Proofpoint, Inc. (NASDAQ:PFPT) Q4 2018 Earnings Conference Call January 31, 2019 4:30 PM ET
Jason Starr - Vice President of Investor Relations
Gary Steele - Chief Executive Officer and Chairman
Paul Auvil - Chief Financial Officer
Conference Call Participants
Chris Speros - Stifel, Nicolaus
Rob Owens - KeyBanc Capital Markets
Phil Winslow - Wells Fargo
Dan Church - Goldman Sachs
Matt Hedberg - RBC Capital Markets
Steve Koenig - Wedbush Securities
Walter Pritchard - Citi
Patrick Colville - Arete Research
Melissa Franchi - Morgan Stanley
Andrew Nowinski - Piper Jaffray
Ken Talanian - Evercore ISI
Tim Klasell - Northland Securities
Sarah Hindlian - Macquarie Capital
Alex Henderson - Needham and Company
Gray Powell - Deutsche Bank
Imtiaz Koujalgi - Guggenheim Partners
Erik Suppiger - JMP
Shaul Eyal - Oppenheimer
Good day, ladies and gentlemen and welcome to the Proofpoint Fourth Quarter 2018 Earnings Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jason Starr, Vice President of Investor Relations. Please go ahead.
Thanks, Keith. Good afternoon, and welcome to Proofpoint's fourth quarter 2018 earnings call where we'll be discussing our results for not only the fourth quarter but also the full year 2018. Joining me on the call are Gary Steele, Proofpoint's Chief Executive Officer and Chairman of the Board; and Paul Auvil, Proofpoint's Chief Financial Officer.
Today, we'll be discussing the results announced in our press release that was issued after the market close this afternoon, a copy of which is available on the Investor Relations section of our website.
During the course of this call, we'll 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 on 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-Q.
These forward-looking statements are based on assumptions that we believe to be reasonable as of today's date, January 31, 2019. 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 neither reiterate nor adjust the financial guidance provided on today's call, unless it is also done through a public disclosure, such as a press release or through the filing of a 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.
Also, I would also like to remind everyone that we have adopted ASC 606 as of January 1, 2018, under the full retrospective method. And as such, all of the comparisons to prior financial periods discussed on today's earnings call and outlined in today's press release are made in reference to our retrospective financials as revised in accordance with the ASC 606 accounting standard. Please refer to our comments during our first quarter earnings call on April 26, 2018 as well as our filings with SEC for greater detail regarding some of the impacts and differences in our reporting under this new accounting standard.
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. We are very pleased with our fourth quarter results which closed our yet another strong year, strong execution for Proofpoint both financially and strategically. Our overall business momentum remains strong driven by the continuing demand for our next generation and cloud security and compliance platform. The ongoing migration to the cloud and our unique disability into the rapidly evolving threat landscape.
For the full year 2018, we beat our guidance on all metrics delivering billings growth of 37%, revenue growth of 38% and an ongoing expansion of our free cash flow margins which finish the year just shy of 22%, all of which highlight our disciplined execution and steady progress for achieving the targets for 2020 that we outlined during our analyst days in prior years. Beyond the strong operating results throughout the year we continue to invest in expanding our product offerings while scaling our organizations and infrastructure around the world, with an eye towards capturing a significant growth opportunities that lies ahead as the need for people centric approach in cyber security comes of age.
More specifically to this point as organization's accelerate their migration of applications and workloads to the cloud. We're finding that our people-centric approach to security is clearly resonating with both customers and prospects. While operating in cloud has many well-known benefits, the move to the cloud also creates an entirely new set of attack vectors that threat actors are readily exploiting and their relentless efforts to comprise organizations. Meaning companies with significant security blind spots given that traditional onpremise security infrastructure by definition cannot meet the challenges posed by this new generation of cloud systems and infrastructure.
And in this new world of cloud applications and workloads threat actors are keenly aware that it's far easier to target and comprise people as oppose to infrastructure and their efforts to infiltrate a company for financial gain. In fact, over 99% of all targeted attacks are designed to drive human interaction in order to achieve their objective, whether it is stealing login credentials, running malicious code, wiring money or exfiltrating [ph] sensitive and valuable data. While the persistent efforts to comprise employees through the delivery of malicious email continues unabated these efforts are now being bolstered by newly emerging vectors such as cloud account takeovers, internal poster account control, social comprise and weaponized documents delivered through cloud applications and file shares. To deal with these evolving set of challenges companies need a comprehensive solution to safeguard their employees whenever they interact with content beyond the firewall.
Proofpoint is uniquely positioned to throughout this broad spectrum of emerging res by combining our excellence in email security and threat intelligence with our broad product suite beyond email including our browser isolation, our Cloud Access Security Broker solution also referred to as CASB. Our Data Loss Prevention solution also referred to as DLP. Our threat remediation solution and our security awareness training which together provide a comprehensive set of defenses to protect employees whenever they interact with content beyond the firewall.
Since over 90% of attacks begin with malicious emails this vector remains the most important entry point for an enterprise to secure and given the rapidly changing threat landscape, existing legacy solutions are unable to provide enterprises with a sufficient capable defense due to their lack of focus and innovation. Defending against this email attack vector has always been Proofpoint's core capability and the insights gain by filtering billions of email daily provide extraordinary visibility into both the sources and destinations of these targeted attacks. As well as the specific intent of each malicious campaign.
This unique vantage point not only serves as the foundation of our exceptional ability to protect customers from email threats, but also enables us to provide each customer with actionable data regarding their most attacked employees and how best to protect them. And since the same attacks that the threat actors attempt to deliver through email are simply repurposed and delivered through these new cloud attack vectors, all of the intelligence that we glean from our email filtering system is immediately applied to our broader set of people-centric defenses.
A great example of these capabilities and action is our newly released Proofpoint attack index. This new capability is available for customers via our TAP dashboard and help security teams to quickly identify which of their employees are the very attacked people and etc. present the greatest risk to their organization. This composite view is based on a threat score based on sophistication of the threat actor, the type and volume of attacks and the spread and focus of the attack across email and the broader spectrum of cloud venues. This aggregate set of information can thereby enable security teams to quickly prioritize and take additional steps to ensure that these very attacked people and the outsets that they have, the rights to access are fully protected through additional adapt to security controls such as Proofpoint's CASB, browser isolation and DLP solutions as well as capabilities delivered through our comprehensive technical integration with ecosystem partners such as Okta and their identity access management or CyberArk and their privileged access management solutions.
We're also finding that as we share more of this data with our customer security teams. We're becoming a more critical partner and their efforts to protect their users from threat actors around the globe and the visibility in insight that our newly released attack index dashboards provide are quite helpful in terms of outline and security risk in a format that a company CEO and Board of Directors can readily understand. As one Fortune 500, CSO recently noted in his discussion with our team email is more than just a defense point it is a key source of intelligence.
