Investor Relations: Results that Matter
April 2016
1Q2016 Cybersecurity Industry Review
PERFORMANCE & VALUATION
Cybersecurity stocks racked up their third consecutive quarter of double-digit underperformance as
investors continued to back away from the group. As shown in Chart I, the stock prices of the 10-company
peer group declined an average of 13% in the first quarter of 2016, versus a 3% drop for the NASDAQ
Composite Index, with negative absolute and relative performance recorded by essentially every name in
the group. Over the past three quarters, the group has now underperformed the NASDAQ Composite
Index by over 40%. As a result, the group now sells for less than 5x projected current year revenue, on
average, and just over 43x projected current year EPS (for those firms having meaningful EPS), versus
comparable figures of 9x and 86x, respectively, as of 6/30/2015.
Operating results, in contrast, remained somewhat healthy in the quarter, at least relative to
expectations. As shown in Chart II, 70% of the peer firms managed to exceed consensus revenue or EPS
estimates, some significantly. Forward guidance trends were not as bullish, however, as 50% of the firms
guided to below consensus revenue for 1Q16 and 80% to below consensus EPS. The latter figure could
suggest that competition for business may be intensifying.
As Chart III illustrates, sell-side analysts maintained an overall net positive opinion on the group and on
most individual issues, although some deterioration was clearly seen. Total positive ratings were 63% as
of 3/31/16, down from 73% as on 12/31/15, as many analysts increasingly backed away from some of the
weaker performing companies in the peer group.
We believe the group’s current price weakness
is consistent with where we place it within its
technology life cycle. As shown on this chart,
technology sub-segments typically experience
a wild phase of growth and investor discovery,
which is followed by a sharp pullback as weaker
firms stumble and valuations are pulled back
down to earth. The best firms ultimately see
strong recoveries, followed by a long period of
stable growth. We believe cybersecurity stocks
are currently moving through their gravity
phase.
ACQUISITION ACTIVITY
Acquisition activity picked up somewhat in first
quarter relative to the two preceding quarters.
As shown in the following table, over a dozen deals were announced, albeit all the acquired firms were
private and most appeared to be small in nature given the absence of financial details. Regarding the
acquisition of public firms, Check Point Software was reported to have courted CyberArk in January, but
was apparently rebuffed, as indicated by public statements made by the latter firm. Also, Barracuda was
reported to have hired Morgan Stanley in February to look for a potential buyer for the firm, but no further
news has been forthcoming. Meanwhile, some of the largest players in technology, including Cisco
Systems, Google, IBM, Intel and Microsoft supposedly remain on the prowl for large cybersecurity
acquisitions, as per their ongoing commentary, but have yet to make any public overtures. Lastly,
Symantec may be poised to become more acquisitive after receiving a $500 million investment by privateequity firm Silver Lake.
Acquiror
FireEye
IBM
Harman
IAI/Formula
Infoblox
BlackBerry
CACI
CyberArk
FireEye
Nokia
PwC
Supercom
Secura
Sirius Computer Solutions
Acquiree
Price (M)
iSight Partners
$200
Resilient Systems
100
Tower Sec
70
Ness Technology
50
IID
34
Encription Ltd.
NA
Purple Secure Systems
NA
Agata Systems
NA
Invotas
NA
Nakina
NA
Praxism
NA
Safend Ltd.
NA
RedSentry
NA
Force 3
NA
IPO AND FINANCING NEWS
Domestic IPO activity essentially ground to a halt
in the first quarter of 2016. The eight deals
announced represented the industry’s weakest
quarterly start to a year since 2009. Moreover,
not a single technology deal was completed in
the period.
