Check Point Software Technologies Ltd. — FY2010 Form 20-F
Reporting period: Fiscal year ended December 31, 2010. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless otherwise noted.
Business context
Check Point develops and sells network, gateway, endpoint and data-security software and appliances, plus related updates, maintenance and services. Sales are primarily through channel partners. The company highlighted its modular Software Blade platform and introduced additional security offerings in 2010. It acquired Liquid Machines in June 2010; the Nokia security-appliance acquisition contributed a full year of results in 2010.
Financial performance and liquidity
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Revenue | $1,097.9 million | $924.4 million | +19% |
| Operating income | $535.0 million | $415.0 million | +29% |
| Net income | $452.8 million | $357.5 million | +27% |
| Diluted EPS | $2.13 | $1.68 | +27% |
| Operating margin | 48.7% | 44.9% | +3.8 percentage points |
| Net margin | 41.2% | 38.7% | +2.5 percentage points |
| Operating cash flow | $688.6 million | $557.1 million | +24% |
FY2010 products and licenses revenue was $444.4 million, up 23%; software updates, maintenance and services revenue was $653.5 million, up 16%. Cost of revenue was $164.0 million, implying a gross margin of approximately 85.1%, versus approximately 85.6% in 2009. Management attributed operating-margin expansion to revenue growth, expense discipline and Nokia integration synergies. Net financial income declined to $30.2 million from $32.1 million, mainly reflecting lower interest rates and currency movements. The company recorded $0.8 million of net marketable-securities impairment in 2010.
Q4 2010: Revenue was $318.5 million versus $272.1 million in Q4 2009 (+17%); operating income was $162.0 million versus $130.6 million; net income was $137.4 million versus $109.5 million; diluted EPS was $0.64 versus $0.51. Q4 2010 operating and net margins were approximately 50.9% and 43.1%, respectively.
At year-end, cash, cash equivalents and marketable securities totaled $2.415 billion; working capital was $753.7 million, total assets $3.605 billion and shareholders’ equity $2.719 billion. Operating cash flow was $688.6 million; investing activities used $459.5 million and financing activities used $91.4 million, principally reflecting investment purchases and share repurchases. No borrowings are presented as a separate balance-sheet item in the filing’s summary statements. The company said available liquidity should meet capital requirements for the next 12 months.
Material changes and capital allocation
- Revenue growth accelerated to 19% in 2010 from 14% in 2009; Asia Pacific and Japan rose to 16% of revenue from 13%, while EMEA fell to 40% from 44%.
- Sales concentration increased: the ten largest distributors generated approximately 59% of 2010 sales; the two largest contributed approximately 35%.
- Research and development expense rose to $105.7 million from $89.7 million, while selling and marketing expense increased to $235.3 million from $220.9 million. Both declined as a percentage of revenue.
- The company repurchased 5.65 million shares for $200 million in 2010. A new program announced in February 2011 authorized up to $300 million annually. No cash dividend was planned; management said tax-exempt earnings would be reinvested.
Outlook, risks and unusual items
The filing provides no quantified revenue or earnings guidance. Management cited continued demand drivers including evolving cyber threats, data-privacy regulation, remote connectivity, cloud computing and growing IT-security complexity. It also cautioned that results may fluctuate, year-end purchasing seasonality is expected to continue, and weak economic conditions could delay customer spending. Low U.S. interest rates were expected to weigh on near-term investment yields.
- Tax dispute: Israeli tax-authority orders for 2002–2005 seek NIS 1.412 billion in additional taxes; appeals were pending. Preliminary assessments for 2006–2007 sought a further NIS 410 million; the company had objected. The balance sheet included a $169.4 million income-tax accrual for uncertain tax positions; the filing does not establish that this accrual covers the full disputed amounts.
- Litigation: Check Point was defending four patent-related suits brought by non-practicing entities, along with other proceedings. SofaWare litigation was settled in Q1 2011, and Check Point reported holding 92% of SofaWare after acquiring additional shares.
- Investment risk: Four auction-rate securities with failed auctions remained valued using Level 3 estimates; their reported fair value was $8.0 million. The portfolio was also exposed to interest-rate and credit-market movements.
- Foreign exchange: A 10% weakening of the U.S. dollar against currencies in which expenses were denominated would, absent offsets, increase annual operating expenses by an estimated $19.6 million. Hedging may not fully offset currency movements.
- Other risks: Competition and pricing pressure, dependence on key distributors and product families, rapid technology change, product defects, acquisition integration, supplier constraints, and political or military instability in Israel could adversely affect results.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2010. Goodwill impairment testing in Q4 2010 found no impairment.
Most important facts for investors to verify
- Progress and potential financial exposure in the Israeli tax disputes, including how the $169.4 million tax accrual relates to assessments stated in shekels.
- Sustainability of revenue growth, margin improvement and service-renewal growth, and the extent to which appliance sales and Nokia integration drove results.
- Distributor concentration, particularly the two largest distributors’ approximately 35% share of sales and receivables.
- Liquidity composition, valuation and duration of investments, including the auction-rate securities and sensitivity of financial income to interest rates.
- Share-repurchase execution and remaining authorization, alongside dilution from employee equity awards.
- Outcome of the four patent suits and other contingencies, and the effect of SofaWare’s transition to full ownership.