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Israel’s ‘Rough Neighborhood’ Forges Leaders Check Point, CyberArk

Check Point Software Technology ( CHKP ) CEO Gil Shwed tipped the domino in 1994 when he unveiled the world’s first commercially available firewall. Ten years later, CyberArk Software ( CYBR ) jumped into the nascent privileged-account security field. Their commonality? Both are based in security-minded Israel and led by men with military backgrounds. Both have also outperformed the sluggish 2016 cybersecurity market that, in January, was tugged down by gloomy guidance from LinkedIn ( LNKD ) and Tableau Software ( DATA ). Wall Street quickly panicked, fearing a big slowdown in IT spending. IBD’s 41-company Computer Software-Security industry group is down a collective 11% this year. Check Point stock withstood the fall and is up 6.6% year to date. CyberArk stock is down, but by just 6.4%. That’s not to say non-Israeli cybersecurity firms didn’t also buck the trend. Symantec ( SYMC ) stock is up 9%. Shares of Fortinet ( FTNT ) and Palo Alto Networks ( PANW ) have fallen a fraction and 8.5%, respectively, also outperforming the sector overall. As the industry recovers, BlueStar Global Investors analyst Joshua Kaplan says investors should turn to the Israeli security software companies Check Point, CyberArk, Imperva ( IMPV ) and Radware ( RDWR ) for innovative products and rising earnings. Israel Steeped In Security Efforts “Israel is in a rough neighborhood. It’s surrounded by enemies on all three sides,” Kaplan told IBD. For that reason, cybersecurity “is a critical part of Israel’s military edge.” Check Point was borne out of Shwed’s Israel Defense Forces (IDF) service, where he was a member of Intelligence Corps Unit 8200. But he began coding long before that: At age 12, he took a coding position at a language-translation software company, according to online news magazine Israel21c . Udi Mokady, too, served in the IDF military intelligence unit before he was tapped to lead CyberArk in 2005. CyberArk made its IPO in 2014, opened at 25 — above the 16 listing price — and ramped 26% in its first two days. (Note that Israeli cybersecurity firms aren’t alone with a military influence at the top. Silicon Valley-based Palo Alto Networks CEO Mark McLaughlin served in the U.S. Army, where he flew an attack helicopter before his 2011 appointment to that security firm’s top spot.) Israel’s innovative tech stems largely from required military service, Kaplan says, noting the silos separating private, public and government sectors are less clear-cut than those in the U.S. Those military skills typically translate well to the private sector. Shwed did as much with his firewall, originally an airtight setup to tie two top-secret Israeli military computer networks. He launched Check Point’s firewall — a software system designed to monitor a network and keep out any unauthorized users — shortly before Silicon Valley-based Cisco Systems ( CSCO ) entered the perimeter market. Now, Kaplan says U.S. and other firms will have to innovate as quickly as their Israeli counterparts to keep pace. The cybersecurity sector is poised for a shake-up as the industry matures, and a number of companies may not survive, he said. “IT spending is not going to drop, it’s going to stabilize at a higher level than it was before,” he told IBD. “When an industry’s growth starts to slow down a little bit, sometimes there’s forced consolidation and companies that just don’t make it.” Check Point is going to stay ahead of that curve by pushing into the platform market. “Platform” is currently the word du jour for the industry, with pure players and tech giants alike touting their wholesale approach to security. Palo Alto Networks, Fortinet, IBM ( IBM ), FireEye ( FEYE ) and many others market security platforms. “There are going to be several companies who are industry leaders and who gain share,” Kaplan said. “But I do believe Check Point started this initiative first.” Imperva: Not ‘A Household Name’ Cloud-based security firm Imperva also ramped up after its 2011 IPO priced at 18, jumping 47% on day one and peaking last November above 77. Imperva has a heavy focus on data center security. Over the years, though, the stock has had big up and down moves after earnings, Kaplan says. Now that the industry’s highest growth, at least for now, seems to have passed, he says it’s unlikely Imperva will gain much notoriety. “I’m not sure Imperva is ever going to be a household name,” he said. “And Radware, I don’t think it’s ever really going to get that investor excitement that it should have.” But the PureFunds ISE Cyber Security ( HACK ) ETF has helped some under-the-radar security firms get noticed, Kaplan says. “Until the HACK ETF came along, a lot of people probably hadn’t heard of the other three Israeli cybersecurity companies outside of Check Point,” he said. “That’s the reason you want to be invested in these companies. Maybe they weren’t on your radar before, and they should have been.” The PureFunds Cyber Security ETF debuted in 2014 and is down 7% this year, after taking some software-related licks in January. Andrew Chanin, CEO of PureFunds, stresses the fund’s diversification. “Before we launched, there was a lot of demand for investing in cybersecurity, but being it’s a constantly adapting, evolving and changing industry, many people don’t understand the companies, their products and services,” he told IBD. PureFunds tries to do the investing legwork. The HACK ETF currently features 35 distinctive cybersecurity firms, including Check Point, CyberArk, Imperva and Radware. But Chanin questions whether investors know — or care — that the four are Israeli. Israel is an obvious tech hub, “but (the companies) weren’t going around saying, ‘Hey, we’re an Israeli company, use us,’ ” he said. More than ever, big tech companies are taking the security plunge, Chanin says, and acquisition rumors are rumbling, including talk that Check Point might be eyeing CyberArk. “We’ve seen many larger, diversified companies come out and say it’s a goal of theirs to increase their cybersecurity footprint,” Chanin said. “Building something organically isn’t easy and acquisitions could save time and money in that plan.”

