Check Point (CHKP) Stock Up on Q4 Earnings & Sales Beat

Shares of Check Point Software Technologies Ltd. CHKP were up 7.5% yesterday following the company’s announcement of impressive fourth-quarter 2016 results, wherein its revenues and earnings came ahead of its own expectations as well as the Zacks Consensus Estimate.

Check Point’s adjusted earnings per share (including stock-based compensation but excluding amortization of intangible assets) of $1.33 beat the Zacks Consensus Estimate of $1.15. Adjusted earnings also climbed approximately 21% on a year-over-year basis, driven mainly by higher revenues and a lower share count, which were partially offset by higher operating expenses.

On a non-GAAP (excluding stock-based compensation and amortization of intangible assets) basis, the cybersecurity company posted earnings of $1.46, which were not only 21.7% higher than the year-ago quarter but way ahead of its own guidance range of $1.20 to $1.28. Moreover, it should be noted that this was the best quarterly non-GAAP EPS growth rate the company has witnessed since the third quarter of 2010.

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

Revenues

Fourth-quarter revenues came in at $486.7 million, up 6.3% year over year, and beat the Zacks Consensus Estimate of $477 million. The figure was also close to the upper end of the company’s guidance range of $460 million to $490 million (mid-point $475 million).

Top-line growth was aided by sales growth of 9.7% in Products & Software Blades and 1.6% in Software Updates and Maintenance. The company also reported a 25.5% surge in subscription revenues at Software Blades.

Check Point witnessed higher demand for data center and high-end appliances. Another factor contributing to overall growth was the increased number of large deal signings. The number of new customers who signed deals worth $1 million or more was 99, a 15% increase from the year-ago quarter’s tally of 86. Moreover, customers who signed deals worth $50,000 and more contributed 76% to the total order value, up from 72% registered in the fourth quarter of 2015.

Geographically, the Americas contributed 47% to revenues and Europe accounted for 38%, while Asia-Pacific, Japan, and the Middle East and Africa added the remaining 15%.

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 $428.5 million. However, as a percentage of revenues, gross profit contracted 20 basis points (bps) to 88%.

Adjusted operating expenses (including stock-based compensation but excluding amortization of intangible assets) rose 13.8% year over year to $183.8 million as the company continued to make investments. The increase may also be attributed to higher research and development, and selling and marketing expenses as well as to acquisitions made over the past year. As a percentage of revenues, operating expenses increased 250 basis points (bps).

Adjusted operating income (including stock-based compensation but excluding amortization of intangible assets) came in at $244.7 million, up nearly 1% year over year. However, margins contracted 260 bps as a percentage of revenues mainly due to higher operating expenses.

Adjusted net income (including stock-based compensation but excluding amortization of intangible assets and other one-time items calculated on a proportionate tax basis) was $225.3 million or $1.33 per share, up from $197.7 million or $1.10 reported last year.

Balance Sheet & Cash Flow

Check Point exited the year with cash and cash equivalents, marketable securities and short-term investments of approximately $3.669 billion. During 2016, the company generated operating cash flow of $923 million. Moreover, Check Point repurchased $988 million worth of common stock in 2016.

Outlook

Taking into account the back-to-back quarters of favorable business trends, Check Point provided a strong revenue and earnings guidance for the first quarter and full year 2017.

The company expects to generate revenues between $420 million and $440 million (mid-point $430 million). The mid-point of the guidance is slightly higher than the Zacks Consensus Estimate of $428.7 million. Non-GAAP earnings are projected in a range of $1.15 to $1.20 per share. GAAP earnings per share are anticipated to be 17 cents or less. The Zacks Consensus Estimate is pegged at $1.03 per share.

For 2017, Check Point anticipates to generate revenues between $1.85 billion and $1.90 billion (mid-point $1.875 billion). The mid-point of the guided range was is higher than the Zacks Consensus Estimate of $1.84 billion. Non-GAAP earnings are projected in a range of $5.05 to $5.25 per share. GAAP earnings per share are anticipated to be 70 cents or less. The Zacks Consensus Estimate is pegged at $4.39 per share.

Our Take

Check Point ended 2016 on a strong note, reporting better-than-expected results for the fourth quarter. The robust year-over-year upside in the top and bottom lines was encouraging. Buoyed by a strong quarterly performance, the company provided a solid outlook for the first quarter and full year 2017.

Favorable fourth quarter results and a strong outlook sent shares of this Israel-based cybersecurity firm as high as $97.92, touching nearly its 16-year high. However, the intraday gain slightly cooled off later in the day and the stock settled at $96.34, up 7.5% from the previous day’s closing price.

Notably, Check Point has been clocking solid returns over the last three months and has gained approximately 25%, outperforming the Zacks categorized Computer-Software industry’s gain of just 6.2%.

Moving ahead, rapid adoption of Check Point’s data center appliances and continuous enhancements in data center product lines are expected to provide ample top-line support.

Furthermore, we believe that Check Point Software will continue to benefit from strong demand for cybersecurity solutions. Note that the financial well-being, brand image and reputation of enterprises and governments are always exposed to the risk of cyber threats. Consequently, cybersecurity has become a mission-critical, high-profile requirement.

Per IDC’s report, corporate spending on threat intelligence security services will reach $1.4 billion in 2018 from an estimated $905.5 million in 2014. Another research firm, MarketsandMarkets, projects that the global threat intelligence security market will reach approximately $5.86 billion by 2020 from $3.0 billion in 2015, representing compound annual growth rate (CAGR) of 14.3%.

We believe Check Point Software is capitalizing on this opportunity and this may well be reflected in the company’s forthcoming quarterly results. Additionally, the company’s efforts on continuous share buybacks bode well for investors.

Check Point currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some other stocks worth considering in the Computer-Software space are Exa Corp. EXA, Microsoft Corp. MSFT and Xplore Technologies XPLR.

Exa sports a Zacks Rank #1 and has witnessed upward estimate revisions in the last 60 days.

Microsoft and Xplore carry a Zacks Rank #2 and have an expected long-term EPS growth rate of 8.3% and 10%, respectively.

The Best Place to Start Your Stock Search

Today, you are invited to download the full list of 220 Zacks Rank #1 ""Strong Buy"" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 ""Strong Sells"" and other private research. See these stocks free >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Check Point Software Technologies Ltd. (CHKP): Free Stock Analysis Report
 
Microsoft Corp. (MSFT): Free Stock Analysis Report
 
Exa Corp. (EXA): Free Stock Analysis Report
 
Xplore Technologies Corp. (XPLR): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research