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Proofpoint Announces Fourth Quarter and Full Year 2017 Financial Results

Fourth Quarter Highlights 

  • Total revenue of $145.4 million, up 36% year-over-year
  • Billings of $188.6 million, up 36% year-over-year
  • GAAP EPS of $(0.24) per share, Non-GAAP EPS of $0.29 per share
  • Generated operating cash flow of $42.5 million and free cash flow of $30.3 million
  • Increasing FY18 billings, revenue and profitability guidance

SUNNYVALE, Calif., Feb. 06, 2018 (GLOBE NEWSWIRE) -- 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, 2017.

“We were very pleased with our fourth quarter results, which marked a strong end to the year.  During 2017, we successfully executed our growth strategy and extended our leadership position, as evidenced by the ongoing robust add-on and renewal activity and increased penetration of the Fortune 1000,” stated Gary Steele, chief executive officer of Proofpoint.  “We entered 2018 with strong momentum and are well-positioned to benefit from enterprise cloud migration as well as our unique visibility and insight into the threat landscape.”

Fourth Quarter 2017 Financial Highlights

  • Revenue: Total revenue for the fourth quarter of 2017 was $145.4 million, an increase of 36%, compared to $106.8 million for the fourth quarter of 2016.  This included approximately $3.0 million in revenue related to the Cloudmark and Weblife acquisitions, and excluding this impact, annual growth represented 33%.

  • Billings: Total billings were $188.6 million for the fourth quarter of 2017, which excluded the $16.1 million in deferred revenue related to the Cloudmark and Weblife acquisitions, and represented an increase of 36%, compared to $138.4 million for the fourth quarter of 2016.  

  • Gross Profit: GAAP gross profit for the fourth quarter of 2017 was $104.9 million compared to $77.0 million for the fourth quarter of 2016.  Non-GAAP gross profit for the fourth quarter of 2017 was $112.9 million compared to $82.3 million for the fourth quarter of 2016.  GAAP gross margin for the fourth quarter of 2017 was 72%, consistent with the fourth quarter of 2016.  Non-GAAP gross margin was 78% for the fourth quarter of 2017 compared to 77% for the fourth quarter of 2016.   

  • Operating Income (Loss): GAAP operating loss for the fourth quarter of 2017 was $(16.2) million compared to a loss of $(16.1) million for the fourth quarter of 2016.  Non-GAAP operating income for the fourth quarter of 2017 was $16.6 million compared to $9.9 million for the fourth quarter of 2016. 

  • Net Income (Loss): GAAP net loss for the fourth quarter of 2017 was $(11.0) million, or $(0.24) per share, based on 45.4 million weighted average shares outstanding.  This compares to a GAAP net loss of $(22.9) million, or $(0.54) per share, based on 42.6 million weighted average shares outstanding for the fourth quarter of 2016.  GAAP net loss for the fourth quarter of 2017 included a tax benefit of $13.4 million.

    Non-GAAP net income for the fourth quarter of 2017 was $15.5 million, or $0.29 per share, based on 55.8 million weighted average diluted shares outstanding.  This compares to a non-GAAP net income of $8.5 million, or $0.18 per share, based on 54.4 million weighted average diluted shares outstanding for the fourth quarter of 2016.  Non-GAAP earnings per share for the fourth quarter of 2017 included the shares associated with the company’s convertible notes, and cash interest expense (net of tax) of $1.0 million was added back to net income as the “If-Converted” threshold during the period was achieved. 
  • Cash and Cash Flow: As of December 31, 2017, Proofpoint had cash, cash equivalents, and short term investments of $331.6 million.  The company generated $42.5 million in net cash from operations for the fourth quarter of 2017 compared to $41.2 million during the fourth quarter of 2016.  The company’s free cash flow for the quarter was $30.3 million compared to $32.4 million for the fourth quarter of 2016.  Free cash flow during the fourth quarter of 2017 included a one-time tax payment of approximately $3.6 million related to the decision to transfer the intellectual property related to the FireLayers acquisition from Israel to the United States. 

“We were very pleased with our fourth quarter results, which capped off another strong year for Proofpoint,” stated Paul Auvil, chief financial officer of Proofpoint.  “During 2017, we delivered billings growth of 38%, revenue growth of 37%, and increased our free cash flow margin to approximately 21%, all of which represented significant progress toward our 2020 targets.”

