Zscaler - where are the security giants?

Investment Analysis Clubs Saul’s Investing Discussions
#5

Hi Saul,
I wrote a lot about ZS around their ipo but no one seemed interested and i didnt push it as the IPO’d and immediately went up 106% first day so seemed pricey. I do love the company though.

http://discussion.fool.com/ceo-interview-from-last-july-i-noted-…

https://www.marketwatch.com/story/zscaler-shares-rally-as-an…

"Zscaler is directly displacing legacy solutions in the $2 billion a year web security market while taking incremental share of the broader $18 billion in network security spending,” Franchi said.

Competitors that Zscaler has to reckon with are Symantec Corp.’s SYMC, -0.29% Blue Coat Systems, Raytheon Co.’s RTN, +0.48% ForcePoint, as well as broader security vendors like Cisco Systems Inc. CSCO, -0.78% and Palo Alto Networks Inc. PANW, -1.63% , Franchi said.

With Zscaler, the idea of a cloud-native security solution is basically a new thing…what we think of as cloud today (AWS, Azure) are all less than a decade old and really only became material starting in 2011-2012 or so. Blue Coat was a known player and got swallowed up by Symantec, a legacy security company. Cisco swallowed up OpenDNS in a similar fashion as it pivoted away from traditional route/switch to software and security. As the OpenDNS founder stated, this is pretty much currently a 3-horse race. So I think the value or perceived value of what zscaler can and should become in terms of a market leader is more easily envisioned.

Dreamer

10 Likes
#6

Dreamer,

I followed it in the shadows but recommended your posts back then … so it didn’t go to waste :wink:

I also think you posted that CSCO tried to buy ZS days before the IPO but the CEO responded that he didn’t want to sell this one like he did with all the past companies… that he wanted to see this one all the way through. That is what motivated me to take more notice of it.

Thanks for bringing this company to us!

BlowfishScrooge
Long ZS

10 Likes
#7

Marko,

The preposition from my side is that My Data is my business and my income.

This has always been the argument against the cloud. Now look how big the cloud has become. Almost all of my data is in the cloud.

Currently you use multiple solutions to gain the same outcome, which come from different vendors, which means not everyone can see every piece of the puzzle.

They are not looking at all your data, Just the portion that tells where it is going and who you are, this will be in the very first part of the package, the rest of the package will not be seen. Could they open the whole package up? I suppose they could, and if they were bad actors it could be a problem. Now I do not know if they are doing this, but if I was invested in the company I would check into it, If I was a company I would just encrypt all of my data going across my network. That should solve that problem.

Andy

7 Likes
#8

The video that MarkoKrus posted the link to, was very helpful to get basic understanding.

It seems to me that ZS if offering a more integrated service that addresses networking, authentication, connectivity and security, all in one package… so in a way it competes with not only PANW and CSCO of the world for networking, it also competes with OKTA of the world for authentication and many others.

Though this was one piece of it, I have seen enterprises spend a large sum of money connecting their remote offices to HQ through a WAN… just this piece of saving can be substantial, if ZS is truly offering a replaceable mechanism. So in this case, it will allow a remote office to connect through a low cost ISP through internet (few $100s per month) vs a dedicated WAN line with VPN etc. that can cost $1000s per month. Though I think this is not a universal solution, quite likely it will make ZS attractive enough to many enterprise to move needle for ZS.

All in all, I see ZS is offering attractive solutions in multiple counts… it is a bit early to tell if they can be the “all things to all people” or they box themselves into a niche play where someone uses ZS only if they are willing to take entire solution…
It is interesting enough for me to take a small position.

4 Likes
#9

The more i think about this, the more I get Saul’s question - why haven’t other guys thought about this before…

To me it seems that the most logical company that should have gone down this path would be Cisco. Yet, it makes sense that Cisco didn’t go down this path in the past because it has been a hardware company at its core… and everything ZS is doing is really replacing specialized HW by specialized SW running on commodity HW… exactly same as Arista and Nutanix approach…

Given that Cisco is still trying to become SW company, I would not be surprised to see them go after ZS at some point… although, Cisco would easily have pieces to put this puzzle together, it would be extremely difficult for Cisco to do so just because how they are organize and operate… may be it will be easier for Cisco to buy ZS at some point.

