Morningstar | Subscription Growth Leads Check Point's Steady 2Q; Ramping Up Sales Efforts; Maintaining FVE of $127
Check Point's year-over-year revenue growth of 4% met our expectations, as the company ramps up sales efforts amid a changing revenue model that is more subscription-based. Compared with the prior year, subscriptions grew by 12.6%, software updates and maintenance grew by 3.6%, and products decreased by 3.1%. New product appliances targeting midrange and high-end audiences were announced in the quarter, but we still expect subscriptions for capabilities such as zero-day threat protection, cloud, and endpoint security to be the growth engines for this narrow-moat name. Check Point is acting on its intention to grow its sales and marketing presence, leading to a year-over-year non-GAAP operating margin decline of 330 basis points to 49.5%. We find these investments prudent to accelerate growth as Check Point expands its security offerings in a hybrid cloud world, and we are maintaining our fair value estimate of $127 per share. Shares are slightly undervalued after dipping marginally after earnings. Still, we point investors to Palo Alto Networks' larger upside potential in cybersecurity.Guidance for next quarter's sales is $480 million-$500 million, representing 4% annual growth, and non-GAAP EPS of $1.36-$1.44. We expect Check Point to come in at the high side of both ranges, led by momentum for security subscriptions and new product introductions, sales training and incentive efforts starting to gain traction, and share count reduction.
The company hired its first business leader for telco, which we view positively as networks are updated during the 5G buildout cycle. Although most cybersecurity peers are growing at faster rates, Check Point remains the operating profile standard-bearer, with solid free cash flow, and is mostly focusing its resources properly, in our view. With cash and investments of $4.11 billion, we expect Check Point to pursue acquisitions that will bolster its profile in places like cloud, endpoint, and application security.
Management commented that the pricing environment and the market remains competitive, but Check Point has not seen any major themes of discounting and pricing is more stable than previous years. New product additions and the shift towards recurring revenue through subscriptions should limit the amount of appliance discounting required for Check Point's growth trajectory.
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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