Tuesday 20 February 2018

How small cyber-security company has reaped the benefit of the Sony effect

The movie 'The Interview' was at the centre of the Sony hacking story
The movie 'The Interview' was at the centre of the Sony hacking story
U.S. President Barack Obama speaks at the Summit on Cybersecurity and Consumer Protection at Stanford University in Palo Alta, California during the week.

Gabrielle Copolla

Even the most bullish analysts were blown away by CyberArk Software's earnings last week.

The company, which focuses on privileged account security, reported fourth-quarter revenue 30pc higher than the top estimate, sending the shares up 42pc last week to a record $52.52.

They've now more than tripled since an initial public offering in September, making CyberArk the best performer among last year's record wave of Israeli IPOs.

With US President Obama convening a national summit to combat hackers and data breaches at companies from Sony Pictures Entertainment to JPMorgan Chase & Co, companies are keen to spend on cyber-security.

That helped CyberArk close deals more quickly than analysts expected in the fourth quarter.

The spate of attacks prompted Jonathan Ho, an analyst at William Blair & Co in Chicago, to upgrade the shares three days before the earnings report.

"The bad guys have made it worthwhile to make these investments and that's what's pushing a lot of these companies to the forefront," Mr Ho, who raised his recommendation to buy from neutral, said by phone from Chicago.

"I wanted to be on the right side of CyberArk, but there was no way I thought it would be as good as it actually was."

The Petach Tikva, Israel-based company said revenue rose 81pc to $36.3m in the fourth quarter, while adjusted earnings was 21 cents a share, compared with an average estimate of five cents.

CyberArk forecast revenue of as much as $130m this year, a 26pc increase from 2014.

The stock is up 32pc this year, compared to a 0.6pc gain on the Bloomberg Israel-US Equity Index, which rose 0.5pc last week. The Tel Aviv 25 Index rose 0.9pc to 1,472.98 at the close of trading on Monday.

Attention to threats that come from inside the firewall is spreading beyond corporate boardrooms and large financial companies, according to CyberArk chief executive Udi Mokady.

The company inked deals with a regional liquor retailer, a private New England college, and a US state government, he told investors this week. "What we felt in the fourth quarter was the fruit of this increased awareness," Mr Mokady said. "Our business is not dependent on specific breaches, customers are also very proactive."

Co-founded by Mr Mokady in 1999, CyberArk helped define the market for privileged account management, which grew from $325m in 2012 to $450m in 2013, according to Gartner Inc.

What was once seen as password controls on a corporate compliance checklist is now being viewed as a "critical layer" of security because of insider leaks such as that of former National Security Agency contractor Edward Snowden, Mr Mokady said.

The majority of analysts say CyberArk shares, at $52, reflect investor optimism more than near-term growth potential. Just two out of nine have a buy rating on the stock, and six recommend holding them, according to data compiled by Bloomberg, which show a consensus price estimate of $43.86, about 16pc below the February 13 close.

The company trades at about 8.6 times estimated 2016 revenue, compared to a 7.5 multiple for larger peers like Palo Alto Networks and 8.3 for FireEye, whose revenue was more than four times that of CyberArk's last year, according to a research note by Nomura Securities International. "The stock is being optimistic that numbers are going to be much higher than the 25pc growth the company just guided for," Rick Sherlund, an analyst with Nomura in New York who has a neutral rating on CyberArk, said. "You need a validation over the next year of what the growth rate is."

The privileged account niche of the cyber-security industry is also attracting more competition from players like International Business Machines, which is investing heavily in the space, and rival BeyondTrust Software, according to Felix Gaehtgens, an analyst at Gartner.

Mr Mokady said he's expanding his sales capacity to keep up with growth, and he continues to invest in research and development to fend off competition. The company's analytics product, released in December 2013, helped generate more business last year, he said.

"It's a greenfield opportunity because most companies around the world do not have this layer," he said. "It's really down to us executing on this, we're a company that has been ready for this day for many years."


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