Proofpoint, Inc. (NASDAQ:PFPT)
Q1 2017 Earnings Conference Call
April 20, 2017 04:30 AM ET
Jason Starr - VP, IR
Gary Steele - CEO
Paul Auvil - CFO
Philip Winslow - Wells Fargo
Melissa Gorham - Morgan Stanley
Matt Hedberg - RBC Capital Markets
Sarah Hindlian - Macquarie
Rob Owens - Pacific Crest Securities
Walter Pritchard - Citi
Jonathan Ho - William Blair
Andrew Nowinski - Piper Jaffray
Steve Koenig - Wedbush Securities
Ken Talanian - Evercore ISI
Erik Suppiger - JMP
Catharine Trebnick - Dougherty
Gabriela Borges - Goldman Sachs
Patrick Colville - Arete Research
Jayson Noland - Baird
Tim Klasel - Northland Securities
Gur Talpaz - Stifel
Michael Kim - Imperial Capital
Jack Andrews - D.A. Davidson
Srini Nandury - Summit Redstone Partners
Howard Smith - First Analysis
Good day and welcome to the Proofpoint's First Quarter 2017 Earnings Results Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Mr. Jason Starr, Vice President of Investor Relations. You may begin.
Thanks. Good afternoon, and welcome to Proofpoint's first quarter 2017 earnings call. With us today are Gary Steele, Proofpoint's Chief Executive Officer; and Paul Auvil, Proof's Chief Financial Officer. We will be discussing the results announced in our press release that was issued after the market closed today, and a copy of this is available on the Investor Relations section of our website.
During the course of this call, we will make forward-looking statements regarding future events and future financial performance of the company, which are subject to material risks and uncertainties that could cause actual results to differ materially. We caution you to consider the important risk factors contained in the press release and this conference call.
These risk factors are also more fully detailed under the caption Risk Factors in Proofpoint's filings with the SEC, including our most recent Form 10-K. These forward-looking statements are also based on assumptions that believe to be reasonable as of today's date, April 20, 2017. We undertake no obligation to update these statements as a result of new information or future events. Of note, it is Proofpoint's policy to not reiterate or adjust the financial guidance provided on today's call unless it is also done through a public disclosure with the SEC on Form 8-K.
Additionally, we will present both GAAP and non-GAAP financial measures on today's call. These non-GAAP measures exclude a number of items as set forth in our release. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results, and we encourage you to consider all measures when analyzing Proofpoint's performance. A reconciliation of GAAP to non-GAAP measures and a list of the reasons why the company uses these non-GAAP measures are included in today's press release.
So with that said, I'll turn the call over to Gary.
Thanks, Jason. I'd like to thank everyone for joining us on the call today, which marks the fifth anniversary of Proofpoint’s first day of trading on NASDAQ where we priced our IPO at $13 per share, representing an enterprise value of approximately $350 million.
I want to take a moment to highlight some of our important accomplishments over these past five years. In 2012, the company debuted as a provider of world class email security solutions, with annual revenues of roughly $100 million and nominal cash flow. And since then through a combination of hard work, persistence and consistent execution, we’ve built a business in to an industry leading cloud based security and governance platform, with this year’s revenues expected to be approximately $0.5 billion with free cash flow margins of 20% and a clear line of sight to our 2020 target.
Our commitment to innovation, as evidenced by our investment in research and development over the years has enhanced our competitive advantage enabling us to expand our product suite to include nine different solutions, more than doubling our total addressable market to over $10 billion.
Of particular note is our Target Attack Protection solution or TAP introduced shortly after our IPO, which has proven to be one of the most successful product launches in the company’s history. Our persistent focus on our customer security requirements through the application of leading-edge technology, customer service and innovation has enabled us to more than double our cost per base, which now includes 34% of the Fortune 1000, while also expanding our footprint within our existing customers with roughly half now running two or more of our solutions.
As a final point, I’m pleased to note that we just recorded our 55th consecutive quarter of sequential revenue growth enabling us to deliver our five-year compound annual growth rate of over 35% highlighted by our ability to consistently meet or exceed our financial guidance as a public company.
Now, moving on to our results for the first quarter. We were very pleased with our strong start to the year. Our ability to once again exceed expectations was driven by our ongoing demand for advanced threat solutions, continued high competitive win rates, robust new and add-on activity, excellent traction with our emerging products and world class renewal rate that continues to exceed 90%.
The broad demand drivers benefiting the company continue to be firmly in place including the overall threat landscape, the ongoing transition to the cloud, quickened by the shift to Office 365 and the developing trends towards customers consolidating their spending around world class platforms such as Proofpoint’s cloud-based security suite.
In particular, the demand for advanced threat solutions is driven by the constantly evolving nature of the threat landscape as attackers continue to target people not infrastructure with their malicious activities. One of the most troubling threats over the past year is known as Business Email Compromise, also referred to as BEC or email spoofing that easily bypasses traditional defenses.
According to a survey of over 5,000 enterprises that we conducted during the fourth quarter of 2016, BEC attacks increased 45% over the prior quarter with 75% of these companies targeted with at least one campaign during this period. In addition, two-thirds of all BEC attacks spoof the customers’ specific email domain, meaning that these malicious emails display the same domain as that of the enterprise itself, making it incredibly difficult to detect.
As a result, organizations need a comprehensive solution that provides a combination of detection, authentication, and monitoring to ensure they don’t fall victims to these attacks, which we believe positions Proofpoint to maintain its momentum for many years to come.
Now, turning to some of our key accomplishments during the first quarter. We were very pleased with the ongoing traction of our advanced threat product suite, which includes both TAP and other advanced security solutions as it represented roughly half of the company’s new and add-on business for the quarter.
