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Check Point (CHKP) Q4 Earnings Top, Revenues Miss Estimates

Check Point Software Technologies Ltd.CHKP reported mixed results for fourth-quarter 2017 wherein earnings topped the Zacks Consensus Estimate but revenues fell short of the same. However, on a year-over-year basis, the company registered growth on both counts.

Check Point's non-GAAP earnings per share (excluding stock-based compensation and amortization of intangible assets) of $1.58 beat the Zacks Consensus Estimate of $1.51 and came in above its guidance range of $1.45-$1.55. Non-GAAP earnings also climbed approximately 8% on a year-over-year basis, driven mainly by elevated revenues, efficient cost management and a lower share count.

Revenues

Fourth-quarter revenues came in at $506 million, up 4% year over year and marginally came in above the mid-point of the company's guidance of $485-$525 million (mid-point $505 million). However, the figure fell short of the Zacks Consensus Estimate of $509 million.

Quarterly revenues were mainly driven by strong adoption of the company's products, particularly its Infinity platform, which was launched in the third quarter. The company, during the fourth-quarter earnings conference call, hinted that its revenues have been affected due to significant changes made in the U.S. sales force which has not yet reached full potential. Notably, the company generates approximately 45% of its total revenues from the Americas.

However, dismal performance in the Americas was more than offset by strong performance across the Europe and Asia Pacific, Japan, Middle East and Africa regions. Europe accounted for 39% of total revenues, while the Asia-Pacific, Japan, and the Middle East and Africa added the remaining 16%.

Segment wise, the company witnessed sales growth of 2.8% in Product and Security Subscriptions, and 5.6% in Software Updates and Maintenance. The company also reported 18% surge in subscription revenues at Software Blades.

Talking about deal size, the number of new customers - who signed deals worth $1 million or more -totaled 110, up 11% from year-ago quarter. Also, customers, who signed deals worth $50,000 and more, contributed 75% to the total order value, which is equal to the fourth-quarter 2016 tally.

Operating Results

On a year-over-year basis, non-GAAP gross profit climbed 4.6% to $448.8 million. As a percentage of revenues, gross profit expanded 50 basis points (bps) to 88.7%.

Non-GAAP operating expenses decreased 3.7% year over year to $156.7 million. As a percentage of revenues, operating expenses contracted 200 bps mainly due to efficient cost management.

Non-GAAP operating income came in at $292.1 million, up nearly 9.7% year over year. In addition, margins advanced 300 bps to 57.7% primarily due to higher gross margin and lower operating expenses, as a percentage of revenues.

Non-GAAP net income was $259.2 million or $1.58 per share, up from $247.2 million or $1.46 reported in the year-earlier 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 fourth quarter with cash balances of approximately $3.848 billion, slightly down from $3.865 billion recorded at the end of the third quarter. During 2017, the company generated operating cash flow of $1.09 billion.

In addition to this, during the reported quarter, the company generated cash worth $248.1 million from operational activities - marking a 36% 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 9.6 million shares for a total cost of $995.3 million in 2017.

Outlook

Taking into account the ongoing challenges related with the U.S. sales force, the company provided outlook for the first quarter and full-year 2018. However, Check Point's revenues and earnings guidance for both periods remained below our expectations.

For the first quarter, the company expects to generate revenues between $440 million and $460 million (mid-point $450 million). The mid-point of the guidance is lower than the Zacks Consensus Estimate of $460.7 million. Non-GAAP earnings are projected in the range of $1.25-$1.35 per share. GAAP earnings per share are anticipated to be 14 cents lesser than the non-GAAP figure. The Zacks Consensus Estimate is pegged at $1.33.

For the current year, Check Point anticipates generating revenues between $1.9 billion and $2.0 billion (mid-point $1.95 billion). The mid-point of the guided range is lower than the Zacks Consensus Estimate of $1.98 billion. Non-GAAP earnings are projected in the band of $5.50-$5.90 per share (mid-point $5.70). GAAP earnings per share are projected to be 62 cents lesser than the non-GAAP figure. The Zacks Consensus Estimate is pegged at $5.74.

Stock Performance

Shares of Check Point remained highly volatile during yesterday's trade. Following the earnings announcement, the stock opened its trade at a price 2.3% lower than the closing price on Jan 30. However, by the end of the day, it recovered much of this loss and eventually closed trade below 1%.

Notably, the stock has underperformed the industry to which it belongs to over the past year. The industry has recorded growth of 12.4% during the period, while Check Point has gained a meager 5.6%.

Our Take

Check Point's ongoing issues related with the changes it made in its U.S. sales force makes us skeptical about the company's near-term performance. It looks like the recently-joined people are taking more-than-expected time for reaching their full potential. The same is reflected in the company's outlook too. Although the issue is temporary, it is wise to stay away from investing in this stock right now until we get some clear visibility on its sales force execution in the United States.

The stock carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader technology sector are Mellanox Technologies, Ltd. MLNX , Advanced Micro Devices, Inc. AMD and SMART Global Holdings, Inc. SGH . While Mellanox Technologies sports a Zacks Rank of 1 (Strong Buy), Advanced Micro Devices and SMART Global Holdings carry a Zacks Rank of 2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Mellanox Technologies, Advanced Micro Devices and SMART Global Holdings have expected long-term EPS growth rates of 15.5%, 7.8% and 15%, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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