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TMCNet:  Proofpoint Announces Third Quarter 2017 Financial Results

[October 19, 2017]

Proofpoint Announces Third Quarter 2017 Financial Results

  • Total revenue of $134.3 million, up 35% year-over-year
  • Billings of $166.5 million, up 33% year-over-year
  • GAAP EPS of $(0.49) per share, Non-GAAP EPS of $0.25 per share
  • Generated operating cash flow of $44.2 million and free cash flow of $32.3 million
  • Increasing FY17 billings, revenue and profitability guidance

SUNNYVALE, Calif., Oct. 19, 2017 (GLOBE NEWSWIRE) -- Proofpoint, Inc. (NASDAQ:PFPT), a leading next-generation security and compliance company, today announced financial results for the third quarter ended September 30, 2017.

“The third quarter marked another strong quarter for Proofpoint,” stated Gary Steele, chief executive officer of Proofpoint.  “Our ability to exceed expectations across all of our key operating metrics was once again driven by enterprise cloud migration, the rapidly evolving threat landscape and the company’s proven ability to identify, block, and remediate advanced threats.  The combination of ongoing traction from emerging products, robust new and add-on activity, and consistently high renewal rates positions Proofpoint to maintain momentum for the remainder of the year and into 2018.”

Third Quarter 2017 Financial Highlights

  • Revenue: Total revenue for the third quarter of 2017 was $134.3 million, an increase of 35%, compared to $99.8 million for the third quarter of 2016.

  • Billings: Total billings were $166.5 million for the third quarter of 2017, an increase of 33%, compared to $124.8 million for the third quarter of 2016.  

  • Gross Profit: GAAP gross profit for the third quarter of 2017 was $98.3 million compared to $72.5 million for the third quarter of 2016.  Non-GAAP gross profit for the third quarter of 2017 was $104.9 million compared to $77.2 million for the third quarter of 2016.  GAAP gross margin for the third quarter of 2017 was 73%, consistent with the third quarter of 2016.  Non-GAAP gross margin was 78% for the third quarter of 2017 compared to 77% for the third quarter of 2016.

  • Operating Income (Loss): GAAP operating loss for the third quarter of 2017 was $(16.0) million compared to a loss of $(11.8) million for the third quarter of 2016.  Non-GAAP operating income for the third quarter of 2017 was $13.3 million compared to $10.5 million for the third quarter of 2016. 

  • Net Income (Loss): GAAP net loss for the third quarter of 2017 was $(22.0) million, or $(0.49) per share, based on 44.4 million weighted average shares outstanding.  This compares to a GAAP net loss of $(18.4) million, or $(0.44) per share, based on 42.1 million weighted average shares outstanding for the third quarter of 2016. 

    Non-GAAP net income for the third quarter of 2017 was $13.0 million, or $0.25 per share, based on 55.4 million weighted average diluted shares outstanding.  This compares to a non-GAAP net income of $9.4 million, or $0.19 per share, based on 54.1 million weighted average diluted shares outstanding for the third quarter of 2016.  Non-GAAP earnings per share for the third quarter of 2017 included the shares associated with the company’s convertible notes, and cash interest expense (net of tax) of $1.1 million was added back to net income as the “If-Converted” threshold during the period was achieved.

  • Cash and Cash Flow: As of September 30, 2017, Proofpoint had cash, cash equivalents, and short term investments of $459.6 million.  The company generated $44.2 million in net cash from operations for the third quarter of 2017 compared to $27.3 million during the third quarter of 2016.  The company’s free cash flow for the quarter was $32.3 million compared to $18.0 for the third quarter of 2016.

A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial tables included in this press release.  An explanation of these measures and how they are calculated are also included below under the heading “Non-GAAP Financial Measures.”

“Our strong third quarter results were highlighted by revenue and billings growth of 35% and 33% year-over-year, respectively,” stated Paul Auvil, chief financial officer of Proofpoint.  “During the quarter, we were particularly pleased with our ability to exceed our profitability and free cash flow expectations while continuing to grow the top line.”

