Check Point Software Technologies Ltd. (CHKP 2.01%) released a set of second-quarter earnings that suggested the company is on track with most of its growth initiatives in 2015. In recent years, the company has been known as the highly cash generative but low growth investment option in the network security sector. However, given its recent performance it might be time to reappraise that assessment. Let's take a closer look at the results.
Check Point Software's second quarter
The headline numbers:
- Revenue of $395.3 million versus company guidance of $380 million to $400 million and analyst estimates of $392.5 million
- Non-GAAP EPS of $0.99 versus company guidance of $0.90 to $0.99 and analyst estimates of $0.95
As you can see above, revenue and earnings came in at the high end of guidance in the second quarter. In addition, the underlying trends in the business look solid. According to CEO Gil Shwed in the earnings release, the company saw strong demand across industries and business segments and data center, super high-end, and SMART-1 management appliances drove product revenue growth.
Meanwhile, management outlined its future growth prospects by highlighting the acquisition of Lacoon Mobile Security as a way of expanding its mobile security offerings, a private cloud security product, and a partnership with network security company FireEye (announced on April 20) to share threat intelligence in real time.
A deeper dive
As ever with Check Point, it's important to look at its products and licenses revenue growth. The company generates sales from three different, but related, revenue streams.
Source: Check Point Software Technologies presentations. All figures in millions of U.S. dollars.
As you can see in the chart above, software updates and maintenance is its most important source of revenue, but its growth largely depends on the company expanding its installed base with more growth in products and licenses.
Essentially, Check Point's business model relies on increasing its hardware sales (products), alongside which it sells software blades subscriptions. Companies can buy bundled solutions (products plus blades), and have the option to purchase new software blades in the future. Naturally, software updates and maintenance are sold into the installed base of users.
As such, it's important for products and licenses sales to keep expanding. As you can see below, products and licenses sales growth tends to lead software updates and maintenance revenue growth and total revenue growth. The good news is that Check Point managed to increase the growth rate in sales of product and licenses in the second quarter, to 6.4% from 5.9% in the previous two quarters.
Source: Check Point Software Technologies presentations.
In case you are wondering about software blades subscriptions sales, they too continue to grow at a healthy clip, with growth of around 20% and above recorded in the last 10 quarters.
Source: Check Point Software Technologies presentations.
The bottom line
All told, it was a strong quarter for Check Point. Overall revenue growth of 9% in the quarter indicates that its ongoing recovery in products and licenses sales is feeding through to overall sales growth. Meanwhile, its industry-leading operating income margins remain strong at 50.3% compared to 52.3% in the same quarter last year -- despite a 13.6% increase in operating expenses as management expands its sales and marketing efforts in order to chase growth.
Meanwhile free cash flow generation of around $190 million in the quarter represents nearly 48% of sales and 116% of net income. Check Point remains highly cash generative, but now it's also a growth story.
