Shares of Proofpoint (PFPT) are on firmer ground this year thanks to investor optimism about some of the cybersecurity vendor’s newer product offerings. Proofpoint stock fell 5% in 2018, dragged down in part by concerns about slowing growth in the company’s core email security business. So far this year, the stock is rallying 44%.
Long-term shareholders of Proofpoint had their patience tested last year, as the stock hit a new 52-week low of $75.92 in late October, falling 41% from the all-time high of $130.27 reached in May 2018.
But a strong fourth-quarter earnings report in late January (both revenue and earnings easily beat the consensus estimates) resulted in a one-day rally of 12.4% in the share price and helped improve overall investor sentiment. In the middle of March, the stock rebounded to an intraday high of $125.68.
As it turns out, all of that worrying about Proofpoint’s growth profile was overdone. The company’s email security business is still experiencing solid demand.
Cybercriminals continue to use email as a top attack vector because they know humans are often the weakest link in an organization when it comes to security. In email fraud attacks, frequently delivered via spoofed email addresses or fraudulently registered domains, attackers count on users to click on dangerous links or attachments.
Proofpoint has a portfolio of 17 cloud-based security solutions, operating in a total addressable market (TAM) of $12 billion. The company’s newer products, which expanded the TAM by an estimated $5 billion, are now starting to really help move the needle. In the December quarter, the emerging offerings accounted for more than 30% of all new and add-on business, signaling growing acceptance across the customer base.
Email Fraud Defense (EFD) is one of the newer solutions that has been seeing strong demand. EFD gets included in many of Proofpoint’s largest enterprise deals. Email fraud, such as domain spoofing and lookalike domain spoofing, costs organizations billions of dollars a year, while phishing attacks are at record levels. EFD blocks fraudulent emails before they reach employees, partners and customers. Users are able to view all inbound imposter threats from a single portal.
Threat Response—a security orchestration, automation and response (SOAR) solution—is another emerging product with strong underlying momentum. The solution handles several key parts of the incident response process. First, it collects lots of information (ranging from security alerts to endpoint forensics data), then automates workflows and response actions based on all of the data it ingests. Auto-generated reports even measure the overall effectiveness of the security response.
With more software moving to the cloud all the time, Proofpoint’s Cloud App Security Broker (CASB) offering is gaining traction. The solution helps protect various cloud applications (including Office 365, G Suite and Box), providing granular visibility and better controls. Proofpoint CASB offers insights into cloud usage at the global, app and user level. It checks for suspicious log-ins and activity in the cloud, while identifying important SaaS files at risk.
Last year, Proofpoint paid $225 million to acquire Wombat, a provider of phishing simulation and security awareness computer-based training. Wombat operates in a TAM that’s expected to reach $1 billion in 2021, estimates Gartner.
With the addition of Wombat, Proofpoint customers are able to use actual detected phishing attacks for training simulations. Wombat also enables quick responses to user-reported phishing incidents, leveraging orchestration and automation to find real attacks, quarantine emails in users’ inboxes and lock down compromised accounts.
On the Q4 earnings call, management talked up the strong growth prospects for Wombat, which was included in a number of large deals in the latest quarter. Proofpoint CEO Gary Steele, citing “great demand within the installed base,” named Wombat the product he’s most excited about for 2019.
Management on the Q4 call also talked about how it handled some recent sales productivity challenges related to the ramping of new reps. In Q4, Proofpoint saw improved sales productivity from recent hires. Steele mentioned a “completely reimagined and revamped focus” on how new reps first engage with customers and potential customers. An improved training program, better mentoring and reduced sales friction via solution bundles are all working to boost sales force productivity.
Proofpoint ended 2018 on a high note, and the company looks to be well positioned for the year ahead. Revenue in Q4 rose 35% to $198.5 million, including about $3 million pulled in early from Q1 of 2019. Even though that business got shifted into Q4, the company was still able to offer Q1 top-line guidance that was above the consensus estimate at the midpoint.
It’s notable that Q4 billings of $269.9 million easily beat the high end of the guidance range, rising an impressive 43%, acceleration from growth of 33% in the previous quarter.
Proofpoint continues to expand its presence at larger organizations. The company’s enterprise customer base now totals 6,100, up 25% organically year over year. About 53% of the Fortune 1000 are customers.
In 2018, the enterprise edition of Proofpoint’s Targeted Attack Protection (TAP) offering, for dealing with advanced attacks such as ransomware, boosted its customer base by 30% to 3,900. The penetration rate for TAP across the enterprise customer base stands at 64%.
For 2019, Proofpoint should be able to generate greater add-on sales, as large customers sign up for more of the company’s offerings. Proofpoint now counts 2,900 customers with three or more products, up 45% from the year-ago level.
Proofpoint’s 2019 revenue guidance range of $870 million to $874 million represents growth of 21.6% at the midpoint. At the recent market cap of $6.7 billion, the forward revenue multiple (using the 2019 consensus estimate of $873.2 million) is 7.6. On the 2020 consensus revenue estimate of $1.06 billion (representing growth of 21%), the forward revenue multiple stands at 6.3.
