Network security company Check Point Software Technologies (NASDAQ:CHKP) delivered a solid set of fourth-quarter earnings this week that should set the company up to have another good year in 2019. Let's take a closer look at its earnings report and guidance.

Check Point Software's fourth quarter: The raw numbers

Let's start with the headline numbers from the quarter:

  • Revenue of $526 million came in at the higher end of the guidance range of $500 million to $528 million. 
  • Adjusted earnings per share of $1.68 surpassed the guidance range of $1.56 to $1.67.

The headline numbers look good, and a breakout of the components of sales growth shows how the company's overall low-single-digit growth rate is supported by a shift in revenue from products toward subscriptions.

As CEO Gil Shwed outlined, "Key drivers to our success and growth this past quarter were our Advanced Security Technologies, primarily our Cloud and Advanced Threat Prevention solutions. These are subscription-based solutions and their continued success is shifting our business into more of an annuity business model."

When software companies turn to subscription-based models, it's a good idea to keep an eye on deferred revenue because revenue won't be recognized up front (as it usually is with products) but instead will be recognized over time. For reference, Check Point's deferred revenue grew 13% year over year in the fourth quarter.

The following chart shows Check Point's breakdown of revenue.

Check Point sales growth breakout

Data source: Company presentations. Chart by author.

Looking ahead

Here are management's expectations for 2019:

  • Full-year 2019 revenue expected to be in the range of $1.94 billion to $2.04 billion, implying growth of 1.2% to 6.5%.
  • Full-year non-GAAP EPS expected to be in the range of $5.85 to $6.25, implying growth of 2.5% to 9.5%.

In other words, management expects another year of revenue growth in the low- to mid-single digits and earnings growth in the mid-to-high single digits.

As the long-established leader in the industry, Check Point is a relatively mature company and has growth rates to match. Whereas the likes of Fortinet or Palo Alto Networks are aiming at mid-teens growth, Check Point's challenge is to continue its single-digit growth trajectory by developing new products and growing software and subscription revenue from its installed base.

In addition, investors will be hoping Check Point can maintain the whopping 53% non-GAAP operating income margin reported in 2018 as well as continue to convert 59% of its revenue into operating cash flow. In a nutshell, Check Point is a mature, high-margin cash cow.

Thus, the pressure is on to maintain growth and make its products relevant to the next generation of security threats. On this note, it wasn't smooth sailing in 2018. Threats are becoming ever more complex and increasingly require a more holistic approach to security architecture

Lines of light flashing through space.

Image source: Getty Images.

On the positive side, Check Point's Infinity solution offers a "fully consolidated cyber security architecture," which protects against fifth-generation attacks. On the downside, such solutions require someone high up in a company to make the decision to buy, and Check Point has previously had execution issues on this front.

Regarding the Infinity solution, on the earnings call, Shwed discussed having made "some significant changes to our sales force" and then said, "I can say that there is a great level of interest in our approach and platform. We are making great progress but have a way to go to see the full impact of these changes."

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