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Check Point Software Technologies (CHKP - Analyst Report) is scheduled to announce its third quarter 2012 results on October 17, before market opens but no estimate revisions at this point could be noticed.

Second Quarter Overview

Check Point delivered an impressive second quarter in terms of year-over-year comps, but missed the Zacks Consensus Estimates both in terms of top and bottom lines. Earnings per share (EPS) of 71 cents missed the Zacks Consensus Estimate by a penny. But the quarter’s results increased 18.3% from a year ago. Revenue saw a 9.3% 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. Also, cost reductions helped in margin expansion. However, currency fluctuations had a slight negative impact on the results.

Management Guidance

For the third quarter, management sees revenue in the range of $316.0 million to $345.0 million. The guidance reflects some concern about the macroeconomic environment and Europe. But at the same time, the company assures that it is ready to face the challenges with renewed strength buoyed by new product launches and increase in market share. The company expects EPS of 74–81 cents for the third quarter. 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: Check Point Misses 2Q Estimates.)

Agreement of Analysts

Recently, Check Point received recognition from IT research firm Gartner, which positions it as the leading vendor for mobile data protection solutions. Another research firm IDC also finds Check Point to be the top supplier of Firewall and UTM appliance in the world.

Industry experts are of the opinion that network security spending has been consistent in the technology sector due to surge in demand for big data protection against encryption and leakage.

Analysts are positive on the growth of Check Point’s security software portfolio and believe that it could be a significant revenue driver, leveraging the market opportunity.

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 from Palo Alto Networks Inc. (PANW - Snapshot Report) in the new target markets of Check Point; challenges in penetrating new high-end customers, low number of suppliers and distribution partners.

None of the 12 and 13 estimates for the third quarter and fiscal 2012, respectively were revised in the past 30 days. The unanimity could be due to Euro and macro concerns, which are expected to get neutralized by the company’s confidence to fight it back with new product launches and market share gains.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the third quarter and fiscal 2012 remained unchanged at 73 cents and $3.00, respectively, over the past 30 days. Also, the Zacks Consensus Estimate for fiscal 2013 stayed unmoved at $3.33 in the past 30 days. However, all the estimates moved a penny down in the past 90 days reflecting the company’s cautious guidance.

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 third 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 Hold rating.

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