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Why Is Check Point (CHKP) Down 1.3% Since Last Earnings Report?

Zacks Equity Research
UnitedHealth (UNH) delivered earnings and revenue surprises of 4.05% and -0.12%, respectively, for the quarter ended June 2019. Do the numbers hold clues to what lies ahead for the stock?

It has been about a month since the last earnings report for Check Point Software (CHKP). Shares have lost about 1.3% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important drivers.

Check Point  Reports Solid Q1 Results

Check Point reported healthy first-quarter 2019 results wherein both the top line and bottom line beat the Zacks Consensus Estimate.

The company’s non-GAAP earnings per share of $1.32 beat the Zacks Consensus Estimate by a penny. The figure came within the company’s guidance of $1.28-$1.34 and climbed 2% year over year, driven mainly by higher revenues and lower share count. Infinity consolidated solution was a significant revenue driver.

Revenues came in at $472 million, up 4% year over year. The figure came within the company’s guidance of $460-$480 million, and beat the Zacks Consensus Estimate of $471 million.

Quarter Details

Security subscription revenues were $144 million, increasing 13.1% year over year, driven by strong demand for its cloud, mobile and zero-day advanced threat prevention technologies.

However, revenues of $112.8 million from Products and licenses fell 4.5%.

Software updates and maintenance revenues increased to $215.1 million, representing 4% growth.

As of Mar 31, 2019, deferred revenues were $1.3 billion, up 13% year over year, reflecting strength in security subscription and support.

Geographically, the Americas generated 45% of total revenues, Europe, Middle East and Africa (Middle East and Africa will henceforth be considered part of Europe) accounted for 44% while the Asia Pacific accounted for 11%.

Talking about deal size, the number of customers — who signed deals worth $1 million — were 47 compared with 44 in the prior-year quarter. Like last year, transactions greater than $50,000 was 71% of total order value.

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

During the quarter, the company completed the acquisition of ForceNock. The buyout will add machine learning to Check Point’s offerings and thus strengthen its portfolio.

Among the new products launched by the company during the quarter, the Check Point Maestro Hyperscale and the 6000 Series Getaways are worth mentioning. Notably, the Maestro has already attracted a few deals.

Operating Results

Non-GAAP operating income for the quarter came in at $234.9 million, falling 1.7% year over year. Non-GAAP operating margin contracted 300 basis points to 49.8%. This can be attributed to increased investments in sales and marketing efforts by the company. Moreover, full effect of the acquisitions of Dome9 and ForceNock were also realized in the quarter, which reflected in the operating results.

Non-GAAP net income for the quarter was $205.5 million, down from $209.9 million in the year-earlier quarter.

Balance Sheet & Other Financial Details

Check Point exited the first quarter with cash and cash equivalents, marketable securities and short-term deposits of $1.76 billion compared with $1.75 billion in the previous quarter.

During the quarter, the company generated cash worth $378.8 million from operational activities, up from $249 million in the fourth quarter. The generated cash included a payment of $2 million for the ForceNock buyout.

The company repurchased approximately 2.7 million shares for about $305 million in the first quarter.

Outlook

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

The company will continue to shift its revenues from products to subscriptions and Infinity. Subscription revenues are expected to continue growing throughout the remaining quarters of the year.

For the second quarter and third quarter of 2019, the tax rate is expected to be approximately 19%.

Furthermore, for the second quarter, revenues are expected to be between $474 million and $500 million and non-GAAP EPS in the $1.32-$1.40 range.
 

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, Check Point has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, 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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