Check Point Software Technologies Ltd. (CHKP) exited fourth quarter 2011 with flying colors. Earnings of 80 cents per share handily beat the Zacks Consensus Estimate of 77 cents. The adjusted earnings per share exclude one-time items, but include stock-based compensation expense. Check Point witnessed strong network security product sales across all geographical regions. Shares surged 7.82% in the after-hour trade.

Revenue

Check Point reported revenue of $356.8 million in the fourth quarter, up 12.0% from $318.5 million in the year-ago period. The quarter’s result was much better than the company’s expectation. The improvement can be attributed to a 10.6% year-over-year growth in Product and Licenses revenue. Moreover, Check Point witnessed a total 13.2% year-over-year growth in its Software Updates, Maintenance and Services revenues.

Overall, revenue improvement was driven by the growing demand for Check Point’s security solutions and Application Control software blades, as well as product launches. The growth in demand was largely due to a general customer pattern of upgrading security levels. Management also reported strong performance regarding the number of large deals, which doubled from the year-ago quarter.

Operating Results

Reported gross profit increased 12.8% year over year to $306.0 million. Gross margin increased 30 basis points from the year-ago quarter to 85.8%.

Operating income came in at $192.6 million, up 18.9% year over year. Operating margin increased 310 basis points year over year to 54.0%. The improvement in operating results was driven by strong revenue growth that outpaced the 3.6% increase in operating expenses. Cost control was also noticed with the year-over-year drop in R&D expenses.

The quarter’s GAAP net income was $159.8 million or 75 cents per share, up from $137.4 million or 64 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP net income was $169.2 million or 80 cents a share compared with $149.1 million or 70 cents in the year-earlier quarter.

Balance Sheet & Cash Flow

Check Point exited the quarter with cash, cash equivalents and marketable securities of approximately $1.36 billion, up from $1.21 billion in the prior quarter. Trade receivables were $357.4 million. Cash flow from operations was $173.2 million, up from $154.5 million in the previous quarter. Capital expenditure decreased to $1.72 million from $1.98 million in the prior quarter. During the quarter, Check Point repurchased 1.32 million shares for a total consideration of $75.0 million.

First Quarter & Fiscal 2012 Outlook

Management sees revenue in a range of $305 million to $315 million, and EPS (excluding one-time items) in the range of 69 cents to 73 cents. For fiscal 2012, Check Point expects revenue of $1.345-$1.395 billion and EPS ex-items of $3.10-$3.20. The Zacks Consensus Estimate for the first quarter and fiscal 2012 are pegged at 67 cents and $2.69, respectively.

Our Take

Check Point delivered an impressive fourth quarter, beating the Zacks Consensus Estimate with respect to earnings per share. We think that investor sentiment will be in Check Point’s favor as shareholders remain encouraged by its market share gains from the tech giant Cisco Systems Inc. (CSCO) and Juniper Networks Inc. (JNPR). Check Point continues to benefit from strength at the high end of the market, and increased demand for its blade solutions. Moreover, the company’s continuous product launches are encouraging.

However, limited margin expansion potential (over dependence on indirect sales model), an uncertain economic environment competitive pressures and Check Point’s significant European exposure are concerns.

Currently, Check Point has a Zacks #4 Rank, implying a short-term Sell recommendation.

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