Check Point Software Technologies Ltd. — FY2020 Form 20-F
Period and context: Annual report for the fiscal year ended December 31, 2020, filed April 2, 2021. This is not a standalone Q4 filing. Financial statements are prepared under U.S. GAAP; amounts below are U.S. dollars unless noted.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $2,064.9 million | $1,994.8 million | +3.5% |
| Products and licenses | $513.6 million | $510.8 million | +0.5% |
| Security subscriptions | $671.1 million | $610.3 million | +10.0% |
| Software updates and maintenance | $880.2 million | $873.7 million | +0.7% |
| Operating income | $904.2 million | $881.8 million | +2.5% |
| Net income | $846.6 million | $825.7 million | +2.5% |
| Diluted EPS | $5.96 | $5.43 | +9.8% |
| Cash from operations | $1,161.0 million | $1,104.3 million | +5.1% |
- Operating margin was 44% in both years; net margin was approximately 41% in both years. Cost of revenue was $226.5 million, implying gross margin of approximately 89%.
- Net financial income declined to $66.6 million from $80.6 million, mainly due to lower U.S. interest rates. The effective tax rate fell to 13% from 14%, substantially due to lower uncertain-tax-position provisions and a benefit from statute-of-limitations expirations.
- Cash, cash equivalents, short-term bank deposits and marketable securities totaled $4,000 million at year-end, versus $3,949 million in 2019. Current assets were $2,278.6 million and current liabilities $1,543.8 million. The balance sheet reports no borrowings or financial debt.
- Operating cash flow less capital expenditures was approximately $1,141.7 million; capital expenditures were $19.3 million. Investing activities used $98.2 million, including $23.1 million net cash for acquisitions. Financing activities used $1,086.3 million.
Material changes and capital allocation
- Subscription revenue was the main growth driver, rising 10%; management attributed the increase to greater sales of advanced-threat, cloud, Infinity and mobile subscription offerings. Product and license revenue was nearly flat.
- Revenue growth was accompanied by increased operating expenses: total operating expenses rose to $1,160.7 million from $1,113.0 million. R&D increased to $252.8 million; selling and marketing to $569.9 million; and general and administrative to $111.5 million. These remained 12%, 28% and 5% of revenue, respectively.
- Share repurchases were $1,297.7 million, or approximately 11.4 million shares, compared with $1,278.0 million in 2019. The company reissued shares for employee option and award settlements, receiving $216.8 million. Year-end shares outstanding declined to 137.2 million from 145.5 million.
- Deferred revenue increased to $1,481.9 million from $1,386.7 million. Remaining performance obligations were $1,679.8 million, of which approximately $1,190.6 million was expected to be recognized within 12 months.
Outlook, risks and unusual items
- The filing provides no numerical revenue, earnings or cash-flow guidance. Management said it planned to recalibrate the Infinity portfolio in 2021, emphasizing Harmony (remote users and access), CloudGuard (cloud security) and Quantum (network security), alongside unified security management.
- Management described COVID-19 as creating uncertainty around sales cycles, customer collections, employee productivity, product development and customer and partner operations. It also cited supplier delays and potential component availability effects; the full duration and financial impact were not predictable.
- Key business exposures include intense competition and pricing pressure; dependence on channel partners (the two largest represented 39% of 2020 sales); reliance on a limited number of suppliers for some hardware components; and concentration in a small number of product families.
- Other material risks include cybersecurity incidents or product defects, foreign-exchange and investment-market fluctuations, tax disputes and uncertain tax positions, privacy and export-control regulation, litigation, and political or military instability in Israel.
- Financial income remains exposed to interest rates and credit spreads. The investment portfolio was primarily fixed-income securities; management reported that a 10% weakening of the U.S. dollar against currencies in which operating expenses are denominated would have increased 2020 operating expenses by $52 million, before considering hedging effects.
- Unrecognized tax benefits were $442.8 million at year-end; the company said $71.4 million could be adjusted within 12 months, principally due to statutes of limitations. The company reported a $32.6 million legal accrual and stated that losses in excess of accrued liabilities were not considered probable. No impairment charges were recorded for goodwill, intangible assets or marketable securities in 2020.
- The company stated that its cash and investment resources and operating cash flow were sufficient for capital expenditure needs over the next 12 months. It did not intend to pay dividends in the near term. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Review the audited financial statements and notes, particularly the definition and composition of the $4.0 billion liquidity balance, investment maturities and credit exposure.
- Assess whether subscription growth and the $1.68 billion remaining-performance-obligation balance convert into sustained revenue and cash generation.
- Monitor the impact of share repurchases on per-share results, share count and available capital; confirm future repurchase pace and authorization.
- Track the $442.8 million uncertain-tax-position balance, potential near-term adjustments, and any developments in tax examinations or legal matters.
- Evaluate ongoing COVID-19 and supply-chain effects, distributor concentration, foreign-exchange exposure, and progress in commercializing the 2021 product-portfolio strategy.