CHKP Check Point Software Technologies Inc

Check Point Software Technologies Ltd.’s (CHKP) third quarter 2011 earnings of 67 cents per share inched past the Zacks Consensus Estimate of 66 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.

Revenue

Check Point reported revenue of $308.3 million in the third quarter, up 12.8% from $273.2 million in the year-ago period. The improvement can be attributed to a 13.4% year-over-year growth in Product and Licenses revenue. Moreover, Check Point witnessed a total 12.5% 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 security solutions and Application Control software blades, as well as 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 in comparison with the year-ago quarter.

Operating Results

Excluding amortization expenses, but including stock-based compensation expenses, non-GAAP gross profit increased 14.2% year over year to $273.4 million. Non-GAAP gross margin was 88.7%, compared to 87.7% in the year-ago quarter.

Non-GAAP operating income (including stock-based compensation expenses) came in at $169.7 million, up 18.0% year over year. Operating margin increased 240 basis points year over year to 55.0%. The improvement in operating results was driven by strong revenue growth that outpaced the 11.7% increase in operating expenses.

The quarter’s GAAP net income was $134.1 million or 63 cents per share, up from $114.5 million or 54 cents per share in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP net income was $143.3 million or 67 cents a share compared with $125.4 million or 59 cents a share in the year-earlier quarter.

Balance Sheet & Cash Flow

Check Point exited the quarter with cash, cash equivalents and marketable securities of approximately $1.21 billion, up from $1.15 billion in the prior quarter. Trade receivables were $197.5 million. Cash flow from operations was $154.5 million, down from $175.5 million in the previous quarter. Capital expenditure increased to $1.98 million from $1.62 million in the prior quarter. During the quarter, Check Point repurchased 1.37 million shares for a total consideration of $75.0 million.

Fourth Quarter & Fiscal Outlook

Management raised its full-year 2011 outlook and provided fourth quarter 2011 guidance. Top-line growth of 11.1% is expected for the fourth quarter and 13.3% for the full year (up from 12.7% previously). Regarding non-GAAP earnings per share, management expects $0.79–$0.82 in the fourth quarter, representing a 10.5% growth at the midpoint, and $2.83–$2.86 for the full year, implying 14.7% growth (up from 13.1% previously).

Our Take

Check Point delivered an impressive third quarter, beating the Zacks Consensus Estimate with respect to earnings per share. We think that investor sentiment will be in Check Point’s favor as they remain encouraged by its market share gains against 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.

However, limited margin expansion potential (over dependence on indirect sales model) and an uncertain economic environment are concerns.

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

 
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