The information-technology network security sector is unusual in the sense that its leading companies offer markedly different maturity levels. If FireEye and Palto Alto Networks (NYSE:PANW) are the new kids on the block, and Fortinet (NASDAQ:FTNT) is the maturing teenager, then Check Point Software (NASDAQ:CHKP) is very much the mature old uncle. With that said, Fools shouldn't dismiss the stock as unexciting. On the contrary, there was a lot to like about Check Point's recent third-quarter earnings, and the numbers confirm that the company's business strategy is working. Time for a look.

Check Point Software's third-quarter results
Highlights of its earnings and guidance for the upcoming fourth quarter:

  • Third-quarter revenue of $370.4 million vs. analyst estimate of $367.1 million

  • Third-quarter earnings per share of $0.93 vs. analyst estimates of $0.91

  • Fourth-quarter revenue guidance of $395 million-$430 million vs. analyst estimate of $410.3 million

  • Fourth-quarter EPS guidance of $0.99-$1.09 vs. analyst estimate of $1.03

In summary, revenue and EPS beat analyst expectations and guidance was ahead of what the market projected. This is obviously good news, particularly because Check Point's management is known for giving conservative guidance.

Segment trends
The earnings were also good from the perspective of the company's ongoing business development. As noted, Check Point is a relatively mature company, and it has grown revenue at a single-digit rate for the last 10 consecutive quarters. It is largely known for being a high-margin network security company with relatively sophisticated and high-ticket solutions.

Its business typically involves selling hardware (product revenue) and then software blades (sometimes bundled with hardware) and subscriptions. As is usual with subscriptions, their introduction tends to reduce initial revenue in favor of longer-term revenue generation. However, the good news is that companies can generate a higher lifetime value from the client via this strategy, even if initial revenue is less. Finally, Check Point Software sells software updates and maintenance.

The revenue generation from these three activities, in the last three years, can be seen below. Each activity has an incredibly high gross margin. For example, in 2013, they generated gross margin of 82.1%, 97.5% and 90.1%, respectively.

Checkpoint

Source: Check Point Software Presentations

Readers will note that software blades and subscriptions are growing much faster than software updates and maintenance, while products and licenses have declined in the period.

Product revenue growing again; software revenue strong
A breakout of quarterly revenue demonstrates the underlying trends. The chart below is a bit "busy," but bear with me. Software blades and subscription growth is indexed on the right side, and growth remains strong. However, the key point is that Check Point has started growing its product and license revenue again. This is important, because if Check Point can't grow its installed base through product sales it is likely to struggle with software blade and update revenue growth in future

In fact, after five negative quarters of growth in product and licenses revenue (from the third quarter of 2012 to the third quarter of 2013), growth has been positive in the last four quarters.

Checkpoint

Source: Check Point Software Presentations

All told, this was a strong earnings report. The headline revenue and earnings numbers came in better than expected, as did guidance. Moreover, its product revenue growth continues to strengthen, while software update and maintenance revenue also continues to grow. Finally, investors should note that the strong growth in software blades and subscriptions implies growth down the line from ongoing subscription revenue and software updates. There is a lot to like about Check Point's earnings report.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Check Point Software Technologies and Palo Alto Networks. The Motley Fool owns shares of Check Point Software Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.