Many cybersecurity companies, including Fortinet, Cloudflare or Rapid7, reported their quarterly earnings in recent days. While revenue and earnings were overall solid, most companies hinted at increasing deal scrutiny from their corporate customers, lengthening sales cycles and softening growth trends going forward as customers navigate a complex environment and are closely watching their spending amidst high inflation and FX pressures.
In our view, this growth deceleration does not come as a surprise and has been largely anticipated by investors over the last few months. Importantly, this is just a slight growth deceleration and not a brutal one as illustrated by the quarterly growth guidance for next quarter. For instance, Fortinet guided to 29-31% growth, roughly in line with Q2’s 29%; Cloudflare projected 45-46% growth for Q3, slightly down compared to the 54% reported in Q2; and Rapid7 guided to 25-27% growth in Q3 after 32% in Q2.
This clearly confirms cybersecurity as a top corporate IT priority and sets apart cybersecurity from other Tech sectors that have been hit hard by the growth slowdown.
In terms of demand, XDR (threat detection and response), IAM (identity & access management) and network security/firewalls are unsurprisingly proving the most resilient cybersecurity segments. They are indeed benefiting from an elevated threat environment and are key components of Zero Trust platforms that are gradually being rolled out in enterprises to ensure that all users and devices, whether in or outside the organization’s network, are authenticated, authorized, and continuously validated before being granted or keeping access to applications and data.
Accordingly, cybersecurity vendors that seek to gather several of these XDR, identity and networking features in a single, automated platform are gaining share and benefiting from extra growth as their enterprise customers are in the process of consolidating their various security products to implement Zero Trust and reduce architecture complexity.
Turning to federal government providers such as Palantir, Leidos or Booz Allen, the picture has not been much different so far, with project delays and elongated sales cycles currently but a robust outlook supported by defense and intelligence budget growth for FY23 (+4% and +9% respectively).
In conclusion, even if cybersecurity companies are caught in the growth slowdown that affects the whole Tech industry, they keep growing at a much steadier pace that is likely to sustain investors’ appetite for the industry. Longer term, the secular drivers are intact with the shift to the cloud of IT infrastructures and the ever-increasing attack surface as the number of connected devices rises exponentially.