Last year, security software bySymantec (
) blocked more than 5.5 billion malicious attacks on computers,
up 81% from the prior year.
These cyberattacks have targeted groups ranging from
governments and financial firms to businesses large and small.
All manner of computer and software tools are available to resist
the onslaught. One primary line of defense is the computer
firewall, a combination of hardware and software used to help
keep a business network from unwanted intrusion.
Among the providers of firewall gear isPalo Alto Networks (
), a relative newcomer to the field that has disrupted longtime
leaders such asCisco (
),Check Point Software (
) andJuniper Networks (
). The reason for that is Palo Alto Networks pioneered a new
method of security protection, known as next-generation firewall
The need for next-generation firewall technology is due to
newer methods of computing. Businesses and their employees have
increasingly used external software applications available
through the Web, including cloud computing platforms. This has
greatly increased the number of ways cyberattacks gain entry into
a business network.
"So much more traffic is coming in through the Web and the
threats have gotten far more complex," said Greg Young, a
research analyst at Gartner.
Last year, about $7 billion was spent on firewall technology,
according to Gartner. When other elements of security are added
in, the estimated market is $10 billion in 2012, growing to $13.4
billion in 2016, according to IDC.
In times past -- thinking of a business like a city --
security experts might have to check only the traffic on freeways
and highways. Now, they also have to closely monitor boulevards
and side streets. The challenge comes in knowing who to let in
and what to keep out.
This is where Palo Alto Networks comes in.
"Until the arrival of Palo Alto Networks' next generation of
network security, companies were forced to either allow the use
of these applications and suffer the security consequences or
block the applications and suffer the productivity consequences,"
said Mark McLaughlin, chairman, president and CEO, in a
conference call with analysts after the company posted quarterly
results Sept. 10, its fiscal fourth quarter.
"We are at the confluence of a major technology trend that
makes our offerings timely, relevant, defensible and highly
differentiated," he said.
Executives of Palo Alto Networks declined to comment for this
article due to an imposed "quite period" resulting from plans for
a secondary offering. On Wednesday, Palo Alto announced the
pricing of 4.8 million shares at 63.
Its technology platform monitors and enables the increasingly
complex and rapidly growing number of applications running on
computer networks. Companies can continue to use these
applications with confidence as Palo Alto Networks provides the
ability to inspect all content for all threats in real time
across a multitude of software applications, according to the
"They've crushed the traditional firewall market with their
disruptive technology," said Jonathan Ho, an analyst with William
Blair. "It has changed the thinking and caused the other major
players to adopt this approach, but from our view Palo Alto
Networks has a sustainable edge."
Just like all other technology transitions, competitors must
adapt or wither. In the case of next-generation firewall
technology, it's not an easy thing to do. Businesses have spent
millions installing security gear over the years. Swapping that
out for a new platform is not as simple as upgrading
"For a lot of legacy products, it's not a natural migration to
rip out those products," said Ho. "It's a paradigm shift."
But the change is coming. Gartner estimates 10% of business
enterprises have next-generation firewall technology in place. It
sees that growing to 38% in 2016.
Palo Alto Networks became a publicly traded company July 20 in
a highly successful offering.
The IPO priced at $42 a share, above the expected range of $34
to $37. It began trading at 55, peaked above 62 and finished at
53.13, up 26.5%. It currently trades near 62, about 17% above its
The advantage of its early lead in next-generation firewall
networks is evident in the revenue growth.
Revenue has grown per quarter at triple-digit rates for most
of the last four years. In the September quarter, though, sales
growth decelerated to double-digit growth of 88%, to $75.6
million. It posted an EPS loss, minus items, of 7 cents,
reversing three prior quarters of profitability. And though Palo
Alto exceeded Wall Street estimates, shares fell nearly 6%,
though it has since recovered from that drop.
"Investors likely expected stronger guidance to sustain the
company's rise in valuation," Ho said in comments at the
For the current quarter, its fiscal first quarter, Palo Alto
Networks guided revenue in the range of $80 million to $84
million. The midpoint of $82 million would be a 44% increase from
a year ago. It expects a profit of 3 cents per share. In the last
three quarters it has added more than 1,000 customers per quarter
and has more than 9,000 customers overall in about 100
Asked in the conference call if Palo Alto Networks was seeing
any competitive threat coming from Cisco, Check Point or Juniper,
McLaughlin said no. "We haven't seen any new releases or
introductions by anybody that indicates they're closing the
But it's not that Palo Alto Networks is waltzing through a
garden of roses. All the major players are working on the
technology transition, includingSourcefire (FIRE). Palo Alto
Networks is also facing a patent infringement lawsuit filed last
December by Juniper Networks.
"Prior to Palo Alto Networks, the competitors in this field
were in a walking race," said Young. "There was not a lot of
innovation. They have since lit a fire, and vendors are moving in