Zscaler delivered an impressive earnings report to cap off their fiscal year, demonstrating their ability to capitalize on strong demand for their leading Zero Trust solution. Coming into the report, investors were concerned about decelerating billings, worsening operating leverage and the need to provide an out of cycle fiscal year guide. Additionally, competitors like Palo Alto and Cloudflare had been increasingly vocal about customer wins. None of these factors appeared to impact the Q4 report, however, with Zscaler re-accelerating billings growth and highlighting several enormous enterprise and federal customer lands.
I had shared similar concerns and gradually reduced my allocation to Zscaler stock over the course of this year. Based on the Q4 results, this move appears to have been premature. While I still wonder about the longer term play for Zscaler, in the immediate term, they are feasting on the heightened demand environment for Zero Trust, as large enterprises and government agencies scramble to upgrade their network security. In this post, I’ll dig into the details from Zscaler’s quarter, revisit their product strategy and consider the path forward.
Zscaler unveiled a number of product enhancements during their Zenith Live conference in June, demonstrating why they are still the leader in Security Service Edge. They continue to expand the capabilities of their core Zero Trust platform, extending secure connectivity for enterprise users into application workloads and now IoT devices. They also introduced several AI-enabled features to streamline threat identification and resolution. While I no longer own the stock, I am impressed by the breadth and depth of their offering. For customers seeking a complete and robust solution for a Zero Trust migration today, Zscaler provides an enterprise-ready, hardened platform that checks all the boxes.
In this post, I will review the announcements made during Zenith Live and discuss how these further solidify Zscaler’s position in Zero Trust. I will also draw some comparisons to Cloudflare’s progress and share my investment approach for this space.
Internet usage patterns and delivery of software applications are undergoing major paradigm shifts. Decentralization is the primary pattern – transitioning away from fixed network entry points, concentrated clusters of compute and single data stores. These changes are being driven by the rapid evolution of work habits, software architectures, connected devices and data generation. After years of Internet resource convergence, we are witnessing a shift towards the broader distribution of compute, data and network connectivity.
Software applications are pushing processing workloads and state outwards towards the end user. This transition began to lower response times for impatient humans, but will become a necessity to coordinate fleets of connected devices. With work from anywhere, network onramps cannot all be routed through central VPN entry points protected by firewalls. Distributed networks backed by dynamic routing will increasingly facilitate point-to-point connections between enterprise users, their productivity apps, corporate data centers and local offices. Massive troughs of raw IoT data have to be summarized near the point of creation before being shipped to permanent stores.
These changes are being driven by exogenous factors, reflecting the same bias towards decentralization. Workers are less likely to concentrate in large office campuses where their network connectivity can be protected by closets of security hardware. The proliferation of connected devices and high-bandwidth local wireless networks are creating new opportunities to streamline industrial processes and enable machine-to-machine coordination. Privacy concerns are prompting government regulations to keep user data within geographic boundaries. The convenience and efficiency of digital engagement are forcing enterprises to move consumer touchpoints onto virtual channels.
Overlaying these trends is an increasing need for security. While hackers have existed for years, the decentralization of defenses and migration away from physical engagement are creating new opportunities to exploit vulnerabilities as technology tries to catch up with consumer habits. Information sharing, corporate-like organization and untraceable payment systems are propelling the practice of hacking into a thriving business function. This has thrust digital security from the back of the enterprise to the front office, layering over every corporate activity. Digital transformation extends the same risks to the enterprise’s customers.
These forces are creating significant opportunities for nimble software, network and security providers. Entrenched technology companies are responding, but existing business incentives and fixed system architectures are creating inertia. Foundations in centralized compute infrastructure, big data stores and network hardware sales are difficult to evolve. Newer companies grounded in a distributed mindset are better positioned architecturally, commercially and culturally to address the new landscape. Focused independent players will carve out large portions of the growing market for distributed Internet services.
In this post, I explore these trends in network connectivity, application delivery and data distribution, and then link them back to the independent, forward-thinking public companies that are capitalizing on them. While many companies are lining up against these trends, I will try to limit my focus on the implications for a few high growth software and network infrastructure companies tracked on this blog. Specifically, these include Cloudflare, Zscaler and Fastly. I will also use this narrative to weave in updates on each company’s recent quarterly results, product developments and strategic moves.
