Check Point CEO outlook reflects demands of cyber war

Check Point Software Technologies CEO Gil Shwed put a bullish spin on Wall Street's 2016 revenue expectations for the maker of firewall software, suggesting annual growth in its segment of the security market remains at or near double digits.

"We're expecting to grow 8% to 10% in 2016," Shwed told me during an interview in San Francisco, after I asked him about analysts' consensus estimates of roughly 8.5% top-line growth for this quarter and this year.

The Israeli-headquartered company has been in the business of selling firewall software and other intrusion-detection products for over two decades, yet has yet to realize a full return on last year's boost to research spending, according to Shwed.

Now, products based on its latest technology have started rolling out, he said, which should help support the company's operating margin.

The important profit metric was equal to a hefty 57% of revenue in the fourth quarter.

Check Point shares have risen 5% this year, versus a 2.7% drop in the Nasdaq.

Based in Tel Aviv but with a U.S. unit based in San Carlos, Calif., its shares are traded on the Nasdaq under the symbol CHKP.

The company reports first-quarter results April 20.

Quarterly sales are expected to rise 8.5% year-over-year, to $404 million, while earnings are seen rising to $1.03 a share, from 95 cents a year earlier.

Shwed is optimistic about long-term revenue growth, he says, because only 5% of overall IT spending now goes toward security software.

As cyber attacks against corporate and government networks increase, however, budgets for buying technology products that protect such systems may grow relative to the money spent on IT operations.

Encryption and cyber war

Shwed said that the companies and governments he talks to about cyber security do so "seriously...but not strategically."

"It's still a very fragmented market," with more than 1,400 vendors around the world, he says.

Thinking strategically is made harder, of course, when companies, consumers and government departments don't know where the next attack will come from.

Cyber attacks are different from the conventional kind, according to Shwed, because one small actor can cause a disproportionate amount of damage with one success.

Thanks to malware proliferating on the Internet, "strategic weapons" are available to criminals all over the world, he says.

And as society goes mobile, attack points proliferate.

"The whole concept of security is based on deterrence," Shwed told me.

But if governments can't strike back at an enemy that vanishes after an attack, "they can't stop it."

Now, the U.S. and other governments are stepping into the market for security software with legislation that could throttle its growth.

A bi-partisan bill proposed by the co-chairs of the Senate Intelligence Committee would force companies to break their encryption if a U.S. court orders them to.

"I'm not in favor of backdoors," Shwed said, after I asked about the legal battle between Apple and the FBI over iPhone data in hundreds of criminal cases.

As noted above, a big problem with creating any hack that circumvents data protections is that such software can spread via the dark side of the internet and become yet another cyber weapon.

Yet "governments need to do what they can to protect people," Shwed added, acknowledging why security technologies are under such legislative scrutiny.

It's a difficult balancing act that began in the 1990s, when the U.S. first began asking for backdoors from encryption-software firms, Shwed says.

It may take a very long time to get right.

"The cyber world is behaving in a different way than the rest of the world," Shwed observed, as we sat in a 14th-floor office with a view of San Francisco's Ferry Building and the bay beyond.

John Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter:  @johnshinal .