IT security company Check Point Software Technologies' (CHKP 1.37%) second-quarter earnings were solid enough, but the real news from the report this week relates to the stabilization of performance in its U.S. operations. Check Point appears to be making progress on its operational objectives, even if its reported numbers don't look great. To understand what's going on, let's take a closer look at the earnings report.
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Check Point Software second-quarter earnings: The raw numbers
Starting with the headline numbers from the quarter:
- Revenue of $467.7 million compared to the guidance range of $445 million to $475 million.
- Non-GAAP EPS of $1.37 compared to the guidance of $1.25 to $1.35
- There was no change to the full-year guidance for revenue of $1.85 billion to $1.93 billion and EPS of $5.45 to $5.75.
Despite its impressive free cash flow generation Check Point doesn't pay a dividend, but management announced it would double its share buyback plan from $1 billion to $2 billion, which should help support the share price.
Details from the quarter
Clearly, the headline numbers were positive compared to the lower end of expectations, but as ever with Check Point, it's important to read between the lines. The company has transitioned itself from more product-based revenue toward more software subscriptions in recent years, and this has a tendency to move the company's metrics around.
For example, product & licenses revenue has declined for four straight quarters on a year-on-year basis. However, double-digit growth in security subscriptions and single-digit growth in software updates and maintenance mean that overall revenue growth remains in positive territory.
Data source: Check Point Software presentations. Chart by author.
What happened in Check Point's quarter
There are two key points of note in the company's second quarter. First, revenue growth of just 2% is somewhat disappointing, and long-term deferred revenue actually declined sequentially to $302.5 million from $304.4 million in the first-quarter of 2018.
Deferred revenue is a good way to monitor the development of future revenue, as subscription-based revenue is booked over time as compared to product revenue, which tends to be booked upfront. For reference, Check Point usually sees a nice lift in deferred revenue from the first and second quarter
One reason for the superficially weak results was given by CFO Tal Payne on the earnings call: "... we had 58 customers with transactions over $1 million. This quarter, the total value of these transactions increased by over $50 million and included some large multiyear contracts that were not fully invoiced, and hence, are not part of the deferred revenues."
In other words, the company's shift toward larger, more complex and holistic solutions -- so-called fifth generation security threat architecture -- is making its revenue and deferred revenue growth look superficially weak.
U.S. sales execution
Second, the company has had issues with its sales execution in the U.S. In a nutshell, Check Point reorganized its sales organization and strategy in order to adjust to the need to sell its more sophisticated solutions to higher-level executives. Unfortunately, the transition hasn't been easy and the U.S has disappointed for the last few quarters.
However, the second-quarter saw improvement with CEO Gil Shwed noting: "I have reported in the past about execution challenges in our U.S. sales force. In the second quarter, we saw a good level of activity and results. Total business volume in the U.S. last quarter was very good."
One swallow doesn't make a summer, and Shwed acknowledged that Check Point has work to do, but investors can take heart from a good quarter of execution in the U.S.
Looking ahead
Investors will want to see a continued recovery in sales execution in the U.S and increased adoption of its fifth-generation security threat solutions. The success in signing big deals in the quarter is an indication that Check Point is back on track with its medium-term objectives and hopefully this will be shown in the headline numbers in future quarters.
