Hack is back! Or at least one of the cyber terror stories is back, Palo Alto Networks (PANW). This one has always been the best of breed, and last night it showed us why with astounding growth, 61% year-over-year billings and a 71% growth in deferred revenue, which means that the profits in the future will be there.
I know a lot of people have been saying "yeah, yeah, sure, sure" about this company because it doesn't make money, but I think some very big free cash flow projections will ameliorate that concern. CEO Mark McLaughlin reminded us why you always want to invest in the best of breed in any business; in the end, that's the one that doesn't disappoint. Why was Palo Alto able to deliver a number that others in the space failed to do so? Simple: it is a soup-to-buts outfit that you bring in when you can catch your breath and not be worried about an imminent attack -- I would bring in Fortinet (FTNT) on that -- or a post-mortem, which I regard to be FireEye's (FEYE) strong suit.
If you recall, FireEye did say after its miss the last quarter that the notion of cyber security has become less episodic, meaning less a function of an individual hit like Action Alerts PLUS portfolio name Target (TGT) or Home Depot (HD) or Sony (SNE), and much more of a solution that can prevent such an intrusion. To me it seems that, with these numbers, Palo Alto is the one that's winning.
What's most intriguing here is that McLaughlin went out of his way to talk about how his company is pulling away from the competition and actually mentions rival Cisco (CSCO) by name, saying "We continue to beat Cisco handily quarter after quarter as we've done this quarter." I have never found it to be fruitful to antagonize, but McLaughlin's never lacked anything in the confidence department.
I think this breakout quarter is a reminder that this sector is still riding a terrific secular wave, and that corporations have underinvested in it and have to turn to end-to-end solutions to solve the issues. The sheer number of new customers and the sector breadth of them is a sign that there's much more spending to come.
Now, I can't speak for Cisco. But I want to reiterate that I think that Imperva (IMPV) and CyberArk (CYBR) are perfect fits for those who want to expand in this business, like none other than IBM (IBM). Imperva protects the enterprise and is profitable. CyberArk protects the privileged accounts that hold the keys to the entire kingdom, and needs a bigger home.
What's interesting about these suggestions that IBM bulk up to challenge Palo Alto with these acquisitions is the firestorm of criticism I took on Twitter. It wasn't so much that people didn't think they were good ideas or even that they were too expensive. The critiques all centered on how IBM would blow the acquisitions and render them meaningless. I question that negativity, and would remind people that when you have a secular growth story this strong and you want to play in it, you have to shell out some capital and keep the brains behind the organization.
One thing for sure, though, we know that the funk in the stocks has nothing to do with the fundamentals, which are on fire. Palo Alto's winning right now, but there's room enough for everyone, including Cisco and IBM, if they do want to try to expand in what may be the fastest-growing end of information technology today.