Check Point Reports In-Line Q1 Earnings - Analyst Blog

Check Point Software Technologies Ltd. CHKP reported first-quarter 2014 adjusted earnings (including stock-based compensation but excluding amortization of intangible assets) on proportionate tax basis of 78 cents per share, which came in line with the Zacks Consensus Estimate.

Shares dropped 4.19% in Tuesday's trade as the company issued tepid revenue guidance for the second quarter.

Revenues

Check Point's first-quarter revenues of $342.2 million not only increased 6.0% from the year-ago quarter but also came marginally ahead of the Zacks Consensus Estimate of $342.0 million.

The year-over-year revenue growth was aided by 9.9% increase in revenues from Products & Software Blades and 2.5% improvement in Software Updates and maintenance revenues. The company reported 26% year-over-year growth in revenues from software blades subscription.

The company witnessed higher adoption of its threat emulation blade and higher renewal rates in Application Control. Moreover, strong demand for Check Point's data center products -- the 13000, the 21000, the 600 and the 1100 -- drove revenues for the quarter. Moreover, Check Point sealed deals worth over $1 million with 36 customers.

Geographically, the Americas contributed 48% of the total revenue while 36% was derived from Europe. The remaining 16% was contributed by Asia Pacific, Japan, Middle East and Africa region.

Operating Results

On a year-over-year basis, adjusted gross profit (including stock-based compensation but excluding amortization of intangible assets) increased 6.1% to $303.4 million, while margins remained flat at 88.6%.

Adjusted operating expenses (including stock-based compensation but excluding amortization of intangible assets) increased 9.5% year over year to $118.4 million as the company continued to invest in the business and hire for research and development, sales and marketing and technological support. As a percentage of revenues, it increased 109 basis points (bps).

Adjusted operating income (including stock-based compensation but excluding amortization of intangible assets) came in at $185.0 million, up 3.9% year over year. However, margins contracted 106 bps primarily due to higher expenses.

Adjusted net income (including stock-based compensation but excluding amortization of intangible assets) was $153.5 million or 78 cents per share, up from $148.6 million or 73 cents in the comparable quarter last year.

Balance Sheet & Cash Flow

Check Point exited the quarter with cash, cash equivalents and marketable securities of approximately $1.21 billion compared with $1.17 billion in the previous quarter. Cash flow from operations was $172.1 million compared with $58.2 million in the previous quarter. During the quarter, Check Point repurchased 2.8 million shares for $183 million.

Second-Quarter Outlook

Check Point expects its revenues in the range of $340 to $375 million (mid-point $357.5 million), lower than the Zacks Consensus Estimate of $360 million at the mid-point. The company also expects non-GAAP earnings per share to be between 82 cents and 90 cents, while the Zacks Consensus Estimate is pegged at 82 cents.

Check Point reiterated its fiscal 2014 guidance. The company expects fiscal 2014 revenues to be between $1.45 billion and $1.5 billion, while non-GAAP earnings are expected in the range of $3.50-$3.70 per share. The Zacks Consensus Estimate for both the top and bottom lines are $1.47 billion and $3.41 per share, respectively.  

Our Take

Check Point delivered modest first-quarter results, while the revenue guidance was tepid. Moreover, the revenue guidance range was wider, reflecting challenges in the international markets, particularly in Asia.  

Nonetheless, the rapid adoption of Check Point's data center appliances and the continuous enhancements in data center product lines are expected to provide adequate support to revenue growth.

Moreover, Check Point's settlement with the Israeli Tax Authorities is a long-term positive. The company's additional share buyback plan should also bode well with the investors.

However, stiff competition from Cisco Systems Inc. CSCO, Juniper Networks Inc. JNPR and Fortinet Inc. FTNT; an uncertain economic environment, competitive pressures, currency headwinds and Check Point's significant European exposure are concerns.

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