In 2018, we launched a number of new products including Cloud Account Defense or CAD, Proofpoint CASB and Internal Mail Defense or IMD. All of which are showing encouraging size of early interest with our customer base. These solutions were [indiscernible] combination of acquired technologies paired with the existing Proofpoint solutions enabling us to create unique offerings that leverage these combined capabilities. We believe that these solutions are unmatched in the marketplace and are increasingly critical to protecting enterprises from the rapidly changing threat landscape.
As we shared on previous calls, we've seen a significant increase in a number of compromised accounts in Office 365 and other cloud applications. These comprises enable threat actors and masquerade legitimate employees and conduct phishing attacks, spread ransomware and exfiltrate sensitive information by co-opting these legitimate corporate accounts. As result of this new method of attack we developed and launched our CAD solution, which is a subset of our CASB offering designed to specifically detect and remediate compromised Office 365 accounts. We've seen strong customer interest in both CAD as well as our fully CASB offering which extends its protection to additional cloud venue such G Suite, Box, Dropbox, Salesfore.com and Slack while uniquely applying both our advanced threat and compliance technologies to these new venues providing a set of capabilities that are uniquely differentiated in the market place.
Now turning to some of our key operating results during the fourth quarter and for the year. Our suite of advanced threat solutions, including our Targeted Attack Protection or TAP offering, continues to be an important contributor to the growth of our business and we had a number of noteworthy TAP and Protection wins during the quarter, including a Fortune 100 airline that added Protection, TAP, and Threat Response, Internal Mail Defense and Wombat for 80,000 users; a large non-profit healthcare provider who purchased Protection, TAP, Threat Response and Email Fraud Defense or EFD for 70,000 users; and a Fortune 500 financial services firm who purchased Protection, TAP, Threat Response, Privacy and EFD for 22,000 users.
Beyond the broader threat landscape the ongoing transition to the cloud and the shift to Microsoft Office 265 in particular continues to be a long-term catalyst that is helping to drive demand for Proofpoint's full suite of security and compliance solutions as existing onpremise infrastructure by definition cannot meet the challenges of this new generation of cloud systems and infrastructure. Examples of deals won this quarter where we display legacy onpremise security appliances as part of the migration to Office 365 included a larger insurance company that purchase Protection, TAP, Threat Response and Privacy for 40,000 users. A Global 2000 airline that purchased Protection and TAP for nearly 30,000 users and a Fortune 500, Power and Energy company that added Protection, TAP, Threat Response, Privacy and Wombat for 20,000 users.
We also continue to effectively demonstrate the strength of Proofpoint's products when we compare to the baseline security solutions provided by Microsoft as part of their Office 365 bundles. Examples of customers who had moved Office 365 and subsequently decided to upgrade their security capabilities with Proofpoint during the fourth quarter included a Fortune 500 global food and beverage company that purchases Protection, TAP, Threat Response, EFD, Cloud Account Defense, Internal Mail Defense and Wombat for 65,000 users; an international food company based in Europe that purchased Protection and TAP for 5,000 and a regional cable company that purchased Protection, TAP, Threat Response, Privacy and Wombat for 4,500 users.
Overall the competitive remains favorable and we continue to experience high wins rates coupled with world class renewal rate that remains above 90%. We were also pleased with the ongoing success of our add on sales which contributes nicely to our growth this quarter representing approximately half of all new and add on, annual recurring revenue booked in 2018. Specifically, we were very encouraged by the ongoing strength and demand for our emerging products which continue to meaningfully outpace the rest of our product portfolio and again contributed to over 30% of the total new and add on business closed during the quarter led by strong demand for EFD, Threat Response and Wombat.
As we mentioned in the past, these new offerings have expanded our TAM by over $5 billion, and are proving to be an excellent source of growth. In fact, as of yearend 2018 this cohort of products now represents over 20% of our annual recurring revenue under contract an important milestone as we extend into new markets. These new products also provide an important competitive advantage as they enable us to holistically defend the enterprise from people based methods of attack across email, cloud and social vectors in a way that is unique in the marketplace. When coupled with the other product innovations we've introduced in 2012, we've effectively increased our total addressable market from $2 billion to over $12 billion and expanded into new segments of the security markets such as Advanced Threat, Security Orchestration Automation and Response, Browser Isolation, CASB and Security Awareness Training.
A few of the key emerging product wins in Q4 included a non-profit healthcare system that added Proofpoint's CASB for over 130,000 users. A Fortune 500, technical services firm that added Cloud Account Defense for 55,000 users. A Fortune 500, food company that added Proofpoint CASB and Internal Mail Defense for 22,000 users. A global toy production company located in Europe that purchased EFD and Wombat for 20,000 users and a Fortune 1000 insurance company added Threat Response, Cloud Account Defense and Wombat for over 5,000 users.
Our compliance segment recorded another quarter of solid growth driven by three factors including continued traction with our [indiscernible] solution accelerating momentum from our Wombat Security Training and Threat Simulation products and lastly [indiscernible] demand for our social offerings. Our pipeline continues to strengthen with several deals converting in the fourth quarter including a Fortune 100 airline that added archiving for 110,000 users. A Fortune 1000 insurance company that added archiving for 5,500 users and a global 2,000 insurance company that added Digital Risk for security and brand protection and a Fortune 500 investment firm and Global 2000 investment bank both of which added Digital Risk to enable their wealth advisors to meet security and compliance requirements in their social selling efforts.
We also remained very excited about our technology partnerships with Palo Alto Network, CyberArk, Imperva, Splunk and most recently Okta. These partnerships continue to help drive our pipeline expand our market reach and increase overall value to customers. As an update we have completed our technology integration with Okta which was released in the third quarter and is another great example of our open approach incorporating best in class solutions to help reinforce our customer security postures. With this relationship Proofpoint can identify users that have clicked on a known malicious linked through TAP's visibility and then automatically notify Okta to take steps to increase authentication for the user in question.
We also continue to make progress towards further expansion abroad and are pleased with the quarterly results in international business which grew 45% year-over-year and represented 19% of total revenue. Also as we noted last quarter, our growth and sales capacity in Europe has been somewhat slower than anticipated and while work remains I'm pleased with our progress here. We sell off significant hiring ahead as we plan to open new geographies in this region throughout 2019. Notable international deals closed during the quarter included a government entity that purchased protection for 180,000 users. A Global 2000 airline located in Japan that purchased Protection and TAP for nearly 30,000 users and a Global 2000 conglomerate that purchased Protection and TAP for 20,000 users.
Finally, as we continue to invest our growth opportunity, we're very pleased to have added nearly 600 people to our team around the world over the course of the past year with our total headcount ending at just over 2,600 as of the end of 2018. We plan to continue to invest in scaling our team in 2019 particularly in our market overseas as we look to capitalize on the emerging demand for people-centric security around the world.