Third Quarter and Recent Business Highlights:

  • Launched Proofpoint Domain Discover solution to proactively stop lookalike domain email attacks before they strike.

  • Launched the integration between Proofpoint’s Email Protection and Email Fraud Defense which expands visibility, tools, and services to better protect from email fraud attacks.    

  • Successfully completed initial deployments of TAP SaaS Defense with customers around the world.

Financial Outlook
As of October 19, 2017, Proofpoint is providing guidance for its fourth quarter and increasing full year 2017 guidance as follows:

  • Fourth Quarter 2017 Guidance: Total revenue is expected to be in the range of $138.0 million to $140.0 million.  Billings are expected to be in the range of $180.0 million to $182.0 million.  GAAP gross margin is expected to be 72%.  Non-GAAP gross margin is expected to be 77.5%.  GAAP net loss is expected to be in the range of $(28.6) million to $(25.7) million, or $(0.64) to $(0.57) per share, based on approximately 44.9 million weighted average diluted shares outstanding.  Non-GAAP net income is expected to be in the range of $9.5 to $10.5 million, or $0.19 to $0.21 per share, using 55.7 million weighted average diluted shares outstanding, and adding back the $1.1 million in cash interest expense as prescribed under the “If-Converted” method.  Free cash flow during the quarter is expected to be in the range of $25.0 million to $27.0 million, which assumes capital expenditures of approximately $13.0 million. In addition, the company has decided to transfer the intellectual property related to the FireLayers acquisition from Israel to the United States which will result in a one-time tax payment of approximately $4.0 million, which is included in our fourth quarter free cash flow guidance.

  • Full Year 2017 Guidance: Total revenue is expected to be in the range of $508.0 million to $510.0 million.  Billings are expected to be in the range of $630.0 million to $632.0 million. GAAP gross margin is expected to be 72%.  Non-GAAP gross margin is expected to be 77%.  GAAP net loss is expected to be in the range of $(102.0) million to $(98.9) million, or $(2.31) to $(2.24) per share, based on approximately 44.1 million weighted average diluted shares outstanding.  Non-GAAP net income is expected to be in the range of $36.1 million to $37.1 million, or $0.73 to $0.75 per share, using 55.4 million weighted average diluted shares outstanding, and adding back the $4.2 million in cash interest expense as prescribed under the “If-Converted” method.  Free cash flow for the full year is expected to be in the range of $101.5 million to $103.5 million, which assumes capital expenditures of approximately $48.0 million. In addition, our free cash flow guidance includes the approximate $4.0 million impact from the intellectual property tax payment mentioned above which was not included in our previous guidance range.
      
  • Full Year 2018 Guidance: Total revenue is expected to be in the range of $644.0 million to $648.0 million.  Billings are expected to be in the range of $798.0 million to $802.0 million.  Non-GAAP net income is expected to be in the range of $50.0 million to $54.0 million, or $0.96 to $1.03 per share, using 56.3 million weighted average diluted shares outstanding, and adding back the $4.2 million in cash interest expense as prescribed under the “If-Converted” method.  Free cash flow is expected to be approximately $135.0 million, which assumes capital expenditures of approximately $45.0 million for the full year.

Quarterly Conference Call

Proofpoint will host a conference call today at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to review the company’s financial results for the third quarter ended September 30, 2017.  To access this call, dial (877) 795-3599 for the U.S. or Canada, or (719) 325-2177 for international callers with conference ID #2246702.  A live webcast of the conference call will be accessible from the Investors section of Proofpoint’s website at investors.proofpoint.com, and a recording will be archived and accessible at investors.proofpoint.com.  An audio replay of this conference call will also be available through November 2, 2017, by dialing (844) 512-2921 for the U.S. or Canada or (412) 317-6671 for international callers, and entering passcode #2246702.

About Proofpoint, Inc.

