Check Point Software Technologies Ltd. — FY2017 Form 20-F
Business context and reporting period. Annual report for the fiscal year ended December 31, 2017, filed April 27, 2018. Check Point develops and sells cybersecurity products and services globally, primarily through channel partners. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars. This is a full-year filing, not a standalone Q4 report.
Financial results and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $1,854.7 million | $1,741.3 million | +7% |
| Operating income | $923.9 million | $852.3 million | +8% |
| Operating margin | 50% | 49% | +1 percentage point |
| Net income | $802.9 million | $724.8 million | +11% |
| Diluted EPS | $4.82 | $4.18 | +15% |
| Net cash from operations | $1,109.6 million | $949.3 million | +17% |
- Revenue mix: Security subscriptions rose 23% to $480.4 million; software updates and maintenance rose 5% to $815.3 million. Products and licenses declined 2% to $559.0 million. Deferred revenue increased to $1,186.6 million from $1,065.6 million.
- Margins and costs: Cost of revenues was $213.0 million, implying an approximately 88.5% gross margin, versus approximately 88.4% in 2016. Operating expenses rose 5% to $930.7 million; R&D increased to $192.4 million and selling and marketing to $433.4 million.
- Taxes: Effective tax rate was 17%, down from 19%; income tax expense was $168.0 million. The filing attributes the lower rate principally to reduced tax rates and Israeli tax benefits.
- Cash, liquidity and obligations: Cash, cash equivalents, short-term deposits and marketable securities totaled $3,848.0 million at year-end, up from $3,669 million. Working capital was $757.5 million; current assets were $1,964.4 million and current liabilities $1,206.9 million. No borrowings are reported in the balance-sheet presentation. The company said available liquidity and operating cash flow were sufficient for expected capital expenditure needs over the next 12 months.
- Cash uses: Investing activities used $178.8 million; capital expenditures were $28.8 million. Financing activities used $873.2 million, principally reflecting $995.3 million of share repurchases, partly offset by proceeds from employee share issuances. The company repurchased approximately 9.5 million shares during 2017.
- Balance sheet: Total assets were $5,462.9 million and shareholders’ equity $3,600.1 million. Long-term marketable securities were $2,437.3 million.
Material changes and management commentary
- Revenue growth was driven by security subscriptions and maintenance renewals; management said product and license revenue fell partly because of sales-force organizational changes, attrition and hiring.
- The company emphasized its Check Point Infinity unified-security strategy and continued investment in threat prevention across network, endpoint, cloud and mobile. Management identified fifth-generation cyber threats and consolidated prevention architecture as strategic priorities for 2018; the filing provides no numerical 2018 revenue or earnings guidance.
- Management reported that 2017 operating margin recovered to 50% from 49% in 2016, while remaining below 2015’s 52%.
- The U.S. Tax Cuts and Jobs Act was enacted in December 2017. Check Point recorded a provisional $41.1 million tax expense from remeasuring U.S. deferred tax balances and said its accounting remained subject to further guidance and analysis.
- The company’s cash flow benefited from higher net income and increases in deferred revenue and accrued liabilities. Deferred revenue growth supports future revenue recognition but is not itself a measure of new sales.
Risks, contingencies and unusual items
- Channel concentration is material: the two largest distributors generated 36% of 2017 revenue; the ten largest distributors generated 54%. The two largest also represented $189.2 million of year-end receivables.
- Competitive pressure, pricing and discounting, changing cloud/SaaS delivery models, and dependence on a limited range of product families could affect sales and margins. Product and license revenue declined in 2017 even as total revenue grew.
- Cybersecurity product failures, customer breaches, defects or attacks on Check Point’s own systems could damage reputation, trigger claims or disrupt operations. The company reported no material operational impact from intrusions or attempted unauthorized access to date.
- Foreign-exchange exposure includes Israeli shekel and euro costs. Management estimated that a 10% weakening of the U.S. dollar against currencies in which 2017 operating expenses were denominated would have increased annual operating expenses by $40 million. Outstanding non-hedge-accounting forward contracts had a $338.1 million notional amount.
- Unrecognized tax benefits were $342.9 million at year-end; the filing says $58.2 million could be adjusted within 12 months due to statute expirations. Tax assessments, incentive eligibility and interpretation of the U.S. Tax Act remain uncertainties.
- The company disclosed ordinary-course litigation and tax disputes, but stated that losses above accrued liabilities were not considered probable. It reported no off-balance-sheet arrangements. Operating lease commitments totaled $23.1 million; uncertain income tax positions were not assigned a reasonably estimable payment schedule.
- Other material risks include rapidly evolving threats and technology, supplier and contract-manufacturer dependence, privacy and data-protection rules including GDPR effective May 2018, political and military conditions in Israel, Brexit-related uncertainty, and interest-rate and investment-portfolio exposure. The company’s available-for-sale investments had $21.9 million of unrealized losses at year-end; management reported no other-than-temporary impairment in 2017.
Most important facts for investors to verify
- Whether subscription growth can continue and offset the decline in products and licenses, and how subscription growth affects service costs and margins.
- Distributor concentration, credit exposure and the durability of maintenance renewals and deferred revenue.
- The final tax effects of the U.S. Tax Act, the company’s Israeli preferred technological enterprise eligibility, and the resolution of uncertain tax positions.
- Cash and investment quality, interest-rate sensitivity, foreign-exchange hedge exposures, and the scale and pace of future share repurchases.
- Whether 2018 investment in Infinity, cloud, mobile and threat prevention translates into sustained growth; the filing contains no quantitative forward guidance.