So in summary, we are very pleased with our Q4 results and our strong momentum as we enter 2019 our unique people-centric approach to cyber security and compliance is clearly resonating with customers and prospects alike and we believe we're well positioned to further capitalize on our opportunity gain share in the over $12 billion total addressable market in the coming years.
With that, let me turn it over to Paul.
Thanks Gary. We were quite pleased with our operating results this quarter with many thanks to the hard work of our teams all around the world. Revenue totaled $198.5 million, up 35% year-over-year and well above our guidance range of $191 million to $193 million. Note that this outperformance was driven by a number of factors including several millions dollars in revenues that were accelerated into the quarter under the ASC 606 accounting methodology that we had otherwise expected to recognize in 2019 under the guidance that we provided back in October.
As we continue to see some of our largest customers prefer to deploy our solutions as a private cloud in their own data centers rather than in the Proofpoint Cloud. Absent this ASC 606 affect we still would have exceeded the high end of our guidance range by roughly $2.5 million driven by billing expected linearity in the quarter and an uptick in hardware and services revenue. Note that, adjusting for the impacts of our recent acquisitions in conjunction with the impacts of the ASC 606 accounting standard we estimate that the underlying organic growth rate was approximately 27% for the quarter.
Billings for the fourth quarter were $269.9 million an increase of 43% year-over-year and above the high end of our guidance range of $266.5 million to $268.5 million. Note that as expected our fourth quarter billings represented over 30% of total billings for the year reflecting a quarter-to-quarter sequential increase of nearly 22% from the preceding quarter. these results not only demonstrate the increasing seasonality we're seeing in this metric as we scale the business, but also the excellent execution by our sales and administrative teams throughout the world during the quarter.
As part of these results, I would also like to note that we did see an improvement in the performance of the ramping members of our sales in the Americas. But of course, the fourth quarter is always a cyclically strong quarter and hence we feel it is premature to declare that this issue has been fully resolved. Thus, we will continue to monitor the performance the newer members of our sales team and continue to invest in the [indiscernible] of our new hirers as we scale the business.
As I explained in detail on our Q1 call, under ASC 606 the derivation of our billings metrics now requires adjustments to reflect unbilled accounts receivable activity during the quarter as well as any write refund liability and for the Q4, the adjustment related to these two items was an impact of negative $1.4 billion in aggregate. Our duration remained in the lower half of our targeted range of 14 to 20 months down modestly from Q3 and continues to underscore the high quality of our free cash flow generation. This trend in terms of duration is further reflected in our deferred revenue balances which ended the quarter at $598 million up $73 million sequentially with short-term growing by $49 million and long-term increasing by $24 million.
Note that the growth in long-term deferred revenues in particular contributed 33% of the overall increase in deferred revenues for this quarter down from 47% in Q3. During the fourth quarter our Advanced Threat segment grew 34% year-over-year and represented 74% revenue. Our compliance segment grew 38% year-over-year and represented 26% of revenue. Turning to expenses and profitability for the fourth quarter on a non-GAAP basis our total gross margin was 79% above our expectations driven primarily by our strong revenue performance.
During the fourth quarter total non-GAAP operating expenses increased 36% over the prior year period to $127.3 million representing 64% of total revenue. In terms of profitability for the quarter, we reported non-GAAP net income of $29.1 million well above our guidance range of $18.5 million to $20.5 million driven by both the revenue outperformance as well as lower than expected spending in both sales and R&D.
Now I would like to highlight that, even if we exclude the unexpected contribution to revenues driven by ASC 606 is discussed earlier we still delivered an upside to net income above the high end of our guidance range by over $5 million. As the revenue growth outpaced the rate at which we can productively invest in the business. Moving on to EPS, non-GAAP earnings per share for the quarter was $0.51 per fully diluted share above our guidance range of $0.33 to $0.36 based on 56.8 million shares. On a GAAP basis, we recorded a net loss for the fourth quarter of $21.2 million or $0.39 per share based on 54.8 million shares outstanding.
As a reminder, in August we called our 2020 convertible bonds which were settled for 2.9 million shares of common stock in September and hence that share count is included in our total share count for both the fourth quarter as well as the full year. in terms of cash flow, we generated $55.1 million in operating cash flow and invested $6.4 million in capital expenditures resulting in free cash flow for the quarter $48.6 million above our guidance range of $43 million to $45 million.
Turning to quick summary of the results for the full year 2018. Total revenue was $717 million an increase of 38% compared to 2017 when we taking into account the contributions of our recent acquisitions for the full year in conjunction with the impact of the ASC 606 account standard we estimate that the underlying organic growth rate was roughly 28%. Billings for the full year were $875 million up 37% year-over-year and above the high end of our final guidance for the year.
Non-GAAP net income for the year was $82 million or $1.47 per share based on $57 million weighted average diluted shares outstanding, well above our guidance of $71.9 million or $73.9 million or $1.29 to $1.32 per share. We generated $185 million in operating cash flow and invested $30 million in capital expenditures resulting in free cash flow generation of $155 million for the year or 22% revenue up from 21% reported in 2017. Highlighting the company's ability to generate strong free cash flow growth while at the same time delivering compelling top line results.
I'd like to take a moment to provide everyone with an update on our annual customer statistics which underscore the significant progress we've made in both expanding our customer base while also driving the sale of additional services into our installed base over the past 12 months. In terms of the customer account we ended the year with nearly 6,100 enterprise customers including approximately 550 customers that came to us through the acquisition of Wombat on March 1. Note that we've updated the derivation of this metric as compared to our reporting in the past and as such this reporting now excludes any customer that contributes less than $10,000 in annual recurring revenue. We believe that this approach provides a better reflection of our ongoing progress in growing footprint in our target market serving large and mid-sized enterprises around the world.
As in the past years, this metric continues to exclude the tens of thousands of customers that are primarily sourced from our Essentials MSP partners. For comparative purposes applying the same methodology to last year's data. Our enterprise customer count was approximately 4,400 at the end of 2017. Our enterprise customer base has growing organically by over 25% during the past 12 months.
Another important factor driving our growth is our success in driving additional sales to our existing customers by leveraging our broadening product line which now stands at 17 unique services and represents an incremental opportunity of well over $1 billion in annual recurring revenue by selling these solutions into our installed base. This expanding product portfolio is also important as many of these solutions particularly Wombat, EFD and Digital Risk create additional opportunities to engage with prospects into land new customers beyond our traditional approach where we've used our security mail gateway as the initial entry point in engagement with new prospect.
Overall we continue to make great progress with add on sales as exemplified by the fact that the number of customers with three or more products has increased from roughly 2,000 to 2,900 in the past 12 months, an increase of 45%. Yet this also highlights that just over half of our customers still only have one or two products providing substantial headroom to drive revenue growth through add on sales into our customer base. Target Attack Protection in particular continues to represent an important driver this add on activity and as of the end of 2018 our TAP enterprise customer account was approximately 3,900 an increase of 900 over the past 12 months reflecting 64% penetration into our enterprise customer base.
