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Check Point (CHKP) Posts In-Line Q2 Earnings, Stock Down

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Once again, Check Point Software Technologies Ltd. (CHKP - Free Report) managed to impress investors with solid quarterly results. For the second quarter of 2016, the company reported in-line earnings and better-than-expected revenues.

Check Point’s adjusted earnings per share (including stock-based compensation but excluding amortization of intangible assets) matched the Zacks Consensus Estimate of 97 cents. Reported earnings also climbed 7.8% on a year-over-year basis, driven mainly by higher revenues and a lower share count, which were partially offset higher operating expenses.

Second-quarter revenues came in at $422.7 million, up nearly 7%, and beat the Zacks Consensus Estimate of $421 million.

Despite the strong top- and bottom-line performance, shares of the leading policy-based enterprise security and traffic management solution provider lost approximately 4% during yesterday’s trading session due to a soft third-quarter outlook.

Quarterly Results in Detail

Top-line growth was aided by sales growth of 9.6% in Products & Software Blades and 4% in Software Updates and Maintenance. The company also reported a 21% 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 63, that of customers who signed deals worth $50,000 and more contributed 72% to the total order value.

Geographically, the Americas contributed 49% to revenues and Europe accounted for 36%, while Asia-Pacific, Japan, and the Middle East and Africa brought in 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 7.1% to $375.2 million, while gross margin improved 20 basis points (bps) to 88.8% from the year-ago tally of 88.6%.

Adjusted operating expenses (including stock-based compensation but excluding amortization of intangible assets) rose 14.8% year over year to $169.8 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 280 bps.

Adjusted operating income (including stock-based compensation but excluding amortization of intangible assets) came in at $205.4 million, up 1.5% 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 $169.0 million or 97 cents per share, up from $165.7 million or 90 cents reported last year.

Balance Sheet & Cash Flow

Check Point exited the quarter with cash, cash equivalents and marketable securities of approximately $1.33 billion, compared with $1.37 billion in the previous quarter.

During the first half of 2016, the company generated operating cash flow of $526.2 million, compared with $477.1 million during the prior-year period.

Moreover, during the first six months of 2016, Check Point repurchased $492.9 million worth of common stock.

Outlook

In spite of decent second-quarter results, Check Point gave a soft outlook for the third quarter. Management cited a shift in the business model to recurring revenues as the main reason behind the weak guidance.

Check Point has revealed that its business model is skewing slightly toward an annual subscription-based model, because of which the company is selling more of bundled products than single products. This has resulted in the deference of some revenues to next year.

Notably, over the past few quarters, Software Blades subscription revenues have been witnessing high double-digit growth as Check Point began offering software blades in bundles, including a series of new appliances. The company has also noted that the transition is progressing faster than anticipated, indicating an impact on third- and fourth-quarter results.

During the second-quarter conference call, Chief Executive Officer Gil Shwed said that “[the shift in business model] will lower revenues by approximately $8 million to $10 million on the third quarter and double than that for the fourth quarter, which also means an effect of approximately $0.03 and $0.06 to Q3 and Q4 earnings per share, respectively.”

As a result, for the third quarter, the company projects revenues in the range of $405 million to $435 million and non-GAAP earnings per share in the $1.03–1.10 band. GAAP earnings per share are anticipated to be approximately 13 cents or lower.

Our Take

Check Point’s second-quarter results were marked by in-line earnings and better-than-expected revenues. The year-over-year improvement in both the top and bottom line was further encouraging.

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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. (CSCO - Free Report) , Juniper Networks Inc. (JNPR - Free Report) and Fortinet Inc. (FTNT - Free Report) , along with an uncertain economic environment and currency headwinds, remain major concerns.

Check Point currently carries a Zacks Rank #4 (Sell).

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