ZS update

[iyu]

Most of us are holding ZS. I have thought that the following comments from Palo Alto Networks could be important to us.

Their CEO Nikesh Arora spent some time to discuss ZS in their Q4 2019 Results and they think they are beginning to do well against ZS.

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In addition to product releases, we had several notable wins during the quarter. We displaced Symantec and Zscaler at a Fortune 50 U.S. retailer to secure their data center and network of more than 2000 retail outlets.

We displaced Zscaler and the Fortinet at a major European national healthcare provider in their digital transformation project.

You do notice that we’re displacing your favorite company Zscaler and many situations.

We have our first over $10 million deal for Prisma access where as we highlighted we’ve displaced Zscaler. So feel very confident in our ability to keep building Prisma access as one of the future architecture for securing the cloud.

Yeah. I – so I think the competition is Zscaler. However, I strongly believe that the right architecture and the right products at the end of the day win.

I don’t know if you know, if Microsoft recommends that when you use Zscaler, you turn – you don’t use Zscaler when you go to Office 365. Why? Because it breaks Office 365. Because that’s what proxies do. And it’s their own technical solution and I strongly believe that the right technical solution will win.

[Kingran]

The comment is already reflected on the stock price, especially on a strong day.

[LifeOfDreamer]

I don’t know if you know, if Microsoft recommends that when you use Zscaler, you turn – you don’t use Zscaler when you go to Office 365. Why? Because it breaks Office 365. Because that’s what proxies do. And it’s their own technical solution and I strongly believe that the right technical solution will win.

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Sounds like FUD from a competitor to me.
Does Splunk admit they are losing to Elastic?
Does any company ever admit they are losing to a competitor?
I hardly ever see a competitor’s name readily mentioned in an ER…seems a bit desperate.

Can anyone find anything from Microsoft saying that zscaler doesn’t work with O365?
A quick search just shows microsoft’s own website touting Zscaler:

https://customers.microsoft.com/en-us/story/zscaler-kelly-se…
https://docs.microsoft.com/en-us/cloud-app-security/zscaler-…

Then you see stuff like this, from Zscaler website, which basically says “hey…O365 migrations can be complicated…make sure you do it correctly, or guess what, you will have problems”
https://www.slideshare.net/Zscaler/pitfalls-to-avoid-when-de…

I think we are seeing these high 30+ P/S multiples are not sustainable, and this was an opportunity to push down ZS stock a bit. ZS at $8b mkt cap is a better buy than ZS at $9b or $10b, if my napkin math is correct.

Dreamer

[Kingran]

Sounds like FUD from a competitor to me.
…
Does any company ever admit they are losing to a competitor?

PANW and ZS are competitors, the CEO is talking about specific instances where they won against ZS. Companies all the time talk about their competitors and how well they do against them. Sometimes, they compare their products, features, and in some cases, industry is growing x and we are winning X+% by taking share, etc… Nothing new.

BTW, the article you linked kind of validated PANW point that ZS implementation will break things and you have to take workarounds and PANW solution doesn’t require these fixes.

[tzbbear]

I am a newbie here and just purchased ZS about a week ago and now I’m down 13% on this Foolish “buy now” recommendation. This Motley Fool stock recommendation is not going well for me and I’m really scared.

[LifeOfDreamer]

Zscaler is brought up 10 times in the PANW ER.

https://seekingalpha.com/article/4289778-palo-alto-networks-…

The PANW ER CC is an interesting read…I skimmed (day job) but very combative.
I believe they basically said “we get the market loves zscaler and SaaS, but we are not going to go that route” and then they bashed crowdstrike, zscaler, sd-wan…etc

Kudos to PANW CEO for not wanting to go down the NTNX rabbit-hole of declaring a full transition from hardware to software.

Apparently this was sort of an ER and Analyst day in one. Not positive, as I don’t follow PANW ER’s.

"Now many of you are so kind, you’ve written me very long notes about what do you want me to tell you, which we’re going to make you happy. It’s very helpful. Just like I have my marching orders you’ve given me the script. So Keith Weiss from Morgan Stanley, yes, we will talk about product evolution M&A. Keith Bachman talks about depth and duration of depressed cash flow stands very depressing, but we’ll talk about that they’re not depressed.

We will go down to the details of our next generation security business and explain the financial models around you, they don’t get spooked by duration issues. And yes, Brad, no hardware company of this size have made a transition like this, but hopefully we just need to keep growing and not make the transition.