Proofpoint Inc. (NASDAQ:PFPT) is a leading next-generation security and compliance company that provides cloud-based solutions to protect the way people work today. Proofpoint solutions enable organizations to protect their users from advanced attacks delivered via email, social media and mobile apps, protect the information their users create from advanced attacks and compliance risks, and respond quickly when incidents occur. More information is available at www.proofpoint.com.

Proofpoint is a trademark or registered trademark of Proofpoint, Inc. in the U.S. and other countries. All other trademarks contained herein are the property of their respective owners.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding momentum in the company’s business, market position, win rates and renewal rates, future growth, and future financial results. It is possible that future circumstances might differ from the assumptions on which such statements are based. Important factors that could cause results to differ materially from the statements herein include: failure to maintain or increase renewals and increased business from existing customers and failure to generate increased business through existing or new channel partner relationships; uncertainties related to continued success in sales growth and market share gains; failure to convert sales opportunities into definitive customer agreements; risks associated with successful implementation of multiple integrated software products and other product functionality; competition, particularly from larger companies with more resources than Proofpoint; risks related to new target markets, new product introductions and innovation and market acceptance thereof; the ability to attract and retain key personnel; potential changes in strategy; risks associated with management of growth; lengthy sales and implementation cycles, particularly in larger organizations; the time it takes new sales personnel to become fully productive; unforeseen delays in developing new technologies and the uncertain market acceptance of new products or features; technological changes that make Proofpoint's products and services less competitive; security breaches, which could affect our brand; the costs of litigation; the impact of changes in foreign currency exchange rates; the effect of general economic conditions, including as a result of specific economic risks in different geographies and among different industries; risks related to integrating the employees, customers and technologies of acquired businesses; assumption of unknown liabilities from acquisitions; ability to retain customers of acquired entities; and the other risk factors set forth from time to time in our filings with the SEC, including our Quarterly Report on Form 10-Q for the three months ended June 30, 2017, and the other reports we file with the SEC, copies of which are available free of charge at the SEC's website at www.sec.gov or upon request from our investor relations department.  All forward-looking statements herein reflect our opinions only as of the date of this release, and Proofpoint undertakes no obligation, and expressly disclaims any obligation, to update forward-looking statements herein in light of new information or future events.

Computational Guidance on Earnings Per Share Estimates

Accounting principles require that EPS be computed based on the weighted average shares outstanding ("basic"), and also assuming the issuance of potentially issuable shares (such as those subject to stock options, convertible notes, etc.) if those potentially issuable shares would reduce EPS ("diluted").

The number of shares related to options and similar instruments included in diluted EPS is based on the "Treasury Stock Method" prescribed in Financial Accounting Standards Board ("FASB") ASC Topic 260, Earnings Per Share ("FASB ASC Topic 260"). This method assumes a theoretical repurchase of shares using the proceeds of the respective stock option exercise at a price equal to the issuer's average stock price during the related earnings period. Accordingly, the number of shares includable in the calculation of diluted EPS in respect of stock options and similar instruments is dependent on this average stock price and will increase as the average stock price increases.

The number of shares includable in the calculation of diluted EPS in respect of convertible senior notes is based on the "If Converted" method prescribed in FASB ASC Topic 260. This method assumes the conversion or exchange of these securities for shares of common stock. In determining if convertible securities are dilutive, the interest savings (net of tax) subsequent to an assumed conversion are added back to net earnings. The shares related to a convertible security are included in diluted EPS only if EPS as otherwise calculated is greater than the interest savings, net of tax, divided by the shares issuable upon exercise or conversion of the instrument. Accordingly, the calculation of diluted EPS for these instruments is dependent on the level of net earnings. Each series of convertible securities is considered individually and in sequence, starting with the series having the lowest incremental earnings per share, to determine if its effect is dilutive or anti-dilutive.

Non-GAAP Financial Measures

We have provided in this release financial information that has not been prepared in accordance with GAAP. We use these non-GAAP financial measures internally in analyzing our financial results and believe they are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial results with other companies in our industry, many of which present similar non-GAAP financial measures to investors. 

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures below. As previously mentioned, a reconciliation of our non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included below in this press release.

