Network security company Check Point Software Technologies Ltd. (NASDAQ:CHKP) delivered a strong set of first-quarter earnings on Monday, and the market rewarded investors by taking the stock higher by 5% on the day. Moreover, management announced a threat intelligence partnership with FireEye Inc. (NASDAQ:FEYE). There's a lot to like about the earnings report, so let's take a more detailed look.

Earnings versus guidance
First, the earnings:

  • Revenue totaled $372.6 million, versus company guidance of $360 million to $375 million and analyst estimates of $370 million.
  • Non-GAAP EPS came in at $0.95, versus internal guidance of $0.89 to $0.93 and analyst estimates of $0.91.

And the guidance:

  • The company guided for second-quarter revenue of $380 million to $400 million, versus analyst estimates of $392.4 million.
  • And it guided for Q2 non-GAAP EPS of $0.90 to $0.99, versus analyst estimates of $0.94.

In a nutshell, revenue came in at the top end of company guidance, while earnings exceeded expectations. In addition, the second-quarter guidance, from a management that tends to give a conservative outlook, is pretty strong. The one disappointment came from management's affirmation, on the earnings call, of its full-year revenue guidance of $1.6 billion to $1.65 billion.

In a review of the previous quarter's earnings, I referenced the company's plans to invest in new hires to accelerate revenue growth. The expectation was that the company would feel the burden of the costs in the first half, with revenue starting to accelerate in the second half, as the new hires start to be more productive. As such, Check Point beat earnings estimates for the first quarter but didn't increase revenue guidance for the full year -- almost a mirror image of what some investors might have expected.

FireEye Inc. deal
On the same day, Check Point announced a partnership with FireEye. Essentially, the two companies will share threat intelligence data, for their respective customers to better benefit from their combined intelligence. According to Check Point's press release, both companies will "update threat information in near-real time within an organization's environment."

On the Check Point earnings call, Deutsche Bank analyst Karl Keirstead asked a question about the overlap in the customer base between the two companies. CEO Gil Shwed replied:

I don't have any numbers. I think it's fairly small. Our installed base is very large. I think FireEye's installed base is a little smaller. So I think the overall is quite small.

In other words, the partnership with FireEye is not likely to cause significant cannibalization for both companies. That's good news all round.

Broad-based strength
Turning back to the numbers, a breakout of revenue demonstrates some strong underlying trends. Check Point operates a razor-and-blade business model, whereby software blades (20% of revenue in the quarter) and software updates (49%) are sold into its installed base of product and license holders (31%). Check Point needs ongoing product and license revenue growth to generate strong software blade and software update revenue growth.

The good news is that, after a period of negative growth in 2012-2013, product and license growth is running in the mid-single digits. Software update revenue tends to follow product and license growth -- therefore, it's reasonable to expect good growth in software update revenue in future quarters. For reference, software blade revenue grew 20.4% in the quarter.

Source: Check Point Software Technologies Ltd. presentations.

The takeaway
The numbers look good from Check Point, and the company's growth initiatives should yield more growth in a few quarters' time. Meanwhile, the company continues to generate gross margin in the high-80% range. Operating income margin came in at 52.9% in the quarter, and there are no immediate signs that Check Point's excellent profit margins are about to come down.

All told, a combination of revenue growth, margin generation, and strong free cash flow makes Check Point an attractive stock for investors looking for exposure to the network security sector.

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.