Symmantec taken down by ZS

Investment Analysis Clubs Saul’s Investing Discussions
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I think Zscaler is up big today because Symmantec just turned in a stinker of a quarter last night missing on revenue and crappy guidance to boot. Enterprise billings were down 24%!!! A while back Symmantec purchased bluecoat (which is part of their enterprise product) which directly competes with Zscaler. This little excerpt is from their conference call as calling out what was their biggest headwind.

Our ProxySG and Web Security Service product plus advanced threat detection protection bundle has been the biggest surprise providing us headwinds. The ProxySG business, which is the Blue Coat hardware proxy bundle has fallen off quicker than we anticipated and as a result, we have not experienced as large a refresh cycle as we expected

Basically this means they Zscaler is eating Symmantec’s lunch in what was supposed to be their growth business. Their new CEO had this to say,

The cause is clear, the move to the cloud was much quicker than thought. We were behind with our product offering, but today, are back with superior performance to our competitor, supported by a growth rate twice the market growth, but unfortunately from a much smaller base. At our current share gain rate, I’m optimistic for the future.

Personally I think Symmantec’s offering has some structural issues such as expensive hardware and forklift upgrades. I’m not sure they can, “improve” their way out of this one. Zscaler is a new paradigm that is as far as I know, faster, cheaper, better.

Some more And as I spoke about it in my text, we, in fact, have strengthened that cloud offering, so we think we have that piece fixed. But the fact that the customer moves, we don’t want to try to force the customer not to go where they want. So we’re in a much better position to retain our key customers into the cloud now that we’ve improved the product. But the fact that our hardware business is declining more rapidly than we anticipated, that’s what led to this downward position.

My Take
Symmantec is hurting, Enterprise has fallen off the cliff. The company has shuffled their senior leadership and retooled their cloud/enterprise offering. I’ll be honest. At this point I don’t know if the retooling of their Enterprise offering is a threat to Zscaler but I’ll say this. Zscaler has massively disrupted Symmantec. Last quarter Symmantec seemed like they didn’t know what hit them with comments like “lengthening sales cycles” blah blah blah. This quarter, Symmantec knows exactly what hit them…Zscaler. Going to be interesting to see ZS’s earnings release.

All the best,
Ethan

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please take one “m” out of every time I wrote, “Symmantec” somehow, somewhere along the way my spell check was trained to symmantec instead of Symantec.

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ZS way up at end of day…why?

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maybe my post wasn’t clear. ZS is up because symantec is losing business so quickly it means that someone is taking it. Everyone thinks that someone is ZS

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https://www.investors.com/research/ibd-stock-of-the-day/hot-…

The above may be why it moved too…IBD stock of the day. No idea how many act on that.

Back in pre-IPO, the only competition for Zscaler seemed to be BlueCoat and OpenDNS aka Cisco Umbrella. Cisco then buys Duo. They all see the writing on the wall a bit too late, in moving from hardware firewall solutions to cloud software. All the endpoint companies, like clbk, rapidly trying to grow cloud-based solutions, too.

Truly ZS is out on an island currently. Legacy vendors are trying to play catchup.
Palo Alto, Fortinet…all are pivoting:

https://www.paloaltonetworks.com/products/globalprotect/clou…
https://www.fortinet.com/products/secure-web-gateway.html
https://duo.com/docs/dag

Zscaler was in private company mode, building out their dc footprint and improving their solution for years. Competitive advantage.

Love the company. Just still having trouble with valuation, as I guess I am supposed to assume 30x TTM is the new normal. I was fortunate to own them for a good stretch earlier this year for good gains. Hope to get back in down the line.

Dreamer

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…great post, Ethan. Really clear. I imagine ZS will take their other “M” now, too…

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Ethan,

Lol. Is this not fun having followed this over multiple quarters, understanding that Symantec’s problem is Bluecoat, knowing what Bluecoat is in relations to Zscaler and the world, knowing why Bluecoat has become a disaster, listening to the Symantec CEO pout out this or that or the other things as reasons why not to worry or this will be fixed etc., while the PROFESSIONAL analysts praise Symantec and put out buy ratings, only to see it play out exactly as we called it a year ago!

I do not know what sort of marketcap and multiple is sustainable for Zsclaler, but its recent double in the last few months was not a fluke that is for sure!

Btw I may have made some very good investment decisions over the last few years, but none of that would have been possible without the group sourcing that goes on here, on NPI and some of the materials the Fool puts out on their premium side.

