January 29, 2015

Fourth Quarter Highlights

  • Record total revenue of $56.2 million, up 38% year-over-year
  • Record billings of $74.9 million, up 53% year-over-year
  • Generated positive adjusted EBITDA for the third consecutive quarter
  • GAAP EPS loss of $0.45; Non-GAAP EPS loss of $0.09
  • Generated record operating cash flow of $15.5 million and free cash flow of $10.9 million
  • Increasing FY15 revenue and billings guidance

SUNNYVALE, Calif., – January 29, 2015 – Proofpoint, Inc. (NASDAQ: PFPT), a leading next-generation security and compliance company, today announced financial results for the fourth quarter and full year ended December 31, 2014.

“The fourth quarter marked a strong finish to the year, driven by continued broad-based demand for our advanced threat protection solutions.  During 2014, we successfully executed our growth strategy and extended our leadership position, as evidenced by the ongoing robust add-on and renewal activity and our increased penetration of the Fortune 1000,” stated Gary Steele, chief executive officer of Proofpoint.  “We entered 2015 with strong momentum and are well positioned to grow market share globally due to our commitment to innovation and ability to leverage our threat analytic capabilities and big data infrastructure.”

Fourth Quarter 2014 Financial Highlights

  • Revenue: Total revenue for the fourth quarter of 2014 was $56.2 million, an increase of 38% compared to $40.8 million in the prior-year period.  Within total revenue, subscription revenue was $52.8 million, an increase of 34% on a year-over-year basis.  Hardware and services revenue contributed the remaining $3.4 million of total revenue.
  • Billings: Total billings were $74.9 million for the fourth quarter of 2014, an increase of 53% compared to $48.9 million in the fourth quarter of 2013.  The company defines billings, a non-GAAP financial measure, as revenue recognized during the period plus the change in deferred revenue from the beginning to the end of the period.
  • Gross Profit: GAAP gross profit for the fourth quarter was $36.8 million compared to $28.2 million for the fourth quarter of 2013.  Non-GAAP gross profit for the quarter was $38.9 million compared to $29.5 million in the year ago period.  GAAP gross margin for the fourth quarter of 2014 was 65% compared to 69% for the fourth quarter of 2013. Non-GAAP gross margin was 69% for the fourth quarter of 2014, compared to 72% for the same period last year.  During the fourth quarter of 2014, gross margin was impacted by a one-time increase in hardware purchases associated with the legacy Sendmail MTA platform, which carry a lower margin than our subscription products.
  • Operating Loss: GAAP operating loss for the fourth quarter was $14.4 million compared to a loss of $11.0 million during the fourth quarter last year.  Non-GAAP operating loss for the fourth quarter of 2014 was $2.0 million compared to $2.1 million for the same period last year.
  • Net Loss: GAAP net loss for the fourth quarter was $17.4 million or $0.45 per share based on 38.3 million weighted average shares outstanding.  This compares to a GAAP net loss of $11.9 million or $0.33 per share based on 36.0 million weighted average shares outstanding in the prior-year period. 

Non-GAAP net loss for the fourth quarter of 2014 was $3.6 million or $0.09 per share based on 38.3 million weighted average shares outstanding.  This compares to a loss of $2.5 million or $0.07 per share based on 36.0 million weighted average shares outstanding during the same period last year.

  • Adjusted EBITDA: Adjusted EBITDA for the fourth quarter of 2014 was a positive $0.5 million compared to negative $0.4 million for the fourth quarter of 2013.
  • Cash and Cash Flow: As of December 31, 2014, Proofpoint had cash, cash equivalents and short term investments of $215.0 million, a decrease of $17.8 million from the end of the prior quarter primarily due to the cash disbursement associated with the purchase of Nexgate.  
    The company generated $15.5 million in net cash from operations for the fourth quarter of 2014 compared to generating $5.3 million during the fourth quarter of 2013. The company generated $10.9 million in free cash flow for the quarter compared to $2.2 million during the same period last year.

“We were very pleased with our execution during the fourth quarter, highlighted by record billings, revenue and free cash flow,” stated Paul Auvil, chief financial officer of Proofpoint.  “The combination of an improving competitive environment, world-class renewals rates and our ability to consistently generate cash, positions Proofpoint to continue to gain market share globally.”

Full Year 2014 Financial Highlights

  • Revenue: Total revenue for the full year of 2014 was $195.6 million, an increase of 42%, compared to $137.9 million in the prior-year period.  Within total revenue, subscription revenue was $187.5 million, an increase of 42% on a year-over-year basis.  Hardware and services revenue contributed the remaining $8.1 million of total revenue. 
  • Billings: Billings were $233.7 million for the full year of 2014, an increase of 46% compared to the full year of 2013. 
  • Gross Profit: GAAP gross profit for the full year of 2014 was $129.9 million compared to $96.4 million for 2013.  Non-GAAP gross profit for the year was $137.1 million compared to $99.8 million for 2013.  GAAP gross margin for the full year of 2014 was 66% compared to 70% for 2013. Non-GAAP gross margin was 70% for the full year of 2014, compared to 72% for 2013.
  • Operating Loss: GAAP operating loss for the full year of 2014 was $51.1 million compared to a loss of $29.5 million during 2013.  Non-GAAP operating loss for the full year of 2014 was $9.5 million, compared to a loss of $10.2 million during 2013.
  • Net Loss: GAAP net loss for the full year of 2014 was $64.2 million or $1.72 per share based on 37.4 million weighted average shares outstanding.  This compares to a GAAP net loss of $27.5 million or $0.79 per share based on 34.9 million weighted average shares outstanding in the prior-year period. 
    Non-GAAP net loss for the full year of 2014 was $15.0 million or $0.40 per share based on 37.4 million weighted average shares outstanding.  This compares to a loss of $11.3 million or $0.32 per share based on 34.9 million weighted average shares outstanding for 2013.
  • Adjusted EBITDA: Adjusted EBITDA for the full year of 2014 was negative $0.5 million compared to negative $4.3 million for the full year of 2013. 
  • Cash Flow: The company generated $21.3 million in net cash from operations for the full year of 2014 compared to generating $12.6 million during 2013.  The company generated $6.3 million in free cash flow for the full year of 2014 compared to $5.0 million during 2013.

