The IT security market has always been highly competitive and the competitive dynamics in the industry are constantly changing. If Check Point Software Technologies (NASDAQ:CHKP) is the established pure play in the sector, and Palo Alto Networks (NYSE:PANW) is the up and coming competitor, then Fortinet (NASDAQ:FTNT) sits somewhere in the middle. With that said, how is it best to look at the investment proposition with Fortinet? In addition, what do its recent, and well received, results really mean to the company?

Check Point Software, Fortinet and Palo Alto Networks, getting to know you
When looking at the three together, I can't help feeling that they could almost be the same company, just at different stages of their development. Indeed, there are some close relationships between them. Palo Alto Networks founder and CTO, Nir Zuk, used to be principal engineer at Check Point, but there is little love lost between the self appointed "Check Point Killer" and the company these days. In addition, Fortinet's VP of services, Michael Anderson, was formerly at Check Point, as was Michelle Spolver, Fortinet's VP of corporate communications.

These links -- although not uncommon in a niche IT industry -- serve to highlight the competitive nature of the industry. It's no secret that Palo Alto Network's is growing revenue in the 30%-40% range by trying to displace incumbents like Check Point, Cisco, and Juniper in the firewall market. But what is less understood is how Check Point and Fortinet are generating growth by competing in smaller and larger deal sizes respectively. They are increasingly encroaching on each others markets.

Check Point targets the low end, Fortinet the high end
Fools already know that Check Point has invested in a dedicated sales team for the small and medium-sized business, or SMB, marketplace, and has the developed the 600 and 1,100 series appliances for the marketplace. Indeed, when discussing the issue of the SMB market on a recent conference call, Check Point's management disclosed: 

[S]ince we launched the product a year ago, I think it was Q2 a year ago, so it's exactly one year. And I think we've more than doubled our unit numbers. We've also seen very nice uptick in revenues overall. So that trend continues. It's still not huge numbers if we look at the dollar contribution.

While the change of strategy hasn't made a "huge" difference to Check Point, going the other way seems to have had a positive effect on Fortinet. For example, here is a chart that demonstrates how Fortinet's deal size has increased over time.

Source: Fortinet Presentations

Fortinet reports a strong quarter
The trend toward increasing deal sizes (high-end products now account for 40% of billings from 35% last year) is obviously good news for Fortinet, and shareholders were further bolstered by a strong set of second-quarter results. But investors shouldn't get too excited. Although, the second quarter revenue figure was strong, the implied guidance for the next two quarters indicates a slowing of growth.

Source: Fortinet Presentations, author's analysis

Moreover, the second quarter saw revenue receive a lift from new product releases, namely the Fortigate3700D and 1500D enterprise security appliances. As the chart above demonstrates, this lift looks likely to fade in coming quarters. In addition, when looking at revenue growth on a sequential basis, it's clear that the guidance for the third and fourth quarter implies lower-than-usual sequential growth.

Source: Fortinet Presentations

Is Fortinet a good value?
Keen-eyed readers will note that Fortinet's guidance implies that growth will slow to around 13%-14% in the fourth quarter. Fortinet is maturing as a company and its growth is slowing in the manner that Check Point's did a few years ago. With this analogy in mind, it's interesting to focus on its cash-flow generation.

The good news is that the corner appears to be turned, and Fortinet has generated $141 million in free-cash flow on a rolling year basis. To put this into context, the figure represents around 3.8% of its current enterprise value, which suggests the stock is fairly valued at the moment.