Check Point (CHKP) Q3 Earnings Top, Q4 View Soft, Stock Down

Continuing with its upbeat performance for the sixth straight quarter, Check Point Software Technologies Ltd. CHKP yesterday reported strong results for third-quarter 2017. Quarterly revenues came in at the higher-end of the company’s expectations, while earnings came above the guidance range. Moreover, the top and bottom lines both surpassed the respective Zacks Consensus Estimate.

Check Point’s non-GAAP earnings per share (excluding stock-based compensation and amortization of intangible assets) of $1.30 beat the Zacks Consensus Estimate of $1.24 and came in higher than the mid-point of its guidance range of $1.18-$1.28 (mid-point $1.23). Non-GAAP earnings also climbed approximately 15% on a year-over-year basis, driven mainly by elevated revenues, efficient cost management and a lower share count.

Revenues

Third-quarter revenues came in at $454.6 million, up 6.3% year over year, and also beat the Zacks Consensus Estimate of $449 million. The figure also came close to the upper-end of the company’s guidance range of $430-$465 million (mid-point $447.5 million). Quarterly revenues were mainly driven by strong adoption of its products particularly its Infinity platform which was launched in the third quarter.

Furthermore, it should be noted that for the last few quarters Check Point has been witnessing sturdy performance of its small and midsize-enterprise product lines as the company has been able to penetrate through the midmarket and acquire new customers successfully. We believe this factor would also have positively influenced third-quarter results.

Segment wise, the company witnessed sales growth of 5.7% in Products & Software Blades, and 7% in Software Updates and Maintenance. The company also reported a 22% surge in subscription revenues at Software Blades.

Geographically, the Americas contributed 45% to revenues and Europe accounted for 37%, while the Asia-Pacific, Japan, and the Middle East and Africa added the remaining 18%.

Talking about deal size, the number of new customers — who signed deals worth $1 million or more —totaled 60, down from year-ago quarter tally of 65. Also, customers, who signed deals worth $50,000 and more, contributed 74% to the total order value, which is equal to the third-quarter 2016 tally.

Operating Results

On a year-over-year basis, non-GAAP gross profit climbed 6.8% to $404.1 million. However, as a percentage of revenues, gross profit contracted 40 basis points (bps) to 88.9%.

Non-GAAP operating expenses flared up 4% year over year to $153.2 million. However, as a percentage of revenues, operating expenses contracted 80 bps mainly due to efficient cost management.

Non-GAAP operating income came in at $250.8 million, up nearly 8.5% year over year. In addition, margins advanced 110 bps to 55.2% primarily due to higher gross margin and lower operating expenses as a percentage of revenues.

Non-GAAP net income was $215.3 million or $1.30 per share, up from $194.1 million or $1.13 reported in the year-ago quarter.

Check Point Software Technologies Ltd. Price, Consensus and EPS Surprise

Check Point Software Technologies Ltd. Price, Consensus and EPS Surprise | Check Point Software Technologies Ltd. Quote

Balance Sheet & Cash Flow

Check Point exited the third quarter with cash balances of approximately $3.865 billion, slightly up from $3.806 billion recorded at the end of the second quarter. During the first three quarters of 2017, the company generated operating cash flow of $841.5 million.

In addition to this, during the third quarter, the company generated cash worth $259.8 million from operational activities, marking a 21% year-over-year improvement. The robust growth in operating cash flow is primarily attributable to strong collections from customers and a reduction in the tax advances paid to the authorities in Israel.

Additionally, Check Point repurchased about 7.2 million shares for a total cost of $745.6 million in the first nine months of 2017.

Share Price Performance

Despite reporting robust quarterly results, shares of Check Point dipped 8% during yesterday’s trade as the company hinted that its fourth-quarter revenues might be hit slightly due to significant changes made in the U.S. sales force which may take some time to reach its full potential. The company noted that its key sales position has now been occupied by recently joined people making the execution risk higher. Therefore, the company is in a doubt if it can match the year-ago quarter’s growth rate.

Apart from this, the company also stated that it has been able to absorb some of the Yom Kippur effect in the third quarter which was earlier expected to be absorbed in the fourth quarter. Check Point incorporated this impact in its fourth-quarter revenue outlook.

However, despite of all this, the company has maintained the outlook on full-year revenues, which signifies that it is optimistic about its long-term prospects.

Notably, shares of Check Point have gained 39.4% year to date, outperforming the industry’s 26.7% rally.

Outlook

Taking into account the aforementioned factors, the company provided outlook for the fourth quarter. It expects to generate revenues between $485 million and $425 million (mid-point $505 million). The mid-point of the guidance is lower than the Zacks Consensus Estimate of $526.9 million. Non-GAAP earnings are projected in the range of $1.45-$1.55 per share. GAAP earnings per share are anticipated to be 15 cents lesser than the non-GAAP figure. The Zacks Consensus Estimate is pegged at $1.48.

For 2017, Check Point continues to anticipate generating revenues between $1.85 billion and $1.90 billion (mid-point $1.875 billion). The mid-point of the guided range is higher than the Zacks Consensus Estimate of $1.87 billion. Non-GAAP earnings are projected in the band of $5.05-$5.25 per share. GAAP earnings per share are anticipated to be 70 cents lesser than the non-GAAP figure. The Zacks Consensus Estimate is pegged at $5.17.

Our Take

Check Point continues to report splendid quarterly results for the sixth consecutive quarter. The company’s top and bottom lines not only came ahead of the respective guidance ranges at the mid-points, but also marked solid year-over-year improvement. Although the fourth-quarter outlook is slightly disappointing, we believe the company is well capable of mitigating the fourth-quarter revenue losses in the following quarter.

Rapid adoption of Check Point’s data-center appliances and continued enhancements in data-center product lines are expected to provide ample top-line support. The company’s focus on enhancing mobile capabilities will enable it to tap greater larger opportunities. Furthermore, Check Point’s strategy of growing through acquisitions is praiseworthy.

Additionally, we believe Check Point Software will continue to benefit from strong demand for cybersecurity solutions. It should be noted that the financial well-being, brand image and reputation of enterprises, and governments are always exposed to the risk of cyber threats. Consequently, cybersecurity has become a mission-critical, high-profile requirement.

Nonetheless, changing customer spending behavior, intensifying competition, an uncertain economic environment and currency fluctuations remain headwinds.

Check Point currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same industry are Imperva Inc. IMPV, Fortinet FTNT and Varonis Systems, Inc. VRNS. While Imperva sports a Zacks Rank #1 (Strong Buy), Fortinet and Varonis carries Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Imperva, Fortinet and Varonis have expected long-term EPS growth rates of 25%, 16.8% and 20%, respectively.

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