A Google search with the keywords "cyber attacks 2014" reveals the renewed cyber threat that governments and corporations are facing. Consequently, the demand for network security hardware and software is increasing by the day. A number of companies are tapping this growing demand, and Palo Alto Networks (NYSE: PANW) is one of them.
Palo Alto competes with bigger peers such as Juniper Networks (NYSE:JNPR) and Cisco (NASDAQ:CSCO) in the security market. However, Palo Alto's specialty in the security market has allowed it to pull ahead of its rivals, and the company looks set for robust growth.
When Palo Alto reported its third-quarter results in May, its revenue increased 49% and billings increased 46% year-over-year, indicating solid demand for the company's products. Its impressive results were driven by solid services growth and market share gains in a rapidly growing enterprise security market.
The enterprise security market is expanding due to an increasing number and sophistication of cyber attacks. This change has led enterprises to focus on the negative consequences of relying on legacy thinking, legacy technology, and point products to help secure their networks. This is driving demand for disrupted platform solutions that can protect and prevent against attacks, apart from just detecting and remediating.
What's driving growth?
Palo Alto has built a robust platform with its next-generation Firewall, combined with next-generation threat intelligence cloud that allows the company to add high-value services to the platform quickly. It also plans to provide complete protection for the enterprise with its prevention technology, Cyvera. This innovative enterprise security platform is gaining popularity in the market. Palo Alto claims that its technically disruptive capabilities are superior to conventional point solutions, providing unique solutions to address modern security requirements.
The company's products are gaining substantial traction. It recorded the highest rate of new customer acquisition in its history in the first quarter. Palo Alto added more than 600 paid WildFire subscribers, taking the number to over 2,000. VMware partnered with Palo Alto for integrating the technology with its NSX platform. In addition, Palo Alto's new PA-7050 chassis saw strong demand, and it received a large number of requests for demonstrations of the Cyvera endpoint protection technology.
Palo Alto's enterprise security platform focuses on bringing about a disruptive solution to solve very complex and important problems that customers face currently. Recently, the company secured a seven-figure deal to secure the entire network of one of America's largest airports by implementing WildFire technology.
The company won a contract with a premiere sports-network production company to secure video traffic by selling PA-7050 into the data center and PA-5000 into every stadium. Finally, it grabbed a strategic deal for distributed firewall projects at a large electric utility in Japan, along with a win at Asia's largest casino. The company's customer base has expanded to more than 17,000, and it expects the momentum to continue.
WildFire analyzes more than 280,000 unique files during the day, and often detects more than 10,000 new malware, over 70% of which is not detected by traditional security technologies. It also provides content updates every 30 minutes to paid WildFire subscribers for preventive signatures to protect against newly discovered malware.
What about the competition?
Palo Alto's focus on delivering cutting-edge products has allowed it to grow rapidly, while its peers are facing a slowdown in this market. For example, in the previous quarter, Juniper's security business dropped 2% year over year. The company's security business has been in a state of flux for some time now, and activist investors are telling Juniper to exit this segment.
However, Juniper believes that the security market is a significant opportunity, and it expects the segment to show some growth this year. It recently introduced Firefly to embed security in the cloud, and also landed a contract from a financial services firm. However, Juniper is not a specialist player in the security-market like Palo Alto, so it isn't a big threat.
On the other hand, Cisco has the potential of disrupting Palo Alto's growth. After completing the acquisition of SourceFire, Cisco is now better-positioned in the security market. It is busy integrating the acquisition into its own structure, and has started adding features that should allow it to land more customers.
Cisco's email, web security appliances, and cloud web security service will be integrated with SourceFire's advanced anti-malware technology. Considering Cisco's gigantic size and its growing focus on the security market, Palo Alto needs to keep innovating in order to stay ahead in this market.
The bottom line
The increase in the intensity and complexity of cyber attacks is a concern for many, but Palo Alto is making the most of this opportunity. The company's products are in demand, leading to steady growth in its top and bottom lines. Finally, Palo Alto's focus on innovation will help the company to sustain its solid performance, and add to the 33% stock price gain that it delivered so far in 2014.
Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems, Google (A shares), Google (C shares), and Palo Alto Networks. The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.