All in all, I think these guys are trying to disrupt multiple companies / domains / industries with a single stroke… I still worry that this may stay as niche play for a while (even then it will be substantial for such a small company, just that they may not get into $B revenue for a long time)…

However, if these guys are little more successful, this can be a true Cisco killer and also hurt whole host of other companies like PANWs of the world, OKTAs of the world and also telecom companies like CenturyLink and AT&T etc

Lets see how it evolves

2 Likes
#10

Following this thread, I saw it mentioned if Zscaler competes with OKTA. The way I read it, is that yes, it could and Bert mentions OKTA in his ZS article on SA. https://seekingalpha.com/article/4184749-zscaler-can-scale-h…

they have 2 main products. You can get a lot from the first ER conf call notes: https://seekingalpha.com/article/4179895-zscaler-inc-zs-ceo-…

"First, Zscaler Internet Access or ZIA for secure and fast access to SaaS applications and the internet. ZIA is designed to ensure malware doesn’t reach the user and valuable corporate data does not leak out. "
This competes against the Symantec-BlueCoat and Cisco-OpenDNS types, and is the main revenue driver right now.

“Second, we have Zscaler Private Access or ZPA for secure access to internal applications in enterprise data centers or the public cloud. ZPA connects a specific user to a specific application based on business policy, without bringing the user on the network, resulting in better security while delivering the best user experience.”
Note the comment below from CEO that, while small now, ZPA is growing very fast.

From Q&A
"Alex Henderson

I was hoping you could talk a little bit about the mix of business in the current quarter in terms of revenue. You said that came in from ZIA versus ZPA, and how that might look different relative to the contracts that you’re winning today for future business. How much of a shift towards ZPA or we seeing in the current flow?

Remo Canessa

So, Alex, I’ll take that question. Our ZPA still represents less than 5% of our revenue. However, our third quarter was our largest quarter for ZPA, and it is increasing fairly substantially. Now, the revenue is less than 5%. We recognize business – we recognized revenue on rapidly basis. So, when you take a look at the actual business coming in, it’s doing well. And the increase in ZPA for new business and upsell this last quarter was the highest that it’s been in the Company’s history.

Jay Chaudhry

If I may additional, Remo, ZPA is the fastest growing new product in Zscaler’s history. And also, we’re pleased we had our first 7-figure annualized revenue deal from ZPA this past quarter."

Dreamer

6 Likes
#11

thanks Dreamer…
i will look to learn more about this company… will post here if / when i have something to share.

#12

…why don’t the internet security giants do the same thing as Zscaler? If they could do it why didn’t they?

Why didn’t Baldwin Locomotive Works switch from steam engines to diesel in a timely manner?
How did the Japanese car makers take so much share away from the US car companies in N. America?
Why Didn’t Kodak better exploit digital photography?
Why did Xerox allow so much of their business to get stripped away from them by competitors?

This list of once high flying and now bankrupt or downtrodden businesses could go on for pages. The answer inevitably comes down to bad management. In every case it was the company’s success that allowed management to ignore or not even notice the changing world around them.

Baldwin management was in charge of the premier locomotive company in the world, they could not conceive that a diesel engine spinning a generator to produce electricity to drive and electric motor would be a better system.

American auto makers were building gas hogs that fell apart in a few years (planned obsolescence). Then the mid-70s OPEC oil embargo suddenly made cars getting 8 - 12 MPG undesirable. The small, efficient Japanese cars took over the bottom of the market. But then people noticed that the cars were much better made and lasted longer with fewer repairs than the American cars. The Japanese moved up the value curve.