You do notice that we’re displacing your favorite company Zscaler and many situations. So, but I’m scared today, we had changes or recommendations, something is going to happen to the rest of you guys. "

Nir, the CTO, is particularly combative…but often that is how a CTO is: very passionate about their architecture and their solution as being the best.

Talk to a NetApp CTO, and guess what, NetApp is the best. Talk to a Pure CTO or an HPE CTO or a DellEMC CTO…you get the idea.

PANW has been constantly pivoting for years now. They, like Cisco, viewed security as a networking problem. More large orgs are moving now to a setup where their DCs are shrinking, and they are more concerned about their remote sites (branch offices, plants, mills, factories) and how to leverage their data and to create more data, leveraging IoT at the edge. Data Analytics can be done at the edge (rather than sending back to main DC) and burst up to cloud from the edge. So the standard way of everything getting routed thru the main network and to the main DC is not how things are being done moving forward. So PANW pivoted to endpoint, and then they had to pivot to cloud-based security. They even admit on the call:

“I anticipate that there are a number of cloud security technologies that haven’t been invented yet, but we will have to be thinking about. And we will continue to be very decisive and purposeful about building out this platform and continue to maintain its position as the most comprehensive solution.”

So PANW is basically saying “hey…as security changes, we are the best to adapt cause we have a lot of experience and there are too many security vendors out there and customers want less security vendors in their environment to manage”.

Not a bad argument, but it in no way negates Zscaler or Crowdstrike or Cisco or VMware+Carbon Black, etc…

Dreamer

Dreamer

[branmin]

Welcome, but this is not for discussion on this board. Suggest you read the Rules of this Board, the Knowledgebase and associated articles to remind yourself why you brought the Company in the first place. Respectfully. Bran.

[Domeyrock]

It looks like it’s time to play that game “How Well Do You Know Your Company?”

There’s a lot of haters and imitators out there, envious of ZScaler. I imagine that will only get worse, and as a shareholder since $46 a share, I’m more than ready for it, waiting with a koolaide smile on my face for the next conference call.

Dominic
long ZS

[tprooney3]

Hi Tzbbear,

Welcome to The Fool. I’ve been a Fool customer for 7 years now, with Stock Advisor and Rule Breakers.

I get your fear–you buy the rec and all it does is drop! Your fear is justified.

Here’s the thing. Some of your stocks are going to lose. The sooner you embrace that, the sooner you are going to be further down the path of being a good investor. And its crazy! I bought Nvidia in January 2018–a great company that has had an amazing run up of over 1000% since the first Fool rec. I’m down 22% (not relative to the market, actually down 22%). I took a 33% loss on Celgene when I sold. I lost 38% on Clean Energy when I sold. I lost 87% in Celldex (no longer a rec).

You must be thinking I am a terrible investor–such losses! But since August 2012, I have averaged a 15.7% return per year. I did great with Mastercard, Amazon, Starbucks, and Activision. I still own and add to each of these. And they have more than compensated for my losses.

So two suggestions:

1. Focus on building a portfolio of 15 stocks built from your highest conviction ideas. Doesn’t matter if you just get 5 shares of one stock, 23 of another. Buy at least 15, and know that you are going to be wrong about some of them (either in market terms of the timing you buy, or sell, or in terms of company fundamentals, where the company’s actual success breaks down). That’s the price of admission.

2. Don’t allocate the same percentage of dollars to each. Put more money in stalwarts, less money in growth stocks like ZS. I would feel pretty differently about being down 13% in MA (which is an 11% allocation for me) than in ZS (which is a 1.7% allocation in my portfolio).

Tom

[Kingran]

Basically the competition is intense and companies are trying to differentiate with each other. If PANW is winning against ZS and bringing ZS out so many times, then it means they are going after ZS in the market place, it could be based on technology, based on PANW size vs ZS size (read it as install base strength) and lastly cost. If you notice PANW margins have gone down, so they could be competing on price also. One of the things that competition does is bring the price, margin down. While companies may be growing, if the margins started going down, the path to profitability gets pushed out, which will show up in stock price eventually.

[shah0048]

BTW, the article you linked kind of validated PANW point that ZS implementation will break things and you have to take workarounds and PANW solution doesn’t require these fixes.

Huh…Errrr…which article? The Slideshare presentation (third link)? All the links seem to affirm ZS works better with O365 than with hardware solutions.

tj

[shah0048]

In addition to product releases, we had several notable wins during the quarter. We displaced Symantec and Zscaler at a Fortune 50 U.S. retailer to secure their data center and network of more than 2000 retail outlets.

We displaced Zscaler and the Fortinet at a major European national healthcare provider in their digital transformation project.

