Check Point Software Technologies' (NASDAQ:CHKP) second-quarter earnings keep the company on track to achieve its objectives in 2019. In other words, the near-term guidance looks assured, but, as ever, investors will want to put the results in the context of the company's long-term aims. So let's take a look at the takeaways from the recent earnings report.

Check Point Software second-quarter earnings report: The raw numbers

Starting with the key headline numbers from the quarter compared to the guidance given on the last earnings call

  • Revenue of $488 million came in slightly above the midpoint of the guidance range of $474 million to $500 million.
  • Non-GAAP (adjusted) earnings per share of $1.38 were slightly higher than the midpoint of the guidance range of $1.32 to $1.40.

As the numbers above show, Check Point's earnings were pretty much within the guidance ranges, and digging into the details reveals even more positive news. For example, in the previous quarter, issues with Check Point's sales execution in the Americas region resurfaced, and sales came in basically flat for the quarter. However, this quarter Americas sales came in with a 4.3% rise (based on my calculations), albeit against a somewhat tough comparison to the same quarter last year.

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Image source: Getty Images.

When execution challenges first emerged in the third quarter of 2017, management made substantial changes to the sales organization and strategy in the U.S. Hopefully, the issues have now been resolved, but with the third quarter coming up against a difficult comparison to last year's period (when Americas region sales rose 8.2%), it won't be easy to tell in the next quarter's results.

More details from the quarter

Check Point hasn't just been transforming its U.S. sales organization. It's also been investing heavily in sales and marketing (S&M) in order to help drive sales growth. As you can see in the chart below, S&M expenses as a share of revenue have been rising and appear to be largely responsible for the drop in operating margin in the last few years.

When a question was asked about the matter on the earnings call, CFO Tal Payne replied, "We said that our margin will be this year around 49% to 50%. So it's in line with our plan."

Check Point's sales and marketing expenses and operating margin.

Data source: Check Point Software presentations. Chart by author.

The increases in S&M expenses and headcount don't seem to have had an immediate impact on product sales growth or even on the trajectory of overall revenue growth -- it remains in the low single digits as befits a mature player in the industry.

That said, Check Point's business model is evolving toward more subscription-based revenue, and deferred revenue actually rose 11% to $1.286 billion in the quarter. Furthermore, in a sign that Check Point is growing its business better than the headline numbers suggest, cash flow from operations rose 9% compared to the same period last year.

Year-over-year growth for Check Point revenue by segment: security subscriptions, products and licenses, and software updates and maintenance..

Data source: Check Point Software presentations. Chart by author.

Looking ahead

Management guided for revenue in the range of $480 million to $500 million in the third quarter, implying year-over-year growth between 2% and 6.2%. Meanwhile, EPS is expected to be in the range of $1.36 to $1.44, compared to non-GAAP EPS of $1.38 in the third quarter of 2018.

The ranges are pretty wide, so it's likely that Check Point can hit a number within them, but investors will be keenly looking for a confirmation of progress in the U.S., plus the possibility of some margin expansion in the future, when the S&M spending initiatives start to fully kick in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.