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Morningstar | Check Point Closes Out Fiscal 2018 With Record Results; Increasing FVE to $127

Narrow-moat Check Point Software Technologies reported record-setting 2018 fourth-quarter and full-year results. The results were in line with our projections as revenue was up 3% to $1.9 billion, driven by a 13% annual increase in security subscriptions, while GAAP-based EPS of $5.15 matched our expectation. Deferred revenue increased by 13% to $1.3 billion as Check Point shifts its selling strategy toward more subscription-based products from perpetuity sales. We are encouraged that management projects elevated sales and marketing expenditures as we believe the firm's strong product strategy and portfolio may have been losing clients due to competitor marketing budgets. Check Point's consolidated approach to cybersecurity, recent acquisitions for cloud-based security, and a rejuvenated sales and marketing approach cause us to increase our fair value estimate to $127 per share from $120. With shares trading around $110, we believe Check Point is an attractive name in the cybersecurity universe.

Outside of the strong security subscriptions growth, product-based revenue was down 6% for the year while software updates and maintenance increased by 4% annually. We expected and like this product mix shift change as Check Point moves from selling individual products, sold in perpetuity, to subscription-based sales. In our view, Check Point's products will remain sticky with customers through offering its full suite of products in a consolidated approach, which can further penetrate customer networks as security is required for adjacent markets like mobile and cloud.

For 2019, Check Point provided guidance of $2.0 billion in revenue and a GAAP EPS range of $5.15 to $5.55. We model revenue exceeding guidance and EPS coming in at the high end of the range. In our view, Check Point’s integration of recent acquisitions plus increased sales and marketing focused on C-suite level decision-makers and channel partners should spur 5% revenue growth.

We model sales and marketing to increase toward 27% of revenue in the short term, alongside increased development costs. Beyond increased efforts in organic sales and marketing, Check Point will also integrate its acquisitions of Dome9, a multi-cloud protection and security monitoring firm, and ForceNock, a firm providing a machine learning security engine for web and API protection. In our view, these firms are nice additions to Check Point's consolidated platform as more customers are requiring cloud-based security solutions with implementation assistance and analytics. The company recently announced its Maestro security solution, an orchestrator that expands the capacity of existing security gateways. With cloud-based security in mind, we believe customers will be receptive to the scale up and down approach of the Maestro platform since businesses are accustomed to hyperscale cloud providers providing on-demand consumption, and security demands can fluctuate based on workloads.

Check Point repurchased 10.3 million shares in 2018, and we expect buybacks to continue at a smaller rate so the company can focus on sales and marketing efforts. We model operating margins to decline toward 46% in 2019, but we believe these increased expenditures, albeit still lower than competitors, are prudent expenses to increase the company's long-term position in cybersecurity.