PaloAlto - Good news for security co.s

PaloAlto is up about $46 or 10.5% after hours after releasing results. Probably is good news for CRWD, ZS, and S, all of whom will be releasing results in the next week or so. (The security market is healthy.)



From the PANW conference call today:

[General comments I’m highlighting that demonstrates cybersecurity is still in an immense tailwind. Note that this means if any of OUR companies report badly in their next report, they really have NO EXCUSE for underperforming, when PANW is able to execute like this.]

In this time of increased macroeconomic volatility and geopolitical uncertainty, we saw… strong cybersecurity market demand …We reported strong top line metrics of both billings and RPO, growing 40% year-over-year. This is the highest billings growth we have reported looking back over the past few years – 4 years

The trend that started with the pandemic and the widespread cyber attacks, the trend of network transformation, cloud transformation and fortifying one’s infrastructure continue to be strong.
…we’re seeing heightened interest from commercial and government customers in Europe around mitigating this nation’s state activity. This ever challenging threat landscape is driving broader and more strategic customer conversations.

The pandemic has accelerated the adoption of SASE. In addition to significant traction from our installed base, we continue to see strong momentum from net new customers…

We continue to see broadening demand for cybersecurity, which is enabling us to grow and invest from a position of strength.

We’re upping guidance across the board for Q4. We’re upping guidance across the board for the full fiscal year, way ahead of what we had promised the markets in our Analyst Day not too long ago, and that seems to be a wonderful story and a happy place to be.

[There appears to be little macro impact on cybersecurity spending.]

Analyst: …just from a macro standpoint, I’m wondering if you’re hearing anything different from customers around how they’re thinking about the spending environment? And in relation to that, given the macro pressures on IT budget more broadly, are you seeing more of a willingness to want to consolidate to fewer vendors as opposed to multiple different point products?

CEO: …if you compare and contrast what we’re seeing today with what we saw about 2.5 years ago, 2 years ago when the pandemic hit, believe it or not, there were more industries impacted by the pandemic, there are – than are impacted right now by inflation concerns.…we’re not seeing the pressure from an inflation or reduced economic activity perspective. I will tell you when the pandemic hit, we were getting letters from CIO saying, listen, our revenue has gone away…I don’t want to be way too optimistic, but the fact that we were able to tide over that pandemic moment as an industry to be fair at cybersecurity, I’m less worried about it right now given what’s going on in the environment because I think on the flip side, as I said, you’re seeing way more security awareness and concern more than I’ve ever seen.

[Looks like the tight tech labor market may ease up soon, which would be good for our companies in general]

Analyst: A, how are you doing in terms of hiring as many people that you need? And then B, how – what exactly are you doing in order to maintain costs in that increasing wage environment around skilled labor?
CEO: …we haven’t hired as many people as we are expecting to in this market. It’s a very tight labor market, it is current point as you see. Having said that, my personal view is the labor market is going to become easier in the next 6 to 12 months. And anecdotally, as you’ve seen, we’re seeing hiring freezes anecdotally. If you think about it 6 months ago, we were losing people to startups. We’re losing people to competitors whose stock prices were going up and to the right. The market rationalization is causing people to take stock and say, wait, do I really want to go make this move.

I’ve already seen anecdotally start-ups start to stop hiring because they’re trying to hold on to their cash because they don’t expect to be able to raise money in the market for the next 12 to 18 months. So I think from that perspective, the labor market actually in our opinion, it’s going to ease up a little bit. We expect some degree of wage inflation, which is being caused because of the fact that we’re in Silicon Valley, and we live around some very large tech companies who are trying to get people to come work there. So we have factored into our planning, some degree of inflation on our wages. But I personally don’t think it’s going to be off the charts.

[The only comment I could find in the call about Federal business was not too insightful. Not much to extrapolate from this]

Analyst: …curious if any commentary on what you’re seeing around sales cycles and any sense of whether maybe you’re pulling forward some demand given the threat environment?

CEO: Look, in every quarter, we’ve seen some deals get pulled forward, sometimes our sales people because they’re trying to hit quotas, sometimes a customer because they’re in a compromised situation, they’re trying to get something sorted quickly as possible. Sometimes it has to do with budgets expiring in different parts of the world, December becomes one of those moments. August becomes that for the federal government. So I think the – perhaps the best answer is that we have not seen any unusual activity around that topic.

Having said that, as we said, we are seeing heightened activity from nation states, especially with the proximity to where the war is, what they’re trying to fortify their defenses and make sure they understand that attack surfaces as a nation better, which they have not had to worry about in the past. They should have worried about it, but they haven’t focused on it. But now as people are trying to petition to go become members of NATO, they’ve got to make sure that their defenses are robust in case they see retaliation.


I have no time to write now as I am traveling. I have sold out of ZS after their last ER in January for a few reasons. My sense is that they are facing some challenges in competing against Palo Alto whose cloud products are gaining traction. While it’s not scientific, I usually get a good sense of which direction the wind is blowing from reading transcripts and anecdotal evidence from people using their products. Cloudflare is also getting into the zero trust network space.

You can see emerging challenges from ZS’s billings and their stalling operating profits for the last couple of quarters (buying revenue with elevated sales and marketing expenses - their S&M costs as a percent of revenue is the highest in SaaS universe and showing no signs of coming down as revenue scales - never a good sign).


On the one paw, I appreciate astute investors like catsunited offering their bearish views and their reading of leaves made of tea. Something to be said for experienced investors listening to their intuition; often enough it’s a key indicator, especially from those who know their industries well.

On the other paw, messages like this make my tummy all upset and dyspeptic because Fear-Uncertainty-Doubt is a thing, and pressing that button repeatedly, especially in times of distress, makes the case seem much more likely than it really is.

So we have to follow the numbers. And the numbers show increasing strength rather than weakness in the business.

I’m going off memory here, but didnt’t Jay Chaudry, chief Suit of ZS, say something like “you know we are called Zscalre because we didn’t want to lock ourselves into being a mere security company. We are/will be much more than that.” Truly paraphrased and maybe Monkey dreamt that phrase entirely.

This is where some of our resident tech weenies might help: I thought ZS’s structural architecture was best in class; so how can a clobbered together offering like Palo’s compete as well as it does? Is it the matter of “good enough” is actually good enough; or are ZS and CRWD not actually as technologically advanced over their competitors as advertised–and they do advertise that all the time.

Hard to know what to believe.

Until we get some kind of substantial answer to these queries, Monkey will have to resort to doing nothing and just leisurly swinging from the branches, day in, day out. Getting tired from jumping in and out of years-long investments and opportunities at the first sound of something rustling in the bushes.


Monkey (long ZS)


I don’t think PANW is eating ZS lunch. Not by a longshot.

We don’t have much vision into how they compete against each other in general but the FED stuff going on provides a glimpse. I searched on zero trust and Palo Alto has 39 where ZS has 24. Note, the PANW one includes other products too so could be if someone just wants their Cortex stuff (similar to CRWD or S), it might show as on this list of 39. In any case, given the sheer size of Palo Alto v ZScaler, 24 is impressive. Also, if you click on ZScaler, it’ll show you what agencies are using the service. ZS has some heavy hitters!

8 Departments (Agriculture, Commerce, HHS, Labor, State, Interior, Treasury, VA)