CHKP - Selling virtual security

I'll start with the 10-year figures:

2006-2015 Revenue: 575M - 1630M = 11%

2006-2015 Net Income: 278M - 686M = 9%

2006-2015 EPS: 1.17 - 3.74 = 12%

2006-2015 Net Debt: 0 - 0

These numbers look quite impressive. Even though net margins have decreased over the years, there is still solid revenue and net income growth.

Note that this company does not capitalize software development cost and I like that. I could not find glaring accounting shenanigans in my brief look. Contrast this to Cerner, where the real net income drops a lot if you do not capitalize software development cost.

What they do

Checkpoint sells security-related software to businesses: firewalls, public and private cloud security software, etc.

Capital Allocation

This company is engaged in my type of acquisition plan: acquiring partial ownership of a business they understand very well. Aka, buying back their own shares. This is much better than acquiring terrible speculative software companies that do not produce profits. Note that they have made acquisitions of other companies, but at a small scale.

Because the company is very capital-light (capex is 3% of net income), it can use almost all the net income (and then some) to repurchase its own shares.

CEO

Gil Shwed is the founder/CEO of this company. He seems passionate about this field and holds several patents himself. I really like his compensation:

"Mr. Gil Shwed, Chief Executive Officer and Director. Cash compensation expenses recorded in 2015 consisted of $14.0 in salary expenses, and $12.7 in benefit costs. Mr. Shwed requested to forego his salary and bonus for 2015, as he has done for the past several years." - 2015 Annual Report

He also owns 17% of the company.

The future

This is a company in a fast-changing industry (technology). Moats in this industry are fleeting and companies need to be nimble to protect them.

I believe this company can stand out from the crowd because of the following reasons:

1. CEO is brilliant and thinks like an owner.
2. They have patents.
3. They have relationships with customers.

However, a complete change in landscape (like Cloud offerings including security bundles) may take away the pie this company has been consuming.

Valuation & Final Thoughts

Currently going for about 20x earnings. I think I may bite and take up a small position that I can increase in case the price moves downwards.