We ended the year with 530 enterprise customers from the Fortune 1000 or just over half of the index. Each of whom has at least one significant enterprise scale deployment with Proofpoint. It's important to note however that even with this ongoing success, we still have a substantial opportunity to further growth our revenues across the Fortune 1000 due to the add on sale of additional Proofpoint capabilities to that install base while also winning new customers in this category through our best in class security and compliance solutions. And as a point of reference of these Fortune 1000 customer approximately three quarters of them of current Protection customers and hence many of them joined Proofpoint through an initial purchase outside of our core email security product line demonstrating another benefit of our broad product suite.
Internationally we ended the year with 24% of the Global 2000 as customers which is up from 18% at the end of 2017 further highlighting that the addressable market outside of the United States in both Europe and Asia Pacific represents a compelling further growth opportunity for Proofpoint.
Looking ahead let's move on to guidance for 2019, as we start the new year we remained well positioned with a broad product line, a loyal customer base and a favorable competitive environment. With that said, note that our fourth quarter results mark the strong finish to the year and when coupled with the significant contribution from our acquisitions across the arc of our 2018 financial results creates a challenging set up in terms of our year-over-year comparisons for 2019 particularly when also considering the wind down of Cloudmark OEM business.
In terms of revenues, despite the $3 million in revenue that was accelerated into 2018 under ASC 606 as previously noted. We're maintaining our original guidance of $870 million to $874 million hence reflecting a modest increase. This represents approximately 22% growth year-over-year at the midpoint or nearly 23% when adjusting for the 2018 ASC 606 revenue acceleration that I noted earlier. Consistent with what I had indicated during our October call, we continue to expect our reported revenue year-over-year growth to be in the range of 21.5% to 22.5% for each of the first three quarters of the year.
In terms of the fourth quarter the very strong performance that we just recorded in the fourth quarter of 2018 driven by the ASC 606 revenue acceleration creates a challenging baseline for the coming year and absent similar effect in 2019, we expect a growth rate just over 20% in the fourth quarter of 2019. In terms of billings our expectations continue to be in the range of $1.058 billion to $1.062 billion representing 21% growth of the midpoint. In terms of the timing over the course of the year, we expect a pattern similar to the past year's with approximately 20% of the total billings for the year to be recorded in Q1. 21.5% of the total in Q2, 26% in Q3 and 32.5% of the total in Q4.
We expect full year 2019 non-GAAP gross margins to be just over 78% modestly improved when compared to 2018 and above the midpoint of our long-term range of 77% to 79%. We're increasing our expectations for full year 2019 non-GAAP net income to now be in the range of $94 million to $98 million or $1.60 to $1.67 per share using 58.8 million and fully diluted shares outstanding. In terms of cash flow, we're raising our 2019 free cash flow guidance to a range of $196 million to $200 million or nearly 23% of revenue at the midpoint up from our previous guidance of approximately $195 million.
Similar to past year, we expect the majority of this cash flow to be delivered in the second half of the year with roughly $60 million or 30% of the total contributed in the first half. We believe that this outlook is particularly compelling given our commitment to innovation and ongoing investments to pursue the key opportunities in the market around the world and demonstrates continued progress toward our target of 24% to 26% free cash flow margins.
Also I would like to note that we're producing this cash flow with an average billed contract duration in the mid teens which highlights the high quality of the recurring cash flow that our business can generate as it scales. This 2019 guidance assumes capital expenditures of $38 million, depreciation of roughly $32 million to $34 million and an income tax provision exclusive of potential discrete items of approximately $2.7 million to $3 million.
Now let's discuss our financial outlook for the first quarter. We currently expect billings to be $211.5 million to $213.5 million a slight increase from our initial guide back in October resulting in year-over-year growth of 14% of the midpoint which we think marks a strong start to the year given the challenging 2018 compares that I noted earlier. Regarding our revenue outlook, we expect a range of $198 million to $200 million which places us at the high end of the range of 21.5% to 22.5% growth that we provided on our last call.
We expect first quarter non-GAAP gross margin to be roughly 78%. We expect first quarter non-GAAP net income to be $18 million to $20 million or $0.31 to $0.35 per share an increase of 14% year-over-year compared to our prior expectations where we've suggested a potential modest decline from the prior year. This also assumes an income tax provision exclusive discrete items of approximately $0.7 million during the quarter. Depreciation of approximately $8.5 million and a share count of $57.2 million fully diluted shares outstanding.
We expect first quarter free cash flow to be $38 million to $40 million representing 48% year-over-year growth and also ahead of our earlier expectations. This includes capital expenditures of roughly $9 million. Now before wrapping up, I'd like to share few reminders about seasonal trends that occur within our financial model. First revenue growth tends to be bit lower sequentially from the fourth quarter to the first quarter given that we employee a daily revenue recognition methodology with respect to releasing subscription revenues from our deferred revenue accounts. More specifically given the Q1 has only 90 days of revenue to recognize as compared to 92 in Q4, the result is a sequential decline in subscription revenue from our existing base of business of approximately 2% which equates to roughly $4 million at our current size and scale.
Also on the cost size, keeping mind the first quarter is always a step backward in terms of profitability and cash flow for the company as our first quarter includes seasonal increases in cost associated with payroll taxes, sales kick off, initial sales and marketing investments for the year as well as the timing of the payment of the company's annual bonus program. We believe that this is a good start for the year particularly in light of the difficult comparisons we face against the financial performance that we delivered in 2018 as I discussed earlier.
As a final comment, I would like to highlight that this guidance for 2019 reflects our dual objectives of driving attractive growth in both revenue and free cash flow which remains a hallmark of Proofpoint's disciplined operating strategy and is further corroborated under the rule of 40 metric discussed last quarter. When considering our outlook for 2019 of nearly 22% revenue growth and 2% free cash flow margin. It suggests a figure of roughly 45 under the rule of 40 construct which places us prominently in the top quartile of all public and traded SaaS companies.
We remain committed to our strategy of driving attractive growth in terms of revenue and free cash flow. So as we think about our business over the next several years given our significant opportunity to add new customers throughout the world, while selling add on into our ever expanding installed base, combined with the strong secular trends regarding the ongoing migration to the cloud and the ongoing severity of the threat landscape, we believe that we can maintain a rule of 40 metric in the mid 40s we're driving revenue growth in excess of 20% while maintaining free cash flow margins in the mid 20s.
In conclusion, we continue to execute while delivering strong, top line and bottom line operating results in the fourth quarter and we believe that Proofpoint remains well position to continue to drive disciplined with increasing free cash flow margins built on proven capacity to defend enterprises against today's advanced security and compliance threats. Before turning it to over operator for questions. I would like to request that everyone limit themselves to just one question to help reduce the duration of our call and to ensure that everyone has a chance to be included in today's discussion. Thank you for taking the time to join us on our call today and with that, we'll be happy to take your questions now. Operator?