Dell’s SecureWorks, which filed an S-1 last
December and had been largely silent in the
ensuing months, is now apparently targeting its
IPO for late April, according to sources close to
the deal. The firm will aim for a valuation
somewhat less than the $2 billion indicated last
summer according to these same sources. With
reported revenue of $339.5 million and a loss of
$72.4 million for their year ended 1/29/16, it remains to be seen how the company’s initial market
cap/revenue ratio will compare to the industry’s recent sub-5x figure and how it will influence any
subsequent deal valuations. The deal’s importance is underscored by the fact that 13 underwriters will be
participating, including 8 bulge bracket firms. Other notable IPO candidates, such as Tanium, Zscaler and
CloudFlare, have recently gone on record as saying that the optimum window to go public could have
been pushed out as much as two to three years given the present market environment and the extended
2
underperformance of the publicly traded cybersecurity stocks, but their outlooks could change
dramatically if the Secureworks offering is successfully received.
Overseas activity in the first quarter of 2016, in comparison, was somewhat healthier as a number of
minor IPOs with small cash raises were completed: Osirium (London), Secura Group (Singapore), WISeKey
(Switzerland) and Zyber (Australia - through a reverse takeover with Dourado Resources).
On the private side, venture capital continues to readily flow into the space with four $50+ million
financings identified in the first quarter of 2016, along with a plethora of smaller deals, as shown below.
The strongest cash inflows into the venture space since the 2000 dot-com bubble are clearly driving
widespread investment in cybersecurity, notwithstanding the decline in private market values that has
likely occurred since mid-2015.
Company
Skybox
Forescout
Pindrop
Malwarebytes
Bromium
Shape Security
Riskifield
Team8
Fireglass
mPrest
Digital Shadows
eSentire
Appthority
Kaymera
Ensilo
Company
Hexadite
Trusona
Cynet
Top Spin
Terbium Labe
ReSec
Lexumo
MWR Infosecurity
Protenus
Siemplify
imVision
Innefu Labs
zvelo
Ironscales
Total
Raise (M)
$96.0
76.0
75.0
50.0
40.0
25.0
25.0
23.0
20.0
20.0
14.0
14.0
10.0
10.0
9.0
Raise (M)
8.0
8.0
7.0
7.0
6.4
5.0
4.9
4.2
4.0
4.0
4.0
3.5
2.8
1.5
$577.3
PARTNERSHIPS
The first quarter of 2016 saw a notable increase in the number of partnerships announced, with FireEye
being the most prolific in this regard. Increasing customer demands for integrated solutions over single
point ones suggest that this trend will likely continue over the foreseeable future.
3
Company A
Checkpoint
Cisco Systems
FireEye
FireEye
FireEye
FireEye
Lockheed
Nexusguard
Proofpoint
Proofpoint
Honeywell
Qualys
Fortinet
Bravatek Solutions
Company B
IBM
Optus
Interset
Cloudlock
Parsons
Forescout
Cyberreason
Tinfoil Security
Triad Technology
Palo Alto Networks
Palo Alto Networks
HEAT Software
Hewlett Packard Enterprise
BiObex
SELL-SIDE COVERAGE
Industry coverage expanded by a net total of four firms in the first quarter of 2016. Goldman Sachs, the
lone holdout among the bulge bracket firms, finally initiated coverage of the cybersecurity group with
reports on six of the ten peers. Goldman’s decision to initiate coverage is a clear indication that they
believe the party is far from over in the cybersecurity sector and that there are still significant
opportunities to be had in the space. Additionally, mid-market firm Jefferies initiated coverage of a single
name, Symantec, as part of broader technology coverage. As shown in Chart IV, 48 separate brokers and
58 analysts, broadly segmented by broker type, now cover the space, up from 44 and 53, respectively, as
of year-end. At this point, there is no other sub-sector of technology that has broader sell-side coverage
than cybersecurity.
