Check Point Execs: Supply Chain Woes Will Persist Into 2023Check Point Beats Q2 Earnings Forecast Despite Spike in Materials, Shipping Costs
Israeli cybersecurity company Check Point anticipates little relief from supply chain pressure as it experiences a spike in the cost of making and shipping hardware supplies. The Tel Aviv company says it's spending historic amounts on buying raw materials and shipping them to the production line - an issue expected to stretch into 2023.
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The company beat second-quarter revenue and EPS growth estimates, but it warned investors in a Monday quarterly earnings call that supply chain costs could have an impact on revenues in the year's remaining two quarters.
"In our original model for 2022, we were predicting the supply chain issue would get solved in the second half of this year and cost would return to their original levels," Check Point founder and CEO Gil Shwed told investors Monday. "Right now, we don't think it will happen in the next half of the year, which will have an impact on the expense side, the revenue and the business growth side."
The increased amount Check Point spends on materials will drive production costs up for firewall hardware over at least the next two quarters, according to Tal Payne, chief financial officer and chief operating officer.
"We had great results taking into account the massive pressures that all the companies are seeing around raw materials in this market," Payne said.
Higher Prices Won't Offset Higher Costs
Check Point's higher costs should in theory be offset by a price increase that took effect at the beginning of July. But Payne and Shwed cautioned that the economic downturn is forcing the firm to discount the new list price to maintain the same volume of deals. Supply chain woes also mean that two or three weeks can elapse between when a product is ordered and when it's delivered, which impacts billing.
"The economy is showing some signs of softness. And there's a lot of uncertainty around that," Shwed said. "If you look at the average customer, they're not paying a higher unit cost to Check Point at the moment."
Based on conversations with Check Point's sales force and customers, Shwed said macroeconomic storm clouds haven't affected the company's sales pipeline or revenue forecast. Payne says the company is maintaining its strong guidance for the third quarter, which ends Sept. 30, but cautioned it's too soon to say how things will look heading into the fourth quarter.
"We are in a very bizarre macroeconomic environment with many different metrics showing up in different directions," Payne said. "Unemployment on the one hand, inflation on the other hand, interest rate, and many moving parts with Ukraine and Russia. There's many things happening and you should be cautious. We don't see anything to worry about except for everything that we see around us."
Despite the macroeconomic troubles, Payne said Check Point recorded its first double-digit increase in product and license sales in more than a decade. The company's overall year-over-year revenue growth of 9% is the highest figure Check Point has recorded in years, and more than double the low- to mid-single-digit growth that has been the company's norm as of late, Shwed said.
Check Point's operating expenses have surged even faster than its sales growth, increasing 18% since last year, Payne said. Surging operating expenses are driving headcount growth primarily in Check Point's sales and R&D organizations, with the company continuing to recruit for newly created positions in sales, Payne added.
Most of the new hiring is focused on workers who will support the company's CloudGuard cloud security portfolio and Harmony user and access security portfolio, Payne said. The higher operating expense figure is in line with Check Point's plans for the beginning of the year, according to Payne (see: Check Point Pursues More Business Outside Network Security).
"We have this winning streak across all product fields, across all geographies, and across many customer segments," Shwed said.
Product, Subscription Sales Grow Double Digits
|Category||Q2 2022||Q2 2021||% Change|
|Software Updates and Maintenance Revenue||$228M||$223.3M||2.1%|
|Security Subscriptions Revenue||$209.9M||$183.7M||14.3%|
|Products and Licenses Revenue||$133.2M||$119.1M||11.8%|
|Earnings Per Share||$1.36||$1.38||-1.4%|
|Non-GAAP Net Income||$209.3M||$217M||-3.4%|
|Non-GAAP Earnings Per Share||$1.64||$1.61||1.9%|
Check Point's Q2 revenue of $571.1 million beat Seeking Alpha's sales estimate of $560.4 million, and the company's non-GAAP earnings of $1.64 per share exceeded Seeking Alpha's non-GAAP estimate of $1.61 per share.
The company's stock price fell $5.57 per share, or -4.47%, to $119.03 at the close of trading Monday. That's the lowest Check Point's stock has traded since June 23.
The Americas accounted for 44% of Check Point's revenue in the second quarter, while Europe, the Middle East and Africa also delivered 44% of revenue. The Asia-Pacific region was responsible for the remaining 12% of revenue. That's identical to the geographic breakdown of Check Point’s revenue in the second quarter of 2021.
For the quarter ending Sept. 30, Shwed says Check Point expects non-GAAP net income of $1.60 to $1.72 per share on earnings of between $555 million and $585 million.