Check Point Software Technologies Ltd. — FY2011 Form 20-F
Period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone Q4 filing; quarterly figures below are unaudited. Financial statements are in U.S. dollars and prepared under U.S. GAAP.
Business context
Check Point develops and sells network, gateway, endpoint and data security products, appliances, software updates, maintenance and subscriptions. It sells worldwide primarily through channel partners. In 2011 it acquired Dynasec, a governance, risk management and compliance provider, and completed the buyout of SofaWare’s minority shares.
Key financial metrics
| Metric | FY2010 | FY2011 | Change |
|---|---|---|---|
| Revenue | $1,097.9m | $1,247.0m | +14% |
| Operating income | $535.0m | $642.2m | +20% |
| Net income | $452.8m | $544.0m | +20% |
| Diluted EPS | $2.13 | $2.54 | +19% |
| Operating margin | 49% | 51% | +2 percentage points |
| Net margin | 41% | 44% | +3 percentage points |
FY2011 revenue comprised $503.5m from products and licenses (+13%) and $743.5m from software updates, maintenance and subscriptions (+14%). The company attributed appliance growth to product sales and recurring-revenue growth primarily to renewals, new maintenance contracts and security services. Gross margin was approximately 86%, calculated from reported revenue and cost of revenues.
| Q4 unaudited metric | Q4 2010 | Q4 2011 | Year-over-year change |
|---|---|---|---|
| Revenue | $318.5m | $356.8m | +12% |
| Operating income | $162.0m | $192.6m | +19% |
| Net income | $137.4m | $159.8m | +16% |
| Diluted EPS | $0.64 | $0.75 | +17% |
| Operating margin | 51% | 54% | +3 percentage points |
| Net margin | 43% | 45% | +2 percentage points |
Q4 2011 revenue included $158.2m from products and licenses and $198.5m from updates, maintenance and subscriptions. Q4 gross margin was approximately 86%, calculated from reported figures.
- Cash flow: FY2011 operating cash flow was $743.0m, versus $688.6m in 2010. Investing cash outflow was $574.1m; financing cash outflow was $227.1m. Q4 cash flow is not separately provided in the filing text.
- Liquidity: Cash, cash equivalents, short-term deposits and marketable securities totaled $2,879.4m at year-end, including $493.5m cash and equivalents. Working capital was $1,007.5m; current assets were $1,770.0m and current liabilities $762.5m.
- Debt and obligations: No funded-debt balance is identified in the presented balance-sheet data. Reported liabilities were $1,055.0m, including deferred revenue and a $219.5m income-tax accrual. Contractual obligations totaled $235.3m, largely uncertain tax positions; settlement timing and amount could not be reasonably estimated.
- Capital returns: The company repurchased $300m of shares in 2011, about 5.6m shares, and announced a further authorization of up to $300m annually in February 2012.
Material changes and management commentary
- Revenue growth and expense leverage lifted annual operating margin to 51% from 49%; management attributed the improvement primarily to revenue growing faster than operating expenses.
- Cash and investment balances rose from $2,414.9m at year-end 2010 to $2,879.4m at year-end 2011. Share repurchases increased to $300m from $200m in 2010.
- The effective tax rate remained 20%. Management said U.S. interest rates were low and not expected to rise significantly in 2012, implying low near-term portfolio yields. No quantitative revenue or earnings guidance is provided in the supplied filing text.
- Management expects seasonal fluctuations in quarterly revenue, including year-end purchasing patterns, and cautions that results can vary. It stated that liquidity sources should be sufficient for capital expenditure needs over the next 12 months.
- Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2011; the auditor issued unqualified opinions on the financial statements and internal controls.
Risks, contingencies and unusual items
- Tax disputes: The Israeli Tax Authority demanded NIS 1,561m for tax years 2002–2006; appeals were pending. A further preliminary assessment sought NIS 197m for 2007 and was under re-examination. These disputed demands are distinct from the company’s $219.5m uncertain-tax-position accrual.
- Channel concentration: The ten largest distributors generated about 58% of 2011 sales; the two largest accounted for about 35% combined, with one at approximately 18% and the other 17%.
- Market and execution risks: Competition, economic weakness and customer spending restraint, product security failures or defects, rapid technology shifts, and dependence on a limited number of product families could affect sales and margins.
- Foreign exchange and investments: About 36% of 2011 expenses were in foreign currencies. The filing estimates a 10% weakening of the U.S. dollar against expense currencies would increase annual operating expenses by $22m, before considering hedges. Two auction-rate securities valued at $6.1m remained illiquid following failed auctions.
- Legal and tax-benefit exposure: The company faced two patent-related suits and other ordinary-course claims; management did not expect losses beyond accrued amounts to be probable or reasonably possible. Tax benefits are conditional and scheduled to expire in phases through 2019.
- Unusual securities item: FY2011 included a $2.0m gain on sales of previously impaired marketable securities. The filing states that reported 2011 net income would have been $12.9m higher if all changes in investment fair values had been recognized in income.
Important facts for investors to verify
- Progress, potential settlement range and cash consequences of the Israeli tax assessments, compared with the recorded tax accrual.
- Whether recurring maintenance and subscription growth continues, and whether distributor concentration or channel changes affect sales.
- Cash conversion and receivables: trade receivables increased to $357.4m from $283.2m, while operating cash flow rose to $743.0m.
- Portfolio credit quality, liquidity and interest-rate sensitivity, including the remaining auction-rate securities and the effect of low yields on financial income.
- Execution and integration of Dynasec and other acquired businesses, and the effect of repurchases on share count and per-share results.