Some of the noteworthy TAP wins during the quarter included a Fortune 100 technology company that added TAP for 135,000 users, a large state government that added TAP for over 60,000 users, and a large energy provider that added TAP and threat response for 20,000 users.
A long term catalyst that is driving demand for Proofpoint’s broader security and compliance solutions is the overall transition to the cloud which requires enterprises to replace their legacy on-premise solutions with cloud based alternatives. The shift to Microsoft Office 365 in particular has been a great example of this effect, as customers look for additional security capabilities to complement and enhance the baseline solutions provided by Microsoft.
One notable example this quarter was one of the world’s largest automobile manufacturers, who had recently made the move to Office 365 and was utilizing the Microsoft Enterprise Online Protection or EOP and Microsoft Advanced Threat Protection or ATP capabilities.
Using our threat discover tools and a basic proof of concept, our team was able to demonstrate our ability to meaningfully improve their email security defenses resulting in the customer choosing to quickly upgrade their production environment to Proofpoint in order to fully protect their 37,000 users.
Additional examples of Microsoft Office 365 customers utilizing the Microsoft security solutions, who also bought Proofpoint to augment their capability during the first quarter included a large mass media corporation that added protection, TAP and threat response for over 15,000 users, and a Fortune 1,000 real estate company that purchased protection, TAP and threat response for 7,000 users.
During the first quarter, our strong results were also driven by the favorable competitive environment as large and mid-sized organization are switching to Proofpoint’s integrated cloud based solution and away from legacy providers. A few examples of protection wins during Q1 included a large healthcare provider that purchased protection, privacy, TAP and threat response for 37,000 users, a global industrial services company which purchased protection and TAP for 35,000 users, and a global life insurance company that purchased protection, TAP and privacy for 17,000 users.
With regards to our partnership with Intel McAfee, we continue to be very excited about the opportunity. During the first quarter, we saw our pipeline from this partnership continue to grow. While the contribution to new business closed during the quarter was within our historical norms.
As a reminder, McAfee’s email security solution was comprised of both a cloud and on-premise offering. The cloud portion of their business adopted primarily by small and medium sized businesses just passed its End of Life deadline. We are now progressing further in to the enterprise portion of their business, all of whom have been given until 2021 to complete their migration.
Since four more years remain on this wind-down period granted by Intel for this agreement, we believe we are still in the early innings of this opportunity.
I like to again highlight that the total McAfee conversion opportunity not only includes the value of the recurring subscription business purchased to replace the baseline McAfee email security solution, but also the upsell of additional Proofpoint products to these customers which we believe could double or even triple customer spend over time. As a result, we believe that Proofpoint is uniquely positioned to capitalize on this overall opportunity over the next several years.
Turning to our emerging products which include our social, mobile threat response, threat intelligence and email fraud defense capabilities, during Q1 these offerings continue to be an excellent source of growth. Yet again this quarter, our bookings of new and add-on business closed during the quarter from our emerging products grew by over 100% year-over-year and represented more than 10% of the new and add-on business closed across the company during the quarter.
Our recently introduced Email Fraud Defense product had another solid quarter driven by the overall increase in BEC attacks that I highlighted earlier. A few of the key emerging product wins this quarter included two large European banks both of which purchased our social solution, a large hospital focused on children’s ailments that purchased Email Fraud Defense, and a Fortune 100 multi-national conglomerate that purchased mobile defense.
During the first quarter, our archiving privacy and governance segment continued to perform well growing 28% year-over-year. For next few quarters, we expect the growth from this segment to decline moderately as the emphasis around our merging products takes center stage as the growth catalyst for the company.
With that said we have a number of larger archiving opportunities in our pipeline and remain confident about this segment, but this segment will continue to contribute nicely to overall growth, cash flow and profitability longer term.
As a reminder, our nine distinct product offerings provide us with the tremendous add-on opportunity across our installed base and leave us well positioned as our customers gradually consolidate to a smaller number of strategic security vendors. As a result, we continue to have significant opportunity to expand our revenue footprint within our existing customer base, particularly since 50% of our customers still only have a single product.
In terms of our ecosystem partnerships with Palo Alto Networks, CyberArk, Imperva and Splunk, we remain very excited about these relationships, as all of the partners continue to be very engaged during Q1. Notable deals closed during the quarter that were influenced by our ecosystem partnerships included, a Fortune 100 financial services company that bought protection, TAP and privacy for approximately 38,000 users, a Fortune 500 retailer that purchased, protection, TAP and threat response for 5,000 users, and a Fortune 200 manufacturer of specialty materials that purchased protection and TAP for 37,000 users.
I would also like to point out that we are once again pleased with the momentum of the channel, as it accounted for over half of the new and add-on business closed for the quarter.
Finally, we continue to make progress towards further expansion abroad, with our international business growing 38% year-over-year. Notable international deals closed during the quarter included a Global 500 European bank that brought protection for 35,000 users, a large European security services company that brought protection, TAP and email fraud defense for 18,000 users, and a large Asia-Pacific based insurance company that brought protection, TAP and threat response for 15,000 users.
The addressable market outside of the United States in both EMEA and Asia-Pacific represents a compelling future growth opportunity for Proofpoint, and we plan to continue to increase market share in these regions.
So, in summary, I am very pleased with our strong start to the year and the ongoing momentum we’re seeing across our entire business. As a result, I believe we are well positioned for our growth in the years to come and to gain share in the over $10 billion total addressable market.
With that, let me turn it over to Paul.
Thanks Gary. We were very pleased with our ability to once again exceed expectations across all of our international metrics during the quarter. First quarter revenue totaled a 113.3 million, up 43% year-over-year and above our previously announced guidance range of 109 million to 11 million.
