With Check Point Software (NASDAQ:CHKP) bumping up against its 52-week high following a strong earnings release, some investors may wonder if it's too late to enjoy the run. But for long-term investors, it looks like there's plenty of growth ahead of the company, particularly because of CEO Gil Shwed's leadership and how management has gone about building the business over the past couple of years.

As one of Check Point's competitors, Palo Alto Networks (NYSE:PANW), has demonstrated Check Point's slow but steady approach to its business model isn't as easy to deliver on as one may think. 

A Check Point data security interface screen.

A data security interface. Image source: Check Point.

Slow and steady

Unlike many of its peers, Check Point Software doesn't post ridiculously high year-over-year revenue gains. While Palo Alto was reporting 50%-plus sales gains for nearly two years running due in part to its rampant spending on sales and marketing, which at $226.7 million last quarter, accounted for more than half its total revenue.

For some perspective, Check Point's sales-related costs totaled just $106.2 million, less than a quarter of its total revenue. Shwed made a committed effort to build Check Point's business methodically by focusing on its recurring revenue foundation via its subscription-based model and managing overhead, and he's delivering.

Though Palo Alto has performed admirably in building its own subscription revenue and became analyst favorites, Check Point was delivering what many others weren't: steadily increasing profits. One reason is last quarter Check Point's sales and marketing  costs rose 15.7% year-over-year, while Palo Alto Networks sales-related costs jumped  24.4%. Recurring sales should result in minimal increases in sales costs and steady bottomline growth, as is the case with Check Point. But Palo Alto continues to spend, negatively impacting its own increasing subscription sales.

Check Point reported $435 million in revenue last quarter, an 8% jump compared to a year ago, about par for the course. Thanks to the combination of its sound expense management and the growth of Check Point's recurring revenue subscription sales, earnings per share increased 15% to $1.08. Palo Alto? It's per-share loss increased to $0.67 from last year's $0.66 a share. Check Point's enjoying the benefit of its low-cost, recurring revenue model while the Palo Alto's of the world continue struggling to overcome costs, minimizing the benefits of an on-going revenue model..

Check Point's subscription revenue still doesn't equal that of its product and license sales, but the gap is narrowing with each passing quarter. Product and license sales equaled $126.3 million last quarter, up 3% over last year. Software subscription revenue contributed $112 million to Check Point's sales, a stellar 27% improvement.

The balance of Check Point's revenue, $197 million, was derived from software updates and maintenance, which should also continue climbing given its software subscription emphasis. The result of Shwed's recurring-revenue focus is it helps keep expenses to a minimum assuming its executing, which Check Point is, because over time it costs less to service existing customers than to continually drum up more product sales.

Yin and yang

The systematic approach to growth Check Point has opted for doesn't warrant a lot of hoopla. It's just a reliable, steady process that investors can rely on for years to come. While Palo Alto is enduring the inevitable slowing of top-line growth yet is still spending indiscriminately, Check Point keeps chugging along.

The more conservative path Check Point has chosen is proving worthwhile. As more pundits and investors take notice of what Shwed and team are doing, shareholders are reaping the rewards, to the tune of a 30% jump in value this year.

At the other end of the spectrum are providers such as Palo Alto. Now that Palo Alto is no longer an analyst darling because of its continually slowing sales growth, its shares are down 3.5% this year.

Yes, Check Point stock is flying high, but the manner in which it's finally won over investors is highly sustainable, so there's no reason to think it will change anytime soon. In fact, at the mid-range of Check Point's revenue guidance of $440 million to $465 million for this quarter, investors can expect its "usual" 7% year-over-year improvement. Check Point has forecast per-share earnings excluding one-time items of $1.17 to $1.25 a share, which would be a 32% increase over last year's $0.95. 

Considering its increasing quarterly profits and expectations for more, its conservative expense management, and a position in an industry that's expected to grow for years to come, Check Point remains a buy, even at the high.

 

Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Check Point Software Technologies. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.