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Check Point Stumbles on Revenue Concerns

The stock drops 12% after saying sales could fall in the first quarter.

Updated from 7:41 a.m. EST

Shares of

Check Point Software

(CHKP) - Get Report

tumbled Tuesday after the Internet security provider posted slightly lower fourth-quarter earnings and warned that revenue could fall in the first quarter of this year.

In the fourth quarter of 2001, Check Point said earnings were 30 cents a share, above Wall Street's expectations for a profit of 29 cents but below earnings of 31 cents a share a year ago.

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Gil Shwed, chief executive officer at Check Point, said in a conference call that conflicting trends make 2002 tough to predict. "There are still challenges in the global economy," he said. But, at the same time, "security is high on companies' purchasing priority lists." For the current quarter, Shwed said, revenue and earnings will be flat to slightly lower, although Check Point still expects to meet the consensus earnings estimate of 29 cents a share.

Revenue Quality

Check Point expects better growth rates in the second quarter and the second half of 2002, Shwed said. Nevertheless, the stock was trading down $5.25, or 11.8%, to $39.15 in afternoon action as investors focused on the first-quarter outlook and a potentially troublesome deferred revenue line item.

Check Point's deferred revenue -- sales that can be booked in upcoming quarters -- decreased for the third straight quarter, a concern among analysts. It fell $4.6 million, while total revenue rose $4.5 million.

"This suggests that revenue gains in the fourth quarter came from deferred revenue," said Ken Kiarash, an analyst at Buckingham Research. "If it stayed flat, they would have missed their targets." Following the conference call, Kiarash lowered his rating on Check Point to neutral from accumulate.

Kiarash said Check Point's insistence on maintaining high operating and net margins could come at a cost to revenue growth in 2002. One thing the company could do is be more aggressive on pricing, he said.

Running Ahead?

Check Point's stock has risen hardily amid an overall rally in technology stocks over the past few months. Since the market's postattack low on Sept. 21, it's up $15.03, or 62%.

But a few analysts think the rally has gone too far. "Some stocks have run ahead of themselves," said Tomas Isakowitz, an analyst at Commerce Capital Markets. "There was a hidden sense Check Point was going to do much better in the future and that guidance would be better than what was provided."