Full Year 2017 Financial Highlights

  • Revenue: Total revenue for the full year of 2017 was $515.3 million, an increase of 37% compared to $375.5 million in 2016.

  • Billings: Total billings for the full year of 2017 were $638.8 million, an increase of 38% compared to $462.8 million in 2016. 

  • Gross Profit: GAAP gross profit for the full year of 2017 was $371.9 million compared to $266.9 million for 2016.  Non-GAAP gross profit for the full year of 2017 was $399.0 million compared to $285.2 million for 2016.  GAAP gross margin for the full year of 2017 was 72% compared to 71% for 2016.  Non-GAAP gross margin was 77% for the full year of 2017 compared to 76% for 2016.   
  • Operating Income (Loss): GAAP operating loss for the full year of 2017 was $(69.5) million compared to a loss of $(85.6) million for 2016.  Non-GAAP operating income for the full year of 2017 was $46.1 million compared to $21.6 million for 2016. 
  • Net Income (Loss): GAAP net loss for the full year of 2017 was $(84.3) million, or $(1.91) per share, based on 44.3 million weighted average shares outstanding.  This compares to a GAAP net loss of $(111.2) million, or $(2.66) per share, based on 41.9 million weighted average shares outstanding for 2016.  

    Non-GAAP net income for the full year of 2017 was $42.1 million, or $0.83 per share, based on 55.4 million weighted average diluted shares outstanding.  This compares to a non-GAAP net income of $16.9 million, or $0.37 per share, based on 45.8 million weighted average diluted shares outstanding for 2016.  Non-GAAP earnings per share for the full year of 2017 included the shares associated with the company’s convertible notes, and cash interest expense (net of tax) of $4.1 million was added back to net income as the “If-Converted” threshold during the period was achieved.  
  • Cash Flow: The company generated $153.7 million in net cash from operations for the full year of 2017 compared to $94.2 million during 2016.  The company generated free cash flow of $106.7 million for the full year of 2017 compared to $59.8 million during 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.”

Fourth Quarter and Recent Business Highlights:

  • Closed the acquisition of Cloudmark, a leader in messaging security and threat intelligence for Internet Service Providers and mobile carriers worldwide, enabling Proofpoint to better protect customers from today’s rapidly evolving threats.

  • Closed the acquisition of Weblife, a leader in browser isolation solutions, which will allow Proofpoint customers to extend their protection to web-based personal email accounts, while preserving the privacy of their users.

  • Positioned in the Leaders quadrant of Gartner’s 2017 Magic Quadrant for Enterprise Information Archiving for the sixth consecutive year.

  • Redeemed all outstanding 1.25% Senior Convertible Notes due 2018, which resulted in the issuance of 5.1 million shares of common stock pursuant to conversion elections delivered by noteholders prior to the redemption date. 

Financial Outlook
As of February 6, 2018, Proofpoint is providing guidance for its first quarter and increasing full year 2018 guidance as follows:

  • First Quarter 2018 Guidance: Total revenue is expected to be in the range of $149.0 million to $151.0 million.  Billings are expected to be in the range of $180.0 million to $182.0 million.  GAAP gross margin is expected to be 70%.  Non-GAAP gross margin is expected to be 76%.  GAAP net loss is expected to be in the range of $(33.9) million to $(31.0) million, or $(0.67) to $(0.61) per share, based on approximately 50.5 million weighted average diluted shares outstanding.  Non-GAAP net income is expected to be in the range of $8.0 to $9.0 million, or $0.15 to $0.17 per share, using 56.1 million weighted average diluted shares outstanding, and adding back the $0.4 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 $22.0 million to $24.0 million, which assumes capital expenditures of approximately $10.0 million. 

  • Full Year 2018 Guidance: Total revenue is expected to be in the range of $660.0 million to $665.0 million.  Billings are expected to be in the range of $828.0 million to $833.0 million. GAAP gross margin is expected to be 71%.  Non-GAAP gross margin is expected to be 77%.  GAAP net loss is expected to be in the range of $(117.6) million to $(111.1) million, or $(2.31) to $(2.18) per share, based on approximately 50.9 million weighted average diluted shares outstanding.  Non-GAAP net income is expected to be in the range of $52.0 million to $56.0 million, or $0.95 to $1.02 per share, using 56.6 million weighted average diluted shares outstanding, and adding back the $1.7 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 $138.0 million to $140.0 million, which assumes capital expenditures of approximately $45.0 million for the full year.   