We do not provide a reconciliation of full year 2018 non-GAAP financial measures to our comparable GAAP financial measures because we could not do so without unreasonable effort due to unavailability of information needed to calculate reconciling items and due to variability, complexity and limited visibility of the adjusting items that would be excluded from the non-GAAP financial measures in 2018. When planning, forecasting and analyzing 2018, we do so primarily on a non-GAAP basis without preparing a GAAP analysis as that would require estimates for items such as stock-based compensation, acquisition-related expenses, and litigation-related expenses, which are inherently difficult to predict with reasonable accuracy. Stock-based compensation expense, for example, is difficult to estimate because it depends on the company’s future hiring and retention needs, as well as the future fair market value of the company’s common stock, all of which are difficult to predict and subject to constant change. In addition, for purposes of setting annual guidance, it would be difficult to quantify stock-based compensation expense for the year with reasonable accuracy in the current quarter.

Non-GAAP gross profit and gross margin. We define non-GAAP gross profit as GAAP gross profit, adjusted to exclude stock-based compensation expense and the amortization of intangibles associated with acquisitions. We define non-GAAP gross margin as non-GAAP gross profit divided by GAAP revenue. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of non-cash charges that can fluctuate for Proofpoint, based on timing of equity award grants and the size, timing and purchase price allocation of acquisitions so that our management and investors can compare our recurring core business operating results over multiple periods. There are a number of limitations related to the use of non-GAAP gross profit and non-GAAP gross margin versus gross profit and gross margin, in each case, calculated in accordance with GAAP. For example, stock-based compensation has been and will continue to be for the foreseeable future a significant recurring expense in our business. Stock-based compensation is an important part of our employees' compensation and impacts their performance. In addition, the components of the costs that we exclude in our calculation of non-GAAP gross profit and non-GAAP gross margin may differ from the components that our peer companies exclude when they report their non-GAAP results.  Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP gross profit and non-GAAP gross margin and evaluating non-GAAP gross profit and non-GAAP gross margin together with gross profit and gross margin calculated in accordance with GAAP.

Non-GAAP operating loss. We define non-GAAP operating loss as operating loss, adjusted to exclude stock-based compensation expense and the amortization of intangibles and costs associated with acquisitions and litigation. Costs associated with acquisitions include legal, accounting, and other professional fees, as well as changes in the fair value of contingent consideration obligations. We consider this non-GAAP financial measure to be a useful metric for management and investors because they exclude the effect of stock-based compensation expense and the amortization of intangibles and costs associated with acquisitions and litigation so that our management and investors can compare our recurring core business operating results over multiple periods. There are a number of limitations related to the use of non-GAAP operating loss versus operating loss calculated in accordance with GAAP. For example, as noted above, non-GAAP operating loss excludes stock-based compensation expense. In addition, the components of the costs that we exclude in our calculation of non-GAAP operating loss may differ from the components that our peer companies exclude when they report their non-GAAP results of operations, and some of these items are cash-based. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP operating loss and evaluating non-GAAP operating loss together with operating loss calculated in accordance with GAAP.

Non-GAAP net loss. We define non-GAAP net loss as net loss, adjusted to exclude stock-based compensation expense, amortization of intangibles, costs associated with acquisitions and litigation, non-cash interest expense related to the convertible debt discount and issuance costs for the convertible debt offering, and tax effects associated with these items. We consider this non-GAAP financial measure to be a useful metric for management and investors for the same reasons that we use non-GAAP operating loss. However, in order to provide a complete picture of our recurring core business operating results, we also exclude from non-GAAP net loss the tax effects associated with stock-based compensation and the amortization of intangibles and costs associated with acquisitions and litigation, and non-cash interest expense related to the convertible debt discount and issuance costs for the convertible debt offering.

