Morningstar | Check Point Relying on Subscription Growth; Increasing Sales and Marketing; Maintaining FVE of $127
Narrow-moat Check Point reported 4% sales growth in the first quarter, but a 3.5% decline in operating income compared with last year. While top-line growth was below our 6% expectation, we anticipated the 44% operating margin due to increased sales and marketing efforts. We welcome the increased expenditures as Check Point looks to establish its brand outside of the firewall arena. Our full-year revenue projections have been slightly decreased to 4% from 5% for 2019, but we expect higher financial income and favorable tax rates to keep the EPS in line with previous estimations. We believe the market reaction to Check Point's quarter and guidance is overblown, and we are maintaining our fair value estimate of $127 per share. With Check Point in 3-star territory, we recommend investors to hold their position.Compared with the previous year, sales from product and licenses dropped by 4.5%, subscriptions grew 13%, and software updates and maintenance increased by 4%. Subscriptions growth mainly came from more nascent solutions for cloud, zero-day threat prevention, and mobile security. Check Point's Infinity platform subscriptions are eating into product revenue, and this trend should continue as Check Point looks to selling a more holistic security solution as a subscription. Sales and marketing increased to 28.6% of sales (26.5% last year) due to investments in headcount and channel incentives. Although operating margin slipped year over year from 47% to 44%, we applaud these investments to increase brand awareness, channel presence, and acumen on selling a platform architecture instead of only firewalls.
Second-quarter guidance of $474 million-$500 million was in line with our previous expectations and EPS guidance was slightly below our previous projection. For the second quarter, we expect Check Point to come in at the high end of its revenue guidance and slightly exceed its GAAP EPS target of $1.15-$1.23. Management reiterated its 2019 full year guidance.
The first quarter included the full effects of Check Point acquiring Dome9, a security monitoring and cloud infrastructure security solution, and ForceNock, a provider of web application and API protection. Additionally, Check Point launched its Maestro architecture, aimed at providing on-demand scalability for security gateways, in the quarter. In our view, these types of technologies are necessary to keep Check Point in front of the changing cybersecurity landscape and we expect continued efforts in the cloud and endpoint security domains to supplement its enterprise firewall base.
Check Point Software Technologies develops, markets and supports a range of products and services for IT security. Co. offers its customers a portfolio of network security, endpoint security, data security and management solutions. Co.'s solutions operate under a unified security architecture that enables end-to-end security with a single line of unified security gateways, and allow a single agent for all endpoint security that can be managed from a single unified management console. This unified management allows for ease of deployment and centralized control and is supported by, and reinforced with, real-time security updates.
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