Now what to do with Zscaler? Good problems to have.

When you see information like this gel together, that is not speculative or visionary, I think the lesson here is to have confidence in what you know. I did the same thing with SHOP (50% of my port with one buy at an opportune moment - while it was still called outrageously overvalued) because such information came together back then as well regarding a Salesforce buyout of its closest (but inferior) competitor.

The biggest issues we are facing now is valuation concerns (sometimes), but also S curve issues at some point. TTD is putting forward that sort of question to many now. Multiple answers on that, the majority seem to think it is just a nice quarter. I will not argue with that. But worthy of examination.

Tinker

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great dialogue here.

i just learnt about Cisco Duo - first I thought that they are finally coming in with something that can challenge ZS… learning a little bit more, its far from challenging ZS… I was a bit surprised and honestly disappointed with Cisco

(yes, I am ZS shareholder and not a Cisco shareholder, yet I thought this storied company will do something to maintain a fight, not clear if they are doing anything yet).

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I think the issue is the perfect innovator’s ilemma. Zscaler’s Revenues are still small in the scheme f things. The pie is growing fast and demand powerful, but too small for the existing giants to make fit on their quarterly product reports. Therefore it is left open to preaching hybrid - which means we cannot stop selling you appliances as the VP in charge will be fired otherwise as his numbers crash, or start ups to find new ways or compete with Tesh Zscaler way.

Zscaler becomes more and more powerful in what it does reLative to everyone else who might try to imitate them, and at some point the market grows so large that even appliance sale seem to be replaceable on the quarterly books. By then of course Zscaler is untouchable.

Cisco fully understands and appreciates Zscaler. They tried to buy Zscaler pre IPO. Cisco’s line is that there are three players in this market, SWG, it will be a multi billion dollar market and that Zs, Cisco, and Symantec will each do very well. This latter company can probably be cr-dosed out now. Meaning ZS and Cisco will largely shaver the market now- in Cisco’s eyes.

In the real world Palo Alto is not stupid, but they too rely so much on appliances.

For now Zscaler is still prechasm if you ask me. The GE architecture, which Zs enables, is hardly spoken about as a possible best business practice these days but instead is being used for greenfield opportunities and by some pioneering CTOs. But as Saul has indicated this snowball grows with each new large reference customer.

Tinker

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color me naive or ignorant but why would the weakness in BlueCoat necessarily mean their loss is Zscaler’s win? I know that the two solutions/approaches are competing and many entreprises are migrating to a cloud managed network security.

Certainly I find it very interesting how you are reading between the lines but I just want you explain it to me like if I was a 5 yol. Thanks!

tj

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I happened to have a conversation (about 3-4 months ago) with a senior manager at Symantec and I asked him what his thoughts were on ZS. He talked very poorly about them, saying sure they’re growing fast because they’re so small, but saying that Symantec’s competing product is so much better that there was just no way ZS would ever be able to compete with them.

If you’re assumption is correct, that Symantec’s loss is ZS’s gain, I will find the conversation I had very funny…

Long ZS

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We discussed this in great detail last year. Symantec ‘s issues are Bluecoat. Bluecoat is the only other competitor in the leader quadrant in SWG. And yet as ZS thrives Bluecoat collapses to the point that the board of directors intervened.

We are not wrong on this. Sounds to me that your contact is textbook disrupted. They never even see why get it is in front of their faces.

Regardless I prefer to enjoy rather than go through the details we discussed last year when this became quite evident. Good luck to your contact selling over priced and overly complicated appliances against the “inferior” POS that Zscaler provides.

Btw Symantec screwed up theirs Veritas acquisition as well and tried to start over w Bluecoat. Such is the way of organizations that are not forward looking, think only of milking their installed base and their glory days, and iterate the same mistakes again.

Funny how in a disruptive and growing market both ZS and Cisco thrive but Symantec’s grand offerings collapse. Fluke or simply customers are too stupid to know what is best.

Tinker

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I’d be curious to hear from GE how they handle “externally originated traffic (for example, traffic destined for the customer’s website)” without appliances. As Gartner points out (https://discussion.fool.com/gartner-names-zscaler-a-leader-redux… ), ZScaler don’t have a solution for that. Symantec, with a variety of solution types, does. Yes, it’s added complexity and cost, but it does seem that one cannot rely exclusively on ZScaler alone. Is that not a risk?

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