Palo Alto Networks & operating leverage

As many of you may know, I’ve been a long time advocate of cyber security. The sector has served me well from Palo Alto Networks to Fortinet to Imperva to Qualys. I’m out of the last one but have kept the rest.

Palo Alto (PANW) just announce quarterly results, guidance and a new CEO who was the one time SoftBank heir apparent.

The results were amazing, guidance strong and the appointment brilliant. PANW has spent a year falling back and and rising again finally breaking out above its old high and now above the 200 psychological level.

This is a case study in navigating product to subscription business models and on premise to cloud.

Growth is a stable 30% but the operating leverage - wow. Pretty soon at this rate they will not just be incredibly non-GAAP profitable but GAAP profitable too.

The operating leverage is amazing. Revenues up 31%, Billings up 33%, Deferred revenues up 34%, non-GAAP Net Inc up 60%+ and the GAAP loss cut by 25%, Astonishing results. Revenue outlook raised and eps outlook miss due to acquisitions. This set up looks great. Growth beyond on premise into the cloud looks good. It took a long time to break out and I think this has good value and a way to run. They couldn’t have found a better CEO replacement.

Palo Alto Networks (NYSE:PANW): Q3 EPS of $0.99 beats by $0.03.
Revenue of $567.1M (+31.3% Y/Y) beats by $21.42M.…




Cyber security has been to me a bit like renewable energy - clearly a trend - but I can’t get past the fragments.

Any feelings and read on Fireye’s latest product - Helix - and its ability to grow FEYE? Is PANW your favorite play in the space?

My experience in the cyber security space is 100% from an electric utility perspective and even then I’m only on the DR and incident management side of the house.


As I said I’m in PANW, CyberArk and Fortinet. I have always liked Fortinet as undervalued but slightly higher risk. Palo Alto fell out of favour but came back. They had folks worried with their subscription model transition. I believed in it and it paid off - up 100% since the wobble. I have also been in Qualys and have interest in FireEye.

I sold out of Qualys when they hit teen level growth rates - as it felt more like terminal velocity rather than a transition that would re-accelerate like Palo Alto. Fortinet for all its seemingly SME image has done brilliantly.

I would characterise Fortinet as the PayCom to Palo Alto’s WorkDay.

Right now with break out on and the operating leverage and finally the GAAP profitability progress I am inclined to advocate PANW as the one to go for. I actually think FireEye will come back from here and the CEO is a genius.

Still for anyone wanting in - I would go for PANW then Fortinet then FireEye or Rapid7 perhaps then CyberArk.

I have massive conviction in the secular trend of cyber security and the proven record of a few players in particular.



Much obliged. I’m also bullish on the sector. Seems like a bucket play might be the safest in early days for this industry. I appreciate you laying out your conviction and thoughts behind each company.