Check Point (CHKP) Beats Q3 Earnings And Sales; Stock Up

Shares of Check Point Software Technologies Ltd. (NASDAQ:CHKP) spiked yesterday following the company’s announcement of splendid third-quarter 2016 results, wherein its revenues and earnings topped 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 $1.01 came in ahead of the Zacks Consensus Estimate of 97 cents. Adjusted earnings also climbed 7.2% 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 non-GAAP (excluding stock-based compensation and amortization of intangible assets) basis, the cybersecurity company posted earnings of $1.13 which were not only 8.7% higher than the year-ago quarter but way ahead of its own guidance range of $1.03 to $1.10.

Revenues

Third-quarter revenues came in at $427.6 million, up nearly 6% year over year, and beat the Zacks Consensus Estimate of $423 million. The figure was also close to the upper end of the company’s guidance range of $405−$435 million (mid-point $420 million).

Top-line growth was aided by sales growth of 9.6% in Products & Software Blades and 1.6% in Software Updates and Maintenance. The company also reported a 23.8% 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. While the number of new customers who signed deals worth $1 million or more was 65, that of customers who signed deals worth $50,000 and more contributed 73% to the total order value.

Geographically, the Americas contributed 49% to revenues and Europe accounted for 35%, while Asia-Pacific, Japan, and the Middle East and Africa added the remaining 16%.

Operating Results

On a year-over-year basis, adjusted gross profit (including stock-based compensation but excluding amortization of intangible assets) increased 5.9% to $377.4 million, while gross margin remained flat at 88.4%.

Adjusted operating expenses (including stock-based compensation but excluding amortization of intangible assets) rose 12.9% year over year to $167.6 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 240 basis points (bps).

Adjusted operating income (including stock-based compensation but excluding amortization of intangible assets) came in at $210.3 million, up nearly 1% year over year. However, margins contracted 240 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 $173.4 million or $1.01 per share, up from $171.1 million or 94 cents reported last year.

Balance Sheet & Cash Flow

Check Point exited the quarter with cash and cash equivalents, marketable securities and short-term investments of approximately $3.708 billion. During the first three quarters of 2016, the company generated operating cash flow of $740.1 million. Moreover, during the first nine months of 2016, Check Point repurchased $739.9 million worth of common stock.

Outlook

For the fourth quarter, the company provided a strong revenue and earnings guidance. It expects to generate revenues between $460 million and $490 million (mid-point $475 million). The guidance range at mid-point is slightly higher than the Zacks Consensus Estimate of $474.6 million.

Non-GAAP earnings are projected in the range of $1.20 to $1.28 per share. GAAP earnings per share are anticipated to be approximately 15 cents. The Zacks Consensus Estimate is pegged at $1.12 per share.

Our Take

Check Point Software reported better-than-expected third-quarter 2016 results, with both its top and bottom lines marking a year-over-year improvement. The year-over-year upside in the top and bottom lines was further encouraging. Buoyed by a strong quarterly performance, the company provided a robust outlook for the fourth quarter.

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. Additionally, the company’s efforts on continuous share buybacks bode well for investors.

However, competition from Cisco Systems Inc. (NASDAQ:CSCO) , Juniper Networks Inc. (NYSE:JNPR) and Fortinet Inc. (NASDAQ:FTNT) , along with an uncertain economic environment and currency headwinds, remain major concerns.

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.

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