Cybersecurity A Primer - Union Securities€¦ · Splunk provides software that collects and analyzes machine data generated by websites, applications, servers, networks, and mobile

CybersecurityA Primer

Introduction

A vast theme in one word…

Cybersecurity is a portemanteau word used to describe a very large industry where players are

often specialized. Yet, it is generally described as the science of keeping digital data safe and only

in the hands of those who should have access.

The audience and demand is unlimited as the digitalization of the economy has been

accompanied by an equally large surge in cyber attacks : if individuals are generally the most

exposed, corporates, municipalities and governments are not the least vulnerable.

As a consequence, the cybersecurity market is highly fragmented. It includes the usual large IT

generalists (Microsoft, Dell, Cisco, Intel…), the defense companies (BAE Systems, Thales…) and

a wide range of pure players who accounts in total for less than 20% of the total market.

A sample of cybersecurity activities

November 19, 2019

Endpoint Security means protecting thecorporate network when accessed via remotedevices such as laptops or other wireless andmobile devices.

Firewall blocks unauthorized access to or from private networks. A firewall may be implemented using hardware, software, or a

combination of both.

Identity and Access Management (IAM)refers to a framework of policies andtechnologies for ensuring that the properpeople in an enterprise have the appropriateaccess to technology resources.

Data governance (DG) is theoverall management of the availability,usability, integrity and security of data usedin an enterprise.

Virtual Private Network (VPN) uses a publicnetwork (such as the Internet) to enableremote users and sites to connect securely tothe corporate network.

Vulnerability management is a securitypractice specifically designed to proactivelymitigate or prevent the exploitation of ITvulnerabilities which exist in a system ororganization.

Intrusion Prevention System (IPS) is atechnology that examines network trafficflows to detect and prevent vulnerabilities.

User behavior analytics (UBA) look atpatterns of human behavior, and then applyalgorithms and statistical analysis to detectmeaningful anomalies from those patterns todetect potential threats.

Top vendors

November 19, 2019

Endpoint SecurityFirewall

Identity and Access ManagementData governance

Virtual Private Network

Vulnerability management Intrusion Prevention System

User behavior analytics

Time to invest in Cybersecurity?

Endogenous growth : cybersecurity should remain one functional

area in Technology unlikely to see a cyclical slowdown, as

companies beef up defenses against new malware and

ransomware attacks. According to a research report by Global

Market Insights, the global cybersecurity market is set to grow

from its current market value of more than $120 billion to over

$300 billion by 2024.

New markets : the 5G deployment should be the next game

changer for the cybersecurity industry as it will enable the

acceleration of the Internet of Things industry (IoT). Indeed, the

cybersecurity is currently mainly focused on the protection of

computers, smartphones and tablets. IoT will bring new devices

and environments to protect : autonomous cars, medical

devices, integrated robots, smart farming, home protection, …

Regulations : tougher new regulations such as the European

GDPR and the California Consumer Privacy Act (CCPA) force the

companies and administrations to take data protection more

seriously.

Market timing : the cybersecurity pure players have suffered

from a technical market correction since August while the rest of

the tech companies have continued their onward march. Such a

correction was due to a sector rotation out of Software and

Services and into Semiconductors, due to global macro concerns

that may affect corporate spending and due to a few company

specific issues.

M&A story : most of the actors are small-sized companies and are

specialized in a few range of services. Bigger players are looking

to buy new pieces to complete their offer and offer ultimately a

one-stop shop.

November 19, 2019

Our favorite stocks

Outside the large IT players (Microsoft, Intel, Cisco), investment opportunities lie in investing in smaller

players, with a leading edge in a sub-segment of the Cybersecurity market. All those players are

currently potential takeover targets though the biggest could also be acquirers

Palo Alto offers a next generation Firewall, that offers enterprise-

wide Internet security to protect companies from breaches in their

corporate networks. It is the technology leader in this segment and

is continuously gaining market share against legacy incumbent

Checkpoint and Cisco.