CyberArk, FireEye Q4 Sales Expected To Brake; But Stocks Rebound

CyberArk Software ( CYBR ) and FireEye ( FEYE ) stocks lent themselves to a security recovery Wednesday, both climbing ahead of their late-Thursday quarterly earnings reports after a four-day downtrend pounded IBD’s Computer Software-Security industry group. The 26-company group rose 1.7% Wednesday after hitting a one-year low on Tuesday, with shares of Qualys ( QLYS ), Imperva ( IMPV ) and Proofpoint ( PFPT ) leading the way, up 15.2%, 6.3% and 5.6%, respectively. CyberArk stock rose 2.3%, while FireEye stock jumped 3.7%. Still, the Computer Software-Security group ranks a mere 176 out of 197 groups tracked by IBD. But CyberArk and FireEye are expected to report sales, for Q4, that will have decelerated for their third- and sixth-consecutive quarters, respectively. CyberArk EPS Seen Falling For Q4, the consensus of 15 analysts polled by Thomson Reuters sees CyberArk reporting $43.9 million in sales and 20 cents earnings per share ex items, up 21% and down 5%, respectively. It would be the first time in six quarters that CyberArk’s earnings have fallen year over year. Three months ago, CyberArk guided to $43 million to $44 million in sales and 18-20 cents EPS minus items. CyberArk is expected to report a 49% year-over-year jump to $153.3 million in sales for the year. EPS is seen climbing 53% vs. 2014 to 81 cents. CyberArk previously guided to $152.3 million to $153.3 million in sales and 80-82 cents EPS minus items. Will FireEye’s Billings Recover? FireEye is expected to report $185.3 million in Q4 sales and a per-share loss ex items of 37 cents. On a year-over-year basis, sales would grow 30% and losses would shrink by a penny. In November, FireEye guided to $182 million to $190 million in sales, 36-38 cents per-share losses minus items and $240 million to $260 million in billings, which for the latter would be up 18% at the midpoint. For 2015, the consensus of 34 analysts polled by Thomson Reuters expects FireEye to report $623.4 million in sales, up 46%. Losses per share ex items of $1.62 are expected to lessen from $1.97 in 2014. The company previously guided to $620 million to $628 million in sales and losses per share ex items of $1.61 to $1.63. Billings guidance for $780 million to $800 million would be up 34% at the midpoint.

Imperva Topples On Mixed Guidance But Clobbers Q4 Expectations

Cybersecurity firm Imperva ( IMPV ) topped analysts’ Q4 views, but its strangled current-quarter and 2016 guidance sent its shares to nose-diving to a 10-month low on Wall Street Thursday. Imperva stock was down 14% in midday trading on the stock market today , near 42.50, earlier falling as low as 41.81, after the company’s late Wednesday earnings report. At least four analysts cut their price targets on Imperva stock. For Q4, Imperva reported 20 cents earnings per share ex items on $72.7 million in sales, topping analysts projections for 15 cents and $68.1 million, and topping the company’s earlier view for 10-16 cents and $66 million to $68 million. Sales rose 41% year over year, and EPS minus items swung from a four-cent loss in the year-earlier quarter. Imperva wrapped up the year with $234.3 million in sales, up 43%, and 11 cents EPS ex items, swinging from a 74-cent loss in 2014. Both measures beat Wall Street expectations and the company’s forecast three months ago. Imperva’s Q1 Losses Expected To Deepen Current-quarter and 2016 guidance was a mixed bag. For Q1, Imperva sees $58 million to $60 million in sales and a 26-32 loss per share ex items. The sales view roughly met the consensus for $59.8 million, but Wall Street was expecting losses of just 11 cents a share ex items. On a year-over-year basis, Q1 sales would be up 32% at the midpoint of guidance, but losses would stagnate or deepen from 26 cents in the year-earlier quarter. Imperva guided 2016 sales at $302 million to $307 million, which would be up 30% at the midpoint. In September, Imperva saw 25% growth in 2016. But the EPS ex items view for 20 cents missed the consensus model for 30 cents, Summit Research analyst Srini Nandury wrote in a research report. Nandury and Piper Jaffray analyst Andrew Nowinski separately blamed the guidance flop on Imperva’s plan to invest more heavily in sales and marketing as well as research and development to gain market share. Both expect that Imperva’s guidance was conservative. Major breaches drove massive growth in earlier quarters and years, Nowinski wrote in a research report. But that “panic buying” has slowed, he says. “It is becoming clear that in the absence of ‘panic buying,’ the security space can still deliver strong top-line growth, but that growth will come at a higher-than-expected cost,” he wrote. Nowinski maintained his overweight rating on Imperva stock but slashed his price target to 54 from 84. Nandury dropped his price target to 70 from 80 but reiterated a buy rating on Imperva stock. Subscription Sales Drive Top Line Subscription revenue of $14.9 million, up 105%, drove Imperva’s top line, Nowinski wrote. The number of $100,000-plus deals grew 15.4% vs. the year-earlier quarter, “and the company did more seven-figure deals than in the entire history of the company.” William Blair analyst Jonathan Ho suggested long-term investors take advantage of Imperva’s stock weakness. Imperva stock is down 33% in 2016. “The fundamentals appear strong,” Ho wrote in a report. “However, we concede there will likely be some continued short-term volatility for security stocks in general due to challenging market conditions.” IBD’s 26-company Computer Software-Security industry group was down 2% midday Thursday and is down 20% for the year, earlier in the day touching a 16-month low. Palo Alto Networks ( PANW ) and CyberArk Software ( CYBR ) lead the group with Composite Ratings of 81 and 80, respectively, out of a best-possible 99. Imperva stock has a CR of 47. Image provided by Shutterstock .