Check Point Revenue Dips 1%, Calls a Trough: Rapid Earnings Reaction

Check Point Software (CHKP -3.99%) reported third-quarter revenue of $669.8 million, down 1% from a year ago, and shares fell about 6.3% in pre-market trading. Management believes revenue bottomed this quarter. But a $25 million R&D credit padded operating income, and falling product and maintenance sales still outrun subscription growth. A recovery needs subscriptions to grow faster than those lines shrink.

Key Numbers

• Security subscriptions revenue: $338.6 million, up 11%.
• Products and licenses revenue: $105.5 million, down 19%.
• Software updates, maintenance, and services revenue: $225.7 million, down 7%.
• GAAP operating income: $177.2 million, versus $199.1 million.

What It Means

Product sales set up future maintenance revenue. Customers who buy fewer firewalls and licenses today will buy less maintenance later, so the product decline points to more softness ahead. Subscriptions are about half of revenue now, but they can’t yet cover both declines.

The R&D credit flatters the margin. Without it, operating margin would be about 23%, not the reported 26%. The credit comes from a new Israeli program, so it may keep lowering reported costs.

Per-share profit looks worse than it is. Last year’s quarter held a one-time tax benefit, and excluding it, non-GAAP EPS rose 1%. Buybacks and higher financial income did that work, since operating income fell.

What to Watch Next

Watch whether revenue improves in the fourth quarter, as management expects, and whether products and licenses stop falling. The release gives no revenue or EPS outlook, so next quarter’s report is the first check.

David Kretzmann has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Check Point Software Technologies. The Motley Fool has a disclosure policy.

Source: www.fool.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.