We'll take our first question from Gur Talpaz with Stifel. Please go ahead.
This is actually Chris Speros on for Gur. For Gary, it was nice to see that Wombat was included in couple of your larger wins during the quarter. Can you talk about the general level of demand for Wombat that you saw in Q4 and how we should think about Wombat is contributing to growth in 2019?
Sure, so we were really encouraged by what we saw and we note in our prepared remarks, Wombat being included in a number of deals. We're really seeing the opportunity come in kind of three form, so on is there is broad demand for Security Awareness Training and Phishing Simulation and so there's just a pretty significant greenfield market and if you look at the market stats published by Gartner and others, that market is growing fast and is quite compelling and it's slated to be over $1 billion by 2021. So we're encouraged by the greenfield aspect, we saw great demand within our installed base. So lots of interest within our installed base for Wombat and then we also saw the reverse where within the Wombat installed base we're seeing demand from the Wombat customer interested in the Proofpoint broader product. So we're very encouraged about the opportunity, where we're basically three quarters into the selling process. I think we have gone to market model right, we now got everyone trained. So we're pretty optimistic about the opportunity as we think about 2019 and the role that Wombat can play in our growth.
Great. thanks guys.
We'll take our next question from Rob Owens with KeyBanc Capital Markets.
Thanks for taking my question and also for Gary, sorry Paul. Gary on the competitive front when you're sitting down with customers, isn't it is noisy as is relative to Wall Street's concerns about Microsoft [indiscernible] and ask that from a standpoint that you talked about scale offers advantage within your solution, the billions of emails each day, but obviously Microsoft is seeing those emails through Office 365 so give us the sense of kind of the competitive landscape. Have they caught up to the perception I think some of the bears on the street think and then how the platform offers advantages to Proofpoint. Thanks.
As I mentioned in the prepared remarks the competitive environments remain very favorable and we did not see Microsoft overall efficacy improving the quarter and we saw our win rate maintain a very high number over 90%, so while I think there's been noise in the market. I don't think there's that noise with customers. I think customers' understand the efficacy we can deliver and frankly what's happening in the market is customers' just test us. And when test us in a comparable head-to-head environment we win those comparison. So while there is, I think there's a perception of noise, I don't think there's much noise actually in the customer world. I think they understand the value that we're delivering and we readily help those customers test. And so we haven't seen change from Microsoft and more broadly across the other competitors that we see, we've really seen no fundamental change and so as we look at 2019, we feel very optimistic about that competitive environment.
Yes and I think just the one point I would add to that is, you're sort of inferring this notion of the volume of email that obviously Microsoft sees through the Office 365 platform. To the point that Gary was referring to having a data is only a part of the problem. The other part is having world class algorithms and analytics that then enable you to sort through that and find the phishing attacks and so yes we've been at this for 16 years now and have evolved multiple times over the course of the history, the company, different platforms, different capabilities including the next-generation platform that we talked about over the course of last year that we recently implemented. All these investments are a key part of what we then when combined with massive amounts of email volume allow you to deliver the superior efficacy, having the data alone doesn't really get you anything.
We'll take our next question from Phil Winslow with Wells Fargo.
Paul, you mentioned an improvement that you saw in productivity of the new hirers, when you think about 2019 obviously you didn't to take through one quarter's trend. So what are you look for there, what kind of process are you putting in place to make sure the Q4 momentum continues and then obviously I'll just have one follow-up for Gary on that.
Yes, so I mean I think first and foremost measuring it regularly which we have been doing but now I think with a more finer grain focus literally looking at it month-to-month and quarter-to-quarter is essential, but I think on top of that, things and Gary will probably speak to this. Things like completely revamping our enablement process and how we bring people into the factory when they first joined, train them on our core product line and broader notions of among other things different vectors into an account. And I alluded to this in my part of the prepared remarks which is historically the email security gateway was our way to get that first relationship and driving to the customer, but today with our Digital Risk products, with Wombat and others there are other ways to get that first toehold and all these things have some art and science associated with them. So doing a great job on training is important, but then beyond that you also have to have a pretty good hands on mentoring programs because you have your new hirers on board, somebody is actually watching them not just managing and making sure they're building pipeline, but helping to make sure in those first engagement that they have with customers they have some real success there. And I think with our new sales leadership there's a completely re-imagined and revamped focus on how that's happening and I'm really optimistic about how I see that coming together right now.
Got it and then Gary, along those lines in terms of improving productivity. How are you thinking about just the pricing and patching of the products. Is there anything that you guys there can do there to sort of streamline and reduce pressure in the sales process personally you call the do the à la carte menu?
Yes one of things that we've rolled out for our sales team is basically solution bundles and make it easier for customers consume their product, but also make it easier for sales reps to drive adoption of our technology and so that's something that we rolled out at the beginning of this year. we held our sales kick off, a week ago I've actually never seen the sales team so excited in my 16 years here and I think that was really an indicator of Blake and new sales leadership in the company that just got people fired up. But I think that it's easy to consume at a bundles that we deliver and put in the hands of the field. I think people are excited about that and frankly it's just easier to digest, easier to sell and easier for the customer to consume. So we're pretty excited about that. It's' early we want to see the results from that but all indications look very positive at this point.
Awesome. Thanks guys.
We'll take our next question from Gabriela Borges with Goldman Sachs. Please go ahead.
Good afternoon, this is Dan Church on for Gabriela aboard. Thanks for taking the question. I guess kind of piggybacking on the last question, how do you think about pricing power and what I mean does your ability to raise prices either while negotiating renewals or through upsell, there in the renewal process. Thank you.
Yes I think there's enough competition in the market that I would describe us as having pricing power, but what I would describe is that through the power of our innovation, we've created a broader and broader set of capabilities and I mentioned earlier in the prepared remarks that we now have 17 different solutions that when we look to drive more price, [indiscernible] the account is by selling them more capabilities. So instead of being a company that goes and says 'hey, thanks for being with us for five years, here's another 5% or 10% price increase'. We come in and say, 'hey, thanks for being with us for these number of years by the way we have some other capabilities we think that would be very important for you to acquire that will help and improve your security posture and give you more value of your broad ways of company' and particularly if the threat landscape evolves from just email security into these other venues whether it's in social areas, whether it's in file secures like Box or Dropbox or new application like Slack or Workday or other things running in the cloud. It's pretty easy for us to demonstrate to folks the need to more broadly protect the enterprise and so we drive more value that way rather than just simply gouging the customer with the price increase.
Okay, thank you.
We'll take our next question from Matt Hedberg with RBC Capital Markets. Please go ahead.
Appreciate the update on the international hires and the new rep productivity that was super helpful. I guess I'm thinking about kind of follow-up to Phil's question. When you kick off new calendar year do you guys expect any changes to sales territories or account assignments, something of something Blake in that role and them maybe as a related question, you think even longer term 2020 and beyond. Is the sales force and the territories need to evolve significantly from where we are today?
