Once again, the earnings calendar is packed with many tech companies that ETR tracks in our quarterly Technology Spending Intentions Survey (TSIS) reporting over the next two weeks, such as Palo Alto Networks, Zoom, Elastic, Workday, and many others. In advance of the earnings reports, ETR has compiled some recent data on a handful of those companies. Remember the complete data sets and reports are all available on the ETR platform. First up, we take a dive into Palo Alto.
Palo Alto Networks | Earnings Date: 2/21/2023. In the most recent January 2023 TSIS survey cycle, the ETR research team wrote, "Entering the New Year, market share and spending intention trends are largely unchanged for Palo Alto. IT budgets remain under pressure; cybersecurity is still a priority (but not immune), and vendor consolidation is the primary method of rationalizing spending. Specific to Palo Alto, spending intent (ETR's Net Score) continues to decelerate, driven by a flattening of spend, while the company's Pervasion (ETR's enterprise penetration) increases, remaining extremely elevated and at the 97th percentile within Information Security.
Despite a longer-term trend of declining spend velocity, overall levels remain pretty healthy, and overall pervasion within large enterprise companies continues to rest at dominant levels. Still, the ETR research team ponders what's next for Palo as the forward-looking spend data seems to be stalling. "A historically acquisitive company in the private market (12 acquisitions in the past five years), we highlight vendors from ETR's Emerging Technology Survey with high customer overlap and/or high Net Sentiment, which might offer the ability to re-accelerate top-line growth for Palo, including mature companies like Netskope, Tanium, and BeyondTrust as well as younger stars like Snyk, Wiz, Salt Security, and several others."
From an equity perspective, the valuation appears slightly asynchronous with the Street's revenue growth expectations, with a 50x+ forward earnings price tag for ~20% topline growth while getting paid less than 4% on a free cash flow yield basis. In addition, nothing has been discovered within ETR's most recent data set, based on Palo Alto's customers, that would warrant an expected unforeseen rate of change in either direction.
Workday | ETR Data Outlook: Positive | Earnings Date: 2/27/2023. ETR took a brief hiatus from its viewpoint for Workday as our survey and data teams split the company between its HCM and Financial components, but once the data set was reconciled, the ETR research team swiftly bounced back with a Positive viewpoint on the vendor's data set in the second half of 2022, which continued into the most recent survey period. "Mild declines in HCM's healthy Net Score are more than offset by gains in Financial Management and Adaptive Insights, and attach rates for the latter two continue to grow. All three products also continue to track well ahead of their sector in Adoptions, Increasing spend, and Pervasion leaving us with a Positive outlook on Workday data."
Again, from an equity perspective, Workday is a mature SaaS company trading at 40x next year's earnings and 6x forward sales in exchange for 20% sales growth (impressive off of massive base levels) and FCF yields just below 3%; however, customer spending intent and enterprise pervasion rates remain exceptionally healthy.
Zoom | ETR Data Outlook: Negative | Earnings Date: 2/27/2023. Unfortunately, not much changed in Zoom's most recent data set. Across all respondents and all sectors where we track the vendor, Zoom's aggregate Net Score dropped 63% over the last twelve months. Yet again, the vendor's Expansion vs. Contraction ratio has thinned out to 28:22 as positive spending has decreased and negative spending has grown since last year. On a positive note, the rate of Net Score decline captured over the past two consecutive surveys is more muted than historical levels, a potentially early inflection point we will monitor going forward.
In addition, Pervasion (relative citation growth amongst our survey sample) remains elevated for the widely used vendor and has improved by 5% since last year. Pervasion rates grew year-over-year in all three sectors where we track the vendor, and Zoom now has the 11th highest Pervasion rate across the entire TSIS vendor universe. However, despite the robust Pervasion levels and signs that the rate of spending declines may be slowing, the 2023 data shows continued declines in Net Score as Increase indications shrink and Replacement rates remain at record highs, yielding yet another Negative outlook for Zoom's most recent data set.
At 20x forward earnings, this old-school researcher can at least comprehend the valuation for Zoom's equity, but with Street expectations of only 5% growth for the out year, the current price seems more than justified. From a data perspective, the rate of spending decline appears to be easing, and we will keep a watchful eye on future data sets to confirm that trajectory.
Stay tuned for next week's installment, where we review data sets for Splunk, Zscaler, Snowflake, Okta, and Salesforce ahead of their respective earnings releases. If you don't feel like waiting around or have the desire to see the full data sets on all of the company's ETR tracks, hop into our leading research platform or start your own free trial.
Enterprise Technology Research (ETR) is a technology market research firm that leverages proprietary data from our targeted IT decision maker (ITDM) community to provide actionable insights about spending intentions and industry trends. Since 2010, we have worked diligently at achieving one goal: eliminating the need for opinions in enterprise research, which are often formed from incomplete, biased, and statistically insignificant data. Our community of ITDMs represents $1+ trillion in annual IT spend and is positioned to provide best-in-class customer/evaluator perspectives. ETR’s proprietary data and insights from this community empower institutional investors, technology companies, and ITDMs to navigate the complex enterprise technology landscape amid an expanding marketplace. Discover what ETR can do for you at www.etr.ai