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Check Point Software Technologies Ltd. (CHKP - Analyst Report) exited third quarter 2012 with adjusted earnings of 73 cents per share, matching the Zacks Consensus Estimate. Adjusted earnings per share exclude one-time items, but include stock-based compensation expense. The miss was due to a feeble macroeconomic environment, which prompted customers to tighten their budgets. Currency fluctuation in Europe also had a negative impact on the overall results. Shares closed at $41.15, down 13.22% from the previous day’s price. Shares also fell 0.66% in the after-hours. The share price depreciation reflected investor concern as the guidance failed to meet their expectations and Euro concerns.

Revenue

Check Point reported revenue of $332.4 million in the third quarter, up 7.8% from $308.3 million in the year-ago period. The quarter’s result was within the company’s guidance range of $316.0–$345.0 million and came slightly below the Zacks Consensus Estimate of $333.0 million. The year-over-year revenue growth was supported by 12.6% increase in Software Updates, Maintenance and Services revenues, partially offset by roughly flat Product and Licenses revenue.

Geographic contributions also remained stable with Americas contributing 45% of revenues, Europe 37%, and Asia-Pacific and Japan, Middle East and Africa region contributing the remaining 18%. North America continued to deliver good results with double-digit growth in product and service revenues. Nevertheless, the quarter was a bit affected by Euro headwinds.

Overall, revenue improvement was driven by the growing demand for Check Point’s enterprise appliance units and software blades. Management also reported decent performance in terms of the number of large deals.

Operating Results

Reported gross profit increased 10.7% year over year to $294.1 million. Gross margin increased 230 basis points from the year-ago quarter to 88.5%. Cost control measures led to improved margin expansion.

Operating income came in at $182.6 million, up 15.5% year over year. Operating margin increased 370 basis points year over year to 55.0%. Total operating expenses increased 3.7% year over year as Check Point continued to invest in business and hirings for research and development, sales and marketing and technological support. However, this was partially offset by the strengthening of the dollar.

Reported net income was $152.4 million or 73 cents per share, up from $134.1 million or 63 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP net income was $153.2 million or 73 cents a share compared with $143.3 million or 67 cents in the year-earlier quarter.

Balance Sheet & Cash Flow

Check Point exited the quarter with cash, cash equivalents and marketable securities of approximately $1.45 million, down from $1.37 million in the prior quarter. Trade receivables were $240.9 million. Cash flow from operations was $180.4 million, up from $157.5 million in the previous quarter. Capital expenditure decreased to $1.18 million from $1.28 million in the prior quarter.

During the quarter, Check Point repurchased 3.2 million shares for a total consideration of $156.1 million.

Fourth Quarter Outlook

Management sees revenue in a range of $355.0 million to $387.0 million, and earnings (excluding one-time items) in the range of 83 cents to 91 cents per share. The Zacks Consensus Estimates for the fourth quarter and fiscal 2012 are pegged at 85 cents and $3.01 per share, respectively. GAAP earnings per share would be 7 cents less than the non-GAAP figure.

Concurrent with fourth quarter outlook, Check Point cautioned that the quarter could be somewhat challenging due to the persisting economic backdrop. 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. This justifies such wide revenue and earnings per share projections.

Our Take

Check Point delivered a modest third quarter with the bottom line matching the Zacks Consensus Estimate and top line coming slightly below. But the results were decent in terms of year-over-year comps. Fourth quarter revenue guidance could not meet the Street’s expectations and we believe that revenue will continue to 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.

However, on the brighter side, Check Point continues to benefit from strength at the high end of the market and increased demand for its blade solutions. 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) and continuous share buybacks.

However, limited margin expansion potential (over dependence on indirect sales model), uncertain economic environment competitive pressures, currency headwinds 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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