Great question so, Blake is off to a phenomenal start. As I indicated earlier, sales kick off was just an incredible event. And I think people really excited and I think what they see is that, there aren't big broad changes being made and they feel enthusiastic about the capabilities that they have to sell in the coming year. So we do not anticipate broad territory changes, broad alignment changes, broad management changes. We don't expect any of that and so I think given that level of stability I think that really helps the team focus on how to go out and kill the number for the year and I think that's what they're excited about. So I think we've got a good step.
And I think to your point, as you think beyond just 2019 into 2020 and beyond. For us the great news is that, there is so much net new opportunity to get with customers around the world that we don't need to make any meaningful changes to how the sales operation operates. We'll continue to add predominantly more resources in the international territories where we're significant under represented today and then because we have this very broad product line adding a handful of specialist here and there to help make sure that particularly in the US where we have a pretty large team. They have the support and the expertise they need to drive customers from having one product to two, to three or more that with that extra help they can drive those add on sales. We think the combination of those two will help us deliver that 20% or better growth rate for the next several helpful.
Super helpful. Thanks guys.
We'll take our next question from Steve Koenig with Wedbush Securities.
Maybe on the last question. You've given some great color on your new hire productivity, you talked a little bit about the bundles and how that can clear to see productivity overall. Maybe when it comes to productivity of your overall sales organization can you talk about your approach to assigning and sensing and enabling the reps. I mean it sounds like the organization is relatively stable this year. have you evolved your approach to how the quarters are being set and how the territories are being set or would you characterize it as being pretty much the same as last year.
I think it's' a pretty simple answer Steve. I think that the structure of our compensation plans hasn't changed. We put that structure in place in 2011 and that structure has worked phenomenally for us. So that stays in place and you can think about the structure of our comp plan, we simply compensate on annual recurring revenue and so we have everyone in the sales organization aligned to drive growth for the business and then as you think about the quota setting. We look at every territory and we determined whether what is right thing to do relative to quotas, but it was generally the same from 2018 to 2019 that's the simple way to think about, there's changes here and there depending on territories and what's happening, but there really weren't significant changes as it related to compensation going into the year, which again creates stability and get people excited and people really feel enthusiastic about the opportunity to really kill their number.
Yes and I think what I would add to that with Blake and his leadership role, historically just given how he operates, he's closer to sort of the day to day to operations and kind of mixing it up on deals and working closely with reps, he's very hands on as a sales leader and so as we went through the process of thinking about setting quotas that Gary just described earlier. I feel like we had better insights into what the actual dynamics were and the various territories and then being thoughtful of making sure we were assigning quotas that were fair to the sales rep but also quite frankly fair to the company and so I think people are generally quite pleased with the quotas we rolled out, but I think it's a good trade between them being able to have a good shot at getting their number and earning the dollars they deserved for all their hard work credit it off against managing the cost expectation for the business.
Fantastic. Thank you so much.
We'll take our next question from Walter Pritchard with Citi.
Gary on the M&A front, we did a lot of acquisitions kind of coming into last year. You know the year maybe turned out little bit different, you didn't do a lot of M&A during the year. How are you feeling about your capacity and interest in doing M&A and what are the drivers of either feeling better or different about that versus where you were in 2018?
Great question. Just to refresh people's memory we did one deal in 2018 which was Wombat that closed basically at March 1. And so we'll basically lap that deal in about a month. We are actively looking for interesting things, but I think we apply very disciplined and we think very carefully about what things would create value for our customers and create opportunity for long-term growth for the company. So I think we continue to apply the same level of disciplined approach and we're pretty optimistic that, there is interesting things out there really comes down to finding things that we think are priced appropriately and can deliver value to our customers. So it's finding that balance that and continue to take that disciplined approach that we've had in the past.
Yes and I think what I would add there is, what we're excited about given the current set up and the $12 billion TAM that we have with the existing product line. We really don't really feel any pressure to go out and do any M&A to broaden the product suite that we have today. There are some interesting areas, where we think making some additional investments through in organic acquisition of technology could be compelling for our customer base, but we don't feel like there is any need to add those as we think about driving our objectives for the next several years in terms of revenue growth.
Great, thank you both.
We'll take our next question with Patrick Colville with Arete Research.
I don't [indiscernible] dead horse about the kind of sales re-org and the sales issues. Can you just remind us what issues were they and yes and just kind of drill down on that and just kind of revisit that topic, if possible?
Yes, there really - just to clarify there was no sales re-org, the one thing that we cited in our earlier prepared remarks, where that we were slow in the European hiring.
Last quarter and we reference in current remarks that we were pleased with the progress that we made over the course of the quarter and then secondly, we refer to the fact that some of our new hires took a little longer to get fully up to speed and we're very much focused on that. So it's not like we had a big sales re-org and that's absolutely not the case and we're happy to flog the source, one more time. But we - just to clarify it's really about how do we ensure that we're meeting our hiring and Emil [ph] we are watching closely and we're making progress there and then continue enablement as Paul described in the earlier question.
Yes and I think maybe the only other thing to add, but just kind of statement to the obvious is, of course as everyone knows our leader Tracey Newell had run the sales organization through the middle of last year and had stepped down and so we did recently have like Blake Sallé who's been with us for about 18 months when we promoted him into that role joined. Just as I think we've alluded to in earlier parts of the prepared remarks as well as earlier questions. One of the advantages that we saw in putting Blake in the role that we've known actually seen play out for another three months is, he's not kind of the person that's going to come in and make broad sweeping changes. He already knows the organization, he knows the people, he knows the playbook, he knows how we got out and win and so he's made a lot of interesting fine tuning and adjustments that I think as Gary alluded to regarding sales kick off, they were hugely favorably embraced by the sales organization and so I think he's really doing a fine job in stepping into that bigger worldwide role and moving everything forward in a way that's incremental refinements, not any wholesale changes to our historical approach.
Thank you so much.
We'll take our next question from Melissa Franchi with Morgan Stanley.
Question for Paul on guidance. The Q4 billing is came in better than expected and it sounds like you guys are pretty bullish across the board and particularly around the emerging solutions. So just thinking about billings as guidance for FY 2019 can you just maybe give us a little bit more color on what are your assumptions are in terms of growth in the core email protection product versus some of the emerging solutions?
Yes, so as we look at the numbers for next year. We mostly break out planned internally as we think about planning based on core capacity organization. So we don't have much of a biased towards one product versus the other, but as we've talked about the emerging products in particular had a really good run over the course of 2018 and as we look at the pipeline and the opportunity going into 2019. They will play a formative role in driving growth in 2019 numbers overall. So we feel like as we look at 2019 heading the billings number now tipped just over $1 billion market an exciting next threshold for the company. As we thought about the guidance that we provided in October and then we sat looking at the numbers here going into the full year starting in January. We felt holding that guidance for now was the right thing to do, as we just developed the momentum of the execution across the first quarter. Here in January, February, March and so we'll obviously revisit the guide when we get to April, but I think that if you look at the setup, emerging products particularly those that are both compliments to the existing secure email gateway but also new capabilities that are well beyond email like CASB, like Digital Risk, like Browser Isolation. Those all have very nice momentum going into the year and so they will play a meaningful role on the margin and helping to deliver those results and hopefully things go well something little bit better over the course of the year.