You do notice that we’re displacing your favorite company Zscaler and many situations.

Hmmm…I’m not sure how to interpret this quote from their CEO (or CTO?). “Displace Zscaler”…as in the company had implemented Zscaler and then the company decided to go with PANW? Or does he mean that we won the client, out competing Zscaler (and other vendors like Fortinet and Symantec)?

My understanding is that once a company implements Zscaler (gets rid of all the hardware and all the people needed to manage the hardware), they are not likely to go back. No?

tj

[XMFBreakerTinker]

TJ,

Been spending the day crowdsourcing this issue with Palo and the conclusion (too long to get into all the details) is clear and blatant BS.

Palo is wrapping an acquisition they made into their architecture to be used where their appliances would otherwise not be used anyways in the meantime increasing complexity and cost and the need for more appliances.

Palo was blatantly untruthful in regard to the 365 Zscaler thing. 4 Pinocchios there. They drew on a 2017 blog about web proxies that never mentioned Zscaler nor bother to metion how Zscaler is integrated into 365 as its security of choice. But hey, if your a $2 billion a year company and you have to mentoin the name Zscaler (a tiny $300 million a year company) that often in an investor presentation, one has to wonder, why? Why so obsessed with such a small little player with an “inferio” product offering, and talk unsubstaniated trash about it at the same time?

I think most here know the answer to that.

Tinker

[JAFbrblev]

Tinker,

Your insights and ability to drill into data is certainly an attribute missed in the Fool community.

Regards

Just a Fool

[BobbyBe]

I think Tinker has it right here. This report just confirms ZScaler’s competitive threat.

However, I’m starting to question ZScaler’s valuation based on the total market size. I could easily see MongoDB, The Trade Desk, and Roku eventually reaching 15b in revenue or more. But looking at Zscaler’s industry, Palo Alto networks is the big dog, and they are only pulling in 2.75b in revenue ttm. At that run rate, they are trading at a p/s multiple of 6.87.

So if ZScaler reaches the size of Palo Alto Networks, and trades at a similar multiple at scale, they would be an 18.91b dollar company. That’s barely a double in stock price from here.

So where’s the opportunity? Is ZScaler going to be able to eventually sustain a greater operating margin than Palo Alto because of its cloud business model and therefore command a higher multiple? Is the security market growing at such a pace, that the tide is going to lift all of the boats to higher revenue?

It just seems that the potential size of Zscaler at scale is much less than the likes of MongoDB and The Trade Desk who are going after much larger markets.

I’m sure I’m not the only person who is wondering about this question…

[shah0048]

BobbyBe,

Zscaler’s immediate opportunity is $17.7 billion (replacing all of the security hardware to their cloud service). Once companies are on their platform, they can expand by offering other services so that should greatly add to their current $18 billion TAM. They do have long road ahead.

tj

[ethan1234]

BobbyBe,

However, I’m starting to question ZScaler’s valuation based on the total market size. I could easily see MongoDB, The Trade Desk, and Roku eventually reaching 15b in revenue or more. But looking at Zscaler’s industry, Palo Alto networks is the big dog, and they are only pulling in 2.75b in revenue ttm. At that run rate, they are trading at a p/s multiple of 6.87.

I think you ask a really important question that I’m not sure has an answer but I’ll take a stab at it. PANW’s revenue is peanuts in the grand scheme of cyber-security. Total spend is around 130 billion a year and it is growing in the 10-15% range a year. Cloud security is one of the fastest growing subsections. Of course ZS isn’t going after all cyber-security spending so what is their piece of the pie? Back at their IPO the company mentioned they thought their TAM was around 17 billion dollars. I’m always hesitant to put much stock in a companies self reported TAM but network/application access /sandboxing/cloud is huge especially as more and more stuff moves online. The stakes are getting larger and the need to protect is getting larger.

Naturally ZS will have/has competition so it will not get anywhere close to all the spend. So far the competition hasn’t shown up in a big way but I think we are in the very early innings.

Anyways all this is to say, the market is big and it is growing really fast, and so far we haven’t seen any indication that Zscaler can’t keep growing.

here are a couple of links that are helpful
https://www.gartner.com/en/newsroom/press-releases/2018-08-1…

https://cybersecurityventures.com/cybersecurity-market-repor…

best,
e

[Kingran]

Tinker,

My rudimentary understanding is Prisma Access (one of PANW product) is in direct competition with ZScalar. From the results…

And our performance in Prisma and Cortex or as we refer to them collectively as next-gen security was especially strong.