4
CHART I
Stock Performance & Valuation
(NOTE - all 2015 revenue and EPS* figures are calendarized)
Firm
Ticker
12/31/15
Price
3/31/16
Price
Barracuda
CyberArk Software
FireEye
Fortinet
Imperva
Palo Alto Networks
Proofpoint
Rapid7
Qualys
Symantec
Group Average
NASDAQ
CUDA
CYBR
FEYE
FTNT
IMPV
PANW
PFPT
RPD
QLYS
SYMC
18.68
45.14
20.74
31.17
63.31
176.14
65.01
15.13
33.09
21.00
15.40
42.63
17.99
30.63
50.50
163.14
53.78
13.07
25.31
18.37
CCMP
5007.4
4869.9
1Q2016 1Q2016
Percent Relative
Change Change
-17.6%
-5.6%
-13.3%
-1.7%
-20.2%
-7.4%
-17.3%
-13.6%
-23.5%
-12.5%
-13.3%
-2.7%
-14.8%
-2.8%
-10.5%
1.0%
-17.5%
-4.6%
-14.5%
-10.9%
-20.8%
-9.8%
-10.5%
0.0%
Market
Cap (M)
2016E
Rev (M)
2016E
EPS*
MktCap/
16 Rev
Price/
16 EPS
818
1417
2987
5259
1629
14417
2209
543
873
11988
340
207
829
1253
305
1584
348
149
197
3626
0.41
0.87
-1.25
0.68
0.21
2.11
-0.22
-0.92
0.77
1.11
2.4x
6.8x
3.6x
4.2x
5.3x
9.1x
6.3x
3.6x
4.4x
3.3x
4.9x
37.8x
49.0x
NM
45.0x
NM
77.3x
NM
NM
32.9x
16.6x
43.1x
* Non-GAAP EPS
CHART II
Operating Performance
Firm
Ticker
Barracuda
CyberArk Software
FireEye
Fortinet
Imperva
Palo Alto Networks
Proofpoint
Rapid7
Qualys
Symantec
CUDA
CYBR
FEYE
FTNT
IMPV
PANW
PFPT
RPD
QLYS
SYMC
4Q Reported
Revenue
EPS*
80.1
51.5
184.8
296.5
72.7
335.0
74.9
32.9
44.4
909.0
0.07
0.39
-0.36
0.17
0.20
0.40
-0.11
-0.31
0.21
0.26
4Q Consensus
Revenue
EPS*
80.3
44.1
185.3
296.4
68.1
318.0
73.0
28.6
44.6
906.0
0.08
0.20
-0.37
0.18
0.15
0.39
-0.11
-0.36
0.17
0.24
Summary
4Q Variance
vs Consensus
Revenue
EPS*
1Q Guidance
vs Consensus
Revenue
EPS*
-0.2%
16.8%
-0.3%
0.0%
6.8%
5.3%
2.6%
15.0%
-0.4%
0.3%
-12.5%
95.0%
2.7%
-5.6%
33.3%
2.6%
0.0%
13.9%
23.5%
8.3%
Below
Above
Above
Below
Below
Above
Above
Above
Below
Below
Below
Below
Below
Below
Below
Below
Below
Above
Below
Above
4.6%
16.1%
5-5
2-8
* Non-GAAP EPS
CHART III
Sell-Side Ratings and Institutional Ownership (as of 3/31/2016)
Firm
Barracuda
CyberArk Software
FireEye
Fortinet
Imperva
Palo Alto Networks
Proofpoint
Rapid7
Qualys
Symantec
Group Average
Ticker
CUDA
CYBR
FEYE
FTNT
IMPV
PANW
PFPT
RPD
QLYS
SYMC
# Analysts
16
16
34
31
22
42
23
6
15
29
Analysts' Ratings
Rated
Rated
Rated
Buy % Hold %
Sell%
40%
60%
0%
60%
40%
0%
47%
53%
0%
67%
33%
0%
82%
18%
0%
90%
10%
0%
91%
9%
0%
83%
17%
0%
40%
53%
7%
21%
75%
4%
63%
36%
1%
5
Institutional Ownership Analysis
Top 10
Top 10
Top 10
Top 10
Net Share
S/O Holdings Buying Holding Selling Change (000)
49.5%
6
4
0
2602
40.3%
5
4
1
1704
24.8%
5
1
4
818
34.8%
8
1
1
5989
43.5%
3
2
5
-403
31.2%
8
0
2
3867
48.5%
5
1
4
-563
20.2%
7
1
2
4019
41.5%
5
2
3
934
48.2%
5
0
5
8737
38.2%
5.7
1.6
2.7
