As businesses digitalise in response to the COVID-19 pandemic, they have to contend with another problem: cybersecurity.
According to a survey by technology conglomerate, Cisco Systems (NASDAQ: CSCO), businesses in Singapore have seen a significant increase in cybersecurity challenges with three out five respondents reporting that they experienced at least a 25% increase in cyber threats since the pandemic began.
Part of the reason why this is happening is that the shift to remote working makes companies more susceptible to attacks when employees connect to their corporate networks outside of traditional offices.
Businesses that experience a surge in the usage of their services have also become more vulnerable.
One recent example is the data breach suffered by e-commerce firm, Lazada, which is owned by Alibaba (HKG: 9988).
The breach led to the compromise of more than one million customer accounts on its online grocery delivery service, RedMart, and exposed personal details that were linked to the accounts.
Rapid digitalisation continues to up the ante for cybersecurity, leading to the emergence of smaller players that offer niche solutions beyond the traditional firewall and antivirus solutions.
Such solutions are typically provided by software giants such as Cisco Systems and Oracle Corporation (NYSE: ORCL) as part of a larger suite of services.
Let’s take a look at three such players that investors may consider investing in when building their cybersecurity portfolio.
Zscaler (NASDAQ: ZS): A leader in cloud-based cybersecurity solutions
Traditional cybersecurity approaches that rely on expensive on-premise hardware and applications to secure physical corporate networks are fast becoming obsolete as businesses increasingly migrate to the cloud.
One company that was among the first to realize this is Zscaler, which was founded in 2007 to allow users, devices and applications to connect securely over any network.
The connections are secured through Zscaler’s “Zero Trust Exchange”, which is distributed across 150 data centres to provide real-time cyber threat detection globally.
As soon as a threat is detected, the exchange uses artificial intelligence to automatically protect all of its customers from it.
Another benefit of the platform is its competitive pricing that is charged on an annual, per-user subscription basis.
By eliminating the cost and complexity associated with traditional network security, Zscaler has gained traction with many cloud-based customers.
The increased adoption has translated into strong revenue growth for the company of 46% year on year to US$125.9 million for the fiscal fourth-quarter ending 31 July 2020.
Zscaler’s consistently high dollar-based net retention rate (DBNR) is a further testament to the value it provides to customers.
For the four quarter, DNBR was 120%, as compared to 119% in the last quarter and 118% for the same quarter a year ago.
However, it is worth noting that the company reported a significantly higher net loss of US$49.5 million as compared to US$5.3 million in the fourth quarter last year.
This was due to higher operating expenses which are expected to persist as management has expressed its intention to continue investing heavily in areas such as research and development as well as sales and marketing in order to grow its market share.
While this is a common strategy for growth companies, it will be prudent for us to track Zscaler’s pathway to profitability by monitoring metrics such as free cash flow and free cash flow margin (the amount of free cash per dollar of revenue).
For the full fiscal year 2020, Zscaler had free cash flow of US$27.5 million or 6% of revenue.
This is a slight dip from the US$29.3 million of free cash flow or 10% of revenue, that was generated in the previous fiscal year.
Okta (NASDAQ: OKTA): A leader in identity and access management
Okta provides cloud-based solutions to help companies keep track of people who access their networks.
They include multifactor authentication and single sign-on across multiple applications to ensure authorized access by employees, contractors and customers.
To ensure a seamless and secure login experience for users, Okta’s solutions are integrated with more than 6,500 enterprise software infrastructure and applications such as Microsoft (NASDAQ: MSFT) Office 365 and Salesforce.com (NYSE: CRM).
The utility and ease of use of Okta’s solutions have also been recognized by the industry.
Last year, the company was named the industry leader in access management by both Forrester Research and Gartner (NYSE: IT) for the third consecutive year.
This success has translated into strong revenue growth of 43% year on year to US$200.4 million in its fiscal second-quarter ending 31 July 2020.
It also bodes well for the firm that more than 95% of its revenue is subscription-based as this income is recurring and predictable.
In fact, Okta’s subscription revenue backlog (or future revenue that is under contract but has not yet been recognized), grew an impressive 56% during the same period.
Okta’s business model also allows it to enjoy high gross margins which came in at a healthy 74.5% in the second quarter as compared to 72.4% in the same period last year.
Consequently, Okta is moving closer to profitability and is forecasting a non-GAAP (generally accepted accounting principles) operating loss of about US$12.0 million for the full fiscal year 2021 as compared to a non-GAAP net loss of US$36.7 million in the previous fiscal year.
CrowdStrike (NASDAQ: CRWD): A leader in endpoint protection
CrowdStrike specialises in protecting all types of endpoint devices such as desktops, laptops, mobile phones and servers from malware, hacking, and data theft.
Protection is delivered via subscription-based modules that offer customers the flexibility of adding modules, for example, to track unauthorized applications, in addition to basic cybersecurity protection.
CrowdStrike’s founder and chief executive officer, George Kurtz, is an internationally recognized security expert who was formerly the chief technology officer of another well-known security company, McAfee (NASDAQ: MCFE).
He founded CrowdStrike in 2011 after he was inspired to create a more efficient and cloud-based security solution when he saw a fellow flight passenger wait fifteen minutes for a McAfee security program to load on the laptop.
Today, CrowdStrike serves more than 7,200 subscription customers after it added 969 net new subscription customers in the second quarter of fiscal 2021 as of 31 July 2020, representing a remarkable 91% year on year growth.
Customers are also increasing their stickiness as they continue to add new modules – the number of subscription customers that have adopted four or more cloud modules increased to 57% while those with five or more cloud modules increased to 39% year on year.
Correspondingly, total revenue surged by 84% year on year to US$199.0 million.
CrowdStrike also appears to be moving closer to profitability as it has narrowed its net loss to US$29.9 million, as compared to US$51.9 million in the second quarter of fiscal 2020.
It has also started to generate free cash flow of US$32.4 million, as compared to negative US$29.2 million in the second quarter of fiscal 2020.
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Disclaimer: Charlotte owns shares in Alibaba, Zscaler, Microsoft, Okta and CrowdStrike.
