Check Point Delivers Impressive Third Quarter

| About: Check Point (CHKP)

Check Point Software Technologies Ltd. (NASDAQ:CHKP) posted strong third quarter 2010 results, with adjusted earnings per share of 59 cents surpassing the Zacks Consensus Estimate of 55 cents. The adjusted earnings per share exclude one-time items, but include stock-based compensation expense. Check Point witnessed strong network security product sales across all regions, particularly in the Americas and Asia/Pacific regions.

Check Point reported revenue of $273.2 million in the third quarter, up 16.9% from $233.6 million in the year-ago period. The quarter’s revenue surpassed the guided range of $255.0–$265.0 million and the Zacks Consensus Estimate of $262.0 million. The improvement could be attributed to a 22.5% year-over-year growth in Check Point’s Product and Licenses revenue.

The improvement in Product revenue was led by strong product adoption including the IP series, Power-1, UTM-1 and Smart-1 solutions. Moreover, Check Point witnessed 13.7% year-over-year growth in its Software Updates, Maintenance and Services revenue.

Check Point delivered strong geographical growth during the quarter. Contributions to total revenue were 44%, 38% and 18% from the Americas, Europe and Asia/Pacific (including Japan, Middle East and Africa), respectively.

Operating Results
GAAP gross margin was 84.6%, slightly down from 84.5% in the year-ago quarter. Excluding one time items (stock based compensation expenses and amortization charges), non-GAAP gross margin remained flat year over year at 87.8%. The growth rate of cost of goods sold was roughly in line with the revenue growth rate.

On a GAAP basis, operating margin was 49.4% in the third quarter compared to 45.1% in the year-ago quarter. Non-GAAP operating margin was 57.4% versus 54.6% in the year-earlier quarter. The improvement in operating results was driven by strong revenue growth, which outpaced the 7.8% increase in operating expenses.

The quarter’s GAAP net income was $114.5 million or 54 cents per share, up from $91.5 million or 44 cents per share in the comparable quarter last year. Excluding the impact of charges related to amortization of intangible assets, stock-based compensation expense and income tax benefit, non-GAAP net income was $132.6 million or 63 cents a share compared to $109.5 million or 52 cents a share in the year-earlier quarter. However, after taking into account the effect of stock-based compensation expense, adjusted net income per share was 59 cents.

Balance Sheet & Cash Flow
Check Point exited the quarter with cash, cash equivalents and marketable securities of approximately $954.2 million, down from $983.3 million in the prior quarter. Cash flow from operations was $144.6 million in the quarter, up from $126.1 million in the year-earlier quarter. Capital expenditure increased to $1.44 million from $1.04 million in the year-earlier quarter. During the quarter, Check Point repurchased 1.44 million shares for a total consideration of $50 million.

For the fourth quarter, Check Point expects revenue to range between $290.0 million and $312.0 million. Earnings per share are expected to be in the range of 56 to 61 cents on a GAAP basis and 65–70 cents on a non-GAAP basis.

For fiscal year 2010, Check Point expects revenue to be in the range of $1.07–$1.09 billion, up from the previously guided range of $1.04–$1.07 billion. Earnings per share are expected to be in the range of $2.02–$2.07 on a GAAP basis (previously $2.00–$2.10) and $2.38–$2.43 on a non-GAAP basis (previously $2.30–$2.40).

Our Take
Check Point delivered an impressive third quarter, beating the Zacks numbers both in respect of revenue and earnings per share. The quarter’s results also surpassed the company’s guidance. We remain encouraged by the upbeat guidance and believe that steady traction of the Software Blade architecture (security solution) could add meaningful incremental revenue going forward.

Additionally, we believe new product ramps will better serve the surging demand for Check Point’s security products. We believe these factors would drive considerable upside to the shares. We therefore have a Zacks Rank of #1 on Check Point shares, implying a short-term Strong Buy rating.