    Given the company’s adoption of ASC 606 effective January 1, 2018, the following financial table summarizes the company’s previous full year 2018 guidance to show the impact from this new accounting standard compared to the historical standard, and also the expected 2018 contribution from the Cloudmark acquisition.  
                                         
2018 Guidance Comparison (in millions)
                                         
    Guidance 10/19/17       Cloudmark Contribution   10/19/17 Guidance updated
for Cloudmark
       606
Impact
  10/19/17 Guidance updated for
Cloudmark & 606
      2/6/18 Guidance -
compliant with 606
  Change in midpoint
Billings   $798 - $802       $20 - $25   $818 - $827       $0   $818 - $827       $828 - $833   + $8
Revenue   $644 - $648       $20 - $25   $664 - $673       ($10)   $654 - $663       $660 - $665   + $4
Non GAAP Net Income $50 - $54       $0   $50 - $54       $0   $50 - $54       $52 - $56   + $2
FCF   $135       $0   $135       $0   $135       $138 - $140   + $4
                                         
Capex Assumptions   $45       $0   $45       $0   $45       $45   $0
Income Tax   $2 - $3       $0   $2 - $3       $0   $2 - $3       $2 - $3   $0
                                         

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 fourth quarter and full year ended December 31, 2017.  To access this call, dial (888) 394-8218 for the U.S. or Canada, or (323) 794-2149 for international callers, with conference ID #7316893.  A live webcast, and an archived recording of the conference call will be accessible from the Investors section of Proofpoint’s website at investors.proofpoint.com.  An audio replay of this conference call will also be available through February 20, 2018, by dialing (844) 512-2921 for the U.S. or Canada or (412) 317-6671 for international callers, and entering passcode #7316893.

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 September 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.

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, loss on conversion of convertible debt, 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, non-cash interest expense related to the convertible debt discount and issuance costs for the convertible debt offering, and loss on conversion of convertible debt.

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
December 31,
  Twelve Months Ended
December 31,
 
          2017       2016       2017       2016    
Revenue:                      
Subscription       $   142,366     $   104,082     $   503,257     $   365,960    
Hardware and services          3,032        2,723        12,032        9,536    
Total revenue          145,398        106,805        515,289        375,496    
Cost of revenue:(1)(2)                      
Subscription          35,937        25,849        125,832        94,716    
Hardware and services          4,561        3,982        17,546        13,877    
Total cost of revenue          40,498        29,831        143,378        108,593    
Gross profit          104,900        76,974        371,911        266,903    
Operating expense:(1)(2)                      
Research and development          35,414        27,772        129,803        98,506    
Sales and marketing          69,133        54,550        258,837        201,204    
General and administrative          16,512        10,778        52,735        52,774    
Total operating expense          121,059        93,100        441,375        352,484    
Operating loss          (16,159 )      (16,126 )      (69,464 )      (85,581 )  
Interest expense          (8,050 )      (6,009 )      (25,597 )      (23,538 )  
Other (expense) income, net          (110 )      (575 )      774        (1,103 )  
Loss before income taxes          (24,319 )      (22,710 )      (94,287 )      (110,222 )  
Benefit from (provision for) income taxes          13,360        (174 )      9,950        (986 )  
Net loss       $   (10,959 )   $   (22,884 )   $   (84,337 )   $   (111,208 )  
Net loss per share, basic and diluted       $   (0.24 )   $   (0.54 )   $   (1.91 )   $   (2.66 )  
Weighted average shares outstanding, basic and diluted          45,424        42,616        44,258        41,859    
                       
(1)  Includes stock‑based compensation expense as follows:                      
Cost of subscription revenue       $   2,520     $   1,988     $   10,635     $   7,427    
Cost of hardware and services revenue           492         374         1,893         1,494    
Research and development           7,991         6,844         30,588         24,342    
Sales and marketing           8,892         7,897         33,962         28,607    
General and administrative           5,350         4,439         20,382         16,826    
   Total stock-based compensation expense       $   25,245     $   21,542     $   97,460     $   78,696    
(2)  Includes intangible amortization expense as follows:                      
Cost of subscription revenue       $   4,945     $   2,965     $   14,512     $   9,423    
Research and development          15        15         60         60    
Sales and marketing          1,143        1,000         3,934         4,938    
   Total intangible amortization expense       $   6,103     $   3,980     $   18,506     $   14,421    
                       

