March 2024 Quarterly Cyber Security comparison

The following is the post I uploaded to the PANW message boards earlier today. It is a little focused on PANW as I am the Tickerguide for PANW but should be interesting to many on these boards so I am posting here as well.

Here is my quarterly Cloud Cyber security comparisons again. This time I will again look at PANW, S, and CRWD as the leaders in this space, but I have added ZS to the list as there seems to be a lot of interest in them.

As usual, for this post I will center on the Cloud Cyber Security space as this is the most exciting in terms of growth and future potential and is largely a SAAS type business which has a lot of aspects that can be extremely beneficial to a stock investor, ie repeat business, stickiness to the customer, extremely high gross margins, etc.

I will also point out that there are other interesting companies that I could include but because I don’t want to make this too confusing nor compare apples to oranges, so I am not including Fortinent, Okta or others that could be argued should be included. If the interest is there I can (or someone can offer to augment this with a follow on post!)

Also, I will also take a shot at looking at the firewall portion of PANW as I think that brings a lot of confusion and perhaps detriment to people buying the company where the others are much more pure play cloud cybersecurity companies.

With that out of the way, I first will repeat the last four quarter’s comparison of a couple of key aspects, cloud ARR (Annual Recurring Revenue) and said growth rate. The first is important to show overall size of the cloud portion of the business and the second to show how it is growing. Then I will share the most recent quarters results.

March 2023 Qtr:

Company ARR ($M) % increase(yr/yr)
S……………….563.6……. ……75%
PANW……… 2,570……………60%
CRWD……….2,730……………42%

And the June / July Qtr results:

Company ARR ($M) % increase(yr/yr)
S……………….612.2……………47%
PANW……… 2,950…………….56%
CRWD……….2,930…………….37%

And the Sept/Oct Qtr report:

Company ARR ($M) % increase(yr/yr)
S……………….664………………43%
PANW……… 3,230……….……53%
CRWD……….3,150…………….35%

And the year end 2023 quarter for each and adding ZS into the mix.

Company ARR ($M) % increase(yr/yr)
S……………….734………………37%
PANW……… 3,490…………….50%
CRWD……….3,440…………….34%
ZS …………….2,100………….…35%

Finally, the March 2024 quarter results

Company ARR ($M) % increase(yr/yr)
S………….…….762………………35%
PANW……… 3,790…………….47%
CRWD……….3,650…………….33%
ZS …………….2,212………….…32%

So there are the numbers, before I start a discussion I should say that my numbers for ZS last quarter were wrong. I had included the quarterly revenues because for some reason they don’t report ARR like the others. I have corrected it now and estimated ARR by multiplying revenues by 4 to get an annual number. Not sure if that is perfectly correct but the best I can think to do. It’s funny because they advertise in their release that they are on a path to get to $5Bin ARR but as best as I can tell, they don’t report the present ARR. if someone sees it, please let me know.

Overall, the trends remain the same. PANW surpassed CRWD a couple quarters ago as the biggest in ARR and are adding to their lead slowly. Growth for all four is great but has been slowly dropping but PANW seems to be hanging on to its lead from a year over year growth rate as well.

And in this quarter, the qtr over qtr rates also favor PANW with a 8.5% rate vs 6% rate for CRWD, and for completeness, the q/q for S was 3.8% and 5.3% for ZS. Personally I don’t put as much weight in qtr over qtr since seasonal or one sale in or out can change the game.

Similar to last quarter, I will say it seems like an interesting decision by PANW to announce changes in their sales efforts to offer freemium packages to entice customers to buy multiple products a couple quarters ago. As explained by PANW, the margins for customers with multiple products are much better. The fact that they are taking these actions when their results seem to be fine is a good sign in my mind. You want a management that is looking forward, not reacting to the past. And now I can say, looking at the results (at least one qtr in) I hasn’t seemed to hurt the cloud based sales at all where they seem to be holding their own (at least!!) against the competition in terms of numbers. I guess we wait a couple more quarters to see further.

