Over the next few years, tens of billions of new devices are expected to be hooked up to the internet. Faster connections and cheaper sensors are dramatically expanding possibilities for what’s generically known as the "Internet of Things." From smartphones to security cameras to factory equipment -- and much more -- some estimates say there could be 75 billion things connected by the year 2025, compared with just 23 billion in 2018.
In cybersecurity parlance, all of these connected devices are known as endpoints, and securing them is a fast-expanding business. It's also received a lot of investor attention. Just this year, leading endpoint security firm Cylance was scooped up by BlackBerry; VMware took Carbon Black; and newcomer CrowdStrike Holdings (NASDAQ:CRWD) had its IPO and is already valued as one of the largest cybersecurity pure-play companies around.
Fortinet (NASDAQ:FTNT) is throwing its name into the mix, too. The company recently announced it's purchasing endpoint security start-up enSilo, adding to its existing endpoint solution to double down on one of the hottest growth trends in the industry. Fortinet isn't the busiest of dealmakers in the security space, but this one makes a lot of sense.
Why endpoints, and why now?
As alluded to, there has been a lot of consolidation in the endpoint security market this year. Besides BlackBerry and VMware getting involved, Fortinet's big competitor Palo Alto Networks (NYSE:PANW) has been dropping hundreds of millions on smaller start-ups, including another endpoint upstart called Zingbox for $75 million that it announced during its last quarterly report.
But why endpoint security, and why now? CrowdStrike's success demonstrates there is a lot of potential in the niche. Through the first half of 2019, the company's sales increased 98%, and management forecasted it would reach about $450 million in revenue for the full year. The company also said it thinks its addressable market in IoT and endpoint security will be $24.6 billion this year, and researcher Global Market Insights expects spending to grow an average of 7% a year through 2024.
Besides that, with many organizations around the globe adding more connected devices to their operations all the time, there is likely opportunity for providing overlapping security services. Many businesses are looking for a single vendor to provide all of their digital safety needs, so adding a solution to one of the fastest-growing pain points to the mix could be a solid foot in the door for many of these firms.
Fortinet didn't disclose how much it paid to acquire enSilo, but the amount is likely a small one. According to Crunchbase, the start-up raised $23.5 million in July 2019. However, that figure implies some impressive growth, as it raised $13 million in another funding round in May 2017. Even if it went for a few million, that's still just a drop in the bucket for Fortinet, which did $522 million in sales during the second quarter of 2019 alone.
The company is still growing fast, though, and keeping up with new security trends will be key to maintaining its trajectory. Revenue in Q2 represented an 18% year-over-year increase, easily outpacing the high-single-digit growth of the cybersecurity industry overall. The company is also a rarity in that it offered up unadjusted net income of $75.2 million as well as free cash flow (basic cash profits after operating and capital expenses are paid for) of $178 million. Adding a new high-growth subsidiary to strengthen its endpoint offering could be a good way to keep things rolling in the quarters ahead, not to mention keep pace with competitors as the security industry continues to evolve.