 

   
Proofpoint, Inc.  
Consolidated Balance Sheets  
(In thousands, except per share amounts)  
(Unaudited)  
         
  December 31,   December 31,  
    2017       2016    
Assets        
Current assets:        
Cash and cash equivalents  286,072     345,426    
Short-term investments    45,526        51,325    
Accounts receivable, net    109,325        72,951    
Inventory    730        598    
Deferred product costs    1,541        1,829    
Deferred commissions    27,144        21,168    
Prepaid expenses and other current assets    18,669        17,498    
Total current assets    489,007        510,795    
Property and equipment, net    73,617        52,523    
Deferred product costs    259        310    
Goodwill    297,704        167,270    
Intangible assets, net    95,602        61,708    
Long-term deferred commissions    5,811        4,496    
Other assets    12,813        4,558    
Total assets $   974,813     $   801,660    
Liabilities and Stockholders’ Equity        
Current liabilities:        
Accounts payable $   12,271     $   15,297    
Accrued liabilities    63,926        50,765    
Capital lease obligations    34        32    
Deferred rent    586        409    
Deferred revenue    381,915        259,109    
Total current liabilities    458,732        325,612    
Convertible senior notes    197,858        366,541    
Long-term capital lease obligations    55        91    
Long-term deferred rent    4,102        2,413    
Other long-term liabilities    11,069        9,008    
Long-term deferred revenue    69,873        53,072    
Total liabilities    741,689        756,737    
Stockholders’ equity        
Common stock, $0.0001 par value; 200,000 shares authorized; 50,325 and 43,015 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively    5        4    
Additional paid-in capital    787,572        514,034    
Accumulated other comprehensive loss    (9 )      (7 )  
Accumulated deficit    (554,444 )      (469,108 )  
Total stockholders’ equity    233,124        44,923    
Total liabilities and stockholders’ equity  $   974,813     $   801,660    
         

 

 
Proofpoint, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
               
  Three Months Ended
December 31,
  Twelve Months Ended
December 31,
    2017       2016       2017       2016  
Cash flows from operating activities              
Net loss $   (10,959 )   $   (22,884 )   $   (84,337 )   $   (111,208 )
Adjustments to reconcile net loss to net cash provided by operating activities:              
Depreciation and amortization    12,812        8,839        42,098        31,552  
Stock‑based compensation    25,245        21,542        97,460        78,696  
Change in fair value of contingent consideration    264        (669 )      (1,533 )      (669 )
Amortization of debt issuance costs and accretion of debt discount    5,353        5,326        21,789        20,842  
Amortization of deferred commissions    9,923        8,886        36,865        33,147  
Loss on conversion of convertible notes    2,641        -         2,696        -   
Deferred income taxes    (14,122 )      8        (15,953 )      119  
Other    118        688        (348 )      1,170  
Changes in assets and liabilities:              
Accounts receivable    (14,963 )      (3,868 )      (33,538 )      (18,737 )
Inventory    (273 )      (168 )      (132 )      (113 )
Deferred products costs    148        (2 )      338        402  
Deferred commissions    (15,944 )      (12,114 )      (44,157 )      (36,009 )
Prepaid expenses    186        (191 )      (1,663 )      (2,660 )
Other current assets    (451 )      (1,933 )      (139 )      (1,472 )
Long-term assets    9        911        (3,429 )      959  
Accounts payable    266        1,365        (1,648 )      4,271  
Accrued liabilities    (1,601 )      3,465        13,943        6,398  
Deferred rent    683        395        1,867        292  
Deferred revenue    43,181        31,642        123,507        87,255  
Net cash provided by operating activities    42,516        41,238        153,686        94,235  
Cash flows from investing activities              
Proceeds from maturities of short-term investments    23,753        20,343        102,556        123,405  
Purchase of short-term investments    (25,645 )      (33,453 )      (96,741 )      (114,686 )
Purchase of property and equipment    (12,202 )      (8,880 )      (46,958 )      (34,407 )
Payment to escrow account    -         -         -         (9,645 )
Receipts from escrow account    950        260        6,066        260  
Acquisitions of business, net of cash acquired    (155,350 )      (45,768 )      (155,350 )      (54,119 )
Net cash used in investing activities    (168,494 )      (67,498 )      (190,427 )      (89,192 )
Cash flows from financing activities              
Proceeds from issuance of common stock    8,797        6,633        25,725        21,779  
Withholding taxes related to restricted stock net share settlement    (11,584 )      (8,573 )      (42,823 )      (25,588 )
Repayments of equipment loans and capital lease obligations    (9 )      (8 )      (34 )      (32 )
Repayment of convertible notes    (14 )      -         (14 )      -   
Holdback payments for prior acquisitions    -         -         -         (1,397 )
Contingent consideration payment    (950 )      -         (6,066 )      -   
Net cash used in financing activities    (3,760 )      (1,948 )      (23,212 )      (5,238 )
Effect of exchange rate changes on cash, cash equivalents and restricted cash    41        (509 )      1,076        (545 )
Net decrease in cash, cash equivalents and restricted cash    (129,697 )      (28,717 )      (58,877 )      (740 )
Cash, cash equivalents and restricted cash              
Beginning of period    416,357        374,254        345,537        346,277  
End of period $   286,660     $   345,537     $   286,660     $   345,537  
               

