Check Point Software Technologies Ltd. — FY2012 Form 20-F
Period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone Q4 filing; it also reports unaudited quarterly results. Financial statements are in U.S. dollars and prepared under U.S. GAAP.
Business context
Check Point develops and sells network, endpoint and data security products, appliances, software updates, maintenance and subscriptions. Sales are primarily through channel partners. The company reported one operating segment. In 2012 it introduced or expanded offerings including ThreatCloud, the GAiA platform, an Amazon Web Services virtual appliance and DDoS Protector appliances.
Financial performance and liquidity
- Revenue: $1.343 billion, up 8% from $1.247 billion in 2011. Products and licenses were $505.3 million, up marginally; software updates, maintenance and subscriptions were $837.4 million, up 13% and 62% of total revenue.
- Profit: Operating income was $746.5 million, up 16%; operating margin rose to 56% from 51%. Net income was $620.0 million, up 14%, with a 46% net margin versus 44%. Diluted EPS was $2.96 versus $2.54. The effective tax rate rose to 21% from 20%.
- Q4 2012: Revenue was $368.6 million versus $356.8 million in Q4 2011; operating income was $210.5 million versus $192.6 million; net income was $174.0 million versus $159.8 million. Diluted EPS was $0.85 versus $0.75.
- Cash flow: Cash provided by operations was $849.5 million, versus $743.0 million in 2011. Capital expenditures were $8.2 million; operating cash flow less capex was approximately $841 million.
- Liquidity and capitalization: Cash, cash equivalents and investments totaled $3.295 billion, up from $2.879 billion. Working capital was $1.054 billion; total assets were $4.552 billion and shareholders’ equity was $3.346 billion. Current liabilities were $871.2 million. The balance sheet presents no conventional borrowing balance; reported liabilities include deferred revenue, payroll accruals and income-tax accruals.
- Capital returns: The company repurchased $466.2 million of shares in 2012, approximately 9.5 million shares. It reported 199.0 million ordinary shares outstanding at year-end.
Changes versus prior period
- Annual revenue growth slowed to 8% from 14% in 2011. Product and license revenue was nearly flat, while recurring updates, maintenance and subscription revenue continued to grow strongly.
- Operating margin improved by five percentage points. Management attributed the increase to revenue growth outpacing operating expense growth, lower amortization of acquired intangibles and favorable foreign-currency effects on expenses.
- Technology amortization fell to $4.0 million from $31.2 million as previously acquired technology became fully amortized. No 2012 other-than-temporary investment impairment was recorded.
- Cash from operations increased, while investing cash outflow declined to $374.3 million from $574.1 million. No acquisitions were made in 2012.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said U.S. interest rates were low and not expected to rise significantly during 2013, implying low near-term investment portfolio yields. The company said available liquidity should meet capital expenditure needs for the next 12 months.
- Management cautions that results may fluctuate and that year-end purchasing seasonality is expected to continue. Weak economic conditions could delay customer spending, lengthen sales cycles and increase price competition.
- Revenue concentration is material: the ten largest channel partners generated 55% of 2012 sales; two partners each represented about 16%. The company also depends on a limited number of product families and suppliers.
- Israeli tax dispute: The Israeli Tax Authority demanded approximately NIS 2.819 billion (about $755 million) for tax years 2002–2007; appeals were pending. A further assessment for 2008 sought NIS 254 million (about $68 million), against which the company expected to file objections. The recorded uncertain-tax-position liability was $259.5 million at year-end; settlement timing and ultimate amount were uncertain.
- Other risks include intense competition, evolving cyber threats and potential product defects, intellectual-property litigation, currency and interest-rate exposure, and political, economic and military conditions in Israel. The filing describes two patent suits and another patent-related declaratory action; management did not expect these matters to be material, while noting litigation outcomes are uncertain.
- Share repurchases, low interest rates and market conditions can affect cash, investment income and portfolio values. A 10% weakening of the U.S. dollar against the currencies of operating expenses was estimated to increase 2012 expenses by $24 million, before considering hedges.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective as of December 31, 2012.
Important facts for investors to verify
- Current status, potential exposure and timing of the Israeli tax disputes, and how the $259.5 million recorded tax liability compares with the tax authority’s asserted amounts.
- Whether subscription and maintenance growth can offset the near-flat product and license revenue trend.
- Durability of the 56% operating margin, particularly as acquired-intangible amortization has fallen and currency effects may reverse.
- Investment portfolio composition, credit quality, rate sensitivity and liquidity, including the remaining auction-rate security.
- Share-repurchase pace and its effect on cash balances, share count and per-share results; also verify the company’s stated dividend intentions.
- Exposure to major distributors, key suppliers, security incidents, intellectual-property claims and geopolitical disruption in Israel.