Kodak took some half-hearted attempts at digital, but the entire company was wrapped around their film, chemistry and paper business. By the time anyone could buy a cheap digital camera for a few dollars and the computer and internet made prints non essential, it was too late for them to recover.

Xerox was making the bulk of their revenue from paper and supplies rather than new machines. They pretty much stopped investing in R&D. And worse, they failed to exploit some of their best research coming out of PARC (Palo Alto Research Center). The pointing device (mouse) was exploited by Apple. OO code (Smalltalk), originally developed by Adele Goldberg, Alan Kay, Dan Ingalls and other at PARC was never commercialized by Xerox. Apple used much of the technology. Adele left Xerox and founded ParcPlace Systems which provided visual Smalltalk development tools.

I always try and learn about the management when I make an investment (not always easy). Quality management is among the top of the list of things that I think important. Technology changes at a blistering pace. Disruption is par for the course. I want management with a history of being disruptors as opposed to disruptees.

9 Likes
#13

…why don’t the internet security giants do the same thing as Zscaler? If they could do it why didn’t they?

Why didn’t Baldwin Locomotive Works switch from steam engines to diesel in a timely manner?
How did the Japanese car makers take so much share away from the US car companies in N. America?
Why Didn’t Kodak better exploit digital photography?
Why did Xerox allow so much of their business to get stripped away from them by competitors?

Thanks Brittlerock for that nice review.

I don’t know what the TAM for PVTL might be, but presently I don’t care. For now and the “long term” I have high confidence in this position.

And for this post you just made too. You must be in China now.

Best,

Saul

1 Like
#14

Quality Management is why I have stuck with ANET when many are selling!!!

1 Like
#15

Still in the US, leaving for China in September.

#16

I notice Zscaler hasn’t pulled back but Carbon Black has of late in case that is of any interest in the category (I don’t hold either but am interested in Zscaler).
https://seekingalpha.com/article/4186366-carbon-black-recent…
Ant

#17

Anyone still on the fence about Zscaler might find the following video helpful…

Scott Guthrie - EVP of the Microsoft Cloud + AI Group
https://www.zscaler.com/zenithlive-2018-live-stream-watch?wv…

Take care,

VR_Robear

12 Likes
#18

Anyone still on the fence about Zscaler might find the following video helpful…

Scott Guthrie - EVP of the Microsoft Cloud + AI Group
https://www.zscaler.com/zenithlive-2018-live-stream-watch?wv……

That was an awesome find, Robear, thanks so much. It sure sounds as if Microsoft has based all their Azure and cloud security on Zscaler. Nice video and not too long.

Saul

9 Likes
#19

After viewing this ZS video and onsidering the recent OKTA acquisition of ScaleFT, is there someone on the board with security expertise who can accurately describe the difference or gap between the targeted solutions of ZS and OKTA?

It has been my understanding in the past that ZS was a more comprehensive solution than OKTA. The ScaleFT acquisition by OKTA appears to narrow the gap.

Thank you in advance.

sjo

#20

https://www.zscaler.com/solutions/cloud-security
what Zscaler does and how

3 Likes
#21

the whole set of videos with partners and customers testimony is really just impressive.

1 Like
#22

There is a video by GE CTO on the same page on ZScaler Summit.
That ~30 minutes video is really illuminating… GE is their customer since 2012 and saving $30M annual by going to ZScaler for security and in the process removing expensive network, enhancing user experience and achieving much better security…

Interestingly, the losers in this game are of course, network appliances (PANW of the world) but also high priced private network services by telecom companies like AT&T and VZ and CenturyLink (its interesting that ZScaler actually got AT&T to host a party at that summit!!). This will ultimately hurt Cisco and HP and Nokia…

And because they are “in the path of all traffic” of their customers, they can easily replace some of the young companies discussed on this board… specifically OKTA and NEWR. These guys are disrupting multiple disruptors and old incumbents at the same time.

I would think Microsoft gets this well… no wonder Satya Nadella showed up in a video address for ZScalar.