In order to provide a complete picture of our recurring core business operating results, we also compute the tax effect of the adjustments used in determining our non-GAAP results by calculating an adjusted tax provision which considers the current and deferred tax impact of the adjustments.  The adjusted tax provision reflects all of the relevant impacts of the adjustments, inclusive of those items that have an impact to the effective tax rate, current provision and deferred provision.  As a result of the varying impacts of each item, the effective tax rate for the adjusted tax provision will vary period over period as compared to the GAAP tax provision. The adjusted tax provision is then compared to the GAAP tax provision, and the difference is reflected as “income tax benefit (expense)” in the reconciliation between GAAP net loss/income and Non-GAAP net loss/income.

Billings. We define billings as revenue recognized plus the change in deferred revenue from the beginning to the end of the period, but excluding additions to deferred revenue from acquisitions. We consider billings to be a useful metric for management and investors because billings drive deferred revenue, which is an important indicator of the health and visibility of our business, and has historically represented a majority of the quarterly revenue that we recognize. There are a number of limitations related to the use of billings versus revenue calculated in accordance with GAAP. Billings include amounts that have not yet been recognized as revenue, but exclude additions to deferred revenue from acquisitions. We may also calculate billings in a manner that is different from other companies that report similar financial measures. Management compensates for these limitations by providing specific information regarding GAAP revenue and evaluating billings together with revenues calculated in accordance with GAAP.

Free cash flow. We define free cash flow as net cash provided by operating activities minus capital expenditures. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after the acquisition of property and equipment, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet. Analysis of free cash flow facilitates management's comparisons of our operating results to competitors' operating results. A limitation of using free cash flow versus the GAAP measure of net cash provided by operating activities as a means for evaluating our company is that free cash flow does not represent the total increase or decrease in the cash balance from operations for the period because it excludes cash used for capital expenditures during the period. Management compensates for this limitation by providing information about our capital expenditures on the face of the cash flow statement and in the "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" section of our quarterly and annual reports filed with the SEC.

 

Proofpoint, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
           
           
   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
   2017 2016 2017 2016 
Revenue:          
Subscription  $  131,038  $  97,163  $  360,891  $  261,878  
Hardware and services    3,274    2,621    9,000    6,813  
Total revenue    134,312    99,784    369,891    268,691  
Cost of revenue:(1)(2)          
Subscription    31,211    23,987    89,895    68,867  
Hardware and services    4,800    3,293    12,985    9,895  
Total cost of revenue    36,011    27,280    102,880    78,762  
Gross profit    98,301    72,504    267,011    189,929  
Operating expense:(1)(2)          
Research and development    32,477    24,493    94,389    70,734  
Sales and marketing    68,518    51,467    189,704    146,654  
General and administrative    13,388    8,393    36,223    41,996  
Total operating expense    114,383    84,353    320,316    259,384  
Operating loss    (16,082)   (11,849)   (53,305)   (69,455) 
Interest expense    (5,733)   (5,920)   (17,547)   (17,529) 
Other income (expense), net    829    (228)   884    (528) 
Loss before provision for income taxes    (20,986)   (17,997)   (69,968)   (87,512) 
Provision for income taxes    (977)   (370)   (3,410)   (812) 
Net loss  $  (21,963) $  (18,367) $  (73,378) $  (88,324) 
Net loss per share, basic and diluted  $  (0.49) $  (0.44) $  (1.67) $  (2.12) 
Weighted average shares outstanding, basic and diluted    44,418    42,109    43,850    41,604  
           
(1)  Includes stock-based compensation expense as follows:          
Cost of subscription revenue  $  2,876  $  2,080  $  8,115  $  5,439  
Cost of hardware and services revenue     493     375     1,401     1,120  
Research and development     7,803     6,019     22,597     17,498  
Sales and marketing     8,943     7,174     25,070     20,710  
General and administrative     5,222     4,315     15,032     12,387  
Total stock-based compensation expense  $  25,337  $  19,963  $  72,215  $  57,154  
(2)  Includes intangible amortization expense as follows:          
Cost of subscription revenue  $  3,190  $  2,223  $  9,567  $  6,458  
Research and development    15    15     45     45  
Sales and marketing    875    1,429     2,791     3,938  
Total intangible amortization expense  $  4,080  $  3,667  $  12,403  $  10,441  
           