27704
CHART IV
Cyber Security Universe Analyst Coverage (as of 3/31/2016)
Firm
Analyst
RPD
CUDA
QLYS
CYBR
IMPV
PFPT
FEYE
FTNT
SYMC
PANW
$543M
$818M
$873M
$1.42B
$1.63B
$2.21B
$2.99B
$5.26B
$12.0B
$14.4B
Y
Y
Total
Firm
Coverage
BULGE BRACKET FIRMS
BofA Merrill Lynch
Barclays
Citi
Credit Suisse
Deutsche Bank
Goldman Sachs
JP Morgan
Morgan Stanley
UBS
Wells Fargo Securities
Y
Y
Ta l Li a ni
Sa ket Ka l i a
Y
Y
Y
Y
Y
Y
Ra i mo Lens chow
Y
Y
Wa l ter Pri tcha rd
Y
Phi l i p Wi ns l ow
Y
Imti a z Kouja l gi
Ga bri el a Borges
Sterl i ng Auty
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
6
5
4
Y
Y
Y
6
7
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Brent Thi l l
6
Y
Y
Y
Y
Y
Y
Y
Y
Kei th Wei s s
Gra y Powel l
Y
Y
Y
Ka rl Kei rs tea d
Mel i s s a Gorha m
Y
Y
Ni kol a y Bel i ov
6
8
4
6
MID MARKET FIRMS
Cowen
Evercore ISI
FBR Capital Markets
Jefferies
JMP Securities
Macquarie
Needham
Oppenheimer
Pacific Crest
Piper Jaffray
Raymond James
RBC Capital Mkts
Robert W. Baird
Stephens Inc
Stifel
William Blair
Gregg Mos kowi tz
Y
Y
Kenneth Ta l a ni a n
Sa ma d Sa ma na
Y
Y
John Di fucci
Y
Eri k Suppi ger
Y
Y
Y
Y
Ra jes h Gha i
Scott Zel l er
Y
Sha ul Eya l
Rob Owens
Y
Andrew Nowi ns ki
Mi cha el Turi ts
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Ma tthew Hedberg
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Da n Bergs trom
Ja ys on Nol a nd
Steven As hl ey
Y
Y
Jona tha n Ruykha ver
Gur Ta l pa z
Jona tha n Ho
Y
Y
Y
Pa tri ck Wa l ra vens
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
9
1
3
6
9
8
5
6
4
Y
Y
Y
8
8
Y
Y
Y
2
7
Y
Y
Y
Y
Y
Y
Y
Y
Y
1
5
3
5
6
7
1
7
Y
Ja s on Noa h Ader
5
3
3
1
9
INDEPENDENT BOUTIQUE FIRMS
Ameriprise Advisor Serv
BTIG
D.A. Davidson
Daiwa Securities
Doughety & Company
FBN Securities
First Analysis
Guggenheim
Imperial Capital LLC
Maxim Group
Nomura
Northland Securities
Topeka Capital Mkts
Wedbush
Wunderlich
Y
Y
Jus ti n Burgi n
Y
Joel Fi s hbei n
Ja ck Andrews
Y
Y
Y
Ma rk Kel l eher
Yoko Ta ma da
Y
Y
Ca tha ri ne Trebni ck
Shebl y Seyra fi
Y
Cra i g Na nkervi s
Y
Y
Rya n Hutchi ns on
Mi cha el Ki m
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Neha l Choks hi
Frederi ck Gri eb
Ti m Kl a s el l
Y
Y
Ma rs ha l l Senk
Y
Frederi ck Zi egel
Y
Steven Koeni g
Y
Y
Robert Breza
Y
Y
Y
Y
6
5
7
2
7
RESEARCH ONLY FIRMS
Argus Research
Buckingham
BWS
Gabelli and Co
Sanford Bernstein
MKM Partners
Summit Research
Coverage Total
Jos eph Bonner
Y
Y
Rohi t Chopra
Y
Ha med Khors a nd
Y
Hendi Sus a nto
Y
Y
Y
Pi erre Ferra go
Y
Kevi n Butti gi eg
Sri ni Na ndury
6
Y
16
Y
15
6
Y
16
Y
22
Y
23
Y
34
31
29
42
2
3
1
3
1
1
6