Check Point Beats Reduced Earnings Estimates

The Israeli firewall company announces revenue just short of its lowered target.

Author:: Ronna Abramson
Publish date:: Apr 23, 2002 7:36 PM EDT

Updated from 6:31 p.m. EDT

Check Point Software Technologies

on Tuesday beat reduced Wall Street earnings estimates by a penny, on revenue just shy of expectations.

The firewall firm, based in Ramat-Gan, Israel, raised second-quarter and full-year guidance above Wall Street expectations but said large orders exceeding $10,000 have declined.

Check Point said it earned $63.54 million, or 25 cents a share, on $104.58 million in revenue in the first quarter. That compares with net income of $83.68 million, or 32 cents a share, on revenue of $145.01 million in the year-ago quarter.

Analysts had been expecting the company to earn 24 cents a share on $106 million in revenue, according to Thomson Financial/First Call.

Sequentially, revenue declined 14.6%. The company said a substantial portion of its revenue decline came from a reduction in orders larger than $10,000. Those larger deals accounted for 52% of the company's business in the first quarter, compared to 57% in the fourth quarter.

On April 4, Check Point warned it would earn 24 cents to 25 cents a share on revenue ranging from $104 million to $105 million in the first quarter. Analysts had been expecting the company to earn 29 cents a share on revenue of $122 million. The company attributed the shortfall to the continued depressed information technology-spending environment.

On a postclose conference call, Check Point said it expects second-quarter revenue to increase 5% to 10% sequentially, which would bring it to between $109.81 million and $115.04 million. Wall Street's consensus of $110 million falls in that range.

The company said second-quarter earnings should come in at 26 cents a share, exceeding the consensus estimate by a penny.

Check Point said Tuesday it expects earnings to come in at between 27 cents and 28 cents in the third quarter and 30 cents in the fourth quarter. That brings full-year earnings to between $1.08 and $1.09 a share, exceeding the $1.03 consensus estimate gathered by Thomson Financial/First Call.

Check Point, which had not given full-year guidance previously, said it expects revenue to grow 5% to 10% in the third quarter and 10% in the fourth quarter, resulting in a full-year revenue range of between $457 million and $485 million. Analysts were expecting full-year revenue to total $452 million.

Gene Munster, an analyst with US Bancorp Piper Jaffray, said consensus estimates are lower than the company's numbers because analysts have been uncomfortable with past company projections of revenue growth ranging from 20% to 30% from 2002 to 2003. Munster has a hold rating on Check Point and his firm hasn't done any banking with the company.

Given that the company preannounced earnings, the only real surprise on the earnings call was when CFO Eyal Desheh said the results of affiliate SofaWare are now consolidated in Check Point's numbers, Munster said.

Shares of Check Point have faced pressure from investor concerns about the company creating SofaWare to offload its R&D costs and maintain its high margins. Check Point has said it owns 20% of SofaWare and holds warrants to own two-thirds of the company. On the call Desheh said the company owns 66% of SofaWare. He said SofaWare contributed to only about 1% of Check Point's total sales and with expenses of $400,000 to $500,000 a quarter, contributed on a "very, very minimal" level to Check Point's profit.

In an interview, CEO Gil Shwed said he believes Check Point has yet to exercise its warrants, but added that doesn't matter because SofaWare is such a small company, with fewer than 20 employees. Still, he added, SofaWare is very important to Check Point because it is helping the company penetrate a new market. Check Point has an exclusive license to sell SofaWare's products, which target the consumer and small business market.

Munster said the SofaWare details may put an edge on the Street's response to Check Point's results, given investors' high sensitivity to accounting issues. "It's a classic example of an immaterial event that becomes material because of the way the company positioned it to the Street," Munster said.

Shares of Check Point fell 43 cents, or 2.3%, to close at $18.20. After Check Point announced its results, shares rose to $19.50 in after-hours trading.