 

Proofpoint, Inc.
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
       
   September 30, December 31, 
   2017 2016 
Assets      
Current assets:      
Cash and cash equivalents  $  416,006  $  345,426  
Short-term investments    43,620    51,325  
Accounts receivable, net    91,478    72,951  
Inventory    457    598  
Deferred product costs    1,654    1,829  
Deferred commissions    21,458    21,168  
Prepaid expenses and other current assets    14,380    17,498  
Total current assets    589,053    510,795  
Property and equipment, net    66,563    52,523  
Deferred product costs    294    310  
Goodwill    167,270    167,270  
Intangible assets, net    49,306    61,708  
Long-term deferred commissions    5,476    4,496  
Other assets    8,170    4,558  
Total assets  $886,132  $801,660  
Liabilities and Stockholders’ Equity      
Current liabilities:      
Accounts payable  $  9,646  $  15,297  
Accrued liabilities   54,548    50,765  
Capital lease obligations    34    32  
Deferred rent    511    409  
Deferred revenue    325,070    259,109  
Total current liabilities    389,809    325,612  
Convertible senior notes    381,149    366,541  
Long-term capital lease obligations    63    91  
Long-term deferred rent    3,495    2,413  
Other long-term liabilities    11,215    9,008  
Long-term deferred revenue    67,436    53,072  
Total liabilities    853,167    756,737  
Stockholders’ equity      
Common stock, $0.0001 par value; 200,000 shares authorized; 44,736 and 43,015 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively    4    4  
Additional paid-in capital    576,446    514,034  
Accumulated other comprehensive loss    -     (7) 
Accumulated deficit    (543,485)   (469,108) 
Total stockholders’ equity    32,965    44,923  
Total liabilities and stockholders’ equity   $886,132  $801,660  
       




  

Proofpoint, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
           
   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
   2017 2016 2017 2016 
Cash flows from operating activities          
Net loss  $  (21,963) $  (18,367) $  (73,378) $  (88,324) 
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation and amortization    10,139    8,092    29,286    22,713  
Loss on disposal of property and equipment    31    17    388    305  
Amortization of investment premiums, net of accretion of purchase discounts    (5)   17    5    52  
Stock-based compensation    25,337    19,963    72,215    57,154  
Change in fair value of contingent consideration    (67)   -     (1,797)   -   
Amortization of debt issuance costs and accretion of debt discount    5,603    5,248    16,491    15,516  
Foreign currency transaction (gain) loss    (573)   224    (659)   259  
Changes in assets and liabilities:          
Accounts receivable    (15,850)   (11,570)   (18,575)   (14,869) 
Inventory    40    (128)   141    55  
Deferred products costs    (169)   (31)   190    404  
Deferred commissions    (2,062)   (255)   (1,271)   366  
Prepaid expenses    (163)   (1,936)   (1,849)   (2,469) 
Other current assets    52    357    312    461  
Deferred income taxes    85    144    (2,031)   (23) 
Long-term assets    272    (3)   (3,438)   48  
Accounts payable    (540)   (3,053)   (1,914)   2,906  
Accrued liabilities    11,530    3,688    15,544    2,933  
Deferred rent    360    (91)   1,184    (103) 
Deferred revenue    32,158    24,970    80,326    55,613  
Net cash provided by operating activities    44,215    27,286    111,170    52,997  
Cash flows from investing activities          
Proceeds from sales and maturities of short-term investments    22,722    34,162    78,803    103,062  
Purchase of short-term investments    (29,736)   (27,491)   (71,096)   (81,233) 
Purchase of property and equipment    (11,889)   (9,333)   (34,756)   (25,527) 
Payment to escrow account    -     (9,645)   -     (9,645) 
Receipts from escrow account    496    -     5,116    -   
Acquisitions of business, net of cash acquired    -     (8,351)   -     (8,351) 
Net cash used in investing activities    (18,407)   (20,658)   (21,933)   (21,694) 
Cash flows from financing activities          
Proceeds from issuance of common stock    3,710    4,811    16,928    15,146  
Withholding taxes related to restricted stock net share settlement    (6,117)   (4,443)   (31,239)   (17,015) 
Repayments of equipment loans and capital lease obligations    (9)   (8)   (25)   (24) 
Holdback payments for prior acquisitions    -     -     -     (1,397) 
Contingent consideration payment    (496)   -     (5,116)   -   
Net cash (used in) provided by financing activities    (2,912)   360    (19,452)   (3,290) 
Effect of exchange rate changes on cash, cash equivalents and restricted cash    460    (66)   1,035    (36) 
Net increase in cash, cash equivalents and restricted cash    23,356    6,922    70,820    27,977  
Cash, cash equivalents and restricted cash          
Beginning of period    393,001    367,332    345,537    346,277  
End of period  $  416,357  $  374,254  $  416,357  $  374,254  
           

