Check Point Software Technologies Ltd. — FY2014 Form 20-F
Reporting period: Fiscal year ended December 31, 2014; filed April 24, 2015. This is an annual report, not a standalone Q4 report. The filing does not provide a clear set of Q4-only financial results. Financial statements are in U.S. dollars and prepared under U.S. GAAP.
Business context
Check Point develops and sells network, endpoint and data security products and services, including security appliances, licenses, subscriptions, and software updates and maintenance. Sales are primarily through channel partners. Management highlighted its Software-defined Protection architecture, new appliances, cloud offerings and Capsule mobile security products introduced in 2014.
Financial performance
Amounts below are in millions of U.S. dollars unless otherwise noted.
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $1,495.8 | $1,394.1 | +7% |
| Operating income | $801.1 | $760.9 | +5% |
| Net income | $659.6 | $652.8 | +1% |
| Diluted EPS | $3.43 | $3.27 | +5% |
| Operating margin | 53.6% (reported as 54%) | 54.6% (reported as 55%) | Down about 1 percentage point |
| Net margin | 44.1% | 46.8% | Down |
| Net financial income | $28.8 | $34.9 | Down |
| Cash provided by operations | $785.9 | $811.3 | Down |
Revenue mix in 2014: products and licenses $520.3 million (+5%); subscriptions $265.0 million (+22%); software updates and maintenance $710.5 million (+4%). Subscription growth reflected greater sales of security blades; product growth was attributed mainly to integrated appliances. Revenue growth was 4% in 2013.
Cost of revenue was $176.5 million, implying gross margin of about 88.2%, broadly stable year over year. Operating expenses rose to $694.8 million from $633.2 million, with higher compensation, headcount and share-based compensation contributing to margin pressure. Stock-based compensation was $63.2 million, versus $51.1 million in 2013. The effective tax rate was 20.5% in 2014, versus 18% in 2013; the filing attributes the higher rate principally to the Preferred Enterprise tax rate increasing to 16% from 12.5%.
Cash, liquidity and capital allocation
Cash, cash equivalents, short-term deposits and marketable securities totaled approximately $3.683 billion at year-end, compared with $3.630 billion in 2013. Working capital was $815.0 million, up from $617.5 million. Total assets were $4.949 billion and shareholders’ equity was $3.638 billion. The balance-sheet data provided do not identify interest-bearing borrowings; verify the complete financial statements and commitments disclosures for debt obligations.
Operating cash flow was $785.9 million; investing cash flow used $246.1 million, mainly reflecting purchases and maturities of securities; financing cash flow used $686.2 million, principally for share repurchases. The company repurchased about 11.2 million shares during 2014 for approximately $765 million, and authorized an additional $1.5 billion repurchase program in January 2015, capped at $250 million per quarter. Capital expenditures were $12.7 million. No dividend was planned in the near term.
Changes, outlook and notable matters
- Growth accelerated versus 2013, led by subscriptions, while product and license revenue returned to growth after a slight decline in 2013.
- Net income grew more slowly than revenue as operating costs increased; net financial income also fell, primarily due to lower interest rates.
- Management expected low portfolio yields in the near term, citing low U.S. interest rates and an expectation of only insignificant rate increases during 2015. The filing provides no specific revenue or earnings guidance.
- Management cited seasonality in customer year-end purchasing and warned that economic weakness could delay or reduce technology spending. Results may fluctuate, and expenses are not highly variable with revenue.
- On February 17, 2015, Check Point completed the Hyperwise acquisition; on April 2, 2015, it completed the Lacoon Mobile Security acquisition. These are subsequent events, not FY2014 operating results.
- The 2013 settlement with the Israeli Tax Authority resolved disputes for 2002–2011 and released accumulated “trapped earnings.” The company committed to approximately $111 million of qualifying Israeli investment over five years; amounts not invested may become payable with indexation and interest.
- Unrecognized tax benefits were $235.7 million at year-end, with timing and ultimate settlement uncertain. The company also disclosed routine litigation and other legal proceedings; management stated that an additional loss above accrued liabilities was not considered probable.
- Foreign-exchange exposure is material: a hypothetical 10% weakening of the U.S. dollar against relevant expense currencies would have increased 2014 operating expenses by approximately $29 million. Non-hedge-accounting forwards generated a $22.0 million net loss in 2014.
Principal risks
Key risks include intense competition and pricing pressure; rapid changes in cyber threats and technology; product defects or customer breaches; dependence on a small number of distributors (the two largest represented about 37% of 2014 revenue); supplier and hardware-manufacturing concentration; and reliance on a limited set of product families. Additional exposures include investment-market and interest-rate risk, foreign exchange, tax-benefit conditions and disputes, legal and intellectual-property claims, economic uncertainty, and political or military instability in Israel. The company reported effective internal control over financial reporting, with an unqualified auditor opinion.
Important facts for investors to verify
- Review the audited statements and notes for the full composition, maturity, credit quality and liquidity of the $3.683 billion investment portfolio.
- Reconcile the share-repurchase cash-flow figure with the reported repurchase amount and assess the pace and remaining authorization of the 2015 program.
- Examine the $235.7 million uncertain-tax-position accrual, related interest, and the remaining obligations under the Israeli tax settlement.
- Track whether subscription growth, maintenance renewals and appliance sales sustain revenue growth while expenses and share-based compensation rise.
- Assess distributor concentration, foreign-exchange hedge effectiveness, and the integration and performance of the 2015 acquisitions.