By Richard Saintvilus

Competition in the enterprise security market has become fierce.

While Check Point Software (CHKP) has a respectable track record that shows it understands the growing needs of its customers, the company is finding it challenging to stave off rivals such as Cisco (CSCO) and Fortinet (FTNT), which are gunning for its business.

Going into its Q3 report, investors wanted to see that Check Point provided enough "oomph" to help them feel more secure about its prospects.

For its third quarter, Check Point earned $152.4 million, or 73 cents per share on revenue of $332.4 million. While the revenue total arrived slightly below estimates of $333 million, it did show 8% year over year from $308.3 million. Likewise, net income of $152.4 million was 14% higher from the same period of a year ago. The company attributed the improved results to growing demand for its Internet security software.

Check Point's chairman and CEO, Gil Shwed offered this:

Third quarter results continued to be good with healthy growth in enterprise appliance units and software blade sales. Our revenues and earnings per share came in at the upper half of our projections. Geographically, North America continued to deliver great results with double digit growth in product and service revenues.

The numbers were impressive. However, this was not enough to prevent a selloff in the stock immediately after the company issued guidance for the fourth quarter. Investors were displeased with the revenue range of $355 million to $387 million. On average, analysts projected $382 million. Similarly, the low end of Check Point's adjusted earnings projections of 84 cents was significantly below analysts' expectations of 90 cents per share. As a result, the stock plummeted almost 13%.

Concerns regarding Europe have a lot to do with the company's conservative guidance. This seems to be consistent with rival Fortinet, which cut full-year projections just the day prior due to weak demand in China and Europe -- sending shares down almost 20%.

Moving forward

Overall, Check Point reported a solid quarter. In light of the ongoing fiscal concerns with Europe, I think the company has taken the right approach with its guidance. However, the bigger issue with Check Point will come from the competition -- in particular, from the likes of enterprise security darling Palo Alto Networks (PANW). In its first quarter as a public company, Palo Alto did what it had to do to affirm investor confidence in its business.

For its fiscal fourth quarter, the company saw revenue jump to $75.6 million -- representing an increase of 88% and topping the $40.2 million it reported in the same quarter of a year ago. Also impressive was its reported loss, which narrowed to $4.6 million on a GAAP basis or 18 cents per share. This compares favorably to its net loss of $6 million in the same period of a year ago.

Clearly there is enough evidence in Palo Alto's numbers to suggest it has begun to steal market share from Check Point. It remains to be seen how significant this will become. But certainly, investors of Check Point can't rest easy seeing such impressive growth numbers from a new rival. Also causing some uneasiness is that Cisco, Fortinet and even Dell (DELL), which just acquired SonicWall, have all begun to make great strides in the enterprise security space. How will Check Point grow when there are so many gunning for its business?

There are always at least two ways to meet the competition head on -- either through investments in R&D or an acquisition. While Dell and Cisco appear to have taken the latter route, investors of Check Point have grown frustrated that the company has yet to decide which path it wants to take.

While it can be argued that Check Point has indeed spent on R&D, $28.5 million during the quarter, it pales in comparison to Cisco, which spent $1.4 billion trying to win its market.

Bottom line

I still like Check Point and even more so now that the stock has taken this recent beating. The company's challenge is to prove to a skeptical market that it has what it takes fight off the competition while producing the rate of growth that investors want. I wonder, though, how much time are investors willing to give Check Point seeing as how dominant Palo Alto looks right out of the gate.

While it is reasonable to expect the rate of growth demonstrated by Palo Alto to decrease, in the meantime it serves as cause for some insecurities for Check Point's investors. On the bright side, Check Point has a solid lead in the market and enjoys a broadly loyal consumer base. What's more, management seems to understand the competitive threats and appears willing to invest for the future while improving its technology. With the company's track record of solid performances, it deserves time to prove its value -- as unsettling as it might be for investors.

At the time of publication, the author held no position in any of the stocks mentioned.

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