 

Reconciliation of Non-GAAP Measures 
(In thousands, except per share amounts) 
(Unaudited) 
            
    Three Months Ended   Nine Months Ended   
    September 30,   September 30,   
   2017 2016 2017 2016  
            
GAAP gross profit  $  98,301  $  72,504  $  267,011  $  189,929   
GAAP gross margin   73%  73%  72%  71%  
Plus:           
Stock-based compensation expense     3,369     2,455     9,516     6,559   
Intangible amortization expense     3,190     2,223     9,567     6,458   
Non-GAAP gross profit     104,860     77,182     286,094     202,946   
Non-GAAP gross margin   78%  77%  77%  76%  
            
GAAP operating loss   (16,082)  (11,849)  (53,305)  (69,455)  
Plus:           
Stock-based compensation expense     25,337     19,963     72,215     57,154   
Intangible amortization expense     4,080     3,667     12,403     10,441   
Acquisition-related expenses     (56)    464     (1,810)    586   
Litigation-related expenses     -     (1,716)    -     12,941   
Non-GAAP operating income     13,279     10,529     29,503     11,667   
            
GAAP net loss   (21,963)  (18,367)  (73,378)  (88,324)  
Plus:           
Stock-based compensation expense   25,337   19,963   72,215   57,154   
Intangible amortization expense     4,080   3,667     12,403   10,441   
Acquisition-related expenses     (56)    464     (1,810)    586   
Litigation-related expenses     -     (1,716)    -     12,941   
Interest expense - debt discount and issuance costs     5,603     5,248     16,491     15,516   
Income tax expense (1)     43     118     671     73   
Non-GAAP net income   $  13,044  $  9,377  $  26,592  $  8,387   
Add interest expense of convertible senior notes, net of tax (2)     1,060     1,060     3,180     -   
Numerator for non-GAAP EPS calculation  $  14,104  $  10,437  $  29,772  $  8,387   
Non-GAAP net income per share - diluted  $  0.25  $  0.19  $  0.54  $  0.18   
            
GAAP weighted-average shares used to compute net loss per share, diluted     44,418     42,109     43,850     41,604   
Dilutive effect of convertible senior notes (2)     7,938     7,989     7,938     -    
Dilutive effect of employee equity incentive plan awards (3)     3,082     3,977     3,355     3,820   
Non-GAAP weighted-average shares used to compute net income per share, diluted     55,438     54,075     55,143     45,424   
            
(1) Due to the full valuation allowance on the Company's U.S. deferred tax assets, there were no tax effects associated with the non-GAAP adjustments for stock-based compensation expense, costs associated with acquisitions and litigations, and non-cash interest expense related to the debt discount and issuance costs for the convertible debt offerings. Only GAAP deferred tax expenses or benefits related to the amortization of intangibles were excluded from the non-GAAP income tax expense.

 
(2) The Company uses the if-converted method to compute diluted earnings per share with respect to its convertible senior notes. There was no add-back of interest expense or additional dilutive shares related to the convertible senior notes where the effect was anti-dilutive.