Billings for the first quarter were 137.4 million, reflecting growth of 40% on a year-over-year basis and exceeding the high-end of our previously announced guidance range of a 133 million to 135 million. As expected, contract duration came down nicely as compared to our fourth quarter results, with duration moving towards the lower end of our historical range of 14 to 20 months. This trend is reflected in our deferred revenue balances which ended the quarter at 336 million in total, up 24 million sequentially with short term growing by 18 million and long term growing by 6.2 million.
Turning to expenses and profitability for the first quarter, on a non-GAAP basis, our total gross margin was 77%, which was above our expectations, driven by revenue upside delivered during the quarter coupled with our ongoing improvements in the efficiency of our cloud operations.
During the first quarter, total non-GAAP operating expenses increased 31% over the prior year period to 79.8 million, representing 70% of total revenue improved from 77% during the same period last year. Growth and spending was primarily driven by hiring in R&D and sales as we added key talent to expand the capabilities of our product offerings and to drive both new customer acquisition as well as add-on sales to our existing customers.
In terms of profitability for the quarter, we reported positive non-GAAP net income of 5.5 million. This was above our guidance range of 3 million to 4 million driven by the upside to revenue coupled with focused spending discipline across all of our global business operations. This result translated a $0.12 per share based on 46.7 million fully diluted shares outstanding and above our guidance of $0.79.
Note that this calculation excludes the 8 million shares associated with our convertible notes as the converted threshold was not met during the quarter. As we are very close to this threshold for the quarter, the impact of having 8 million fewer shares used in the EPS calculation is essentially a wash against the add-back of 1.06 million in interest from the convertible notes and as such either method yields affectively the same EPS results for the quarter.
We’ve included a section in our press release entitled computational guidance and earnings per share estimates, which is intended to provide additional details on this topic and explain the resulting differences in share count used in these calculations based on our results.
On a GAAP basis, we recorded a net loss for the first quarter of 25.5 million or $0.59 per share based on 43.2 million shares outstanding. In terms of cash flow, we generated 40.5 million in operating cash flow and invested 12.3 million in capital expenditures, resulting in free cash flow for the quarter of 28.2 million or 25% of total revenue. This result was well above our guidance range of 15 million to 20 million primarily due to strong billings and collection trends, with customers paying better than timely during the quarter as evidenced by our DSOs of 38 days, a record low over the course of our five years operating as a public company.
We ended the first quarter with 413 million in cash and short terms investments and 372 million in debt, compared to 397 million in cash and short term investments and 367 million in debt as of December 31, 20116. This sequential increase in cash during the quarter was driven primarily by cash generated from operations, as well as contributions to capital from stock option exercises and our employee stock purchase plan.
Now turning to our financial outlook, starting with the second quarter of 2017, we currently expect billing to be 141 million to 143 million resulting in year-over-year growth of 40% to the midpoint. This guidance assumes the contract duration remains at the low end of our historical range.
Regarding our revenue outlook, I would like to remind everyone that just as we discussed in our call on January, we are entering a rate of challenging year-over-year comparisons given the extraordinary and noteworthy performances that we delivered over the second, third and fourth quarters of 2016.
For the second quarter, we are targeting a revenue range of 118 million to 120 million or 32% growth year-over-year at the mid-point. As a reminder, during the second quarter of 2016, the company benefitted from exceptional linearity in terms of the timing of new and add-on business book, which creates a particularly difficult year-over-year comparison for the coming quarter.
We expect second quarter non-GAAP gross margin to be approximately 76.5%, a modest decline from the 77% recorded in Q1, as our spending continues to catch up with the accelerated revenue delivered during the past several quarters. We expect second quarter non-GAAP net income to be 5 million to 6 million or $0.11 to $0.13 per share and this assumes an income tax provision exclusive discreet items of $900,000 to $1 million during the quarter, depreciation of approximately 6 million and a share count of 54.8 million fully diluted shares outstanding and adding back the quarterly cash interest expense associated with our convertible notes of 1.06 million, as prescribed by the If-Converted method.
In terms of free cash flow, as discussed during our call on January, we expect this year to follow a similar pattern to our results in 2016 with the majority of the cash flow delivered in the second half of the year. Given our strong start here in Q1, we expect to end the first half with roughly 40 million in free cash flow, enhance 11 million to 12 million during the second quarter, marking a very strong start towards our goal for the full year. This second quarter guidance includes capital expenditures of roughly $10 million.
From a full year perspective, we are increasing our guidance driven by the Q1 over performance and the expected ongoing strength of our business, specifically we now expect billings to be in the range of 619 million to 623 million, which represents an annual growth rate of 34% at the mid-point of the range, and this compares to our previous guidance of 611 million to 615 million.
With this billings performance, we are also increasing our total revenue guidance, with a new range of 496 million to 500 million, reflecting an annual growth rate of 33% at the midpoint, and this compares to our previous total revenue guidance of 488 million to 492 million or 31% growth.
We continue to expect full year 2017 non-GAAP gross margins to be approximately 76.5%, demonstrating ongoing progress towards our 2020 target range of 77% to 79%. As a result, we expect full year 2017 non-GAAP net income to be 26.5 million to 28.5 million or $0.56 to $0.59 per share an improvement from our previous guidance of 23 million to 25 million or $0.49 to $0.52 per share.
Our new non-GAAP EPS guidance for 2017 is based on approximately 55.3 million fully diluted shares outstanding and adding back the 4.2 million in cash interest expense as prescribed under the If-Converted Method. Our guidance also assumes depreciation of approximately 24 million, and income tax provision exclusive potential discreet items of approximately 3.84 million.