Very helpful. Thank you.
We'll take our next question from Andrew Nowinski with Piper Jaffray.
And the number of Microsoft displacements you highlighted as well as few of the other wins you had in the quarter. I think they were roughly about 5,000 users and [indiscernible] great wins and demonstrate your ability to continue being Microsoft. I'm wondering if we should read anything into that regarding Proofpoint moving perhaps more downstream into the long end of the enterprise market, where vendors like Mimecast might compete.
No, you shouldn't read anything into that, those are just the examples that we chose to put in the script. We had wins with Microsoft across the board in the very high all the way down. So that was just, those were just the specific examples that we referenced in the script. We feel like as customers are moving to Office 365 we're seeing more hesitation from those larger customers to go there and so I think overtime you're going to see larger customers when they make their initial dive to Office 365 that they will select a security provider outside of Microsoft.
I think couple things I would add, as we talked about when we're describing our enterprise customer count, we don't even count customers that are less than $10,000 recurring revenue and it's not that we don't value them. But when we think of enterprise accounts, it's got to be over $10,000 recurring revenue really be thought as an enterprise from our view. So back to your point, while we talked about Fortune 1000 and the Global 2000 statistics because those are sort of benchmarks that are tracked by every company that reports as a public company, that focuses on large and mid-enterprise. The reality is, there is a hugely lucrative market that operates below the Fortune 1000 well down into the high 1,000 of users. And so 5,000 account for us even if they just few products it's still very compelling in terms of the long-term value of that customer and if they buy a broader product suite, it's a very, very compelling engagement for us. So while we talk about larger accounts because that tends to be a touchdown for enterprises businesses like ourselves. We are just as happy to close 5,000 seat [ph] account. They're equally important, equally strategic, equally strategic lucrative in their own way.
Got it. That's great. Did the government shutdown have any impact on your result this quarter, your guidance for Q1?
Sadly no, our federal business continues to a relatively small part of our business, so we haven't seen any impact. We do have federal business that were news in the first quarter and I will just specifically say, that we're assuming that it will renew in Q1. So we had another shutdown that then extended all the way through the end of the March. Yes it could on the margin have a small impact on our business, but it's 75% of our overall business for the quarter so it's not a material impact, but it could glitch a little bit in terms of what we record for billings in Q1 versus Q2. We wouldn't lose the customer but it might just move the time, when we were actually able to invoice them so we'll see.
Great. Keep up the good work guys.
We'll take our next question from Ken Talanian with Evercore ISI.
So Paul, I was wondering if you could give us a sense for what assumptions you've made around growth internationally in your 2000 outlook and weather on the upside might manifest in the first half or second half of 2019.
In the face line plan, we've alluded to this both in the call back in October as well as the call here. We do expect to see the growth rate to decelerate a bit internationally compared to what you've seen in the last few quarters. Part of is just lapping a tough year-over-year compare as we did have a nice international contribution from the cloud mark acquisition which now play through and we don't have another acquisition with international revenues that are contributing in organically. So that will be a little bit of headwind, but as well as we look at it. We talked again back in October. We got a little bit behind on our hiring internationally and while we did make some nice progress in Q4. There's still work to be done there, but at the end of the day the overall baseline plan assumes that you're - contributes and international overall contributes at a growth rates that's roughly on par with the US. So to your point exactly, I think if we can get a little bit more of catch up on hiring. There's potential for an upside for us to deliver over the course of the year driven by better execution in Europe and internationally in other geographies and you know the local line leadership in the countries is really, really quite good and the people that hired are quite good. So we've got all the baselines capabilities in place to potentially deliver on that sort of results little bit of upside but let's see how things will play out in Q1 and then we'll go from there.
Great. Thanks very much.
We'll take our next question from Tim Klasell with Northland Securities.
My question has to do with the emerging products. You listed off Wombat and Internal Email and some others that were pretty happy over the last year. Which ones are you most excited about - which ones, maybe just pick out one who you think will be the rookie of the year, out when we have this call. This time next year.
Yes, I think I would say it will likely be Wombat because what I noted earlier. We just see demand coming from really three different points. One; greenfield market; two, our install base and three; we're just getting this cross-selling opportunity into the Wombat base. So I suspect it will be Wombat and it plays broadly across the globe and not only do we see domestic opportunity, we see an international opportunity and those deals tend to have higher velocity, it's an easier to decision for customer to make, so it's' a nice entry point where it's a bigger decision if you're talking about taking out your [indiscernible] those security. I think the other thing I would note though, we've had very good performance across the emerging cohorts. So we noted in the prepared remarks the performance of Email Fraud Defense or EFD or the performance Threat Response those would probably be the next couple to think about. But they're all doing quite well and I think they will be nice contributors to growth in 2019.
Very helpful. Thank you.
We'll take our next question from Sarah Hindlian with Macquarie Capital.
I'd like to dig in a little bit more on the sales side given the new sales head and you know Tracey had a very particular focus on the channel and your mix of channels have gone up pretty considerably over the years. So how is the new head of sales thinking about the business, does he have a different strategic approach. Obviously you're happy with productivity ramps of new hires, but a little bit more color in terms of how he views the landscape would be really appreciating guys. Thank you.
I'll start and I think Paul has commented here too Sarah. So one is, I think his view is one where we're really extending the reach to the channel. So under Tracey's leadership she was very focused on some of the big national resellers that operated at very large scale. I think with Blake and the way he's thinking about extending that reach down to critical regional partners where those individuals have really important regional relationships thinking drive, incremental business for us into tough to crack accounts and so we've already seen in very short period of time, some very good engagement not only with the broader national partners, but also with critical regional partners so it's a very, I think it's a perspective that really extends beyond where we've been and we've already seen impact and productivity improvements from that.
And I think what I would add to that is, so if the sales kick off we had couple weeks ago. I actually gave sort of the introductory remarks for the portion that was related to our channel strategy and part of it was just to emphasize that in case anybody was wondering, the CFO was 100% committed to the channel and then we brought up a handful of panelists, who were some of the top performers for the year, people who are going to sales club where they told their stories about how working with the channel help them deliver some quite frankly pretty extraordinary results to some of these people delivered and I have to say then at the end of the session and the session go 45 minutes after I've given my kick off remarks I went kind of wandered to the back of the room just to kind of observe the overall session from the other end. And honestly there wasn't a single person on their phone, everybody was just captivated by the session so, so I would say going into this year there is, as much or more momentum in terms of channel and how we engage to go drive our business then I've seen in past years of the business, with the company.