 

 
Reconciliation of Non-GAAP Measures
(In thousands, except per share amounts)
(Unaudited)
               
   Three Months Ended     Twelve Months Ended 
   December 31,     December 31, 
    2017       2016       2017       2016  
               
GAAP gross profit $   104,900     $   76,974     $   371,911     $   266,903  
GAAP gross margin   72 %     72 %     72 %     71 %
Plus:              
Stock-based compensation expense     3,012         2,362         12,528         8,921  
Intangible amortization expense     4,945         2,965         14,512         9,423  
Non-GAAP gross profit     112,857         82,301         398,951         285,247  
Non-GAAP gross margin   78 %     77 %     77 %     76 %
               
GAAP operating loss   (16,159 )     (16,126 )     (69,464 )     (85,581 )
Plus:              
Stock-based compensation expense     25,245         21,542         97,460         78,696  
Intangible amortization expense     6,103         3,980         18,506         14,421  
Acquisition-related expenses     1,429         494         (381 )       1,080  
Litigation-related expenses     -         9         -         12,950  
Non-GAAP operating income     16,618         9,899         46,121         21,566  
               
GAAP net loss   (10,959 )     (22,884 )     (84,337 )     (111,208 )
Plus:              
Stock-based compensation expense   25,245       21,542       97,460       78,696  
Intangible amortization expense     6,103       3,980         18,506       14,421  
Acquisition-related expenses     1,429         494         (381 )       1,080  
Litigation-related expenses     -         9         -         12,950  
Interest expense - debt discount and issuance costs     5,353         5,326         21,789         20,842  
Loss on conversion of convertible notes     2,641         -         2,696         -  
Income tax (income) expense (1)     (14,349 )       26         (13,678 )       99  
Non-GAAP net income $   15,463     $   8,493     $   42,055     $   16,880  
Add interest expense of convertible senior notes, net of tax (2)     950         1,060         4,123         -  
Numerator for non-GAAP EPS calculation $   16,413     $   9,553     $   46,178     $   16,880  
Non-GAAP net income per share - diluted $   0.29     $   0.18     $   0.83     $   0.37  
               
GAAP weighted-average shares used to compute net loss per share, diluted     45,424         42,616         44,258         41,859  
Dilutive effect of convertible senior notes (2)     7,462         7,989         7,848         -   
Dilutive effect of employee equity incentive plan awards (3)     2,938         3,802         3,288         3,908  
Non-GAAP weighted-average shares used to compute net income per share, diluted     55,824         54,407         55,394         45,767  
               
(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, loss on conversion of convertible notes, and non-cash interest expense related to the debt discount and issuance costs for the convertible notes. Only GAAP deferred tax expenses or benefits related to the amortization of intangibles and deferred tax benefits related to changes in the Company's valuation allowance resulting from business acquisitions were excluded from the non-GAAP income tax expense. The Non-GAAP income tax for the three months and year ended December 31, 2017, excluded $12,345 of deferred tax benefits related to changes to the Company’s deferred tax valuation allowance due to the businesses acquired in the 4th quarter of 2017, and $2,024 of deferred tax benefits related to the impact of the Tax Cuts and Jobs Act of 2017 on certain intangible assets. 
 
