Check Point (CHKP) Q1 Earnings Top, Stock Down On Dismal View

Maintaining its earnings streak, Check Point Software Technologies Ltd. (NASDAQ:CHKP) once again reported better-than-expected bottom-line result for first-quarter 2018. The company’s non-GAAP earnings per share of $1.30 beat the Zacks Consensus Estimate of $1.28 and came in line with the mid-point of management’s guided range of $1.25-$1.35 (mid-point $1.30). Non-GAAP earnings also climbed 8.3% on a year-over-year basis, driven mainly by higher sales, reduced cost of revenues and a lower share count, partially offset by higher operating expenses.

Despite this, shares of Check Point depreciated more than 6% yesterday as first-quarter revenues, as well as top-line outlook for the second quarter fell short of the Zacks Consensus Estimate.

Notably, the stock has underperformed its industry in the year-to-date period. The industry has recorded growth of 20.2% during the period, while Check Point lost 7% of its value.

Revenues

First-quarter revenues came in at $452.3 million, up approximately 4% year over year. The revenue figure marginally came in above the mid-point of the company’s guidance of $440-$460 million (mid-point $450 million). However, revenues missed the Zacks Consensus Estimate of $452 million.

The company’s statement during the first-quarter earnings conference call hints that the U.S. sales force, which has undergone a significant change, is yet to attain its full potential, and this has affected overall sales growth. Notably, the company generates approximately 45% of its total revenues from the Americas.

However, Check Point noted that its Infinity platform continues to register strong adoption among customers.

Geographically, the Americas region generated 47% of the total revenues, Europe accounted for 37% of total revenues, while the Asia Pacific, Japan, and the Middle East and Africa accounted for the remaining 17%.

Segment wise, the company witnessed sales growth of 3% in Product and Security Subscriptions, and 5% in Software Updates and Maintenance. The company also reported 14% jump in subscription revenues at Software Blades.

Talking about deal size, the number of new customers — who signed deals worth $1 million or more —totaled 44. Also, customers, who signed deals worth $50,000 and more, contributed 71% to the total order value, which is equal to the first-quarter 2017 tally.

Operating Results

On a year-over-year basis, non-GAAP gross profit climbed 5.7% to $409.4 million. As a percentage of revenues, gross profit expanded 160 basis points (bps) to 90.5% “mainly as a result of changes in the mix of revenues and products.”

Non-GAAP operating expenses increased 10.5% year over year to $170.4 million. As a percentage of revenues, operating expenses advanced 230 bps to 37.7%.

Non-GAAP operating income came in at $239 million, up nearly 2.5% year over year. However, margins shrunk 70 bps to 52.8% as benefits from higher gross margin were more than offset by elevated operating expenses, as a percentage of revenues.

Non-GAAP net income was $209.9 million or $1.30 per share, up from $201.5 million or $1.20 reported in the year-earlier quarter.

Balance Sheet & Cash Flow

Check Point exited the first quarter with cash balances of approximately $4 billion, up from $3.8 billion recorded at the end of the fourth quarter of 2017. In addition to this, during the reported quarter, the company generated cash worth $355 million from operational activities — marking an 18% year-over-year improvement. The robust growth in operating cash flow is primarily attributable to a tax refund of $45 million related to the prior year. Excluding this, operating cash flow increased 5%. Additionally, Check Point repurchased about 2.4 million shares for a total cost of $249 million in the quarter.

Outlook

Taking into account the ongoing challenges related with the U.S. sales force, the company provided outlook for the second quarter and updated full-year 2018 guidance. Notably, Check Point’s revenues and earnings guidance for both periods remained below Zacks expectations.

For the second quarter, the company expects to generate revenues between $445 million and $475 million (mid-point $460 million). The mid-point of the guidance is lower than the Zacks Consensus Estimate of $478.7 million. Non-GAAP earnings are projected at $1.25-$1.35 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 $1.36.

For the current year, Check Point now anticipates generating revenues between $1.85 billion and $1.93 billion (mid-point $1.89 billion), down from the previous guidance of $1.9-$2.0 billion. The guided range is lower than the Zacks Consensus Estimate of $1.95 billion. Non-GAAP earnings are now projected in the band of $5.45-$5.75 per share (mid-point $5.60), down from the previous range of $5.50-$5.90. GAAP earnings per share are estimated to be 62 cents lesser than the non-GAAP figure. The Zacks Consensus Estimate is pegged at $5.74.

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 wait and watch right now until we get some clear visibility on the company’s sales-force execution in the United States.

The stock currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Mellanox Technologies, Ltd. (NASDAQ:MLNX) , Fortinet, Inc. (NASDAQ:FTNT) and Varonis Systems, Inc. (NASDAQ:VRNS) . While Mellanox Technologies sports a Zacks Rank of 1 (Strong Buy), Fortinet and Varonis Systems carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Mellanox Technologies, Fortinet and Varonis Systems have expected long-term EPS growth rates of 15%, 16.8% and 20%.

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