 
(3) The Company uses the treasury method to compute the dilutive effect of employee equity incentive plan awards. 
  
            
Reconciliation of Total Revenue to Billings 
(In thousands) 
(Unaudited) 
            
    Three Months Ended   Nine Months Ended   
    September 30,   September 30,   
   2017 2016 2017 2016  
            
Total revenue  $  134,312  $  99,784  $  369,891  $  268,691   
            
Deferred revenue           
Ending     392,506     280,539     392,506     280,539   
Beginning     360,349     254,370     312,181     223,726   
Net Change     32,157     26,169     80,325     56,813   
Less:           
Deferred revenue contributed by acquisitions     -      (1,200)    -      (1,200)  
Billings  $  166,469  $  124,753  $  450,216  $  324,304   
            

 

           
Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows
(In thousands)
(Unaudited)
           
    Three Months Ended   Nine Months Ended  
    September 30,   September 30,  
   2017 2016 2017 2016 
           
GAAP cash flows provided by operating activities  $  44,215  $  27,286  $  111,170  $  52,997  
Less:          
Purchases of property and equipment     (11,889)    (9,333)    (34,756)    (25,527) 
Non-GAAP free cash flows  $  32,326  $  17,953  $  76,414  $  27,470  
           

 

Revenue by Solution 
(In thousands) 
(Unaudited) 
              
   Three Months Ended  
  September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016 June 30, 2016 
              
Protection and Advanced Threat $  101,434 $  90,376 $  84,480 $  78,698 $  72,664 $  64,797 
Archiving, Privacy and Governance    32,878    31,953    28,770    28,107    27,120    25,107 
Total revenue $  134,312 $  122,329 $  113,250 $  106,805 $  99,784 $  89,904 
              

 

      
Reconciliation of Non-GAAP Measures to Guidance 
(In millions, except per share amount) 
(Unaudited) 
      
   Three Months Ending   Year Ending  
   December 31,   December 31,  
  2017  2017  
      
Total revenue $138 - $140 $508 - $510 
      
GAAP gross profit 99.7 - 101.4 363.8 - 365.6 
GAAP gross margin 72% 72% 
Plus:     
Stock-based compensation expense 4.1 - 3.9 14.6 - 14.3 
Intangible amortization expense 3.2 12.8 
Non-GAAP gross profit 107.0 - 108.5 391.2 - 392.7 
Non-GAAP gross margin 77.5% 77% 
      
GAAP net loss $(28.6) - $(25.5) $(102.0) - $(98.9) 
Plus:     
Stock-based compensation expense 28.5 - 26.6 100.7- 98.8 
Intangible amortization expense 4.0 16.4 
Acquisition-related expenses - (1.7) - (1.8) 
Interest expense - debt discount and issuance costs 5.6 - 5.5 22.2 - 22.1 
Income tax expense (0.0) - (0.1) 0.5 
Non-GAAP net income $9.5 - $10.5 $36.1 - $37.1 
Add interest expense of convertible senior notes, net of tax (if dilutive) 1.1 4.2 
Numerator for non-GAAP EPS calculation $10.6 - $11.6 $40.3 - $41.3 
Non-GAAP net income per share - diluted $0.19 - $0.21 $0.73 - $0.75 
Non-GAAP weighted-average shares used to compute net income per share, diluted 55.7 55.4 
      
      
   Three Months Ending   Year Ending  
   December 31,   December 31,  
  2017  2017  
      
GAAP cash flows provided by operating activities  $38.0 - $40.0   $149.3 - $151.3  
Less:     
Purchases of property and equipment (13.0) (47.8) 
Non-GAAP free cash flows  $25.0 - $27.0   $101.5 - $103.5  
      


Media Contact
Kristy Campbell
Proofpoint, Inc.
408-517-4710
[email protected]

Investor Contacts
Jason Starr                                                                        
Proofpoint, Inc.
408-585-4351
[email protected]

Seth Potter
ICR for Proofpoint, Inc.
646-277-1230
[email protected] 

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