Finally, we are raising our free cash flow guidance for the full year to the range of 98 million to 106 million or just over 20% at the midpoint, with the majority of the cash flow delivered in the second half of the year similar to last year. This includes capital expenditures for the full year of 40 million to 42 million.
It is important to note that we are producing this cash flow with an average build contract duration in the mid-teens based on a model with over 95% recurring revenue and renewal rates over 90% which highlights the very high quality of the recurring cash flow that our business model generates. A reconciliation of our GAAP to non-GAAP guidance for both the second quarter and full year 2017 can be found in our release that we issued this afternoon.
So in summary, we are very pleased with our execution in our first quarter performance which paired strong topline growth with meaningful expansion and profitability as well as free cash flow. In addition, our increased 2017 expectations demonstrates further progress towards Proofpoint’s goal of achieving our 2020 targets of generating approximately 1 billion in revenue with free cash flow of approximately 250 million or 25% of revenue.
I would like to highlight the disciplined growth paired with a focus on driving free cash flow expansion year-over-year is a hallmark of how we operate the business, and one which we expect to continue to deliver going forward in our ongoing focus to create additional value for our shareholders.
We look forward to providing additional details on this objective at our upcoming analyst day to be held in New York City on September 7.
Before turning it over to the operator for questions, I wanted to note that due to the timing of 4 July holiday, we do plan to hold our Q2 earnings call on July 27, which is a week later than our typical second quarter reporting cadence. I’d also like to request that everyone limit themselves to just one question to help reduce the duration of the call overall and to ensure that everyone has a chance to be included in to today’s discussion.
Thank you for taking the time to join us in our call today, and with that we would be happy to take your questions now. Let me turn it back over to the operator.
[Operator Instructions] We will take our first question today from Philip Winslow with Wells Fargo.
The questions that we’ve been getting recently concerns really about the sales force attrition and pricing, wondered if you could comment on those two, what you sort of saw this quarter? Because it doesn’t seem like there were issues in the results or the guidance there.
Yeah, on both of those, so from a sale force attrition standpoint we’ve seen very consistent attrition over the last three years, there’s been no spikes, no changes at all. And then with respect to pricing, pricing is held extremely consistent and we look at this quarter-on-quarter and we’ve seen no changes in pricing across our products for the last several years.
Our next question is from Melissa Gorham from Morgan Stanley.
Gary, so you talked about McAfee opportunity and how much more runway you have. But I’m wondering if maybe you can provide a little bit more color and what you’re assuming in terms of the FY ’17 guide. Are you still assuming share gains in line with historical levels or share gains ahead of what you’ve seen historically?
As we think about the McAfee opportunity, we continue to be excited and we see a significant number of those larger enterprise opportunities in our pipeline. So that feels very good to us. Having said that, we’re not assuming some extraordinary performance in our guidance, we’re assuming that our McAfee portion of the business remains within historical norms.
Our next question is from Matt Hedberg with RBC Capital Markets.
Congrats on the quarter. We’ve been talking about TAP and the success for a long time. But clearly you are starting to reference Office 365 more and more in your prepared remarks. It seems like you’re getting really nice traction there. I’m wondering what inning are we in? I would assume that this could be more like a three to five year driver for you guys. But curious, where is it versus your expectation, because it seems like it’s quite a large opportunity?
It’s definitely a very significant opportunity for us. And while we don’t have exact numbers of penetration of Office 365 within the overall exchange base, our point of view is that it’s still probably in high teens maybe, mid to high teens in terms of overall penetration. So we view this as an opportunity that extends itself for three to five years. And so from our point of view, we’re just getting started. And I would point to, an example I would give there is this regulated industry. There’s lots of customers who have a desire to go, but it’s going to take them years to get ready and years to move. And so while aspirationally they are thinking about it, they are beginning to plan, it’s beneficial to us, because they engage us in those conversations. But this is an opportunity that is a great growth catalyst for many years to come.
The other thing I’d add that is important to keep in mind as well is that, even as that starts to become playing through 25%, 30%, 40%, 50% of people move over. As we talked about in both this call and the last call, we do have plenty of examples of people who will move over and try out Microsoft, see if it works and then ultimately realize it’s far short of their requirements and we upgrade them later.
So even as people do move to Office 365, it doesn’t mean that if they haven’t picked Proofpoint at that stage that’s it’s an opportunity that’s lost for all time. It just means we’ll come back around and pick it up at some point further down the road.
Our next question is from Sarah Hindlian with Macquarie.
Great quarter and some interesting things there. I wanted to talk a little bit about what you’re seeing in the archiving business, and any time you’re seeing marriages in enterprise assessing their archiving technology, given some of the larger archiving players in the market are being a little bit [indiscernible].
Great question. So what we are seeing as we talked about is from a competitive point of view there appears to be lack of investment in this overall segment and that’s creating opportunity for companies like Proofpoint with the next generation offering. What we do see is those larger opportunities coming in to our pipeline. There’s lots of discussion and evaluation on behalf of organizations globally about what do they want to do next for their archive. We do think those deals will take more time to get through the pipeline. So as we indicated, we think in the short term, we’ll see some deceleration in growth in that segment. But long term there are just tremendous opportunity there.
Our next question is from Rob Owens with Pacific Crest Securities.
My question was around Paul your comments with regard to duration, and just the puts and takes in terms of long term deferred revenue, because a year ago you saw your long term deferred revenue tick down in the first half from Q4 to Q1, Q1 to Q2. And at these low duration levels now we’re seeing an expansion in long term. I understand that we can see the aging of the buckets and things of that nature. So maybe A, you could help us with the lock there. And B, given your duration comment there’s still one question, just two parts Paul.
