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Where Will Palo Alto Networks See Next Leg Of Growth?

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B ig-box retailers, investment banks, health insurers, governments, universities: No enterprise seems immune from cyberattacks. That is bad news for victims, but it means more work for cybersecurity companies such as the fast-growingPalo Alto Networks ( PANW ).

This year alone, hackers gained access to millions of personal records, including Social Security numbers from the U.S. Office of Personnel Management and other personal data fromAnthem ( ANTM ), one of the nation's largest health insurers. More than 30 million e-mail addresses were infamously stolen from extramarital-affairs website Ashley Madison.

EvenApple ( AAPL ) got hacked: popular Chinese names in its App Store were infected with malicious software.

And these were just high-profile examples this year. They followed a long list of headline-making breaches, including attacks onSony Pictures ( SNE ),JPMorgan Chase ( JPM ),Target (TGT) andHome Depot (HD). Untold others suffered breaches outside the spotlight.

"There will be more," said Jonathan Ho, an analyst with William Blair & Co.

Santa Clara, Calif.-based Palo Alto Networks is one of the fastest growing of all the cybermilitia forces and claims to be the fastest growing in next-generation network firewall security.

It launched its first next-generation network firewall security product in 2007 and has since expanded to encompass advanced threats, endpoints and the cloud. Meanwhile, it keeps enhancing existing products and rolling out new ones.

Palo Alto competes with established names in network security such asCisco Systems (CSCO),Check Point Software (CHKP),Juniper Networks (JNPR) andFortinet (FTNT).

Disrupting The Legacy Players

"We were a disruptive company," said Palo Alto Chief Marketing Officer Rene Bonvanie in an interview with IBD. Legacy players "did not understand apps, new mobile devices and the cloud. So they couldn't make it safe (everywhere). Our technology makes the use of applications safe no matter where they live."

Palo Alto's next-generation firewall platform is still core to the company's mission: to make it safe for people working in private or public enterprises to use any application from any kind of device.

The company has more than 26,000 customers worldwide and says that it's added at least 1,000 new ones every quarter for the last 15 quarters. It sells to private enterprises, governments and service providers.

In the last quarter, the U.S. government comprised 13% of its business, spread across civilian, intelligence and defense sectors. More than 10% came from service providers, with the rest largely enterprise accounts.

The problem with traditional firewall products was that they became obsolete over time as hackers found ways around them, Ho says.

Next-generation firewall solutions have more and better defenses, including analytics, intrusion prevention and anti-malware to thwart "lots of different bad things that affect your computer," he said.

Legacy players are adapting, but it takes longer for big companies to change course than small ones. Meanwhile, Palo Alto is "rapidly catching up" to the leaders in network security, Cisco and Check Point, Bonvanie says.

"We are now the third-largest player in the enterprise security market after Cisco and Check Point," he said, adding that his firm's share is around 9%.

Palo Alto has been growing revenue more than 50% on average the last two years. In its fiscal fourth quarter, ending in July, revenue jumped 59% to $283.9 million, billings 69% to $393.6 million -- both well above analysts' estimates.

Excluding items, it earned 28 cents per share in Q4, 3 cents above views, up from 11 cents last year.

Revenue is expected to slow some from a robust 50%-plus rate, but it's still seen growing in strong double-digit percentages. Palo Alto expects revenue to increase 46%- 48% in the current Q1, ending in October, to $280 million-$284 million. Analysts expect revenue for full fiscal 2016, ending next July, to increase 39% to $1.29 billion.

Earnings for the new year are seen rising 99% to $1.71 per share, according to Thomson Reuters.

Investors Are Beneficiaries

Shares have climbed about 49% this year and are up 336% since the company went public in July 2012.

Firewall solutions still make up "(the) vast majority of our business," Bonvanie says.

Ho says that Check Point has lost "the least (market) share," while Fortinet is still early in next-generation firewall products.

Cisco started stemming market-share losses starting late last year as it integrated products from its acquisition SourceFire in late 2013, according to Nomura Securities analyst Frederick Grieb.

Based on a recently published Nomura survey of 30 security professionals asked about their buying plans for this year and next, Palo Alto and rivalFireEye (FEYE) could be expected to gain the most in spending dollars.

The survey indicated that the No. 1 priority for security spending this year is for advanced persistent threat protection, which plays into Palo Alto's WildFire product. WildFire's customer base increased 140% by the fourth quarter vs. a year ago to more than 7,000.

Endpoint protection -- whether for a desktop, laptop, tablet, smartphone, cash register, ATM or other computerized hardware -- was the second priority. Target, for example, was attacked at the endpoint -- through its cash registers.

Palo Alto's even newer Traps product, which addresses endpoint security, ended the last quarter with 150 customers.

FireEye competes with Palo Alto in both advanced persistent threat protection and endpoint security.

Wild West Exotic Tech

Endpoint security "has become the Wild West of security," attracting startups with "exotic technology," said Palo Alto's Bonvanie. "Everybody has figured out that the original products are not very useful."

Palo Alto's large installed base of customers using its firewall products "gives us a competitive advantage over the smaller guys" in endpoint security, he said.

Other endpoint security players include privately held Bit9 + Carbon Black, Invincea and Bromium.

Symantec (SYMC) and McAfee dominate endpoint security. Nomura's survey of security professionals was "generally negative" for Symantec, Grieb noted in the survey report, "with customer perception of the company and its road map continuing to deteriorate over the past 12 months."

Similar Endpoint Opportunities

Said Ho: "Palo Alto is the main beneficiary of the next-generation transition on the firewall side, and we think they could have similar opportunities in the next-generation endpoint side."

Nomura's survey suggested that IT security spending will grow 14% this year and 17% next year.

In a recent research note, JPMorgan analyst Sterling Auty said that Palo Alto's platform "is increasingly resonating with customers" and that demand for its products "remains robust."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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