Check Point Software Technologies Ltd. — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. Although the request identifies 2018 Q4, this filing is an annual report and does not provide a clear standalone fourth-quarter financial summary. Figures below are consolidated U.S. GAAP amounts; dollar values are rounded unless stated otherwise.
Business context
Check Point develops and sells cybersecurity products and services, including network and endpoint security, cloud and mobile security, subscriptions, and software updates and maintenance. Sales are primarily through channel partners. The company emphasized its unified Infinity security architecture and prevention of advanced cyber threats. It acquired cloud-security company Dome9 in October 2018; ForceNock was acquired in January 2019, after year-end.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $1.916 billion | $1.855 billion | +3% |
| Operating income | $914 million | $924 million | -1% |
| Operating margin | 48% | 50% | Down 2 percentage points |
| Net income | $821 million | $803 million | +2% |
| Diluted EPS | $5.15 | $4.82 | +7% |
| Net cash from operations | $1.143 billion | $1.110 billion | +3% |
- Gross margin was approximately 89.5%, compared with 88.5% in 2017. Net margin was approximately 42.9%, versus 43.3%.
- Free cash flow, calculated as operating cash flow less capital expenditures, was approximately $1.126 billion; capital expenditures were $17 million.
- Cash, cash equivalents, short-term deposits and marketable securities totaled $4.039 billion at year-end, up from $3.848 billion. Working capital was $990 million; current assets were $2.322 billion and current liabilities $1.332 billion.
- The filing reports no debt balance in the provided financial statements; total liabilities were $2.056 billion, including deferred revenue and tax accruals.
- Security subscriptions grew 13% to $542 million and maintenance/update revenue rose 4% to $849 million. Products and licenses declined 6% to $526 million, primarily as customers shifted to subscription offerings.
Material changes and capital allocation
- Revenue growth was led by subscriptions and maintenance, while product and license sales declined. Recurring subscription and maintenance revenue represented 72% of total revenue, compared with 70% in 2017.
- Operating expenses increased 8% to $1.003 billion, mainly reflecting higher selling and marketing costs, which rose to $501 million as the company expanded its sales and marketing workforce. R&D expense increased to $212 million.
- Net financial income increased to $65 million from $47 million, primarily due to higher interest rates and yields on investments. The effective tax rate fell to 16% from 17%.
- Operating cash flow benefited in part from a $145 million increase in deferred revenue. Investing activities used $330 million, including $155 million of net cash paid for Dome9. Financing activities used $755 million.
- The company repurchased 10.34 million shares for approximately $1.104 billion during 2018. Year-end shares outstanding declined to 155.4 million from 159.0 million a year earlier. The board-authorized repurchase program was increased by $2 billion in July 2018, with purchases capped at $325 million per quarter.
- Dome9’s purchase consideration was allocated at approximately $161 million, including $139 million of goodwill and $27 million of core technology. The filing states no impairment charges for 2018.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or margin guidance. Management described a continued 2019 focus on fifth-generation cybersecurity, unified protection across network, endpoint, cloud and mobile, and subscription-based offerings.
- Management said cash and investment balances plus operating cash flow were expected to cover capital expenditure needs for the next 12 months. The company did not intend to pay dividends in the near term.
- Customer and channel concentration is material: the two largest distributors accounted for approximately 36% of 2018 revenue, and the ten largest distributors for 53%. The business also depends on a limited number of product families and hardware suppliers.
- Foreign-exchange exposure affected results: non-hedge-accounting forward contracts generated net losses of $33.3 million in 2018. The company estimated that a 10% weakening of the U.S. dollar against relevant expense currencies would raise annual operating expenses by $46 million, before considering mitigation.
- Unrecognized tax benefits were $375 million at year-end; the company said $56.7 million could be adjusted within 12 months. Tax outcomes remain uncertain, including the effects of U.S. tax-law changes and eligibility for Israeli tax benefits.
- Marketable securities had unrealized losses; management stated that recognizing all accumulated fair-value changes in income would have reduced 2018 net income by $24 million. The company reported no other-than-temporary investment impairment.
- Other principal risks include intense competition and pricing pressure, evolving cyber threats and product defects, acquisition integration, privacy and data-protection regulation, geopolitical conditions in Israel, and interest-rate and investment-market volatility. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
- ASC 606 was adopted in 2018 using the modified retrospective method. Management reported no material effect on the pattern of revenue recognition; the adoption increased opening retained earnings by $19 million, principally reflecting capitalization of qualifying sales commissions.
Investor verification priorities
- Confirm the annual figures against the audited statements and obtain separate Q4 results if a quarterly comparison is required.
- Assess the sustainability of subscription and maintenance growth alongside declining product and license revenue.
- Review operating-margin pressure from sales and marketing investment and the contribution of financial income to earnings.
- Examine distributor concentration, receivable exposure, and the renewal and deferred-revenue profile.
- Track repurchase-program pace, share-count effects, and remaining authorization against cash needs and acquisition plans.
- Monitor tax contingencies and Israeli tax-benefit eligibility, foreign-exchange hedging results, and marketable-securities valuation exposure.
- Evaluate Dome9 integration and the expected strategic and financial contribution of the post-year-end ForceNock acquisition.