The recent successful IPO from Palo Alto Networks Inc. (NYSE: PANW) has put the fast-growing networking security vendor in the spotlight. The company priced its offering this month at $42 a share (above the expected range of $38 to $40), and the stock opened for trading at $55.20.
Palo Alto is a specialist in next-generation firewalls (NGFWs), which identify, control, and safely enable applications while inspecting all content in real-time for any potential threats. The company's security appliances include a suite of subscription services as well as support and maintenance. Palo Alto has more than 7,750 customers in 100+ countries.
According to IT research firm IDC, the worldwide enterprise networking security market -- including firewall/VPN, unified threat management (UTM), Web gateway, and intrusion prevention -- is expected to reach $12.5 billion in 2015, up from an estimated $10 billion this year.
Palo Alto has an experienced management team, led by CEO Mark McLaughlin, who joined the company last August. From March 2000 to July 2011, McLaughlin served in various management roles at Internet infrastructure services provider Verisign Inc. (Nasdaq: VRSN), the last of which was CEO.
Nir Zuk, Palo Alto co-founder and CTO, started his career as an engineer at Check Point Software (Nasdaq: CHKP). Then in 1999, Zuk founded OneSecure, a provider of prevention and detection appliances, which he sold to NetScreen Technologies in September 2002. When Juniper Networks (Nasdaq: JNPR) purchased NetScreen in April 2004, Zuk was named chief security technologist. He lasted at Juniper for less than a year, launching Palo Alto in March 2005.
For the nine months ended in April, Palo Alto's revenue of $179.5 million advanced 129% from the comparable period in fiscal 2011. Growth like this does not come cheap, though. At a recent price of $59.88 a share, Palo Alto's market cap of $4 billion is 11.8 times my calendar 2012 revenue estimate of $340 million.
Competitor Fortinet Inc. (Nasdaq: FTNT), a provider of UTM appliances, is not growing as fast, but its valuation is more reasonable. At a recent price of $25.05 a share, Fortinet's market cap of $3.94 billion is 7.4 times the company's newly upwardly revised 2012 revenue guidance midpoint of $527.5 million. Revenue growth this year is expected to come in close to 22%.
For the second quarter (ended June), Fortinet's revenue of $128.9 million was up 25.2% year-over-year, topping the consensus estimate of $126.1 million. Fortinet's billings growth accelerated to 32% year-over-year from 28% in the first quarter and represented the strongest growth since the first quarter of 2011.
Billings growth was robust across all geographies, led by the Americas at 39%. Even the challenging Europe, Middle East, and Africa (EMEA) region experienced billings growth of 24%, while the Asia/Pacific region turned in growth of 33%.
Another positive metric in the latest quarter: Deal sizes were on the rise, with Fortinet closing 168 contracts worth more than $100,000 each, up from 127 in the year-ago period. The number of deals worth more than $500,000 each jumped 73% year-over-year, and there were even a few transactions greater than $1 million.
While some other tech companies have been reporting delays in getting deals closed or customers reducing transaction sizes (especially across Europe), Fortinet management said it saw no real problems, with healthy demand even at the high end of its UTM product portfolio.
Fortinet is strongest across the service provider, government, retail, financial services, and education verticals. The company competes mainly with (and has been taking market share from) the larger security vendors -- including Cisco Systems (Nasdaq: CSCO), Juniper Networks, and Check Point Software. Fortinet management says it sees Palo Alto Networks in about 15% to 20% of all competitive bakeoffs.
According to Fortinet co-founder and CEO Ken Xie, who in an interesting twist co-founded NetScreen Technologies, Palo Alto's solutions lack the performance and functionalities required by large telecom service providers, the customer base representing the biggest portion of Fortinet's billings.