IT security company Check Point Software (NASDAQ: CHKP ) delivered a good set of results recently, but its guidance disappointed and the stock took a hit. The company has long been known for its high profit margins and excellent cash flow, but the security marketplace is very competitive. Is Check Point starting to feel the heat from competitors like Fortinet (NASDAQ: FTNT ) and Palo Alto Networks (NYSE: PANW ) ? Or, is its guidance too conservative?
Check Point reports a good quarter
A brief look at the results indicates that Check Point's first-quarter earnings came in slightly better than the mid-point of its guidance:
- Revenue of $342.2 million versus guidance of $330 million-$350 million
- Non-GAAP EPS of $0.84 versus guidance of $0.79-$0.86
- Full-year guidance unchanged, with expected revenue of $1.45 billion-$1.50 billion and non-GAAP EPS of $3.50-$3.70
- Second quarter guidance that is wider than the usual range, with expected revenue of $340 million-$375 million and non-GAAP EPS of $0.82-$0.90
The sticking point is clearly the second-quarter guidance, which predicts that revenue will come in between a 0.1% decline and a 9.6% increase compared to last year. That is a pretty big range, and it suggests a significant amount of uncertainty in the quarter.
Indeed, in discussing the outlook on the conference call, Check Point's management alluded to "some softness in international markets, particularly Asia." Europe was also cited as having a slow start, but this is possibly due to the last two quarters being strong for Check Point within the region. The Americas, which contributed 48% of revenue in the first quarter, continue to be strong, with North American product sales up an impressive 20%.
Four reasons why Check Point is doing well
First, it usually makes sense to listen to what a management says about current trading conditions, but bear in mind that Check Point's guidance does tend to be a little conservative. While a slight pause in European growth is expected, the fact that North American growth remains strong is an indication that any "softness" is not due to a lack of competitiveness with rivals Fortinet and Palo Alto Networks. Check Point's products can't be losing their competitive edge if North America is doing well.
Second, the weakness in Asia is somewhat surprising. Check Point certainly wouldn't be the only IT company to report some weaker conditions in emerging markets, but its peers actually reported good growth in Asia. Fortinet generated 11% growth its Asia-Pacific revenue, and it claimed to have won a "seven-figure firewall deal" with a "large diversified telecommunications company," beating out Palo Alto, Check Point, and others in the process.
As for Palo Alto, its Asia-Pacific revenue grew 42%, although its second quarter ended in January. Fools will be well advised to keep an eye out for Palo Alto's next results at the end of May for a better gauge on conditions in Asia.
Third, Check Point's underlying performance was pretty good in the first quarter. Total revenue grew 6%, while software growth remained strong. Note that the product and licenses figure includes software blade -- as distinct from software revenue -- subscriptions, sales that used to be included in Check Point's product sales line.
As readers can see, Check Point underwent a superficially difficult period of product sales growth in 2012-2013, but the underlying picture was that its software blade sales were growing strongly. In fact, software blade sales grew nearly 26% in the quarter and now make up more than 35% of its product sales.
Fourth, its cash-flow generation continues to grow strongly. Management claimed that adjusted operating cash flow increased by 12.7% to $282 million in the first quarter -- noticeably more than the 6% rise in non-GAAP EPS. If you think that cash flow growth is more important than EPS, particularly with companies that are increasing their software-based sales, then Check Point is growing at a faster rate than its headline earnings suggest.
The bottom line
Check Point's guidance has possibly created a decent buying opportunity in a stock that is undoubtedly the value play in the IT security sector. On the other hand, the revenue range was widened in order to reflect some uncertain trading conditions. Cautious investors will want to monitor the IT sector for signs of general weakness in Asia and focus on what Fortinet and Palo Alto Networks say in their next reports.
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