Monday, January 31, 2011

Check Point Still Growing Strong

A super set of results from Internet Security specialist Check Point saw the stock price initially sell off, but I believe any weakness will provide a good entry point. There has been a lot of 'selling on the news' recently in the sector and Check Point doesn't seem immune.

Firstly, turning to the results, it was a substantial beat.
  • Revs of $318.5m vs. $306m estimate
  • Non-GAAP EPS of 73c vs. 69c estimates
  • Q1 Revs of $268-279m vs. $276m estimates
  • Q1 EPS of 59-62c vs. 62c estimates
They subastantially beat estimates but the Q1 guidance was a little lighter than analyst forecasts. However, it should be noted that this company traditonal guides under and then beats forecasts. I think the evidence suggests that Check Point will do the same in the coming quarter.

 Internet Security Sector Doing Well

In general the sector has reported positive results in the last quarter of 2010. For example, Fortinet gave very strong results, although Fortinet is more focused on the small and medium size market in Unified Threat Management. Check Point is more focused on larger enterprise solutions.

Indeed, the market seems to be on a similar growth path to what it was in 2009. This is notable because usually the first year of recovery is the strongest for corporate investment. I think this confirms that this sector is capable of super GDP growth.

In order to demonstrate this, I wanted to look at sequential revenue and deferred revenue growth.

Check Point Sequential Growth

Revenues and deferred revenues break down like this

(m)Q4 08Q1 09Q2 09Q3 09Q4 09Q1 10Q2 10Q3 10Q4 10
Seq growth %-10.4%14.7%4.5%16.5%-9.9%6.5%4.6%16.6%
Cur Defer Rev290.0283.1330.0322.8384.3380.9377.0362.9424.2
Seq growth %-2.4%16.6%-2.2%19.1%-0.9%-1.0%-3.7%16.9%
LT Defer Rev40.841.932.137.441.038.937.733.440.4
Seq growth %2.8%-23.4%16.4%9.8%-5.1%-3.0%-11.4%20.8%
Tot Defer Rev330.8325.0362.1360.1425.3419.8414.8396.3464.6
Seq growth %-1.7%11.4%-0.5%18.1%-1.3%-1.2%-4.4%17.2%

 This confirms that sequential revenues in the fourth quarter were comparable to previous years. In addition deferred revenues look similar. This is actually quite positive considering Check Point's revenues are shifting slowly towards selling a higher percentage of application solutions. Much of software companies deferred revenues comes from services paid for upfront, sometimes for a few years in advance. All of which augers well for future growth.

Check Point Outlook

Indeed, listening to the conference call the management sounded bullish about prospects. However, Check Point was cautious not to attribute the growth solely to industry acceleration. Management seemed to believe that the company is grabbing market share as well as generating growth.

One aspect that is favouring Check Point, is that its offering is a diversified and multi faceted approach. Check Point sells a variety of software blades of various applications. This means that average selling prices can expand as Check Point, sells more blades into its established base. The model is proving scalable.

However, it is not just about the established base, because the company seems to be generating new clients and this is demonstrable by looking at the deferred revenues. Cash flow generation and margins remain very strong and I would expect some analyst upgrades after these results.

Political uncertainty coupled with the general climate of selling tech after results may conspire to weaken the stock price and I think this could create a good buying situation.

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