Check Point Software Technologies Ltd. — FY2013 Form 20-F
Business context and reporting period. This U.S. GAAP annual report covers the fiscal year ended December 31, 2013; the filing was signed March 28, 2014. Check Point develops and sells network, endpoint and data security products and services, primarily through channel partners. The filing also provides unaudited fourth-quarter results.
Key financial metrics
| Metric | FY2012 | FY2013 | Change |
|---|---|---|---|
| Revenue | $1,342.7 million | $1,394.1 million | +3.8% |
| Operating income / margin | $746.5 million / 56% | $760.9 million / 55% | +1.9%; margin down 1 point |
| Net income / margin | $620.0 million / 46% | $652.8 million / 47% | +5.3% |
| Diluted EPS | $2.96 | $3.27 | +10.5% |
| Net cash from operations | $849.5 million | $811.3 million | −4.5% |
| Cash, cash equivalents and marketable securities | $3,295.4 million | $3,629.9 million | +$334.5 million |
| Working capital | $1,061.1 million | $613.5 million | −$447.7 million |
| Total assets / shareholders’ equity | $4,544.9 million / $3,346.3 million | $4,886.4 million / $3,602.1 million | Both increased |
Amounts are U.S. dollars. The balance sheet reports no interest-bearing debt. Management said available liquidity and operating cash flow should cover capital expenditure needs for the next 12 months. Capital expenditures were $9.6 million in 2013. Cash used in financing was $431.7 million, primarily reflecting share repurchases; the company repurchased $537.8 million of shares during 2013.
Fourth-quarter results and material changes
Q4 2013 revenue was $387.1 million, up 5.0% from $368.6 million in Q4 2012. Operating income was $214.1 million versus $210.5 million; net income was $194.1 million versus $174.0 million. Diluted EPS was $0.99 versus $0.85. Q4 2013 operating and net margins were approximately 55% and 50%, respectively. The filing describes year-end purchasing seasonality.
- FY2013 subscriptions grew 29% to $209.4 million; software updates and maintenance rose 1% to $680.1 million. Products and licenses were nearly flat at $504.6 million.
- Operating expenses rose 6.2% to $633.2 million, including increased R&D and sales and marketing spending. Management attributed margin pressure mainly to higher compensation and headcount, with foreign exchange also contributing.
- Net financial income declined to $34.0 million from $40.3 million, primarily due to lower yields. Management expected U.S. interest rates and portfolio yields to remain low in the near term during 2014.
- Cash and cash equivalents plus short-term deposits declined, while long-term marketable securities increased; total cash and investments nevertheless rose. The filing reports a $3.63 billion investment portfolio, principally government and corporate debt securities.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management notes economic, industry and quarterly-result uncertainty, and expects seasonality to continue. It states liquidity is sufficient for planned capital expenditures over the next year.
- The November 2013 Israeli tax settlement resolved disputes for tax years 2002–2011 and released accumulated “trapped profits.” Check Point must make approximately $111 million of qualifying Israeli investments over five years; any shortfall is payable with indexation and 4% annual interest. Cash taxes paid in 2013 were $173.2 million, versus $85.9 million in 2012.
- The effective tax rate fell to 18% from 21%, primarily due to the reduced Preferred Enterprise tax rate. These tax benefits depend on meeting program conditions and could change.
- Key business risks include intense competition and rapid security-technology changes; product vulnerabilities or customer breaches; reliance on a limited number of distributors (the ten largest generated 56% of sales); and concentration in a small number of product families.
- Currency movements affect expenses, particularly Israeli shekel and euro costs. The company had $236.4 million of outstanding foreign-exchange forwards not designated for hedge accounting and cautions that hedging may not fully offset exposures. Low interest rates, credit quality and market valuations may affect investment income and portfolio value.
- Other risks include political and security conditions in Israel, tax and legal proceedings, and supply-chain constraints. Management did not expect the identified litigation matters to be material; the filing reports a patent-related declaratory action and other ordinary-course claims.
- The company does not intend to pay dividends in the near term. On January 28, 2014, the board authorized up to an additional $1.0 billion in share repurchases.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of December 31, 2013.
Important facts for investors to verify
- Whether subscription growth can continue to offset flat product and license revenue, and whether maintenance renewals remain stable.
- How the $111 million Israeli investment commitment will be fulfilled and how the tax settlement affects future cash taxes and effective tax rates.
- Whether operating cash flow, margins and investment income remain resilient as expenses rise and interest rates stay low.
- The composition, maturity and credit exposure of the $3.63 billion investment portfolio, and the impact of currency hedges and market movements.
- The pace and funding of share repurchases, alongside the reduction in reported working capital and continued distributor concentration.