Cybersecurity Is Hot, So Why Is Israel's Check Point So Tepid?

The company posted single-digit percentage increase in sales and earnings in the first quarter and expects little improvement in the second

Yoram Gabison
Yoram Gabison
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FILE PHOTO: The Check Point Software Technologies Ltd. logo is seen at the company's offices in Tel Aviv, Israel August 15, 2011.
FILE PHOTO: The Check Point Software Technologies Ltd. logo is seen at the company's offices in Tel Aviv, Israel August 15, 2011. Credit: REUTERS/Nir Elias/File Photo
Yoram Gabison
Yoram Gabison

“I believe that the opportunity ahead of us is much bigger than what we’ve seen before. While I’m happy with the progress we are making in some areas, our growth rate should be higher than what we’ve seen.”

So said Gil Shwed, the CEO of Israel’s Check Point Software Technologies, in a phone conference with investment analysts on Friday following the release of its first-quarter results. As it turns out the market was unhappy, too.

Over the previous four months, the Israeli cybersecurity company’s shares had risen as much as 32% amid signs of improving revenue growth in the second half of last year. But with the release of the first-quarter figures, , Check Point shares plunged as much as 11% on Friday and ended up closing at $119.99 for a daily loss of 7.4%.

Analysts had expected Check Point to report adjusted (non-GAAP) earnings of $1.31 a share on sales of $471 million. The company did even better at $1.32 and $472 million, respectively. But the improvement was mild, to say the least – EPS was up a mere 2 cents from a year ago while revenue edged just 4% higher.

In fact, the topline results were even weaker because they included several million dollars of revenue from Dome9, a company it acquired last October and wasn’t included in the year-earlier figures.

Worse still, Check Point’s guidance for the second quarter sees earnings of between $1.32 and $1.40 a share on sales of $474 million to $500 million. At the midpoint of these forecasts, it signals a pro forma profit of only $1.36 a share on sales of $487 million. The sales number meets Wall Street analysts’ average estimate for Check Point, but the earnings number would fall 2 cents short of projections.

Check Point is one of the hottest markets in high-tech right now. In the same week that Check Point was turning in lukewarm results, special counsel Robert Mueller’s report was detailing to extent of Russian meddling in the U.S. 2016 election. Shwed himself pointed to cellphone hacking of Benny Gantz, the Kahol Lavan party leader, and Amazon founder and CEO Jeff Bezos.

“During the last number of years, we’ve seen an almost 3x increase in the number of vulnerabilities discovered in the world’s technology infrastructure, operating systems, hardware, software, servers, critical infrastructure, etc. Last year, there were over 16,000 reported vulnerabilities, with 800 in mobile operating systems alone,” Shwed told the analysts.

But the fact is Check Point is growing like a tech company but like an old-line business: Strauss Group, an Israeli food maker, reported first-quarter growth about the same as Check Point’s.

One reason for Check Point’s slow growth is the transition it is undergoing from its old model of selling its cybersecurity software through one-time licensing contracts to a model of selling subscriptions and services. The result is that instead of getting a one-time payment, revenues are booked in its profit-and-loss statement over the life of the contract, which typically runs 18 months to three years

But the transition alone isn’t enough to explain Check Point’s problems because it began three years ago.

Rather, the problem seems to stem from the launch of its Infinity Total Protection system, which joins all the company’s cybersecurity offerings into a single package for mobile, cloud and applications.

For Check Point, Infinity was supposed to build revenues by offering veteran customers an all-inclusive package that would reduce the need for relying on complementary but competing products.

The problem is that approval from customers for such a n important product comes the top of the corporate ladder, either the CEO or the board of directors. Check Point’s sales people were used to working a notch or two lower, with a vice president for information systems or some equivalent title. They knew the contact people and the time to sale was relatively short.

The sales team should have been better prepared for the transition. Sales people how a difficult time leaving their comfort zone and the result is that Check Point lost market shares to rivals like Palo Alto Software and Fortinet.

The problem is most acute in the North American market, Check Point’s biggest. In the first quarter, sales fell 0.1% from a year ago while in Europe they were up 9.3% and in Asia-Pacific by 4.3%. “Overall, looking at our global sales structure, we’ve seen areas with great improvements, and we’ve seen areas where improvement still needs to be realized,” Shwed said.

The company is belatedly getting its act together. In January, it hired Frank Rauch, who was head of the Americas channel for VMware for the previous six years, as its worldwide head of channel sales.

It has also introduced a new program for divvying up revenues with its partners, which should not only boost sales volume but enable Check Point to enter new markets. The company has undertaken massive hiring of new sales people.

Meanwhile, CFO Tal Payne noted that the Infinity subscription model takes time to works its way into the P&L statement. But he cited one figure that should encouraged investors: Future revenues from subscriptions already sold had reached $1.31 billion as of March 31, an increase of 13% over a year ago.