Network security company Check Point Software Technologies Ltd. (CHKP 0.18%) delivered another solid set of earnings recently, and served notice that its long-term strategic efforts in cloud, mobility, and threat prevention are starting to pay off. As a relatively mature market leader in its industry, Check Point isn't going to match the growth rates of rivals like Fortinet Inc. or Palo Alto Networks Inc. but management has taken steps to increase growth. Meanwhile, underlying growth and cash flow generation remains excellent.
Check Point first-quarter earnings: The raw numbers
| Metric | Q1 2017 | Q1 2016 | Year-Over-Year Change |
| Revenue | $435.4 million | $404.3 million | 7.6% |
| Net income | $182.5 million | $167.4 million | 9% |
What happened with Check Point this quarter?
The increased profitability stand out, but don't get too excited; it's largely due to more favorable tax rates. The following chart of revenue and operating income growth gives a better picture of underlying conditions. As you can see, operating expenses rose in 2015 as management increased spending on R&D and sales & marketing with the goal of driving future growth.
Data source: Check Point Software Technologies Ltd. presentations. Chart by author.
The improvements brought about by those increased expenditures can be seen in the revenue increases in recent quarters, and also in management's commentary on underlying growth conditions. In this context, it's worth noting that Check Point is aggressively increasing the number of software blade subscriptions it sells, which is holding back reported revenue growth.
This is because the price of the software blade is separate from the product sale, and goes on the balance sheet as deferred revenue -- over time, it will be recognized as revenue. Therefore, it's important to look at deferred revenue growth and software blade subscription growth to get the full picture. As you can see below, overall deferred revenue grew 14% in the quarter, and software blade subscriptions increased 27%.
Data source: Check Point Software Technologies Ltd. presentations. Chart by author.
What management said
On the earnings call, management asserted that its strategic investments are bearing fruit. For example, CFO Tal Payne noted that "Customers continued transitioning to higher value packages which include our advance threat protection solutions. In addition, some of the acceleration growth came from the shift of revenues from the product to subscription as a result of the bundling of the new appliances."
CEO Gil Shwed talked of "great customer uptake" with Check Point's cloud, mobility and threat prevention solutions -- key areas of investment -- and cited triple-digit percentage growth among these products.
Looking ahead
The company is quietly building the foundation for long-term growth by investing in key areas and developing its software blade subscription sales. In time, the deferred revenues associated with subscription sales will turn into recognized revenue for the company.
In short, it was a good set of results, but the company made no changes to full-year guidance. The full-year and second-quarter guidance is outlined below:
- Full-year revenue still expected in the range of $1.85 billion to $1.9 billion, with non-GAAP EPS expected in the range of $5.05 to $5.25.
- Q2 revenue guidance in the range of $440 million to $465 million which would be growth of 4% to 10% on from Q2 2016.
- Q2 non-GAAP EPS of $1.17 to $1.25, equal to growth of 7.3% to 14.7%.