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.”

Fourth Quarter and Recent Business Highlights:

  • Announced entering into a definitive agreement to acquire Nexgate, a pioneer in security and compliance solutions for social media communication channels.
  • Announced that LinkedIn has selected Proofpoint’s Nexgate social media security and compliance solutions for inclusion in the LinkedIn Certified Compliance Partner Program.
  • Positioned in the Leaders quadrant of Gartner’s 2014 Magic Quadrant for Enterprise Information Archiving for the third consecutive year.
  • Ranked Number 410 on Deloitte’s 2014 Technology Fast 500TM, a ranking of the 500 fastest growing technology, media, telecommunications, life sciences, and clean technology companies in North America.
  • Proofpoint Enterprise Governance recognized for excellence with 2014 Third-Party Reader's Choice Award from Redmond Magazine.
  • Launched the first Social Media Security Council (SMSC) to help organizations better protect their corporate social infrastructure.

Financial Outlook

As of January 29, 2015 Proofpoint is providing guidance for its first quarter and full year 2015 as follows:

  • First Quarter 2015 Guidance: Total revenue is expected to be in the range of $56.0 million to $57.0 million.  Billings are expected to be in the range of $61.0 million to $63.0 million.  Adjusted EBITDA is expected to be in the range of breakeven to $0.5 million.  Non-GAAP EPS loss is expected to be in the range of $0.09 to $0.08 based on approximately 38.9 million weighted average shares outstanding.  Free cash flow is expected to be in the range of positive $2.0 million to $4.0 million.
  • Full Year 2015 Guidance: Total revenue is expected to be in the range of $245.0 million to $247.0 million.  Billings is expected to be in the range of $288.0 million to $292.0 million.  Adjusted EBITDA is expected to be in the range of $1.0 million to $2.0 million.  Non-GAAP EPS loss is expected to be in the range of $0.38 to $0.36 based on approximately 40.0 million weighted average shares outstanding.  Free cash flow, defined as operating cash flow less capital expenditures, is expected to be in the range of positive $20.0 million to $25.0 million, which assumes capital expenditures of $18.0 million to $20.0 million for the full year.

Qurterly 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 fourth quarter and full year ended December 31, 2014.  To access this call, dial 888-263-2736 for the U.S. and Canada or 913-312-6668 for international callers with conference ID #6818257.  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 February 12, 2015, by dialing 877-870-5176 for the U.S. and Canada or 858-384-5517 for international callers and entering passcode #6818257.

About Proofpoint, Inc.

Proofpoint, Inc. (NASDAQ:PFPT) is a leading security-as-a-service provider that focuses on cloud-based solutions for threat protection, compliance, archiving & governance, and secure communications. Organizations around the world depend on Proofpoint’s expertise, patented technologies, and on-demand delivery system to protect against phishing, malware and spam, safeguard privacy, encrypt sensitive information, and archive and govern messages and critical enterprise information. 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, future growth, market share 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; 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 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 quarter ended September 30, 2014, 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.

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.

Non-GAAP gross profit and gross margin. We define non-GAAP gross profit as GAAP gross profit, less 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 stock-based compensation expense and the amortization of intangibles associated with 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. Non-GAAP gross profit and non-GAAP gross margin exclude stock-based compensation expense. 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 less stock-based compensation expense and the amortization of intangibles and costs associated with acquisitions and litigation. 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, non-GAAP operating loss excludes stock-based compensation expense. 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 operating loss may differ from the components that our peer companies exclude when they report their non-GAAP results of operations. 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 less stock-based compensation expense and the amortization of intangibles and costs associated with acquisitions and litigation, and non-cash interest expense related to the convertible debt discount and non-recurring issuance costs for the convertible debt offering. 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 non-recurring issuance costs for the convertible debt offering. We used a 3 percent effective tax rate to calculate non-GAAP net loss for the fourth quarter of 2014 and 9 percent for the fourth quarter of 2013. We believe that a 6-10% effective tax rate range is a reasonable estimate of the near-term normalized tax rate under our current global operating structure. The same limitations described above regarding our use of non-GAAP operating loss also apply to our use of non-GAAP net loss.

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 excluding 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.

Adjusted EBITDA. We define adjusted EBITDA as net loss, adjusted to exclude: depreciation, amortization of intangibles, interest income (expense), net, provision for income taxes, stock-based compensation, acquisition- and litigation-related expense, other income, and other expense. We believe that the use of adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We use adjusted EBITDA in conjunction with traditional GAAP operating performance measures as part of our overall assessment of our performance, for planning purposes, including the preparation of our annual operating budget, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance. We do not place undue reliance on adjusted EBITDA as our only measure of operating performance. Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using this non-GAAP financial measure, including that other companies may calculate this measure differently than we do, that it does not reflect our capital expenditures or future requirements for capital expenditures and that it does not reflect changes in, or cash requirements for, our working capital.

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.

MEDIA CONTACT:
Orlando DeBruce
Proofpoint, Inc.
408-338-6870
odebruce@proofpoint.com

INVESTOR CONTACT:
Seth Potter
ICR, Inc. for Proofpoint, Inc.
646-277-1230
seth.potter@icrinc.com