Hackers have been out in full force on their
search-and-destroy missions in recent months.
In February, for example,Burger King 's (
)Twitter account reportedly was hacked to look likeMcDonald's (
). The hacker tweeted that Burger King had been sold to
McDonald's, and the account had been taken over by Burger King
With attacks like this one on the rise, so too has demand been
rising for better network security from companies likePalo Alto
Palo Alto, which went public in July, has staked its claim in
a network security market long led by outfits such asCheck Point
Software Technologies (
) andJuniper Networks (
Founded in 2005, the relative newcomer to the field has taken
on its big-shot rivals by coming to market with a key point of
differentiation: It pioneered the next-generation firewall
The firewall serves as the barrier between an organization's
internal network and the Internet. Palo Alto's next-gen platform
allows businesses, service providers and government to secure
their networks and safely enable the increasingly complex and
fast-growing number of applications running on their
Its approach focuses security on applications and users vs.
traditional firewalls, which focus security on the network port
and protocols of the data network traffic. Its next-generation
firewall delivers application, user and content visibility and
control integrated within the firewall through proprietary
hardware and software.
Palo Alto's platform has caught on in a big way. Revenue has
grown by at least 50% since its market debut. In the most recent
second quarter, sales soared 70% to $96.5 million. Profit surged
40% to 5 cents a share. It added more than 1,000 new customers
for the fifth straight quarter. At the end of the quarter, it had
more than 11,000 customers in over 100 countries.
What's the big draw?
"Its next-generation firewall can block specific Web apps such
as Dropbox," said Northland Capital Markets analyst Catharine
Trebnick. "Its solution enables the enterprise to specify down to
the application level which ones should be allowed to be used by
At a time when there's such a large and growing number of
targeted threats, such as the Burger King breach, she says, the
next-generation firewall is in "huge demand."
"And Palo Alto is going after these large enterprises with
legacy solutions in place and saying 'you need to get rid of that
and get the new one.' They were the first to market. So they have
first-mover advantage. They have pretty good performance from
what I understand."
The traditional firewall approach worked well for basic email
and Web browsing applications, which behaved in a predictable
fashion and adhered to standard network ports and protocols,
according to a company filing with the SEC. But a growing number
of applications, such as Web 2.0 and social media, allow users to
collaborate and share information on the Internet in ways that
weren't possible in the past. These applications, says the
filing, have become increasingly more complex and unpredictable
and more challenging to the legacy firewall.
That's where Palo Alto's approach comes in: "What Palo Alto
has driven is the idea that it's no longer good enough to look at
ports and protocols," said Stifel Nicolaus analyst Todd Weller.
"You have to look at the application coming in and who's using
this application and whether to let it in."
Incumbents, which include network security companies like
Check Point and Juniper, have added application control
capabilities, Weller says.
But Palo Alto, having that first-mover advantage, also now has
a brand advantage.
"The question comes down to whether that's sustainable or
not," he adds. "We spend time trying to figure it out. It's a big
point of debate in the market."
Meanwhile, says Weller, the market environment for network
security is "healthy" amid an increasing number of attacks and
more devices accessing the network. All the pure-play network
security vendors are benefiting from that.
500 Big Clients
Palo Alto gave some telling signs of its progress in the
market at its March 21 analyst day. Palo Alto said 500 companies
out of the Forbes Global 2000 are customers, said Trebnick in a
note after attending the meeting. Another good sign: 60% of new
customers are using Palo Alto as a primary firewall vs. 50% a
Palo Alto estimates the total addressable market for security
will be roughly $13.4 billion in 2016, up from $10 billion in
2012. It pegs its market share at 5%. The company plans to boost
share by expanding its major account team lineup to 40 teams from
Analysts polled by Thomson Reuters expect the company's
full-year profit to grow 50% to 21 cents a share. They see a 110%
rise in 2014 and a 68% gain in 2015.
Trebnick says she's heard the demand is there for Palo
"They're replacing a lot of the legacy firewalls in the Forbes
2000 at the expense ofCisco Systems (CSCO)," she said.
Its customers include JD Williams & Co. Ltd., the United
Kingdom's leading home shopping company; Farm Credit Financial
Partners, the top provider of technology services to farm credit
associations; and wireless telecommunications company Qualcomm