Here is some well written comments from WALL STREET JOURNAL. See the last few paragraphs.
Check Point Falls After Strong Net
As Investors See Warning Signals
By NICK WINGFIELD
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- By most measures, Check Point Software
Technologies' first-quarter results were sensational: The company turned in
a 140% increase in profit that well exceeded Wall Street expectations.
But the good news didn't prevent a rout of the company's stock, as
investors chose instead to focus on several measures of sales and looming
competition from Microsoft.
Check Point shares lost 7 3/4, or 19%, to close at 33 1/4 in trading
Thursday on the Nasdaq Stock Market. Meanwhile, the Nasdaq
Composite Index lost 36.21, or 1.9%, to 1881.50, while Morgan
Stanley's high-tech 35 index dropped 13.15, or 2.3%, to 565.87.
Check Point's drop had many analysts scratching their heads. "Analysis
has gone by the wayside and people react to rumor, innuendo and ghosts
in the night," said Gibbs Moody, an analyst at UBS Securities.
Check Point, a leading maker of firewall software for protecting
corporate networks, late Wednesday reported net income of $15.5
million, or 41 cents a fully diluted share, from $6.5 million, or 17 cents a
share, in the year-ago period. The results beat by a wide margin the 31
cents-a-share mean earnings estimate of Wall Street analysts, compiled by
First Call.
But -- despite blowing by profit estimates -- Check Point's quarter
contained some disappointments in the eyes of investors.
Revenue increased 125% to $30.9 million from $13.7 million for the same
period in 1997. Unlike profit, however, revenue only marginally beat
analysts' expectations; Eric Zimits, an analyst at Hambrecht & Quist LLC,
said revenue beat his estimate by about $300,000. Mr. Zimits, who
maintains a "buy" investment rating on the stock, said the discrepancy
between Check Point's upside profit and revenue showings probably hurt
the stock.
"Typically, the company has shown a lot of earnings upside and some
revenue upside as well," said Mr. Zimits. "The difference here was there
was no revenue upside."
Although Check Point's business is substantially related to the Internet, the
company is clearly being judged by a different measure of success than
other Internet firms, many of which have seen their stocks skyrocket even
though profits have proven elusive. Check Point has a sizable chunk of
the firewall market, which has exploded as more and more companies
have connected themselves to the Internet. Firewalls act as a shield
between the Internet and a company's internal network, permitting only
authorized access to data and applications located within the private
network.
According to analysts, Check Point's relatively lackluster revenue growth
was the result of a decline in average selling prices for its products.
Interpretations of that decline's significance differed: Most said it reflected
a higher percentage of sales through original equipment manufacturers and
discounted volume purchases by corporations. But Mr. Moody said
Check Point's average selling prices have fluctuated in the past and that he
didn't see much cause for concern.
Another red flag for investors was a substantial increase in Check Point's
days sales outstanding to 57 days from 44 days. Days sales outstanding
are a measure of the time it takes customers to pay for products, and is
considered an indicator of customer satisfaction with a company's
products. But analysts said they believe the increase this quarter was due
to glitches in its order processing system, not primarily with late payment
by customers. "We don't expect it to continue into next quarter," a Check
Point spokeswoman said.
Investors may have been spooked for another reason, though. Earlier this
week Steve Ballmer, Microsoft's executive vice president of sales, was
quoted in Globes Arena (www.globes.co.il), an Israeli business
newspaper, as saying that the software giant would increasingly compete
with Check Point in the firewall market. "If they want to cooperate, to
create products for our platforms, we will be happy to tell them our plans,"
Mr. Ballmer was quoted as saying in the article. "If they wish to compete,
they are invited to choose to compete with us."
Check Point, of Ramat-Gan, Israel, is one of that country's biggest
high-tech firms. Its U.S. headquarters are in Redwood City, Calif.
Microsoft has already introduced
software, known as proxy server software,
that includes some basic firewall features.
But the product isn't considered to be
much of a threat to Check Point's firewall
products, which analysts said provide
better management tools and security. A
more serious competitor, according to
analysts, is Cisco Systems, but even that
networking giant hasn't made much of a dent in Check Point's business.
Still, competitive rumblings from either company have in the past triggered
fears amongst Check Point investors.
"We've seen this draw before," said Paul Merenbloom, an analyst at
Prudential Securities. "This is not an easy business to get into." |