May be i am over thinking

Two major issues i see:

  1. GE CTO mentioned this bold and clear at the end - ZScalar will enable CIOs to reduce the size of team managing corporate networks… these IT networks teams will resist it big time… I think this is why ZScalar will “only grow at double digits and not triple digits on annual basis”

  2. Is that being “the path of their client’s traffic”, ZScaler itself now becomes single point of failure… not sure how they get around that… will need to learn more.

11 Likes
#23

Nilvest,

I purposefully just did not look at ZScaler given the crazy multiple it has. 20x!

However, your conversation here piqued my curiosity. I listened to multiple of the talks by third parties, and the future road map, I read through some analyst opinions, and now I am digging into competition (if any real competition therebe).

Thereafter I will look at it again within the valuation/multiple issue (I know Saul does not look into that, and for the correct company that may be wise as I can name MULE that sold for 16x forward revenues, and Mobileye that Intel bought for far more than that, maybe 2x that in forward multiples (being desperate to stay relevant does not hurt)) as such, with the correct company such a forward multiple may be justified.

Not because “this time it is different” but because the smart money, companies using their own money, have proven this to be the case.

If Zscaler beats the current high estimate by 20% (which is probably conservative given the way these forward revenue estimates go) Zscaler will be at ~14x (less than SHOP) but within the realm of best of breed SaaS companies. If Zscaler is singular (as Mobileye was - I made the mistake with Mobileye of LISTENING TO THE ANALYSTS and not Duma - in my defense, I was just starting back in the market after a year or two away from active investing and it took awhile to get my senses back - it really did not feel the same to start - thus I did not use the analyst to my advantage but allowed it to create angst) it is a multiple that may be well deserved.

Yes, Zscaler will be in a position as the central tunnel (as the term “tunnel” is used by the company to refer to its connections to everything) to be the singular point of contact to every communication from email, to website, to application. EVERYTHING!

It is a good perspective to dig into and perhaps better understand this company that one analyst described as not something to understand in a traditional perspective because it is so disruptive.

I have become quite interested but need to finish a deep dive. Dreamer, good instincts on this one. However, you did not miss out on too much not buying right in. The stock opened on its IPO at $27 and is now at $39, around 44% return year to date. Excellent, but not something in the current market that we missed out on. I am going to view it as moving forward from here and the alternatives I may want to invest in.

But yes, there may very well be something quite special here given where Zscaler is in the software stack and that is, Zscaler IS the software stack, as it is everywhere at the edge (part of its disruptive nature).

Tinker

14 Likes
#24

Thanks Tinker… looking forward to more insight from you and Dreamer and others more knowledgeable folks on this board.

I spent few more hours today because i just couldnt get off the topic…

few interesting points i found.

  1. somewhere i read that they use 100 datacenters around the world… i guess to offer fast, easy access as well… and ofcourse, it can be used to avoid single point of failure that i was talking about in earlier post.
    For a company of this size, 100 datacenter claims look too big. I can imagine that their datacenters are either optimized, small center primarily hosting ZScaler SW…
    OR they may be just renting some space on public providers like Azure and AWS etc… but with specific connection bandwidth and capacity… and geographic dispersion.
    Based on their capex and need to be scalable, i suspect its the latter… but not figured out yet.

  2. Ex CEO of Palo Alto Networks used to be part of the management between 2010 and 2015. That says a lot… ofcourse CEO Jay Chowdhary has tremendous credentials himself.

  3. Looking at IPO filings, CEO owns 27M shares directly and another 30M shares in a family trust. that’s ~50% of the company… and he doesn’t take salary or bonus or equity incentives. Reminds of Ubiquity CEO and may other legendary founder, owner, CEOs.

  4. Pure Storage CEO Charlie Giancarlo is on the board of directors. Joined relatively recently.

  5. Glassdoor is full of glowing reviews with 4.5 rating thats been growing since last six months.

It does look like this one is special…

13 Likes