Should You Avoid Check Point After Its Latest Report?

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Check Point Software Technologies (NASDAQ: CHKP) needed to reassure investors that it isn't losing ground in the cybersecurity market, but its latest set of results indicates otherwise. The cybersecurity specialist failed to match Wall Street's revenue expectations during the fourth quarter, reporting its slowest top-line growth in the past five years.

The problem at Check Point

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Check Point is facing execution challenges in the U.S., where its revenue has been declining for the past two quarters despite efforts to reorganize its sales force. The company believes that the reorganization will take time to deliver, raising a red flag for investors, as rivals such as Palo Alto Networks and Cisco are moving at a greater pace to tap the fast-growing cybersecurity market.

Palo Alto's revenue grew 27% year over year last quarter. Meanwhile, Cisco's cybersecurity business is its fastest-growing segment, reporting 14% year-over-year growth in the last-reported quarter.

On the other hand, Check Point's guidance turned out to be a big disappointment, representing a stark slowdown in revenue growth. The company's revenue guidance range of $440 million to $460 million and the adjusted earnings per share range of $1.25 to $1.30 are well below the consensus estimates. Wall Street was originally expecting $1.32 per share in earnings on revenue of $462 million.

The full-year forecast was also disappointing, indicating that Check Point's top line will grow just a shade over 5% in fiscal 2018, down from the 6.3% growth seen in 2017. This is alarming when you consider that overall cybersecurity spending is expected to rise at least 8% this year, according to Gartner.

So Check Point's quarterly results and the accompanying guidance don't inspire any confidence. But there were some positives that could keep investors interested in the company.

A look at the good news

Check Point reported solid bottom-line growth once again. The company's net income jumped close to 8% last quarter, outpacing the top-line growth as it managed to keep costs under control. In fact, the company's spending on sales and marketing dropped almost 9% year over year thanks to the growing contribution of subscription revenue to its top line.

Check Point's subscription-based revenue increased 18% year over year to $130 million, while software updates and maintenance revenue jumped 5.6%. With the company's subscription revenue growing at a decent pace, this implies that the updates and maintenance business will gain momentum as Check Point sells more subscriptions.

The increase in subscription sales also led to an improvement in Check Point's deferred revenue base. Deferred revenue is the amount collected by a company in advance for services to be provided later, and it is recognized on the income statement when the actual delivery takes place. So the year-over-year increase in deferred revenue indicates that Check Point has been signing up more subscription customers, which will contribute to its long-term growth.

Check Point provided proof about the upswing in its business when it revealed that the number of deals of $1 million or more increased 11% in the latest quarter. This increase in large deals should help Check Point improve its margin profile in the future -- it costs less to retain existing subscription customers than it does to acquire new ones.

Investors might miss all these positive takeaways from Check Point Software's latest quarterly report in light of its slowing top-line growth.

What should you do?

Check Point's recent quarterly report is giving out mixed signals. Its revenue growth is slowing because of execution challenges in a crucial market such as the Americas, which supplies 45% of its total revenue, but disciplined cost management is having a positive impact on margins and earnings.

Additionally, Check Point's deal activity is gaining pace, as shown by the number of large transactions it struck last quarter. So, conservative investors looking to get into a cybersecurity stock on the cheap can definitely consider Check Point, as it trades at a forward earnings multiple of just 18 as compared to the extremely high industry average of 148.

But investors with a higher risk profile looking for a more aggressive cybersecurity play will be better off looking elsewhere as Check Point has a few challenging quarters ahead of it. The company is doing well right now by keeping costs low, but it needs to put some life into its revenue -- you can't cut costs forever to boost earnings.

In the highly competitive cybersecurity market, Check Point needs to loosen its purse strings and become more aggressive with its sales and marketing strategy to keep pace with rivals. Check Point is quite capable of doing that given its strong cash position of $1.5 billion and no debt, though investors will need to be patient before its strategies start bearing fruit.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends Cisco Systems and Palo Alto Networks. The Motley Fool has a disclosure policy.