Is it time to reconsider your free cash flow margin, because should duration remain at these levels, you’re already at 20% I think with the goal of getting to 25, with still some time to get there.
Good question and we do a lot of multi-part question as long as it’s only asked at one time. So duration definitely improved nicely from Q4 to Q1, but we’re still not all the way at the low end of our range. And when you see that $6 million increase in our short term deferred, it reflects the fact that we haven’t quite pumped all the way to the bottom.
With that said one thing I’d like to point out to everybody, because I think it’s helpful to keep in mind. Remember that this period last year we had had roughly $5 million of renewals had been pulled between quarters, and so as a result, the growth that you see stated in terms of the billing print is understated as a result.
Now if you want to go ahead and adjust for some of the additional short term deferred revenue that we created. In the end you’re still end up with about 40% print overall, so the net of it is, we had a very strong quarter, we are very pleased with how the numbers came together. And now to your broader question, we think about where things go from here I think we’ll probably have some updated thoughts when we get to the September analyst day.
I think for now to your point given what we produced in the second half of last year, given the numbers we put up this quarter, clearly we feel reasonably comfortable with the 2020 model that we put out there which is roughly 1 billion of revenue and 24% to 26% free cash flow as we look at how the results come together in the next couple of quarters, we’ll be taking that in to account as we think about our prepared remarks for the September analysts day if that’s helpful.
Our next question is from Walter Pritchard from Citi.
Paul and Gary, I think one thing that we’re hearing a lot about in the last couple of quarters is some of the new products driving some strength and I’m wondering if you could talk about any metrics you could give us around dollars per seat, or dollars per customer probably tougher, but dollars per seat and how that is proceeding as a driver for your business most recently here.
Let me lead off and I’ll let Paul come in on pricing. Just a couple points to cover. So we mentioned in the prepared remarks the strength of email for our defense. It’s really unusual to have a product that we’ve been selling for two quarter have such strong performances in such a short period of time. So we believe that we are definitely on the right track because it’s leveraging what’s going on in the overall threat landscape.
We also are seeing broader and more interest on the social side. We had yet another very good quarter with respect to social. And then even products that we haven’t talked a lot about in the past like through a response solution which is our orchestration and automation solution for security operations centers. That product had a really good quarter. So we’re seeing collectively these bring together really nice growth.
I’ll let Paul, because it’s a combination of product so I’ll let Paul comment on the pricing of these individual solutions.
I would say that what we’re generally seeing on the new products is, pricing that’s consistent with our legacy products. So if you think about protection for a 5,000 seat account being around $10 a user a year. When you look at email product defense, for example, is sitting around $10 user a year for an account of that same size As well mobile we had a few nice wins this quarter. Again it kind of hangs in around $10 user a year for our customer in the 5,000 seat range, and for the threat response it’s a little less depending on the nature of the functionality you’re deploying. We see the initial deployment tend to be more email centric, so there will be a less full set of features that get included in that initial deployment; as a result that pricing is maybe half the three quarters of regular protection scale. We see that as a great land and expand opportunities and go in to those accounts and sell them the full set of features around threat responses kind of a next step in the sales cycle. So the net of it is, sometimes people will joke with us that every product is $10 or like their dollar store times 10. And it is a little true, it just tends to be the nature of how we see value and delivering both a compelling set of capabilities to the customers but also receiving what we think is a fair value in exchange for our shareholders the intellectual property we created and the value we delivered to the account.
Our next question is from Jonathan Ho with William Blair.
I just wanted to get some additional color in terms of what’s happening with the international distribution opportunity and channel and maybe what’s driving some of the pickup there.
We’re pleased with the results on the international side. We saw good wins across EMEA, while we have a smaller presence in the Asia-Pacific region, we did have some nice wins there as well. I think there’s a couple of things going on, so one is in Europe you have the broad BEC effects that we’re feeling across the US, they’re equally present in Europe. You have the planning and anticipation for GDPR which I think will elevate in importance as we work our way through ’17, and then thirdly there’s been more threat after activity in Europe than we had historically seen. And I think all those things coupled together have been nice growth [inaudible] for us as we continue to gain market share over there.
And our next question is from Gur Talpaz with Stifel.
With fire layers, can you talk about your thoughts regarding the acquisition now that’s been under your belt here for a few months? And then how should we think about growth outside of email related businesses going forward and then as well as future acquisitions. Thank you.
With respect to fire layers, we’re very excited about the work we’re doing with that team, integrating it with our core advance threat detection. So we’d indicated earlier that we would have product out in the middle part of the year and we’re on track for that and nothing has changed. And so we think about revenue and revenue opportunity beginning in the second half. Again just to remind folks, what we’ll be able to with that capability is identify threat associated with cloud application.
So if somebody is downloading a file from box or drop-box or one drive will be able to identify and block malicious contact coming in to the enterprise with the integration of fire layers and TAP. And so we’re excited about that. We’re in a good number of early customer environments getting some really nice feedback and the feedback has been extremely positive. So we’re optimistic about the contribution of revenue from that solution in the coming quarters. And you had another part of your question, it was about growth beyond email, and I think the comment would be, again we’ve seen some nice ongoing uptick in social and mobile which is part of the emerging products category. While the product what we call TAP or [SAS] is still officially embedded.
We actually have initial pipeline we’re developing with some of our favorite customers that wanted to be involved in early sales cycle. I would say that early results were pretty promising, and so we feel quite good as we think about the arc between where we are today and 2020, that we’re going to see a meaningful amount of growth that comes from demand for our products that cover all security needs that are above and beyond just protecting people when they are use email.
