Morningstar | Check Point Reports Durable 3Q, Acquires Dome9; Maintaining Our $116 FVE
Check Point Software Technologies reported a solid fiscal third quarter of 2018 that came within our expectations. Thus, we are maintaining our $116 per share fair value estimate and narrow moat rating. We stated in the second quarter that earnings represented a return to form after a number of guidance misses and adjustments. In the third quarter, Check Point reported another solid quarter and announced the acquisition of Dome9. While we thought Check Point looked attractive earlier in the year when it traded at a discount to our fair value estimate, shares are fairly valued today after appreciating to 3-star territory.Check Point produced revenue of $470 million, 3.6% year-over-year growth. GAAP operating margins clocked in at 48%, as sales and marketing costs increased 17% year over year. However, we were pleased to see the sales investments, particularly as we have long stated that Palo Alto and Fortinet may be outspending Check Point to gain share.
Historically, Check Point has remained extremely disciplined with its war chest, with industry-leading GAAP operating margins and an increasing cash and marketable securities balance of $4 billion. We had previously been advocating for Check Point to use this cash balance for a tack-on acquisition, in tandem with increased share buybacks (it increased its buyback last quarter) and to continue to reinvest in the business. We have seen rivals, such as Palo Alto (Palo Alto bought Evident.io, Secdo, and Redlock) and Fortinet (Bradford Networks and ZoneFox) open their wallets to purchase firms in 2018, while Check Point has largely sat on the sidelines. While we believe Check Point remains a network security leader, its revenue growth rates have sat below Palo Alto's and Fortinet's, both of whom have been growing enterprise firewall market share. This quarter, Check Point bought Dome9 a cloud security vendor, a move in the right direction, in our view.
Dome9, according to Gartner, allows customers to secure their virtual machines in infrastructure-as-a-system cloud by centrally controlling, auditing, and visualizing security policies. The firm provides agentless protection for Amazon Web Services, Microsoft Azure, and Google Cloud. Dome9 is thus attractive for customers seeking protection when using more than one IaaS vendor.
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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