Big competition for Check Point

It's a company's worst fear come true: The threat of Microsoft honing in on the bread-and-butter of its business.

The software giant's recent warning that it will soon step into the network security software ring only darkens the shadow created by rumors of big-name players entering Check Point's market.

Though Check Point claims Redmond's products won't compete with its own, the company has beefed up its own lineup with at least one acquisition, perhaps in preparation for the onslaught of competition long-predicted by market analysts. The firm took a hit on Wall Street after Microsoft's warning.

According to Reuters, Israel's Globes business newspaper quoted Microsoft executive vice president Steve Ballmer as saying in Tel Aviv that Microsoft is developing software that would soon compete with Check Point.

"If they want to cooperate, to create products for our platforms, we will be happy to tell them our plans," the newspaper quoted Ballmer as saying in Tuesday's edition. "If they wish to compete, they are invited to compete with us."

Check Point spokeswoman Emily Cohen responded: "There's nothing new here. They're talking about their proxy server, which has low end [security] functionality. We don't compete with it one iota. We're extremely bullish about the future." (See related story)

Despite an upbeat earnings report yesterday, shares of the firewall firm dropped in heavy trade today after the news that Microsoft would compete with the network security software company.

Check Point was off 17 percent to 34 in midday trading, losing 7 on Ballmer's comments that his firm will strengthen its Internet security offerings.

The hit to Check Point's stock price mirrors events in January, when Morgan Stanley Dean Witter downgraded the stock because Microsoft and Cisco Systems might enter the security market.

More broadly, however, the stock market gyrations reflect worries about Internet security companies as other, bigger rivals enter the security niche. Already a wave of acquisitions is sweeping the industry.

"You're seeing a roll-up of the industry--the name of the game is consolidation," said Nicole Schmidt, analyst with CIBC Oppenheimer. "It's not because their growth is slowing but because a lot of them are single product companies that don't have enough time to create critical mass. They have to worry about competition springing up soon--in a race to create critical mass or get bought out, there's a window of opportunity of 18 to 24 months."

For its part, Check Point is trying to grow outside the security space, earlier this month buying Internet address firm MetaInfo. Rather than expanding into other parts of the security market, Check Point has designs on networking, the company has said.

Microsoft does not currently have firewall software, but its proxy server software has some attributes of firewalls, which are used to protect computer network from outside intruders from the Internet. But Ballmer indicated, as investors and security experts have believed for some time, that Microsoft will add firewall features to the proxy software and perhaps build it into the 5.0 version of its Windows NT operating system.

Though yesterday's first-quarter earnings beat Wall Street analysts' expectations by a mile, Oppenheimer's Schmidt, a bear on the stock, was unimpressed.

"Basically, the earnings quality wasn't there," she said, even though the company reported net income of $15.5 million or 41 cents a share, better than the consensus estimate of 31 cents a share, according to First Call. Higher profits came from factors other than revenue growth, she argued.

Revenues for the quarter ending March 31 were $30.8 million, up 125 percent from $13.6 million for the comparable period in 1997. For 1997's first quarter, earnings were $6.4 million or 17 cents a share.

However, Prudential Securities analyst Paul Merenbloom at Prudential reiterated his buy recommendation, setting a target price of $51 in the next 12 months.

Reuters contributed to this report.