Network security company Check Point Software Technologies Ltd. (NASDAQ:CHKP) delivered a solid set of results on Thursday, helping ease fears of a slowdown in security spending. The headline numbers look good enough, and they came in toward the top end of the company's guidance, but there's a lot going on beneath the surface. Let's take a deeper dive into the numbers.

Check Point Software Technologies Ltd. earnings
Overall revenue increased 8.9% in the fourth quarter, with non-GAAP EPS of $1.20 coming in 12% ahead of the same period last year. However, both figures somewhat mask some key underlying trends with the company.

Check Point operates a razor-and-blade business model and generates revenue from three related streams. Hardware product sales (38% of revenue in the quarter) are sold with software blades (19%), which offer a range of differing applications. The third revenue stream comes from software updates and maintenance (43%), which are sold into the installed base. Clearly, generating product sales is the key to future growth. If there are no hardware sales, there are no software blades sales or software maintenance revenue.

As you can see below, growth of 7.4% in hardware sales helped continue a good run -- software updates and maintenance revenue should grow in due course.


While revenue increased nearly 9%, operating profit only increased 4.2% as operating margin fell to 52.2% from 54.5% in last year's fourth quarter. The reason? Operating expenses increased 14.5% with Check Point investing heavily in sales and marketing (up 21.7%) in order to drive new sales growth. As you can see in the chart above, it's a sign of the company's determination to accelerate growth following a stagnant period of product sales growth in 2013.

Deferred revenue and software blade subscriptions
Still, there is more. The third stream of revenue, software blade subscriptions continue to grow strongly, and along with them comes a substantive amount of deferred revenue, which will be recognized over time. In other words, deferred revenue is a snapshot of future earnings and cash flow.

As you can see below, both remain on a strong growth track.


Essentially, the increases in sales and marketing expenses are in order to drive product sales and future growth, so you shouldn't just look at Check Point in terms of operating income growth and headline revenue.

Turning to future expectations, management's guidance is as follows:

  • First-quarter revenue of $395 million to $410 million
  • First-quarter non-GAAP EPS of $0.99 to $1.05
  • Full-year revenue of $1,720 million to $1,790 million
  • Full-year non-GAAP EPS of $4.45 to $4.60

The full-year revenue forecast implies a growth range of 5.5% to 9.8%, an increase of 7.7% at the midpoint and representing a slowing of growth from a 9% revenue increase in 2015.

Looking ahead
All told, it was a good set of results that confirmed management's sales and marketing initiatives are bearing fruit. The loss of operating margin is a concern, and 2016 may well see some more degradation. However, any worries on margin should be balanced by a consideration of the increased growth in product revenue and the promise of long-term earnings and cash flow streams from deferred software revenue.

Check Point has always been the high-margin, high-cash-flow-generating company in the network security sector, but its management is making a concerted push for growth and its long-term revenue stream looks assured.

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