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Why Are Cybersecurity Players Losing to Palo Alto Networks?

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Palo Alto continues to grow at the expense of its peers

So far in this series, we’ve discussed Palo Alto Networks’ (PANW) recent fiscal 2Q16 results. Palo Alto Networks, which operates in the cybersecurity space, has a hybrid business model. Companies often prefer Palo Alto Networks since they don’t have to completely let go of their older solutions in order to use the company’s security offerings. Palo Alto Networks’ products can work with a company’s existing security technologies without forcing them to completely replace their older solutions.

In PANW’s fiscal 2Q16 earnings release, Mark D. McLaughlin, the company’s chairman, president, and CEO (chief executive officer), stated that the company’s offerings were preferred over Intel (INTC), McAfee, Check Point Software Technologies (CHKP), and Cisco.

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According to Synergy Research Group, Cisco (CSCO) leads the worldwide network security market. It’s followed by Check Point Software Technologies (CHKP), Symantec, Huawei, Juniper Networks (JNPR), and Palo Alto Networks (PANW). The established players in the security software industry are losing both market share and technology innovation to new players. New players are more agile and innovative, which gives them an edge over established players.

Andrew Nowinski, an analyst at Piper Jaffray, stated, “Cisco, Check Point and Juniper have consistently been called out by resellers as the vendors most frequently losing to Palo Alto.” Nowinski went on to say, “These are also the top vendors in the firewall market, suggesting Palo Alto continues to gain share at the expense of all the major vendors in the space.”

If you want to know more about Palo Alto Networks’ place in the space, please read Why Palo Alto Networks Threatens Cisco and Other Major Players.

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Palo Alto Networks expects >40% growth in revenues and free cash flows

For fiscal 3Q16, Palo Alto Networks expects revenue and EPS (earnings per share) to be $335 million–$339 million and $0.41–$0.42, respectively. The company’s revenue guidance shows 43%–45% YoY (year-over-year) growth rate, which exceeded analysts’ estimates who were expecting the company to post revenues of $334.6 million.

As for EPS, Palo Alto Networks’ guidance fell short of analyst expectations of $0.45. PANW expects 40% FCF (free cash flow) margins in fiscal 3Q16.

Frank Calderoni is PANW’s newest board member

Palo Alto Networks has announced a new board member, Frank Calderoni. He is currently Red Hat’s (RHT) CFO (chief financial officer) and was previously Cisco’s CFO.

Investors who wish to gain broad-based exposure to Palo Alto Networks can consider investing in the iShares Russell 1000 Growth ETF (IWF). IWF has an exposure of ~11% to application software and invests ~0.11% of its holdings in Palo Alto Networks.

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