When you're dominating a fast-growing segment of the software industry, life is very sweet. Network security provider Check Point Software Technologies(NYSE: CHKP) bolstered its case for its high valuation today when it reported yet another quarter of super-strong earnings. Revenue for the first quarter sounded off at $78 million, a 78% increase over the year-ago quarter and 15% of last quarter. Net income grew a comparable 77% year-over-year, reaching $35 million. Folks with a gift for division already know that that's a pretty impressive 45% profit margin. Earnings per share (EPS) for the quarter ran up to $0.40, five cents ahead of First Call analysts' estimates.
Check Point deals primarily with products that secure systems. Its flagship product is Firewall-1, which integrates access control to a network, authentication, encryption, and the like. Check Point also makes the VPN-1 family of virtual private networking (VPN) products, developed with Rule-Maker holdingNokia (NYSE: NOK) , which can be implemented across multiple platforms and integrated into an overall enterprise security policy.
VPN-1 enjoys over 50% market share in high-end VPN appliances, three times more than its next competitor, and its lead is growing. That market is expected to expand about 300% this year, according to Infonetics Research. Frost & Sullivan predicts that IP-based VPN services will boost revenues from $1 billion currently to $13.59 billion in 2004. Check Point increased its VPN subscriptions 24% just this quarter, from 34,000 to 42,000.
The financial results that this growth translates into for Check Point are just astonishing. I love looking at the financials of a software company that's running the table. It's like looking at a Greek statue from the Classical period; they exhibit perfection of form, right down to the ankle bone -- er, cash flow statement.
Actually, Check Point hasn't released a cash flow statement in the last year. Since it is incorporated as an Israeli company, it doesn't have to provide SEC filings. The company does provide an annual report that resembles a 10-K, but it hasn't yet produced it for 1999. In 1998, however, the company's Cash King margin already stood at a whopping 46%. With the cash it has generated since then, I'd be surprised if that number isn't much higher now.
In 1998, Check Point had $82 million in cash and short-term investments. At the end of 1999, it had $242 million. This quarter, the company reported that it had $320 million in its coffers, 32% more than the previous quarter, thanks to its outstanding profit margins. Check Point has enough cash on hand to pay off its current liabilities more than two times.
What else do you want to see in a company? Check Point has had operating margins near 90% for five straight years. Its net margins turn in consistently around 45%, thanks in part to its lower tax rate as an Israeli company. Its Foolish Flow ratio stands at 0.51. Its days sales outstanding, now at 59 days, has increased recently, but its days payables outstanding has risen much faster, producing a negative-330 day cash conversion cycle at the end of 1999.
The past looks great. The future also looks bright. Management boosted its growth estimates for the coming year to sales in the high-60% range and EPS growth between 40-45%, 10% higher than previously expected. As network penetration soars, Check Point sees its sales encroaching into the small- and medium-business markets. It plans to spend its cash on research and development and attracting talented employees, in order to improve and expand upon its current product lines.
Check Point looks, smells, and moves like the gorilla in a lucrative, fast-growing market.
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