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

Guidance

• 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 08	Q1 09	Q2 09	Q3 09	Q4 09	Q1 10	Q2 10	Q3 10	Q4 10
Revenue	217.6	195.0	223.6	233.6	272.1	245.1	261.1	273.2	318.5
Seq growth %		-10.4%	14.7%	4.5%	16.5%	-9.9%	6.5%	4.6%	16.6%
Cur Defer Rev	290.0	283.1	330.0	322.8	384.3	380.9	377.0	362.9	424.2
Seq growth %		-2.4%	16.6%	-2.2%	19.1%	-0.9%	-1.0%	-3.7%	16.9%
LT Defer Rev	40.8	41.9	32.1	37.4	41.0	38.9	37.7	33.4	40.4
Seq growth %		2.8%	-23.4%	16.4%	9.8%	-5.1%	-3.0%	-11.4%	20.8%
Tot Defer Rev	330.8	325.0	362.1	360.1	425.3	419.8	414.8	396.3	464.6
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.

If you like this article than why not add a twitter feed from 'EarningsView' by clicking on the 'birdie' link on the left border of this blog.  Alternatively, add us on facebook at 'Earnings View', whereby articles will be automatically linked.

Fortinet Delivers Strong Results

Fortinet delivered a super set of results and demonstrated that the IT security segment has the potential to be one of the fastest growing sectors in 2011.

I first featured Fortinet in a -more in depth- post linked here

I was very pleased with these results and will update this post again after I here the conference call later, so add this blog to your twitter feed by clicking the button on the left of this site if you want to keep updated. I bought some more stock .

Fortinet Earnings

The stock is up sharply as they simply blew away expectations

• Revs of  $93.6 vs. $86.7m estimates
• Non-GAAP EPS of 19c vs. 14c estimates

The reported non-GAAP was actually 22c but this included 3c of tax benefits, so I have excluded that to aid comparisons. These are superb numbers.

 In the previous analysis I argued that Fortinet was experiencing a number of favourable end demand drivers and also had great potential to deliver very strong earnings and cash flow growth due to opportunities of scale. It looks like they are beginning to deliver. I've updated numbers from the previous chart.

All the margins are moving in the right directions. The tax rate is likely to go up but I think it is likely that Fortinet can comfortably hit a 30% free cash flow margin next year. Moreover, in the latest results total year billings went up 33% year on year and sequentially by 17.2%

Evaluation

Incidentally, analysts currently have 16.9% revenue growth forecast for 2011 but this will be subject to revision. Given a free cash flow margin of 30% this would put the stock on a forward FCF/EV of 113/2210=5.1%  This is too cheap for a stock growing EBITDA in the mid teens. I think the stock has a lot further to run. I would consider a $42 target to be conservative.

Fortinet 2008 2009 2010 CheckPoint 2009 Revenue 211,791 252,115 324,696 791,147 Gross Mgn 71.10 72.24 73.58 85.58 SG&AMgn 49.27 45.55 41.37 30.00 R & D Mgn 17.49 16.74 15.33 9.71 Op Mgn 2.33 10.05 17.04 44.89 FCF Mgn 16.47 22.76 30.49 59.82

source: Fortinet, Earnings View

NCC Group a Fast Growing IT Security Stock

NCC Group gave interim results last week and they were warmly received by the market. This is a UK based small cap IT company, but before international stock pickers turn away, I suggest taking a closer look. This stock offers a compelling proposition of offering a highly cash generative business model as well as strong secular growth prospects.

Before discussing the results, I want to outline the nature of the company.


A Secular Growth Stock

NCC core business is software escrow. In other words when a company buys some developmental software, it has to carry the risk that the developer could go bust or disappear. Holding the software code in escrow will help to mitigate this risk, because the company can always retrieve it. The defensive nature of this business was put to the test in 2008-10 and it passed with flying colors. NCC was not able to implement the Co's annual price increases, but with this result NCC confirmed that the price hikes are now back.

The second main division is Assurance, and this focuses on the high growth are of information security. NCC have been acquisitive in this area and has built revenues steadily over the years. NCC offers a range of services and cross sells them across the constituent parts. NGS secure sells security testing services. Site Confidence sells web performance and load testing services. SDLC is a UK based testing services provider.
Finally, US based iSEC Partners sells security testing mainly to the US.

The iSEC acquisition is expands NCC presence in the US, where NCC are seeking to also expand software escrow revenues.


NCC Interim Results

I liked these results. Some bullet points

• Closure of the under performing general IT consulting unit
• Group orders and renewals at £41m vs. £30.9m last year
• UK Escrow annual price increases re-implemented with 5% hike
• Assurance growing strongly due to acquisitions, but underlying profits still rising at 6%
• Margins reducing because Assurance (lower margin than Escrow) is becoming a larger share of sales
• High cash flow generation and the current ratio is falling

I think the closure of the general IT consulting unit has been due for some time. NCC reported that

 

The Group's withdrawal from the general IT Consultancy market resulted in a one off exceptional charge of £950,000, of which £450,000 is non cash related.  Total post tax losses from discontinued operations were £1.1m in the period compared to a profit of £182,000 in 2009

This means that the reported results contain losses of £1.1m from attributable profit which makes 3.1p of diluted EPS. The adjusted diluted cash EPS actually rose 24.6% from 12.2p to 15.2 with the trailing EPS at 32.4p giving a PE ratio of 640/32.4=19.7 times.

The disposal is good news because NCC can now focus on growth.

NCC Set for Growth

I've broken down half year historical numbers for Escrow and Assurance here. NCC year end is in May, all data in millions.

	Nov 2007	May 2008	Nov 2008	May 2009	Nov 2009	May 2010	Nov 2010
UK Escrow	7.8	7.9	7.9	8.7	8.5	9.4	9.2
Eur Escrow	.1	1	1.2	1.2	1.4	1.5	1.5
US Escrow	.5	.7	.8	1.2	1	1.2	1.1
Total Escrow	8.4	9.6	9.9	11.1	10.8	12.2	11.9
Assurance	5.8	7	7.7	18.1	11.3	19.5	21.1

Clearly, the acquisition led growth in Assurance is shifting revenues towards a lower margin division. Furthermore, it is interesting to note that non-UK escrow revenues have gone from 7.1% to 21.8% in the last two years. This is partly due to the inability during the recession to implement price rises and from the international expansion plan. Nevertheless, growth has been excellent and few IT companies can boast anything similar over the last few years.

Turning to segment profitability

  

	Nov 2007	May 2008	Nov 2008	May 2009	Nov 2009	May 2010	Nov 2010
Escrow Profit	4.6	5.6	5.5	6.2	6	7.3	6.7
Margin %	55	58.3	56	55.4	55.4	60.1	56.1
Assur Profit	.8	.9	1	2.6	1.3	2.7	2.4
Margin %	14	13	13	14.1	11.8	13.8	11.5
Total Margin %	38	39.1	36.9	29.8	31.6	32.2	27.6

The reduction in margin can be seen in, however, profits are growing strongly. Moreover, this has always been a highly cash generative business. Trailing free cash flow is 12.1m which puts it on a FCF Yield of 5.6% with strong growth due in the second half. Historically, the second half is stronger and NCC expects the same thing this year. 

Consensus forecasts are for £70.4m in revenues, EPS of 36.6p and pre tax profits of £17.2m with a market cap of £214.5m.  I think this stock is better priced at aroud 710-725p.

If you like this article than why not add a twitter feed from 'EarningsView' by clicking on the 'birdie' link on the left border of this blog.

Alternatively, add us on facebook at 'Earnings View', whereby articles will be automatically linked.