Our next-gen security billings were approximately $192 million in the quarter, this represents a $768 million annual run-rate to approximately and accelerated our growth to approximately 180% year-over-year."

Compare that to ZS revenue. Let us see what numbers ZS reports and where the growth rate is going to shake out for ZS. But take a second and let 180% y-o-y growth sink in on products that directly compete with ZScalar offering.

Why so obsessed with such a small little player with an “inferio” product offering, and talk unsubstaniated trash about it at the same time

Companies attack emerging competition is nothing new and irrespective of their strength they attack other competitors. And clearly from the remarks on the conference call, the investment community and analysts are concerned about PANW’s ability to compete with emerging competition from ZS.

While you consider it as “trash” talk, market just rewarded PANW with a $1B raise in their market cap. I don’t follow PANW so I am not sure whether the raise is due to something in their investor presentation, or in their latest results. I am just wondering whether market was worried about the emerging competition and today’s results showing PANW can address the threat from Zscalar.

[XMFBreakerTinker]

Kingran, what Palo is selling is a hybrid product. The appliance less functionality only happens on the edge such as on SD-WAN installations where they would not use appliances anyways. Yes, in these greenfield opportunities they are competing.

But then again they are not. Zscaler sells transformations that remove appliances. Palo is selling extensions to its appliance architecture. Not much different from what Bluecoat was doing. Nothing changed w your Palo deployments w their offering. It is just an extension where appliances are not practical.

Palo has tens of thousands of heavily vested customers. I am sure they are going to town selling into that base. They will also win with companies that simply want an incremental improvement. Zscaler DOES NOT OFFER INCREMENTAL IMPROVEMENTS. You transform or go with someone else.

I with the help of many others have dug into this issue deeply. Palo has not had an investor’s conference in 2 years. Why now? Because their share price is falling and the market is concerned that Palo may go the way of Symantec/BlueCoat. That is why Zscaler was trashed at this meeting. So they can tell the world were not gonna be BlueCoated by Zscaler. And they probably will not be. They are a much better run company.

Look at what Palo said. They dissed “proxies” as the wrong solution (and absolutely lied about Zscaler and 365 - made an “inference” they would say I’m sure) and used the language of ROUTERS to explain their superior solution.

We know routers and switches as we followed Arista and Cisco. Lots of software involved BUT ALL THAT SOFTWARE RUNS ON HARDWARE USING A ROUTER SOLUTION.

Palo has to sell hardware or their business model (like Cisco’s) dies. If you want to keep your Palo investment w all the appliances and all it involves then Zscaler is not your first choice.

If you want to dump the appliances or make a strong transformative step to do so then Zscaler is your first and almost only real choice.

We dig some great digging on this. So yeah, they do compete but not necessarily in a straight forward manner. And the weaknesses of the Palo product mirror Cisco’s weaknesses vs Arista as an analogy. Except Zscaler’s solution is far more differentiated and paradigm shifting vs Palo than Arista was/is to Cisco.

Keep in mind Cisco was always the large market share leader through out due largely to their installer base and larger sales force.

On this case Zscaler, last number I read (from last year) had more than 55% marketshare in the SWG market and that includes against BlueCoat, Cisco, Palo, and everyone else.

There is a reason they singled out Zscaler and that is because that is whom their installed base and future customers are looking at when Palo comes to call. I fully expect Palo to have more revenue. They are selling an incremental continuous product into a very large vested customer base.

Zscaler is selling a less mature, totally disruptive product into green field opportunities with no large installed base to upsell into.

Is what it is and what it is, is not straight-forward competition. But one of the things a slack channel is made to help dig up.

Tinker

[Kingran]

Look at what Palo said. They dissed “proxies” as the wrong solution (and absolutely lied about Zscaler and 365 - made an “inference” they would say I’m sure) and used the language of ROUTERS to explain their superior solution.

Tinker,

My understanding is Zscaler uses proxy based architecture for their cloud based firewall, and that is just a fact and no lying there. Now, specifically for O365, access control policies for O365 apps are defined with Zscaler next-gen firewall, and BTW, that is based on “proxies”.

Not sure why you think it is lying. I would be curious to ask ZS about this and see what they have to say. They do have an opportunity to address in their earnings call, let us see.

There is a reason they singled out Zscaler and that is…
I think this is battle for firewall market. ZS uses cloud based, “proxy” based architecture, firewall and PANW has installed base, and appliances that are installed on-premise market they have to defend to. I think we should not ignore, “prisma access”. I think PANW, is not just defending their on-premise firewall’s but attacking ZS with “prisma”.