Our next question is from Andrew Nowinski with Piper Jaffray.
Just one question maybe on the Fortune 1000, so excluding the McAfee tail end, it seems like one of your largest opportunities that can really move the needle still is deeper penetration within the Fortune 1000. I know there are a lot of very good competitors in the S&B space, but I’m curious to know who you’re most frequently displacing within that Fortune 1000 market.
It’s a good question. So we’re excited about the continued opportunity of penetrating the Fortune 1000, and having 35% means we’ve got 65% to go. We see some combination of the remaining McAfee obviously and then Cisco and Symantec and obviously some customers that might have migrated in Office 365 and haven’t purchased anything yet. So it’d be some combination of those.
Our next question is from Steve Koenig with Wedbush Securities.
I just wanted to ask about the channel, I think it was the start of this year you relocated that function in this geography basically as oppose to having a worldwide function. It was may be one of the changes you made at the start of the year. You already got asked about may be the international angle on that, but just more generally and including in North America how is that initiative coming in terms of building the channel up and making those channel partners more productive and greater contributors to a year of sales.
In the quarter we were pleased with the results that we saw with the channel which again we saw the channel touching over half of our business. And we’re seeing a reasonable level of productivity from those channel partners. As a company we have a strategy to focus on fewer partners that go deeper with those partners and we’re seeing very good uptick from that particular strategy. And so we’re executing that similar strategy in Europe where we’re picking a few critical partners in each geography and going deep with those. We think that strategy will play-out well where we can drive great value for them and great value for us. And this is a continued investment that we’re making, but we’re very pleased in the current period with the results that we had.
We’ll take our next question from Ken Talanian with Evercore ISI.
So when you break down your pipeline, what areas do you believe have the highest likelihood to offer upside to the current annual billings guidance?
That’s an interesting question. The pipeline as you would think it’s very oriented towards the protection and advance [inaudible] areas because that’s where we see a lot of the bulk of the business if you will. But I would say that we’ve got some pretty interesting emerging product opportunities there and we’ve a couple of very big archiving deals in the pipeline, but I wouldn’t expect those to close till late this year.
The one thing I would say though is we’ve had really good success with this emerging products category. And while it’s relative new we don’t have years and years of history with it, and so frankly there’s probably upside there simply because we don’t have years and year’s history. And we were extremely happy with the results that we had in Q1, it really echoed what we saw in Q4 and so I think there’s a lot of optimism simply because many of those products are growing faster than we thought they would.
And further reason it’s complicated to answer the question is that and we’ve been through this before maybe we’re done for a lot of you, but just to remind everybody, we pay our sales people in a completely neutral fashion irrespective of which product they sell. They basically have a recurring revenue quota and they go out and close whatever deal or deals they can close in the most faster way in order to get the quota and then exceed quota and go to our club.
So with that said it’s hard to handicap one thing over another because given that kind equal construct on how compensation and code retirement works, people are driving hard on whatever products they think are the right product to sell in to either a net new opportunity or selling as add-on to the existing customer base. But its interesting question and I guess part of it is we’re enthusiastic about the broader product line overall. So it’s hard to pick one as a specific catalyst.
Our next question is from Erik Suppiger with JMP.
On McAfee, when do you think that might elevate above the historical norms, and how much market share do you think you’re getting in the enterprise business that’s leaving the old McAfee product?
It’s hard to say when it’s going to be above the norms. As a question that was already asked a little bit earlier, we don’t plan for it to be above the norm because I don’t think that would be a prudent or adequately conservative assumption. But one thing to keep in mind that these enterprise customers literally do have four years to make the switch. So they have the right to continue for as long as they want to between now and 2021.
And so while we do have a lot of really interesting conversations and sales cycles going, it doesn’t necessarily comport directly to timing in terms of when people might move over. So I would say, it’s a little hard to tell at this stage. But I think that to your other question, I would say that we’re getting the lion share of the convergence of customers that are in the large and mid-enterprise space which is what we principally target at the lower end of the market.
It’s hard to say we kind of opportunistically serve that market and pickup business here and there, but I suspect most of that business which again was mostly served by the MX Logics platform which finally shutdown recently, I would say most of that business probably went to the players that serve the S&B market now Proofpoint, which what we’ve talking to Wall Street about for the last five quarters since we talked about the McAfee [analyze].
In the enterprise section do you think that you might be two-thirds of that piece of the lion share that maybe would you be surprised if it was more or less than two-thirds.
I think it’s hard to put an exact number on it. I mean honestly I would be surprised if we didn’t get at least half, but I think we certainly have the opportunity to get quite a bit more than that, and we’ll see how it plays out.
Our next question is from Catharine Trebnick with Dougherty.
What processes have you been putting in place for metrics on sales, other competitors, other security players have overstaffed and over divided the territories. I am pretty curious to make sure that you guys don’t run in to the same issue. What methods do you put in place such that you don’t over give the upper particular region and don’t over hire for that region.
We’ve pretty sophisticated in what we do there. I’m quite impressed with what the sales ops teams does. So we look very carefully at all the accounts and where the actual buying centers are for those customers, obviously not only across the United States but around the world. And so as we think about breaking down territories we’re looking a couple of things, one is how many buying centers do you have in your territory and how mailbox is in each of those buying centers and then it’s a combination of both existing customers, rather new customers but also existing customers and how much wide space opportunity we have in an account.
So again we have a pretty sophisticated set of mathematics to look at. For an existing customer what’s that Tam of unsold product? So one customers Tam might be larger because all they’ve bought is protection, another Tam might smaller because they bought protection, TAP, rep response and the social product.