Thank you and congratulations on this important quarter. Great job, appreciated.
We'll take our next question from Alex Henderson with Needham and Company.
I was hoping you can talk a little bit about the quarterly progression in the hiring both in the US and internationally. It sounded like you had a fair amount of sales people come in, but it sounded like that came in more towards the back end of the quarter. So I would think you would see some increase in the cost sequentially as result and how is that progressing as we go through the first quarter. Are we again likely to be more backend waited in the hiring process? Thanks.
So it's typical, you offer that a reasonable number of sales people who join, either right at the end of Q4 and early Q1, are they're finishing up whatever they have left to do with their current employer and so this year was no different than past year's in that regard. I think as we talked about this very high outperformance in terms of our net income for the fourth quarter. We were little less linear than I planned on some of the hiring there, not a problem obviously and the way we delivered over our results and nice upside of profitability for shareholders. But I feel like as we stand here at the end of January the core to capacity that we had in place, sales kick off sets us up quite nicely for the year and I don't expect not only you're hiring for sales end over the course of the year, we expect fading maybe a little front end loaded as they go out. We basically give them hiring objectives to the year and tell them to just go and work on filling those roles, I think little too far ahead of themselves against our profitability metrics, we might put a pause on it but generally people go out next Q quite well and it all kind of fits within our overall financial model and we track all that quite closely.
Again as you can see in terms of the sequential profitability from Q4 to Q1 we're picking up a bit a load in terms of that step function and additional sales folk joining here in the first quarter. But I think within the overall profitability model that we had planned for the year and the guidance we that we just provided, it all fits together quite nicely. So again I think we stand here at the end of January very strong cohort of sales people going out and engaging the market and I think a good hiring plan both internationally as well as domestically to build quarter capacity for the year.
We'll take our next question from Gray Powell with Deutsche Bank.
So within the guidance, what's your confidence level on potential for billings growth to reaccelerate from I think it's 14% in Q1 back into something like the mid 20% range by Q4?
Well that's basically what the current guidance suggests and obviously we have a reasonably good level of confidence and we wouldn't have guided to it. So again we specifically laid out the goal for the year and then the percentage of that total goal that we deliver in Q1, Q2, Q3, Q4 and with the way that lays out to your point that suggest billings growth rates that are in the mid 20s in the third and fourth quarter. So as we look at the combination of new add on business and our core to capacity to drive that, combined with the season [indiscernible] timing and renewals. As we stand today again we're talking about numbers are that quite a ways out of this point, but we feel generally quite good about that guide.
Okay, that's really helpful and then how much through the multi-year contract renewals held at Q4, 2018. I just want to make sure I'm thinking about the comps correct as I looked at Q4, 2019.
Yes I mean you can just look forward in the - we talked about short and long-term for revenue growth. So long-term for revenue growth was up about $24 million sequentially so you can kind of parse that and think about what portion of the overall contracts that we renewed in Q4, we are more than one year in duration. But again the guidance that we provided kind of captures that and again, notionally these the duration of the business that we booked in aggregate across new add on and renewals was actually down slightly from the third quarter.
Okay, that's helpful. Thank you very much.
We'll take our next question from Imtiaz Koujalgi with Guggenheim Partners. Please go ahead.
Paul, in Q3 you mentioned of the sales high was slow down given the issue that you had in the productivity last quarter. [Indiscernible] expenses grew 39% in 2019 would that be lot lower and I'm sorry, grew 39% 2018 would that lot lower in 2019?
No, I think it will kind of grow just slightly below the overall pace of our overall revenue growth. We just view the tremendous opportunity particularly outside of the US to build core to capacity and go after not only in the core markets that we have already planted the flag like US, France, Germany but also new deals where we're just getting start up like Italy, Spain, Benelux, Sweden and others and of course Asia Pacific and Japan are big opportunities as well. So I think you'll see strong hiring in the sales organization in the terms of quarter bearing headcounts across the [indiscernible] entire year 2019.
Got it and the for the Wombat you got into $36 million of billings in 2018, can you comment how that actually came out versus your initially guidance for $36 million?
Yes, we really haven't provided any specific updates around billings organic or in organic, it's complicated to try T's and apart and so rather than give numbers that are just broad estimates, we decided not to specifically speak to that over the course of the year.
Okay, it has grown faster than the core business, can you at least comment on if the growth of Wombat is faster or lower than the core business?
Well I can tell you that the organic growth meaning, once we owned the thing March 1, the engagement with our sales team and execution around our sales organization along with Wombat which we're then paying for they're over like execution was quite good and in fourth quarter in particular, we saw a very nice close rate new business coming to point through those engagements.
Got it. That's very helpful. Thank you.
We'll take our next question from Erik Suppiger with JMP. Please go ahead.
I know we talked a little bit Microsoft so far, but they have been apparently investing in their security. Can you comment as to how your competitive dynamics have changed relative to the breadth of services? My impression is, that [indiscernible] services and they've improved some of the efficacy and some of the traditional services so when you're competing them is it the breadth of services that your customers are preferring Proofpoint or is it still a significant competitive advantage in terms of efficacy of the traditional products that you've got.
Yes we're winning on two fronts, we're winning on efficacy and so our ability to run in live production in a comparable way as Microsoft improved hands down and there were more effective that has been a key driver for us. And then secondly, as product line has grown customers have looked to the broader side of capabilities Proofpoint can offer, so I think both of those play a role, but efficacy has we've seen no change in Microsoft efficacy.
We'll take our final question from Shaul Eyal with Oppenheimer. Please go ahead.
Just maybe quickly focusing back in Europe. So outside of your hiring plans and comments in Europe specifically, can you talk to us about the macro level demand trend? There are also conflicting views mixed signals probably market versus Wall Street. So what [indiscernible] that you guys have been seeing in Europe specifically. Thank you for that.
Sure. No we've seen broad based demand across our product line and so we're very encouraged by the broad demand that we're seeing in terms of organization having to deal with the kinds of targeted attacks that they're coming through email today and so the play that we had traditionally run in the US, the same play that we're running in Europe and then second to that, we're encouraged by the broad demand for our the emerging products in Europe. We saw very good demand early for Wombat, we saw very good demand for things like Email Fraud Defense or EFD. So we feel pretty optimistic broadly speaking about the European opportunities.
Ladies and gentlemen, this concludes today's question-and-answer session at this time. I would like to turn the conference back to Gary Steele for any additional or closing remarks.
Great. I want to take a moment to thank everyone for joining us on the call today. We're very pleased with our Q4 results and are excited about our continued progress with our people-centric approach to cyber security, we believe we remain well positioned to drive attractive returns for our shareholders and we look forward to talking to you on our next call and to see many of you on the conference circuit in the quarter. Thanks so much for joining us today.
Ladies and gentlemen, this concludes today's conference. We appreciate your participation.