Fortinet is losing market share to Palo Alto in firewalls but remains

a key player in the network security space. It has the opportunity to

expand its market by reaching directly to enterprises (they

traditionally focused on service providers) and to offer solutions for

edge computing and cloud.

CyberArk is the leading vendor in the security market of Privileged

Access Security (PAS) which helps enterprises to monitor privileged

account access and activities. The Israeli company continues to

grow its topline in excess of 20% per annum as corporates become

increasingly aware of the need to secure workstations.

Splunk provides software that collects and analyzes machine data

generated by websites, applications, servers, networks, and mobile

devices. It is a key player in the Big Data Theme. Security analytics

has ramped up to over 50% of the business over the past 5 years.

Splunk has a dominant position in that space and has expanded

into Behavioral Analytics through acquisitions.

How to invest in Cybersecurity ?

Investment Solutions

November 19, 2019

Source Bloomberg and Union Securities Switzerland SA.For illustration only. Past performance is not indicative for future results

Airbag Note on Cybersecurity Basket

USD, 24 Months, 100% participation, Callable after one year at 110%, Low Strike 80%

Product Information

Underlying Basket below Callable By issuer

Currency USD Non-Call Period None

Maturity 24 Months Conditional Coupon 10%

Strike Price 80.00% Frequency Annually

Protection Type Low Strike Participation 100%

Payoff Description

After one year,

- The issuer can call back the product at its sole discretion. If the product is called, the investor will receive 100% + the 10% Conditional Coupon.

- If the product is not called, it will continue to the next observation date.

At maturity,

- If the Underlying is at or above its Initial Price, the investor receives 100% + 100% x Upside Performance.

- If the Underlying is between the Initial Price and the Low Strike Price, the investor receives 100% of the nominal.

- Else, the investor receives a cash amount equal to Final Level / Strike Price of the Underlying (the investor loses only from the Low Strike level).

100% of the upside

Exposure to downside from the Low Strike 80%

Protection on the first 20%

40%

60%

80%

100%

120%

140%

160%

180%

30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150% 160% 170%

Payoff at Maturity

Underlying Performance Payoff

Equally-Weighted Underlying Basket

Name Weight Name Weight

CyberArk Software Ltd 12.50% Check Point Software Ltd 12.50%

Palo Alto Networks Inc 12.50% Sail Point Technologies Inc 12.50%

Splunk Inc 12.50% Cisco Systems Inc 12.50%

Zscaler Inc 12.50% FireEye Inc 12.50%

Product CategorizationProduct C lassif icat ion Invest or Expect at ion

Participation

Capital

Protection

Credit Linked

Note

Yield

EnhancementLeverage

Ascending


November 19, 2019

Lock-In Note on CyberArk Software & Palo Alto Networks

USD, 18 Months, 100% participation, Lock at 100%, 110%, 120%, 130%, Cap at 130%, Low Strike 80%

Product Information

Underlying Worst of Lock-In Step 10%

Currency USD First Step 100%

Maturity 18 Months Frequency Quarterly

Strike Price 80.00% Cap 130%

Protection Type Low Strike Participation 100%

Payoff Description

Every quarter,

- If the worst performing Underlying closes at or above a Lock-In Level (100%, 110%, 120% or 130%), the product becomes capital protected at its lock-in level.

- Else, the product has not locked.

Final Redemption

- If a Lock-In event occurred, the investor will receive the Maximum between the performance of the Worst Underlying capped at 130% and the Higher Lock reached.

- Else, if the Worst Underlying is between the Initial Price and the Low Strike Price, the investor receives 100% of the nominal.

- Else, the investor receives a cash amount equal to Final Level / Strike Price of the Worst Underlying (the investor loses only from the Low Strike level).

