In a nutshell, Network security company Check Point Software (NASDAQ:CHKP) pleased the market delivering results at the top end of expectations. In doing so, it also announced its intent to increase investment in order to accelerate future revenue growth. Of course, more investment usually results in companies suffering an initial drag on earnings before generating higher profits down the line. Indeed, company guidance indicates this dynamic at play in 2015. Let's take a closer look at the results.

Check Point Software delivers in the fourth quarter
A brief look at the earnings:

  • Fourth quarter revenue of $420.6 million versus internal guidance of $395 million to $430 million and analyst estimates of $416.1 million
  • Fourth quarter non-GAAP EPS of $1.07 versus internal guidance of $0.99 to $1.09 and analyst estimates of $1.05


  • First quarter revenue guidance of $360 million to $375 million versus analyst estimates of $368.4 million
  • First quarter non-GAAP EPS guidance of $0.89 to $0.93 versus analyst estimates of $0.93
  • Full-year 2015 revenue guidance of $1.6 billion to $1.65 billion versus analyst estimates of $1.59
  • Full-year 2015 non-GAAP EPS guidance of $3.90 to $4.02 vs. analyst estimates of $4.07

Earnings and revenue came in at the top end of guidance for a strong fourth quarter. However, first quarter and full-year EPS guidance are below analyst estimates. The reason?

On the earnings conference call, Check Point management outlined the intent to increase investment in order to accelerate revenue growth. In particular, management expects to substantially increase sales and marketing hiring, with much of it being front-end loaded. 

In other words, expect operating expenses to increase in the first half of the year but revenue to start to jump in the second half, as the extra hires start generating sales. Indeed, as you can see above, full-year revenue guidance is 2% more than estimates.

A detailed look at the earnings report
For those of you unfamiliar with the company, Check Point is known for being a high-margin, high cash-generating company, albeit with only single-digit revenue growth in recent years. Check Point operates a business model whereby it sells hardware products, which are sometimes bundled with software blades (with various applications), and software updates and subscriptions.

Products and licenses generated 34.8% of 2014 revenue and contributed to an 81.6% gross margin. The good news is that revenue growth remains solid, so Check Point should be able to grow future software update and maintenance revenue. The latter contributed 47.5% of 2014 revenue and came with an 89% gross margin.

Source: Check Point Software Presentations

However, this is not the whole story. Check Point software blade revenue is also growing strongly at 19.5% year-over-year for the fourth quarter, another indication of future software update and maintenance revenue growth.

The following chart breaks out the composition of revenue in the last four years. We can how software blade and subscription revenue is growing -- not bad, especially when you consider that it comes with a 97.8% gross margin.

Source: Check Point Software Presentations

Meanwhile, its operating margin continues to come in at the 55% to 60% range.

Source: Check Point Software Presentations

The bottom line
All told, this looks like a good report. The midpoint of full-year 2015 revenue guidance implies a year-over-year growth rate of 8.6%. Furthermore, the higher-margin parts of its business (software blades and subscriptions and software updates and maintenance) are growing faster than its products and licenses, increasing the potential for margin expansion. Going forward, investors should monitor the success of its growth plans.

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.