So we add all that together and look very carefully then at how to apportion the territories accordingly. And I would say that even in the US, we’re still significantly under distributed in terms of the opportunity of out there versus the size of our sales team both for the people who are out in the field but cover the largest accounts as well as the inside sales team that handle the accounts on the phone.
And as part of all this we continue to kind of evolve and upgrade not only how we manage that operation at a detailed metrics perspective, but we’ve also added some important leadership talent recently. I think there’s a little bit of noise about some supposed reorder of our sales organization. We brought in a great individual from outside the company to run all the Americas for us, great guy, great background, he’s hit the ground running. I’m impressed by the work he’s done already. And then on top of that we took a few of our best regional leaders and promoted them in to larger jobs, because they’ve done a great job and they were ready to step up to the next role and then that’s created some other opportunities to bring people in, it can align management level.
So I think sometimes the noise associated with the growth and expansion of the leadership of the organization, sometimes gets misconstrued as reorganization. But I will tell you here the organization is executing really well and we would know and we’re very pleased with the last couple quarters of performance, but as I look the pipeline and opportunity for the remainder of the year. As you can see we not only had a nice guy for Q2, but an nice raise for the full year, both on billings and revenue.
Our next question is from Gabriela Borges from Goldman Sachs.
Maybe just a follow-up on the Office 365, Proofpoint also talked about being agnostic to have [inaudible] mass servers deployed, because I believe you can put your Proofpoint in our security in front of an email services. So I would appreciate any color on whether you see customers move the security and service to the cloud on [inaudible] or how independent those two factors are.
We see a couple of things happening with as it relates to Office 365. So as customers begin to plan their journey to Office 365, they begin to evaluate their security compliance capabilities which typically are in premise. And what we find is that as customers begin the migration process to Office 365, they want that security and compliance capabilities, they want those in place in the cloud at that time, because you do not benefit from the overall economics of Office 365 if you’re routing out your mail through your corporate network. And so there is a pretty nice economic catalyst to help the customers get moving on the security compliance migration.
Now as you indicated, so we can support many different configuration and it’s not uncommon for us to deploy in the cloud basically protecting an on-premise environment that is not an uncommon configuration. We will also sell to the customers an on-prem device that then can be migrated at their leisure to cloud and we can manage, help the customers manage the economics and transition through that. So we make it really easy as they think through the different dynamics of getting the Office 365.
Our next question is from Patrick Colville with Arete Research.
Can you talk through the puts and takes or contest with the Symantec this quarter? Did they do anything interesting, are they still bleeding.
I would say from a competitive standpoint, I think we saw pretty much consistent behavior from Symantec. Not a big change, and again I think the Symantec represents a pretty interesting opportunity for us and helping some of those customers move from the Symantec environment over to Proofpoint, but we didn’t see a dramatic change competitively through the course of Q1.
And I think one of things that seems clear to us is they have such a big opportunity to go drive business around Blue Coat and driving their DOP on two products in the Blue Coat customers and driving Blue Coat in to the installed base and want to combined with then their opportunity with their next generation and point to drive additional opportunity in the end point space.
Email is a relative small market and a small part of their business, and so it makes sense to me that their sales teams are likely mostly engaged there, and as a result we don’t see them a lot on email.
And would you say that that’s still the number one factor?
They certainly have number one market share, because they rolled up a tremendous amount of market share over many years. So in terms of an incumbent from which we’re able to the ultimately rotate from Symantec as the incumbent over to Proofpoint and drive business for Proofpoint. Sure, as a competitor that shows up in the market place on a regular basis either defending that share or trying to sell that new, no.
Our next question is from Jayson Noland with Baird.
Do you see higher sales force attrition to start the year in a Q1 moderating through the year, just trying to understand what we’re hearing versus typical seasonality.
We did not see any inconsistent sales force turnover in Q1 from what we’ve seen historically.
Is it typically higher at the start of the year.
It is actually, because you have the classic. We put people on annual plans, we also have a very strong culture around performance management. So there’s a close observation of individuals performance over the period of the year and whether we think they should continue their employment with us as they enter the New Year.
Our next question comes from Tim Klasel with Northland Securities.
The collection seem to be almost abnormally strong on the quarter. Was that happen stance or was there any changes in our willing terms on the quarter or maybe you can walk us through that if it was just pure happen stance or some change of behavior out there.
One thing that always amazes me is the degree to which, I think because we are cloud service we have essentially no failure to pay, we have no bad debt write-off and we have a very few people pay late and we do this obviously in a constructive way. But if you don’t pay on time, we’re shutting your service off which is of course problematic for you. And so we have a team literaly of people that at this point is collecting on the order of $150 million a quarter and this team does a great job.
Now I do think that having more business is a channel, obviously simple, because the channel helps facilitate that collection even more accelerated way. But this quarter as I noted with 38 days for DSO it’s a record low for us over the last five years. I also can’t kind of explain it. As I in the prepared remarks, people paid better than timely, meaning we literally had people who amounts that were due in the month of April that just paid in March. And it’s not us brow beating them or bending their elbow or they just pay. And so that’s great and so it accelerated cash flow in toe Q1 that otherwise would have been in to Q2, hence we are holding our total guide for the first half of the year at about 40 million, but we’re always pleased to get paid soon rather than later. But there’s nothing extraordinary, just an extraordinary collections quota.
Our next question is from Michael Kim with Imperial Capital.
Could you talk a little bit about the ramp and your Ecosystem partners I think [inaudible] is probably furthest long in maturity. But kind of curious about paced maturity of some of the other partners. And then just in aggregate, do you think over the course of the year that the ecosystem partners contributed somewhere in matter of a few points the new [inaudible] business.
