AnalysisRecession hits cybersecurity companies hard as layoffs mount
Analysis
Recession hits cybersecurity companies hard as layoffs mount
The latest reports from the likes of SentinelOne, CrowdStrike and Palo Alto Networks revealed the crisis is already beginning to hit even the supposedly immune cybersecurity industry
The cybersecurity industry is not immune. This message has been internalized over the past week in the technology sector. It started with U.S. company CrowdStrike, which is considered one of the biggest players in the market. The company revealed good results in its financial reports for the third quarter, but the CEO admitted that customers are cutting expenses and postponing purchases.
On Wednesday, Israel’s SentinelOne, CrowdStrike's sworn rival, published its financial reports that repeated the same warning - currently the numbers are good, but it is difficult to ignore the emerging weakness in the corporate market.
"The macroeconomic factors are manifested in a slower closing of deals, especially of large transactions," Tomer Weingarten, founder and CEO of SentinelOne, said yesterday after the publication of the reports. "Customers are more focused only on the most critical and immediate security needs and reject the offer in other areas".
Nir Zuk’s Palo Alto Networks, the world's largest cyber company in terms of market capitalization, also posted good results at the end of November, but its managers also noted that the cyber market, which is perceived as more resistant to the winds of recession, is beginning to show signs of slowing down.
The words of the CEO of CrowdStrike sent its stock to a sharp fall of 19% in one day last week, which also reflected on the stock of SentinelOne, which has lost about 10% since then. Shares of Zscaler and Okta, other American cyber stars, also suffered declines and even Palo Alto fell from its Mount Olympus and the record value it was traded at. SentinelOne has a market cap of around $4 billion entering Thursday, less than half of the value at which it was issued last year - thanks to which it now has $1.2 billion in cash.
And when companies like CrowdStrike, Palo Alto or SentinelOne admit that the cyber industry is not immune, it is easy to understand why quite a few startups in the field have announced layoffs in the last week. Aqua Security, a cyber unicorn, parted ways with just over 60 employees who make up 10% of the workforce. Another unicorn, Perimeter 81, laid off 8% of its workforce; and Cognyte, which previously split from Verint, laid off 100 workers. Last month, Snyk also made a deep move of laying off 200 employees, and at the same time Cybereason, Imperva and Checkmarx also parted ways with employees.
In the meantime, the public companies have avoided layoffs, with the exception of the Israeli Varonis, which laid off 110 employees - 5% of the workforce. However, Weingarten noted yesterday with the publication of the reports that SentinelOne has halted hiring and is mainly investing in the training of the many marketing and sales personnel it recruited last year.
In the meantime, it is still losing money, and a lot, but revenues have doubled compared to the corresponding quarter to $115 million. The rapid growth still does not cover the expenses that are growing at the same rate, so the bottom line is that the company recorded a loss of $98 million. The forecast for the current quarter, although the company improved it slightly, indicates a slowdown in the growth rate. Quarterly revenues should reach $125 million, so that SentinelOne will finish the entire year with a turnover of $420 million.
So what is exactly happening in the cyber market? Up until now, the common perception was that cyber is the last expense to be cut, and this for the simple reason that it is an existential need. The other basic assumption is that the activity of hackers and ransom demanders is not affected by economic cycles, if anything maybe even the opposite - they also need more money in view of inflation. Because of this, no one wants to skimp on security budgets and be responsible for a breach that cripples the organization.
But in the field there is talk of the fact that if in recent years the CISOs, those VPs of systems security, received every budget they requested from the CFOs or CEOs, today the situation is different. The purchasing binge has also created a situation where organizations have armed themselves with many cyber systems, some of which aren't even that effective. This is probably another reason that now security managers are being sent to first check what exactly they bought in the good years and what else can be done with these products.
And there is something else happening in the cyber market, even if it remains a little under the surface because most of the players in it have no incentive to admit it - the rise of Microsoft's power. The giant, which is not historically seen as a traditional player in the cyber market, has greatly strengthened its technological solutions in the field, especially those provided with its cloud services. Among other things, it did this through a series of purchases of Israeli startups, led by Adallom, but also Aorato, CyberX and others.
In its latest financial report, Microsoft surprised many by saying that its cyber business already generates annual revenues of $15 billion and that it is growing by 40% a year. Microsoft is pushing its security solutions not only with cloud services, but also with Office. Microsoft plans to invest an additional $20 billion in bolstering its cyber solutions, thus only increasing the intensity of competition against all the players in the market, many of them Israeli, from Check Point to CyberArk or Varonis. Google has clearly noticed Microsoft's move and purchased Mandiant in a $5.5 billion deal to strengthen its cyber response to cloud customers and in general.
With or without Microsoft, one of the big questions today in the cyber market is whether the slowdown and tighter budgets will cause a preference for big brands and well-known companies so as not to risk working with a startup that may not be here tomorrow. Or whether instead, with the goal of saving and getting a boutique solution at the same time, customers will prefer to purchase cyber solutions precisely from the small startups. These will be willing to compromise more on the price and sometimes will even agree to provide it for free in exchange for using the customer's name for sales promotion to subsequent customers. In the coming period it will be easy to distinguish which companies have the most comprehensive and necessary solution and which of them are companies with a single feature that can be received as part of a more comprehensive solution of a major player, even if of slightly lower quality.
In the meantime, cyber shares have opened a negative gap against the S&P 500 index, even though Palo Alto Networks and Check Point manage to maintain relative stability. The declines produce value levels that are starting to look attractive and many private investment funds are keeping an eye on cyber companies with the aim of merging some of them and creating a potential giant. Of course, even the big companies themselves, from Microsoft to Check Point, see the current value levels and are preparing to make acquisitions, which will make the cyber sector one of the most interesting to watch in 2023.
