It has been a while since all earnings were out so I thought I would do an update on my quarterly Cloud Cyber security comparisons again. Especially after the interesting interview and discussions a couple of threads back. As usual,I will look at PANW, S, and CRWD as the leaders in this space. As I have often said, PANW can sometimes tend to get overlooked in this space because of the large Firewalled cyber security business they have (that is doing very nicely by the way). But I think that may finally be changing a bit.
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 have included some notes of Fortinet as I get questions on this although I do not believe they have a substantial cloud based business (or at least they don’t seem to break it out in their quarterly releases.
With that out of the way, I first will repeat the last two 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. Here is the December ‘22 quarter for all three…
Company ARR ($M) % increase(yr/yr)
S………………549……………92%.
PANW……… 2,330…………. 63%
CRWD………2,560……………48%
And here is the recent March Qtr:
Company ARR ($M) % increase(yr/yr)
S……………….563.6……. ……75%
PANW……… 2,570……………60%
CRWD……….2,730……………42%
And now the June / July Qtr results:
Company ARR ($M) % increase(yr/yr)
S……………….612.2……………47%
PANW……… 2,950…………….56%
CRWD……….2,930…………….37%
A couple of quarters ago, it was said that CRW was bigger with equal to or greater growth, but with the most recent results, PANW is both pretty much maintaining its growth and CRWD continuing to drop off, (albeit good growth for any other industry ) and actually passed it on size. It has taken awhile but the higher growth rates has caused PANW to be larger in ARR, Think about that. It is really getting hard for me to understand the logic that CRWD is winning the cloud cybersecurity space which many people continue to espouse.
As for S, clearly the growth is still very good, but it is dropping pretty rapidly now and from a much smaller base. And just as importantly, it is almost 1/5 the size of PANW, with a growth rate that is causing it to lose ground. No wonder they are looking at potential buyers. You have to figure that if they can’t grow to a reasonable size they will have a tough time competing in this market place (which it appears they are.)
Now let’s look at Free cash flow, S is still negative which is not surprising due to thier size. CRWD is actually starting to turn this around showing $189 M in free cash flow last quarter, but PANW garnering $388M. So more than twice as much Adj Free Cash Flow as CRWD.
And to be fair, part of the free cash flow advantage is because of their sister Firewalled Cyber security business. But really, that in inself is an advantage in my opinion. They have built in existing firewall customers to add cloud services without needing new customers and as the entire industry matures, I have to believe that having both sides of the business helps to retain customers as you wouldn’t necessarily want to use two different companies for different aspects of the same business need. In fact, that is what they have been saying, selling the fact that they have a complete platform to support all of your Cyber security needs.
In any event, as I have said for quite some time now, it seems to me that PANW is winning this race for customers in a land and expand market and they are my favorite in this space.
As for Fortinent, it is hard to do a direct comparison because, as I have mentioned they do not call out ARR or any cloud based revenues separately. But they did have a nice last quarter with total revenue growth of $ 1.29B on a growth rate of 26%. Free cash flow of $438.3M va $ 283.5 M last year. Very nice overall numbers indeed. It seems that their business model and product lines are a little different but a very healthy business indeed. As I write this I realize I really need to taking a closer look at them. Perhaps not the sexiness of the cloud spade but nicely growing and thriving company none the less.
To be clear, I like all three (S much less so) and think it is a vital industry that is likely to keep growing in the future and there may be more than one winner. But to be open here, I will say I sold out of my small position in S a while ago and now hold a good position in PANW and a smaller position in CRWD (and need to look into Fort)
Having said all that, my biggest concern with the space is still how much market share the gorilla Microsoft can grab as they enter the fray. Like Amazon or Google, It is hard to ignore them in any venture they focus on.
What are your thoughts?
Randy
PANW Tickerguide and long CRWD, and PANW.