Back at the beginning of the year, Check Point Software Technologies (CHKP +0.84%) looked like a solid cybersecurity bet for investors. The company had said goodbye to its conservative growth strategy, and had started spending money again in a bid to remain relevant in its highly competitive space.
But following a solid start, Check Point's share price faltered after it turned in a mixed first-quarter earnings report. Though the company's revenue and earnings were on par with analysts' expectations, its second-quarter earnings guidance fell slightly short of what they were looking for.
As a result, Check Point stock has pulled back in the past three months. But this is an opportunity for new investors.
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The pain point
Check Point's Q1 results were actually a bit ahead of expectations on both revenue and earnings. However, the midpoint of the company's Q2 earnings-per-share guidance range was slightly behind the analysts' consensus of $1.38.
That two-cent difference isn't much to worry about, but it wasn't surprising to see investors taking money off the table, because the company admitted that there's something wrong with its sales execution in the Americas. In Q1, it got 45% of its revenue from the Americas, and 44% from Europe. The problem was that revenue contribution from the Americas was down on a year-over-year basis, as that region supplied 47% of the top line a year earlier. Meanwhile, overall revenue rose 4% during Q1.
Management admitted that it needs to improve its performance in the Americas, and it is already taking steps to do so. During the earnings conference call, CEO Gil Shwed said the company was adding sales capacity so that it could go after new customers. Shwed believes that "it's a matter of taking the time to see" the fruits of those efforts.
Investors can cross-check the CEO's comments by taking a look at Check Point's selling and marketing expenses. The outlay on this line item increased nearly 13% year over year during Q1. Check Point spent 28.6% of its total revenue on sales and marketing last quarter, up from 26.4% in the year-ago period.
CHKP SG&A Expense (% of Quarterly Revenues) data by YCharts
The company's higher outlays on this front seem to be reaping results. This is evident from the improvement in Check Point's deferred revenue, which increased 13% annually during Q1 to $1.3 billion. The fact that this metric grew at a faster pace than the actual revenue bodes well for the company's long-term growth.
This is because deferred revenue refers to the money received in advance for services that will be rendered at a later date. The double-digit-percentage improvement in this metric indicates that customers are committing to long-term contracts.
Moreover, Check Point is witnessing an uptick in the number of large transactions. It struck 47 deals with a transaction sizes above $1 million last quarter, up from 44 in the prior-year period. All of this should help Check Point eventually deliver stronger top- and bottom-line growth.
An attractive bet right now
Check Point Software is trading at cheaper price-to-earnings ratios than its cybersecurity peers, and also enjoys a far stronger profit margin.
CHKP PE Ratio (TTM) data by YCharts
This gives it room to ramp up its spending further and get its sales force working harder and smarter. So don't be surprised to see the company stage a comeback with a better-than-expected earnings report and sound guidance when it reports July 24.
