June 10, 2022
Inflation is at a record high.
The labor market is at full employment.
We have supply chain challenges coupled with a war in Eastern Europe exacerbating an already stretched global economy.
Given the broader macro challenges and uncertainties, we might expect next-generation cloud-based cybersecurity companies to experience headwinds. Perhaps businesses decide to extend or make do with their legacy solutions. Or maybe IT budgets get axed enough to defer digital transformation projects. So I kept a close eye on earnings and management commentary to get a sense of where we are headed.
Based on recent quarterly reports and management commentary, it appears next-generation cybersecurity companies are, thus far, not impacted by macro headwinds. These companies reported strong growth and generally provided bullish guidance.
Source: Zscaler Q3 2022 Investor Presentation.
For example, Zscaler (NASDAQ: ZS), a company that provides cloud-based firewall and VPN replacement products, reported sales of $287 million, up 63% year on year, aided by an acceleration of large enterprise deals. Zscaler CEO and co-founder Jay Chaudhry addressed the macro elephant in the room up front, noting:
“While there are broader macro challenges and economic uncertainties, we have seen an increase in large, multi-year commitments for multiple product pillars of the Zscaler platform as periods of uncertainty can act as a catalyst for change. This, coupled with growing cyber threats such as ransomware, are driving IT leaders to transform security from castle-and-moat security to zero-trust architecture. In this environment, customers cannot risk transformational and mission-critical projects with immature offerings from unproven vendors.”
Similarly, cloud-based endpoint security company SentinelOne (NYSE: S) reported 109% revenue growth to $78.3 million and noted in their shareholder letter that “cybersecurity is a top IT spending priority and we haven’t seen that change because of macro conditions.”
Palo Alto Networks (NASDAQ: PANW), which made its name back in the day selling state-of-the-art hardware gear for security, also reported robust results. Palo Alto Networks saw the number of million-dollar deals signed increase by a whopping 65%; furthermore, the size of those deals also increased!
Source: Palo Alto Networks Q3 2022 Investor Presentation.
When asked about potential cuts to IT budgets because of macro headwinds, Palo Alto Networks’ CEO Nikesh Arora offered some interesting “color”. According to Arora, during the early days of the Covid-19 crisis, many businesses were faced with the prospect of doom. Arora claims that more companies were impacted by the pandemic than by inflation today. He went on to say:
“The oil industry is not stressing about IT budgets. The commodity industry is not stressing about IT budgets. The CPG industry is not stressing about IT budgets. The tech industry is not worried about IT budgets.”
In a nutshell, cybersecurity remains a priority today because enterprises are rapidly embracing the cloud. Today, more work is done electronically than ever before; companies can’t afford to risk compromising the enabling fabric. And as more enterprises embrace digital technologies, the potential surface area of attacks increases. That means sophisticated solutions that protect cloud computing services and workloads are the need of the hour.
In many ways, next-generation cybersecurity solutions are likely among the best defensive-yet-growth opportunities today. The bad actors have become sophisticated. There are many more data and services in the cloud and in private data centers. Protecting these digital assets is of paramount importance to get work done. Cybersecurity might not be recession-proof, but it might hold up much better than many other sectors through a recession.
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