Worst Underlying among

Name Ticker Name Ticker

CyberArk Software Ltd CYBR US Palo Alto Networks Inc PANW US

60%

80%

100%

120%

140%

160%

50% 60% 70% 80% 90% 100% 110% 120% 130% 140% 150%

Payoff at Maturity

Worst Underlying Performance Payoff

Lock-In 3: 120%

Lock-In 4: 130%

Lock-In 1 : 100%

Lock-In 2 : 110%


Participation

Capital

Protection

Credit Linked

Note

Yield

EnhancementLeverage

Ascending

Pricing alternatives

Worst Underlying among Low Strike Level Lock-in Levels Frequency Participation Cap

CyberArk - Splunk 80% 100% - 110% - 120% - 130% Quarterly 100% 130%

CyberArk - Fortinet 80% 100% - 110% - 120% - 130% Quarterly 100% 130%

Splunk - Fortinet 85% 100% - 110% - 120% - 130% Quarterly 100% 130%

Splunk - Palo Alto Networks 85% 100% - 110% - 120% - 130% Quarterly 100% 130%

Fortinet - Palo Alto Networks 85% 100% - 110% - 120% - 130% Quarterly 100% 130%


November 19, 2019

Source Bloomberg and Union Securities Switzerland SA.For illustration only. Past performance is not indicative for future results

Phoenix Memory on CyberArk Software, Splunk, Palo Alto Networks

USD, 18 Months, 9.00% p.a., Coupon with Memory, 75% Low Strike, 95% Autocall Trigger, One Star 100%

Product Information

Underlying Worst of Autocall Trigger 95%

Currency USD Non-Call 6M

Maturity 18 Months Frequency Quarterly

Strike Price 75.00% Memory Coupon 9.00% p.a.

One Star 100% Coupon Barrier 75%


Yield Enhancement

Capital

Protection

Credit Linked

Note

Participation Leverage

Stable

Coupon P a y me nt : t he Coupon is paid if t he worst

Underlying is at or above t he Coupon Barrier.

If no Coupon is paid, t he invest or can receive t he

Memory Coupon upon t he next observat ion dat e

Coupon P a y me nt : t he Coupon is paid if t he worst

Underlying is at or above t he Coupon Barrier.

If no Coupon is paid, t he invest or can receive t he

Memory Coupon upon t he next observat ion dat e

Coupon Payment & Autocall

Autocall Event

No

Coupon

2 x Coupons1 x Coupon

Product Description

Coupon Payment

Every quarter,

- If all the Underlying are at or above their respective Coupon Barrier, the investor receives the Coupon- Else, if at least one Underlying is below its Coupon Barrier, no Coupon is paid- If a Coupon is to be paid, the investor will receive any potential previously missed Coupon(s)

Early Redemption

Every quarter,

- If all the Underlying are at or above their respective Autocall Trigger, the product early redeems at 100%- Else, the product continues to the next observation date

Final Redemption

At maturity,

- If at least one Underlying closes at or above its One Star Level, the investor receives 100% of the nominal- Else, if all the Underlying are at or above their respective Strike Price, the investor receives 100% of the nominal- Else, the investor receives a cash amount equal to Denomination x FInal Level / Strike Price of the worst Performing Underlying (the investor loses only from the Low Strike level)

U nf avorab le case:

The Underlying closes below the Strike Price AND

has breached the Protect ion Barrier, the investor

is exposed to the negative performance of the

Underlying from the Strike Level

One St ar Ef f ect :

Regardless of the worst Underlying performance,

if the best performing Underlying closes above

the One Star Barrier at maturity, the investor will

receive the principal.

Payoff at MaturityF avorab le case:

The worst Underlying closes at or above the

Protect ion Barrier, the investor will receive the

principal at maturity.