And so now I will take a shot at trying to understand the firewalled business. I don’t see anywhere where they break it out for me so I will do some back of the envelope calculations to estimate. Please note this may not be totally accurate but shouldn’t be terribly wrong either. PANW’s total sales are were $1.79B. Since ARR is $3.79B, I will estimate this quarters cloud sales as 3.79 B /4 or $0.95B and with the stated growth rate of 47%. That means the growth in sales was $303 M. Since the total growth was $233M (math left to the reader, I always wanted to say that!!) that means the remainder of the business revenues were down a little. I am estimating 8% (70/840, again left to the reader!).

I would take this all with a grain of salt as perhaps some of the firewalled business is set up as SAAS and ARR but does give the idea that the firewalled business is finally flat and maybe falling a little. I did this a couple quarters ago and it was still showing growth. Perhaps this is a direct effect of the freemium platformization effort they have started. As a side note to this, the economics of the company haven’t gotten any worse at all. Non-GAAP earnings up 25%, Operating margin up 200 basis points, and trailing 12 month free cash flow up to a half of a Billion dollars!

One final point on PANW, they are clearly doing more than just turning over the firewalled customers as can be seen by the numbers but also the big wins this last quarter from United Health Care (after a cyber hit on UHC) and IBM. Two huge respected companies to win!

So there you have it. I never want to underestimate how the market reacts to a company as it is seldom wrong, especially over the long term, but it does seem like PANW has been taken to the wood shed a little more than I would see as appropriate. It almost feels like ZS and CRWDs management hype is driving some of it, where as PANWs is a little more circumspect, although the numbers don’t really support the low key approach.

In addition, if you are in for the long term, how much penalty do you attribute to a management that has a plan to improve margins even if there is a little short term pain. Especially when it is coming from a management that has consistently produced great results for years and appears to be winning the cloud business which is a land and expand industry at the moment.

Finally, this is a little bit of an embarrassment of riches. All of these companies are in an industry that is doing great and seems to have a bright future because it is hard for me to imagine a world where this doesn’t continue to grow in importance over time.

Me, I own shares in both CRWD and PANW and don’t plan on selling anytime soon.

What are your thoughts?

Randy
Long PANW and CRWD and PANW Tickerguide

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Yep - it is strange how they are setting an ARR target but don’t report on it other than in terms of customer counts at $100k, $1m and $5m ARR at each quarter and only intermittently in aggregate.

Ok firstly they talk about being on a path to $5b in their results presentation (slide 16)…
https://seekingalpha.com/article/4696573-zscaler-inc-2024-q3-results-earnings-call-presentation?source=content_type%3Areact|section%3Asummary|section_asset%3Aall_news|first_level_url%3Asymbol|button%3ATitle|lock_status%3ANo|line%3A7

In terms of their revenue model this is what they say in their 10-Q…

“Subscription and support revenue is recognized over time and accounted for approximately 98% and 97% of our revenue for the three and nine months ended April 30, 2024, respectively, and 97% for each of the three and nine months ended April 30, 2023, respectively.”

They announced that they crossed $2bn ARR after Q1 in October last year…

I thought I saw an ARR number but can’t locate it but would imagine it is maybe a touch higher than $2.2bn but you probably aren’t far off.

Thanks for the interesting comparison update.

Ant

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Yes. The $4B was a typo, should have been $5B. Thanks for catching that and I will edit it.

I also agree that my estimate of ARR might be a little low. Using the quarterly revenue should always underestimate ARR because a sale at the end of the quarter wouldn’t show up in that quarter, but should be in the ARR therefore revenue should be always lagging. But, as I said, I was a little shocked it wasn’t reported in the release as all the others do.

By the same logic, I probably somewhat underestimated the firewalled revenue of PANW and therefore overestimated revenue reduction percentage for the quarter. But in the end, precision can be the enemy of accuracy and the general discussion still holds I think.

Thanks
Randy

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