Check Point needed Sourcefire
Cancelling the merger cost it $40 million. CFO Eyal Desheh: We'll take measures to restore growth.
Gitit Pincas 4 Apr 06 19:33
One of the dark clouds hanging over Check Point Software Technologies Ltd.’s (Nasdaq: CHKP) in recent years concerned its short and long-term growth. This cloud caused a downpour when at 8 pm New York time yesterday, Check Point published a profit and revenue warning for the first quarter of 2006 and for the year as a whole.
At the start of today’s conference call, Check Point chairman and CEO Gil Shwed said, “The results will be less than we expected.” This is the understatement of the year. The company’s results will be quite dismal, and it is now possible to see how much Check Point needed to acquire Sourcefire to restore its growth momentum. It also demonstrates how, without Sourcefire, Check Point’s revenue in 2006 will show meager 5% in the least worse scenario, and will be zero in the worst case.
Check Point specializes in perimeter Internet security using firewalls and virtual private networks (VPNs), internal defense, web defense and defense of end products. The company’s market cap is $4.9 billion. In the wake of the cancellation of the acquisition of Sourcefire under pressure from the US administration, it was clear that Check Point would have to revise downwards its guidance for the year. Today’s surprise wasn’t only that the company’s results have been adversely affected, but the extent of the damage to its guidance for the first quarter.
What happened? In the press release, Shwed said, “We believe that our first quarter results were impacted by three main factors: first, the change in our decision to acquire Sourcefire; second, a shift in product mix toward increased longer term engagements such as software subscriptions and SmartDefense and decreased product revenues; and third, a slower growth pace in our industry.”
In other words, the company took three hits: two were internal, and one, it claims, was industry wide.
Check Point CFO Eyal Desheh said, “This isn’t the end of the world. I’m certainly not complacent, but we’re not heading for the bunkers shouting Armageddon. We’ll still post a profit of almost $80 million and a cash flow of almost $100 million for the quarter, and our profit levels will be high, and meet the test of business booms and busts. Our subsequent growth will come from a combination of acquisitions and in-house growth, we have a set of new products that will push the results forwards. We know we have to work hard, we’ve been here before, and didn’t like it at all. We worked hard and built the company. We’ll do it again now.”
2006 initially seemed to show signs of being a wonderful year. But in reality, Check Point will post $580-610 million revenue, similar to its $579.4 million revenue in 2005. This means that revenue growth will be 0-5.3%. Taking Sourcefire out of Check Point’s guidance cuts $40 million from the latter’s revenue. Check Point will post earnings per share of $1.16-1.24 for 2006, reflecting a net profit of $288.3-208.2 million. It will post a pro forma profit of $1.37-145 per share, reflecting a pro forma profit of $340.6-360.4 million. The good new is that the company said its deferred income for the first quarter rose by $10 million to almost $179 million.
“Globes”: This is a very severe warning.
Desheh “Let’s not exaggerate. Our profit is larger that what we posted last year, and our earnings per share is one cent less than the range in our guidance. The word 'severe' suits a situation in which profits are halved. I know that journalists love to write such headlines, but things should be taken in proportion. Its unpleasant and unfortunate, and believe me when I tell you that we’re taking today’s numbers very seriously, more seriously than anyone else. We’ll do things and take measures that will restore revenue and profit growth.”
Check Point talks about a market slowdown. The interesting point is that meanwhile, at least as the first quarter is concerned, there seems to be no slowdown among Check Point’s competitors and other IT security companies. Competitors such as Internet Security Systems Inc. (Nasdaq:ISSX), McAfee Inc. (NYSE:MFE), SonicWALL Inc. (Nasdaq:SNWL), WatchGuard Technologies Inc. (Nasdaq:WGRD) and Symantec Corp. (Nasdaq:SYMC) have not yet released figures for the first quarter, and it will be interesting to see what will happen when they do.
Desheh said, “The market isn’t terrible, but it’s weak. It isn’t plummeting, but growth is slow.” What about Check Point, which is unlikely to grow, not even slowly? “The guidance can be revised over the year. We’ve already seen such things happen,” he says optimistically.
Analysts believe that the acquisition of Sourcefire was important for Check Point to resume its growth momentum and supplement existing weakly performing InterSpect, Connectra and other product lines. Check Point will now have to find a new strategy to persuade the market that can grow internally or make prudent acquisitions. It is quite possible that the Sourcefire diverted management’s attention during the first quarter hurt Check Point’s results. Wall Street now believes that the company should now use its $1.74 billion in cash ($7.50 per share) to make acquisitions to boost its top line. The company has only made two such acquisitions in its history.
Published by Globes [online], Israel business news - www.globes.co.il - on April 4, 2006
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