Check Point Software Technologies Ltd. — FY2016 Form 20-F
Reporting period: Fiscal year ended December 31, 2016; filed April 28, 2017. This is an annual report, not a standalone fourth-quarter filing. Financial statements are consolidated, in U.S. dollars, and prepared under U.S. GAAP. Check Point develops and sells network, gateway, endpoint and data-security products and related subscriptions, updates and maintenance, primarily through channel partners.
Financial performance and position
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $1,741.3 million | $1,629.8 million | +7% |
| Operating income / margin | $852.3 million / 49% | $839.7 million / 52% | Income +1%; margin down 3 percentage points |
| Net income | $724.8 million | $685.9 million | +6% |
| Diluted EPS | $4.18 | $3.74 | +12% |
| Operating cash flow | $946.2 million | $946.7 million | Approximately flat |
| Capital expenditures | $24.1 million | $17.3 million | +$6.7 million |
- Revenue mix: Products and licenses were $573.0 million (+3%); subscriptions $389.9 million (+22%); software updates and maintenance $778.5 million (+3%). Subscription growth was attributed mainly to Blade Packages. Deferred revenue increased to $1,065.6 million from $905.8 million.
- Margins and costs: Cost of revenue was $202.0 million, implying a gross margin of approximately 88.4% (versus approximately 88.4% in 2015). Operating expenses rose 13% to $889.0 million. R&D increased to $178.4 million and selling and marketing to $420.5 million; management cited higher compensation, hiring and travel costs. Net income margin was approximately 41.6%, versus 42.1%.
- Cash flow and capital returns: Cash from operations was $946.2 million; investing activities used $109.8 million and financing activities used $841.3 million. Repurchases totaled $987.9 million, partly offset by $129.2 million from stock-plan issuances. Approximate operating cash flow less capital expenditures was $922.2 million.
- Liquidity and debt: Cash, cash equivalents, short-term deposits and marketable securities totaled approximately $3.669 billion at year-end. Working capital was $726.6 million; current assets were $1.892 billion against current liabilities of $1.166 billion. The filing reports no off-balance-sheet arrangements and does not identify conventional borrowings or debt; total liabilities were $1.727 billion, substantially including deferred revenue and tax accruals.
- Shareholder equity: Year-end shareholders’ equity was $3.491 billion, down from $3.532 billion. Outstanding ordinary shares were 166.0 million, versus 174.9 million a year earlier, reflecting repurchases. The company said it did not intend to pay dividends in the near term.
Material changes and unusual items
- Revenue growth moderated to 7% from 9% in 2015. Subscription revenue was the fastest-growing category, while maintenance and product/license revenue grew 3% each.
- Operating income grew more slowly than revenue as operating expenses expanded, reducing operating margin from 52% to 49%. Basic and diluted EPS grew faster than net income, alongside a lower weighted-average share count.
- The effective tax rate fell to 19.0% from 21.5%. The company attributed the reduction partly to $19 million of benefits from R&D credits, tax settlements and statute-of-limitations expirations. A settlement with the Israeli Tax Authority for tax years 2012–2015 was reached in December 2016.
- Net financial income rose to $44.4 million from $34.1 million, attributed to improved investment yields and a one-time $4 million investment-exercise gain. The filing says that including accumulated investment fair-value changes in income would have reduced 2016 net income by $9 million.
- Share repurchases were substantial: $987.9 million in 2016. The board authorized up to an additional $1.5 billion in repurchases, subject to a $250 million quarterly limit and market conditions.
Outlook, commentary and risks
- No quantified revenue, earnings or margin guidance is provided. Management describes cloud, mobility and advanced threat prevention as strategic priorities and anticipates continued security challenges as cloud and mobile use expand. In April 2017, after the reporting period, Check Point launched its Infinity security architecture.
- Management expects liquidity sources and operating cash flow to be sufficient for capital expenditure needs over the next 12 months. It expects to adopt the new revenue-recognition standard on January 1, 2018; the quantitative effect was not yet estimable, though contract-acquisition costs may be affected.
- Key operating risks include intense competition and pricing pressure, evolving cyber threats and product vulnerabilities, rapid technology change, and reliance on a concentrated distribution network. The two largest distributors accounted for approximately 37% of 2016 sales; the ten largest accounted for 52%.
- Other notable exposures include foreign-currency movements (42% of expenses were in foreign currencies; a hypothetical 10% weakening of the dollar against expense currencies would have increased 2016 operating expenses by $38 million), interest-rate and investment-market risk, and economic and geopolitical risks associated with Israel and international operations.
- Unrecognized tax benefits were $306.7 million at year-end, with $43.7 million potentially subject to adjustment within 12 months. Contractual-obligation disclosures show $18.3 million of operating leases and $306.7 million of uncertain tax positions; timing of tax settlements could not be reasonably estimated. The company also has an approximately $111 million Israel investment commitment associated with the tax settlement and temporary relief, due over a five-year period.
- The company reported various lawsuits and tax disputes; management stated that a loss in excess of accrued liabilities for disclosed legal claims was not probable. No goodwill or long-lived-asset impairment was recorded in 2016. The independent auditor issued unqualified opinions on the financial statements and internal control; management also concluded controls were effective.
Most important facts for investors to verify
- Whether subscription growth and deferred-revenue expansion continue, and whether product and maintenance growth can improve.
- Whether expense growth—especially selling and marketing and R&D—moderates enough to stabilize operating margins.
- The sustainability of the 19% effective tax rate, including Preferred Enterprise benefits, tax settlements and the $306.7 million uncertain-tax-position balance.
- Distributor concentration, competitive discounting and the potential effects of currency movements on costs and reported international revenue.
- Repurchase pace and remaining authorization, alongside cash generation, investment portfolio valuation and the timing of tax and Israel investment obligations.
- Implementation impact of the 2018 revenue-recognition standard and progress of the company’s cloud, mobile and threat-prevention strategy; the filing provides no quantified forward guidance.