NNNNNNNNNNNNNNNNNN

NNNNNNNNNNNNNNNNN

One Star Effect

T icker C ount ry C cy

CYBR US USD

PANW US USD

SPLK US USD

Palo Alto Networks Inc

Splunk

United States

United States

Underlying Worst

N ame

CyberArk Software Ltd Israel

Annex

CyberArk Software Ltd

DescriptionMkt Cap ($bn) 4.3 Industry Software & Services

Country ISRAEL Sector Information Technology

Index NASDAQ 100 Stock Index

Top Line by Segment Top Line by Geography

Value Creation Index Cash Flow generation Index

Est. RoE 16.5% 35% Est. Dividend Yield 0.0% 1.0%

Sales Growth (3y avg.) 28.9% Dividend Payout Ratio 0% 43%

EPS Growth (3y avg.) 47% FCF Margin (3y avg.) 29.5%

LT Exp. EPS CAGR 18% FCF Yield 2.9% 4.2%

Asset Turnover 58% Est. Net Margin 21.0% 16%

Est. EBIT Margin 26.5%

Valuation

Est. PE 42.0 20.9 EventsEst. PE GAAP 67.3 Fiscal year end 31-Dec-19

Est. EV/EBITDA 25.0 13.0 Expected Report Date 13-Feb-20

Ex-Dividend Date na

Financial LeverageDebt/Asset Ratio 0.0 32.5

Absolute Performance:Stock Price (lh) / PE (rh)

30.8

130.8

230.8

330.8

430.8

530.8

630.8

730.8

32.7

52.7

72.7

92.7

112.7

132.7

152.7

Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 Mar-19 Jul-19

Stock Price PE (right scale)

56%

44%

License - 56.1%

Maintenance &Services - 43.9%

55%23%

12%

8%2% United States - 54.7%

EMEA - 22.9%

Other - 12.6%

United Kingdom - 7.8%

Israel - 2.0%

Palo Alto Networks Inc


Country UNITED STATES Sector Information Technology





Sales Growth (3y avg.) 28.1% Dividend Payout Ratio na 43%





Valuation

Est. PE 44.9 20.9 EventsEst. PE GAAP na Fiscal year end 31-Jul-20

Est. EV/EBITDA 26.0 13.0 Expected Report Date 25-Nov-19

Ex-Dividend Date na



30.8

50.8

70.8

90.8

110.8

130.8

150.8

32.7

82.7

132.7

182.7

232.7

282.7



61%

39%

Services - 61.3%

Product - 38.7% 69%

19%

12% Americas - 68.6%

EMEA - 19.3%

APAC - 12.1%

Splunk Inc







Sales Growth (3y avg.) 39.2% Dividend Payout Ratio na 43%

EPS Growth (3y avg.) -3% FCF Margin (3y avg.) 16.8%




Valuation

Est. PE 55.2 20.9 EventsEst. PE GAAP na Fiscal year end 31-Jan-20

Est. EV/EBITDA 38.3 13.0 Expected Report Date 21-Nov-19

Ex-Dividend Date na



30.8

130.8

230.8

330.8

430.8

530.8

630.8

730.8

830.8

30.8

50.8

70.8

90.8

110.8

130.8

150.8



100%

InfrastructureSoftware - 100.0%

71%

29%United States - 71.1%

International - 28.9%

Fortinet Inc







Sales Growth (3y avg.) 21.4% Dividend Payout Ratio 0% 43%





Valuation

Est. PE 38.5 20.9 EventsEst. PE GAAP 56.7 Fiscal year end 31-Dec-19

Est. EV/EBITDA 21.6 13.0 Expected Report Date 5-Feb-20

Ex-Dividend Date na



23.8

33.8

43.8

53.8

63.8

73.8

83.8

23.8

33.8

43.8

53.8

63.8

73.8

83.8

93.8

103.8



63%

37%

Services - 62.6%

Product - 37.4%

42%

38%

20%

Americas - 42.4%

Europe, Middle East and Africa (“EMEA”) - 37.6%

Asia Pacific (“APAC”) - 20.0%

Contacts

Union Securities Switzerland SA

11 Cours de Rive

1204 Geneva Switzerland

www.unionsecurities.ch

Union Securities Switzerland SA is a FINMA-registered Securities Dealer.

November 19, 2019 15

http://www.unionsecurities.ch/



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Cybersecurity A Primer - Union Securities€¦ · Splunk provides software that collects and analyzes machine data generated by websites, applications, servers, networks, and mobile