Forescout helps customers discover, classify and manage all of the devices on their network.

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Forescout Technologies (FSCT) is an emerging provider of device visibility and control solutions. With so many new and different devices on corporate networks these days, organizations now face multiple attack vectors. Forescout gives investors exposure to the growth opportunities associated with securing the Internet of Things (IoT) and operational technology (OT).

The company helps enterprise customers continuously discover, classify and manage all of the devices on their network. Given the degree of device proliferation, Forescout is becoming a more strategic security asset.

Many large organizations don’t have a complete view of how many devices they need to secure and wouldn’t even know if some of the devices on their network had been breached. Using Forescout, customers on average discover that at least 30% of all devices on their network were previously undetected and unsecured. Forescout today has more than 66 million devices under management.

Forescout went public in October 2017 at $22 a share. In March 2019, the stock reached a record high of $46.43, but then traded down to the $30 level as recently as early June.

In its IPO prospectus, Forescout estimated its total addressable market (TAM) at $8.6 billion. The company got to that TAM by applying an assumed ASP per device to the estimated number of addressable devices in its core target markets. Gartner predicts the worldwide IoT security market alone in 2021 will be worth $3.1 billion, up from $1.9 billion estimated for 2019.

Forescout serves a little over 3,300 customers across a number of verticals. Last year, the company added more than 500 new logos (including 60+ Global 2000 customers) and 13 million+ devices under management.

In 2018, the top line rose 33% to $297.7 million, with two verticals (government and financial services) accounting for 61% of total revenue. Healthcare is another key vertical, while Forescout is gaining traction in the retail, energy and manufacturing sectors.

Forescout’s core eyeSight product first discovers managed and unmanaged devices on a network using more than 20 passive and active monitoring techniques. It then automatically classifies each device (encompassing 5,000+ device vendors and models) into three groups: traditional computing, IoT and OT. After that, eyeSight continuously monitors the network and the security profile of each connected device, producing individual risk assessments that are updated in real-time.

The company’s eyeControl product controls access to resources based on user profiles, enabling differentiated access for guest devices and blocking access for compromised or malicious devices. With eyeControl, users are able to automate compliance assessments to make sure endpoints are properly configured and can take action when there are critical configuration problems.

A big advantage with Forescout is that no endpoint agents are required for authentication and network access control. By being agentless, Forescout is capable of monitoring and controlling a number of managed, unmanaged and IoT devices, as the data comes from the network itself.

Forescout’s technology gives it the ability to effectively compete with legacy antivirus vendors, which require a little bit of software on every device. The company has been particularly successful in securing IoT devices across campus environments.

By pushing its agentless technology into a wider range of use cases, Forescout can continue to expand its TAM. The new 5G wireless standard will provide another tailwind for the IoT trend, as it will enable more devices to operate efficiently on a network.

Last November, Forescout paid $113 million in cash to acquire SecurityMatters, a provider of OT security solutions. The acquisition was a smart move because it drives Forescout deeper into the OT stack, securing things such as controllers and sensors in industrial environments.

Using technology from the SecurityMatters acquisition, Forescout in Q1 released the industry’s first unified device visibility and control platform for IT and OT security. The company is getting to the market early, ahead of an expected ramp in devices. By 2023, the average CIO will be responsible for more than three times the endpoints they managed in 2018, with the vast majority of the growth coming from IoT and OT over traditional IT, according to Gartner.

In Q1, Forescout’s revenue rose 27% to $75.6 million, beating the consensus estimate by 2.5%. Growth was consistent across both license and subscription revenue. International revenue (30% of total revenue) advanced 83%. Gross margin of 77% rose 300 basis points year over year. Cash flow from operations totaled $6.4 million, while free cash flow came in at $4.9 million.

The Q1 metrics were solid, but Forescout’s Q2 revenue guidance of $75.3 million to $78.3 million fell short of the consensus of $82.7 million because of some large-deal slippage. All of the pushed deals remain active in the pipeline, according to management. The most recent Q2 consensus revenue estimate stands at $77.2 million. Forescout is scheduled to report Q2 results on August 7.

For 2019, Forescout’s latest revenue guidance range represents 24% growth at the midpoint. It’s notable that even though the Q2 top-line guide came in rather light (7% below the consensus at the midpoint of the range), Forescout still raised its revenue guidance range for the year, suggesting management has confidence in the enterprise demand environment for the second half of 2019.

At the recent market cap of $1.66 billion, Forescout trades at 4.5 times the 2019 consensus revenue estimate of $371.2 million. On the 2020 consensus estimate of $448.9 million (representing growth of 20.9%), the forward revenue multiple is 3.7.

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