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Check Point Software Technologies (CHKP - Analyst Report) is scheduled to announce its second quarter 2012 results on July 18, before market opens and we see some estimate revisions at this point.

First Quarter Overview

Check Point delivered a decent first quarter, with earnings per share (EPS) of 68 cents beating the Zacks Consensus Estimates by a penny. The quarter’s results increased 19.3% from a year ago. Revenue saw an 11.3% year-over-year increase, aided by strong performances by Product & Licenses as well as Software Updates, Maintenance and Services segments.

The overall improvement was mainly aided by the growing demand for the company’s security products and strong geographic contributions. The growth in demand was largely due to a general customer pattern of upgrading security levels.

Management Guidance

For the second quarter, management sees revenue in the range of $324.0 million to $336.0 million. The guidance reflects some concern about the macroeconomic environment and Europe. For fiscal 2012, Check Point reiterated its revenue expectations between $1.345 billion and $1.395 billion. The company also continues to expect services and subscription revenue to grow faster than product revenue, based on the product mix shift toward annuity blades and increasing adoption of premium support contracts.

The company expects EPS of 74–77 cents for the second quarter and $3.10–$3.20 for the fiscal 2012. GAAP EPS would be 7 cents less than the non-GAAP figure due to prevalence of some one-time items.

(Detailed earnings results can be viewed in the blog titled: Product Demand Aids Check Point 1Q)

Agreement of Analysts

As cyber-attacks and security risks reach new levels of sophistication, customer expectations for security infrastructure are also increasing. Given Check Point’s ability to innovate and deliver new and improved security products and technologies, it can be assumed that popularity of the company’s products will keep growing. Hence, a continuous legacy firewall refresh cycle and a broadening product portfolio could fetch a steady revenue stream.

Analysts are positive on product growth as CHKP has launched a new appliance series as well as new operating system (OS). They think that 50.0% of Nokia’s customer will upgrade to its new OS system as it is packed with new features.

Analysts are positive on management’s transformation from a largely single-product, software-focused company to a broader provider of appliance-based network security solutions. They believe that the company’s transition to its blade architecture provides a continuous growth avenue for the company, in terms of both up-sell opportunities and new applications.

On the other hand, some analysts believe that revenue can be under pressure due to weakening macroeconomic variables, increased pricing pressure, slowdown in growth, billing and spending by the company as well as fresh  competition in the new target markets of Check Point, challenges in penetrating new high-end customers, low number of suppliers and distribution partners.

Out of the 9 and 11 estimates for the second quarter and fiscal 2012, one and two estimates, respectively, were revised downwards in the past 30 days. However, one estimate was raised for the second quarter in the past 30 days. Despite the positive momentum, we think that the downward revision could be due to the strained macroeconomic condition and ongoing debt problems in Europe, which could put a lid over IT spending budgets.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the second quarter remained unchanged at 72 cents for the past 30 days. However, the Zacks Consensus Estimate for fiscal 2012 decreased 2 cents to $3.02 over the past 30 days. The Zacks Consensus Estimate for fiscal 2013 also dropped 2 cents to $3.34 in the past 30 days. The reason for the downward movement could be reflective of analyst concerns.

Recommendation

We think that investor sentiment will be in Check Point’s favor as shareholders remain encouraged by its market share gains from the tech giant Cisco Systems Inc. (CSCO - Analyst Report) and Juniper Networks Inc. (JNPR - Analyst Report). Check Point continues to benefit from strength at the high end of the market, and increased demand for its blade solutions. Moreover, the company’s continuous product launches are encouraging. Considering all these, we believe that the second quarter and fiscal guidance are quite conservative.

However, limited margin expansion potential (over dependence on indirect sales model), an uncertain economic environment, competitive pressures and Check Point’s significant European exposure are concerns.

Currently, Check Point has a Zacks #3 Rank, implying a short-term Sell recommendation.

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