(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     Twelve Months Ended 
   December 31,     December 31, 
    2017       2016       2017       2016  
               
Total revenue $   145,398     $   106,805     $   515,289     $   375,496  
               
Deferred revenue              
Ending     451,788         312,181         451,788         312,181  
Beginning     392,506         280,539         312,181         223,726  
Net Change     59,282         31,642         139,607         88,455  
Less:              
Deferred revenue contributed by acquisitions     (16,100 )       -          (16,100 )       (1,200 )
Billings $   188,580     $   138,447     $   638,796     $   462,751  
               

 

               
Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows
(In thousands)
(Unaudited)
               
   Three Months Ended     Twelve Months Ended 
   December 31,     December 31, 
    2017       2016       2017       2016  
               
GAAP cash flows provided by operating activities $   42,516     $   41,238     $   153,686     $   94,235  
Less:              
Purchases of property and equipment     (12,202 )       (8,880 )       (46,958 )       (34,407 )
Non-GAAP free cash flows $   30,314     $   32,358     $   106,728     $   59,828  
               

 

                         
Revenue by Solution  
(In thousands)  
(Unaudited)  
                         
   Three Months Ended   
  December 31, 2017   September 30, 2017   June 30, 2017   March 31, 2017   December 31, 2016   September 30, 2016  
                         
Protection and Advanced Threat $   111,405   $   101,434   $   90,376   $   84,480   $   78,698   $   72,664  
Archiving, Privacy and Governance     33,993       32,878       31,953       28,770       28,107       27,120  
Total revenue $   145,398   $   134,312   $   122,329   $   113,250   $   106,805   $   99,784  
                         

 

         
Reconciliation of Non-GAAP Measures to Guidance
(In millions, except per share amount)
(Unaudited)
         
     Three Months Ending     Year Ending 
     March 31,     December 31, 
    2018   2018
         
Total revenue   $149 - $151   $660 - $665
         
GAAP gross profit   103.6 - 105.4   469.6 - 474.0
GAAP gross margin   70%   71%
Plus:        
Stock-based compensation expense   4.5 - 4.3   19.0 - 18.5
Intangible amortization expense   5.1   19.6
Non-GAAP gross profit   113.2 - 114.8   508.2 - 512.1
Non-GAAP gross margin   76%   77%
         
GAAP net loss   $(33.9) - $(31.0)   $(117.6) - $(111.1)
Plus:        
Stock-based compensation expense   31.0 - 29.5   130.0- 128.0
Intangible amortization expense   6.9   26.0
Acquisition-related expenses   0.8 - 0.6   0.8 - 0.6
Interest expense - debt discount and issuance costs   3.1 - 3.0   12.5 - 12.4
Income tax expense    0.1 - 0.0     0.3 - 0.1 
Non-GAAP net income    $8.0 - $9.0     $52.0 - $56.0 
Add interest expense of convertible senior notes, net of tax (if dilutive)   0.4   1.7
Numerator for non-GAAP EPS calculation    $8.4 - $9.4     $53.7 - $57.7 
Non-GAAP net income per share - diluted    $0.15 - $0.17     $0.95 - $1.02 
Non-GAAP weighted-average shares used to compute net income per share, diluted   56.1   56.6
         
         
     Three Months Ending     Year Ending 
     March 31,     December 31, 
    2018   2018
         
GAAP cash flows provided by operating activities    $32.0 - $34.0     $183.0 - $185.0 
Less:        
Purchases of property and equipment   (10.0)   (45.0)
Non-GAAP free cash flows    $22.0 - $24.0     $138.0 - $140.0 
         


   
Media Contact
Kristy Campbell
Proofpoint, Inc.
408-517-4710
kcampbell@proofpoint.com
 
   
Investor Contacts
Jason Starr
Proofpoint, Inc.
408-585-4351
jstarr@proofpoint.com
Seth Potter
ICR for Proofpoint, Inc.
646-277-1230
seth.potter@icrinc.com

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