasing 13% year over year, driven by strong demand for its cloud and Infinity solutions; and SandBlast zero-day advanced threat prevention technologies. However, revenues of $121.8 million from Products and licenses fell 3.1%. Thus, total revenues from product and security subscriptions totaled $270.5 million, growing 5% year over year.

Software updates and maintenance revenues increased to $217.6 million, representing 4% growth.

As of Jun 30, 2019, deferred revenues were $1.29 billion, up 11% year over year, reflecting strength in security subscription and support.

Region wise, the Americas generated 48% of total revenues, Europe, Middle East and Africa (Middle East and Africa will henceforth be considered part of Europe) accounted for 40% while the Asia Pacific accounted for 12%.

The Infinity Gen V security platform witnessed solid traction and drove customer acquisition, leading to new deals in various industries.

During the quarter, the company focused on IT modernization. The cloud business more than doubled in size. Also, the Maestro Hyperscale, launched in the first quarter of 2019, witnessed solid traction with many new deals.

The company continued to innovate on its core product line and introduced high end 16000 and 26000 security appliances, which are optimized for Gen 5 security operations.

The America region witnessed a healthy growth rate. Check Point also significantly increased its marketing activities during the quarter. The Check Point experience program was propagated to different cities around the world with participants growing to almost 11,000.

The company’s research team identified major malware and vulnerabilities in mobile and cloud during the second quarter. In the mobile space, a vulnerability in Xiaomi mobile devices was found that may affect more than 100 million devices. Moreover, malware Agent Smith, which affected numerous applications and more than 25 million android users, was also identified by the company. Additionally,  Check Point discovered a security gap in Electronic Arts, Apex Legend game that might have affected 300 million online users.  

Operating Results

Non-GAAP operating income for the quarter came in at $241.8 million, falling 2.1% year over year. Non-GAAP operating margin contracted 720 basis points to 60%. This can be attributed to increased investments in sales and marketing efforts by the company.

Non-GAAP net income for the quarter was $211.5 million, down from $218.2 million in the year-earlier quarter.

Balance Sheet & Other Financial Details

Check Point exited the second quarter with cash and cash equivalents, marketable securities and short-term deposits of $1.6 billion compared with $1.8 billion in the previous quarter.

The company generated cash worth $233 million from operational activities, down from $378.8 million in the first quarter.

It repurchased approximately 2.8 million shares for about $325 million in the second quarter.

Outlook

Check Point reiterated guidance for full-year 2019. Revenues are expected to be in the range $1.94-$2.04 billion. Non-GAAP earnings are projected to be $5.85-$6.25.

The company intends to continue shifting its revenues from products to subscriptions and Infinity.

Furthermore, for the third quarter, revenues are expected to be between $480 million and $500 million, and non-GAAP earnings in the $1.36-$1.44 range.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, Check Point has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Check Point has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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