Yeah, I will start and Paul will probably want to jump in. As you indicated we definitely have the most maturity in terms of relationship with Palo Alto and we’re just seeing very good momentum from a go-to-market perspective where its carrying out in lots of joint co-operation and specific deals. There’s lots of co-operation with the channel. We’re seeing channel partners that hadn’t been proved quite re-sellers in the past coming to us as a result of their relationship, they want to sell both products. So it’s working really well.
We announced that relationship at the beginning of 2016 in January, so we’re just a little over a year in to it, and I couldn’t be more pleased with the results thus far. If I look then down at the other relationships we’ve announced, so Splunk, we’ve got all of our technical integration in place and we’re really just getting to go to market in motion right now and the same is really true of both Imperva and CyberArk.
So Palo Alto leads the pack in terms of where we are from the maturity standpoint. But we’re very optimistic to extend the success we’ve had with Palo Alto to Spunk, CyberArc and Imperva and I’ll let Paul comment on how to think about the impact on our numbers.
I think they are not direct channels, meaning they don’t actually sell our products, they are influencers, we meet in the channel with them and so it’s hard to put a specific quantitative impact. But I can tell you in the current most recent quarter, Q1 the relationship with Palo Alto was meaningful in helping to facilitate new deals in to the pipeline as well as helping to drive some deals over the line and close them out. This enabled bridge between Wildfire and [tab] product is a high value item, a high value feature. And people will remark that we have more integration between Proofpoint, Palo Alto, Splunk, CyberArc and companies with larger product lines all under the same brand have in terms of the integration of their products and people are impressed with that.
So as I look at the full year, I can’t really put a specific number on it, but it absolutely is one of a number of factors that creates a tailwind recruiting pipeline and also helping to facilitate close rates especially on larger accounts where these bigger partners Splunk and Palo Alto have meaningful accounts presence, those relationships and that favorable hand shake if you will in the account and the integration that we can provide absolutely is one more thing that tips the account in our favor and helps us get the deal closed. So I know that’s a lot of qualitative statement with no real numbers, but I just can’t put numbers on it, but it’s no doubt an important effect and will likely add a few other partners to that cohort over the course of the year.
Our next question is from Jack Andrews with D.A. Davidson.
I was wondering if you could just drill down a little bit more on your social media product in particular if there’s any parameters around the size or growth rate about what’s going on there.
In terms of size, we haven’t actually disclosed the social numbers specifically, but it is part of that emerging products cohort which was over 10% in the new add-up business we closed this quarter and growing at over 100%. I think we’re seeing an evolving awareness on the part of customers that you need to protect not only people when they are email, but you need to protect those people when they are in the social venues and mobile.
And so we think that product line will continue to be an accelerated element of what driver’s growth for the business as characterized in the emerging products commentary from the last couple of quarters. I also think that just that about product line is an important factor that helps us win in some of our larger accounts because they understand that they’d really like to have a single platform that protects not only again people and email, but in mobile, social and these other venues in SAS. So while we may not have as large a direct attribution to revenue coming from social right now is, maybe we would have thought of when we first did the acquisition, it’s absolutely an important part of how people pick the Proofpoint platform as a basis for deciding on an overall solution set to meet the needs of protecting and defending your employees when they are operating with content that’s outside of your firewall.
Next question is from Srini Nandury with Summit Redstone Partners.
You addressed this before, you talked about competition vis-à-vis Symantec and the legacy providers. Just can you talk about Mimecast. We keep hearing that Mimecast is getting fair share with large enterprise customers historically, they’re focused only on the mid-market.
We’ve seen Mimecast traditionally at the very low end of the segments that we serve. There is some amount of competition where our low end insight sales people might run up against Mimecast. We have on occasions seen them working in larger accounts. We’ve consistently had a very high win rate and we haven’t seen them have a tremendous amount of success in the larger customers as we think about larger customers.
And our final question from Howard Smith with First Analysis.
I want to circle back to some of your archiving comments. I understand the slowdown due to some very large deals taking a little longer to close, but in your prepared remarks I thought you also mentioned some shift of focus to some of the emerging products from archiving and in light of your kind of product neutral approach to quota, is that in marketing budgets or maybe you could explain what do you mean by kind changing priorities there?
I’ll start and Paul is going to jump in. It’s very simple, I think what’s happening is we’re seeing strong demand profiles for some of these emerging products and given that we don’t have a bias in terms of where a sales rep spends their time, because there has been this stronger demand profile for some of our emerging products. We just feel like reps are going to move that way because of the opportunity that exist. No more complicated than that.
And as we indicated earlier, some of these archiving opportunities just are larger, and they will take more time to move through the pipeline. And so what we see is the short term, we see the emerging products really playing a role. But we very much are committed and believe the archiving business will play a critical role in our growth over a long period of time.
And just to slightly punctuate that, part of what we’re trying to get across is that at any given moment of time sales reps are working on a variety of things in their pipeline. And we’re kind of handicapping what we think is going to happen in the next few quarters. I think we’re going to see an acceleration in the closed rates around the emerging products as the sales team gets more excited about that and it will continue then to be a meaningful contributor.
And it doesn’t mean that we won’t be driving archiving business. But because those archiving business have longer sales cycles, I think it is going to take longer to kind of reel in and land those opportunities that you then see reflected in our revenues.
And that does conclude today’s question-and-answer session. I would now like to turn the call over to Gary Steele for any additional or closing remarks.
Thank you very much. We want to thank everyone for taking the time to join us today, and we look forward to talking to you in another quarter. Thank you so much.
And that does conclude today’s conference. Thank you for your participation and you may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!