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A service for software industry professionals · Tuesday, December 10, 2019 · 504,465,041 Articles · 3+ Million Readers

Proofpoint Announces Third Quarter 2019 Financial Results

/EIN News/ -- Third Quarter Highlights

  • Total revenue of $227.4 million, up 23% year-over-year
  • Billings of $277.8 million, up 26% year-over-year
  • GAAP EPS of $(0.79) per share, Non-GAAP EPS of $0.49 per share
  • Operating cash flow of $68.6 million and free cash flow of $58.6 million
  • Increasing FY19 revenue and profitability guidance

SUNNYVALE, Calif., Oct. 24, 2019 (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, 2019.

“The third quarter marked another strong quarter for Proofpoint,” stated Gary Steele, chief executive officer of Proofpoint. “Our people-centric approach to cybersecurity and compliance, our proven ability to identify and block advanced threats, and a favorable competitive environment all continue to be the main drivers of our success.  We are seeing further momentum with our bundling strategy and consistently high customer renewal rates which have us well-positioned to continue to drive attractive growth and increase our market share in the over $13 billion total addressable market that we’re pursuing.” 

Third Quarter 2019 Financial Highlights

  • Revenue: Total revenue for the third quarter of 2019 was $227.4 million, an increase of 23%, compared to $184.2 million for the third quarter of 2018.

  • Billings: Total billings for the third quarter of 2019 were $277.8 million, an increase of 26%, compared to $221.4 million for the third quarter of 2018.

  • Gross Profit: GAAP gross profit for the third quarter of 2019 was $167.5 million compared to $133.2 million for the third quarter of 2018. Non-GAAP gross profit for the third quarter of 2019 was $181.0 million compared to $144.3 million for the third quarter of 2018. GAAP gross margin for the third quarter of 2019 was 74% compared to 72% for the third quarter of 2018. Non-GAAP gross margin for the third quarter of 2019 was 80% compared to 78% for the third quarter of 2018.
  • Operating Income (Loss): GAAP operating loss for the third quarter of 2019 was $(24.4) million compared to a loss of $(26.6) million for the third quarter of 2018. Non-GAAP operating income for the third quarter of 2019 was $33.9 million compared to $22.7 million for the third quarter of 2018.

  • Net Income (Loss): GAAP net loss for the third quarter of 2019 was $(44.3) million, or $(0.79) per share, based on 56.0 million weighted average shares outstanding. This compares to a GAAP net loss of $(36.1) million, or $(0.69) per share, based on 52.2 million weighted average shares outstanding for the third quarter of 2018. Note that this result also included a current and deferred GAAP tax expense of $17.6 million for the transfer of certain intellectual property from Israel to the United States in the third quarter of 2019 associated with the acquisition of Meta Networks.  Non-GAAP net income for the third quarter of 2019 was $29.8 million, or $0.49 per share, based on 61.2 million weighted average diluted shares outstanding. This result included a $6.1 million income tax expense, calculated using an effective rate of 17%, by applying the SEC’s Non-GAAP Financial Measures Compliance and Disclosure Interpretations (C&DI 102.11) compared to the Company’s historical calculation methodology, and as disclosed on April 25, 2019. Non-GAAP earnings per share for the third quarter of 2019 and 2018 included the shares associated with the company’s convertible notes, and cash interest expense (net of tax) of $0.2 million and $0.3 million, respectively, was added back to net income as the “If-Converted” threshold during these periods was achieved. 

  • Cash and Cash Flow: As of September 30, 2019, Proofpoint had cash, cash equivalents, and short-term investments of $1,051.5 million. The company generated $68.6 million in net cash from operations for the third quarter of 2019 compared to $64.7 million during the third quarter of 2018. The company’s free cash flow for the third quarter of 2019 was $58.6 million compared to $58.2 million for the third quarter of 2018.  Note that the cash tax payment for the transfer of certain intellectual property from Israel to the United States associated with the acquisition of Meta Networks did not occur in the third quarter and was subsequently paid in October.

“We are pleased with our ability to exceed expectations during the third quarter and once again demonstrate the strong operating leverage inherent within our financial model,” stated Paul Auvil, chief financial officer of Proofpoint. “The company remains well-positioned to execute our disciplined growth strategy given the ongoing investments we’re making in expanding our product portfolio for our customers and driving strong returns on behalf of our shareholders.”

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.”

Financial Outlook

As of October 24, 2019, Proofpoint is providing its fourth quarter and full year 2019 guidance as follows:

  • Fourth Quarter 2019 Guidance: Total revenue is expected to be in the range of $237.5 million to $239.5 million. Billings are expected to be in the range of $339.0 million to $343.0 million. GAAP gross margin is expected to be 73%. Non-GAAP gross margin is expected to be approximately 79%. GAAP net loss is expected to be in the range of $(32.7) million to $(28.2) million, or $(0.58) to $(0.50) per share, based on approximately 56.4 million weighted average diluted shares outstanding. Non-GAAP net income is expected to be in the range of $30.0 million to $32.0 million, or $0.47 to $0.50 per share, using 64.9 million weighted average diluted shares outstanding, and based on our reporting under C&DI 102.11. Free cash flow during the quarter is expected to be in the range of $58.2 million to $60.2 million, which includes an $8.4 million cash tax payment associated with the transfer of certain intellectual property from Israel to the United States as a result of the acquisition of Meta Networks. Excluding this tax payment, free cash flow guidance would have been $66.6 million to $68.6 million. Capital expenditures are expected to be approximately $14.2 million.

  • Full Year 2019 Guidance: Total revenue is expected to be in the range of $882.3 million to $884.3 million. Billings are expected to be in the range of $1,064.0 million to $1,068.0 million. GAAP gross margin is expected to be 73%. Non-GAAP gross margin is expected to be 79%. GAAP net loss is expected to be in the range of $(134.2) million to $(129.7) million, or $(2.40) to $(2.32) per share, based on approximately 55.9 million weighted average diluted shares outstanding. This estimate for GAAP net loss includes a GAAP tax expense of approximately $17.6 million for the transfer of certain intellectual property from Israel to the United States that occurred in the third quarter of 2019 associated with the acquisition of Meta Networks. Non-GAAP net income is expected to be in the range of $103.5 million to $105.5 million, or $1.72 to $1.75 per share, using 60.6 million weighted average diluted shares outstanding, and based on our reporting under C&DI 102.11. Free cash flow is expected to be in the range of $200.5 million to $202.5 million, which includes an $8.4 million cash tax payment associated with the transfer of certain intellectual property from Israel to the United States as a result of the acquisition of Meta Networks. Excluding this tax payment, free cash flow guidance would have been $208.9 to $210.9 million. Capital expenditures are expected to be approximately $38.0 million.

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, 2019. To access this call, dial (800) 239-9838 for the U.S. or Canada, or (929) 477-0448 for international callers, with conference ID #1877243. 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 November 7, 2019, by dialing (844) 512-2921 for the U.S. or Canada or (412) 317-6671 for international callers, and entering passcode #1877243.

About Proofpoint, Inc.

Proofpoint, Inc. (NASDAQ: PFPT) is a leading cybersecurity company that protects organizations’ greatest assets and biggest risks: their people. With an integrated suite of cloud-based solutions, Proofpoint helps companies around the world stop targeted threats, safeguard their data, and make their users more resilient against cyber attacks. Leading organizations of all sizes, including more than half of the Fortune 1000, rely on Proofpoint for people-centric security and compliance solutions that mitigate their most critical risks across email, the cloud, social media, and the web. 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, 2019, 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.

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 income. We define non-GAAP operating income 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 it excludes 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 income versus operating loss calculated in accordance with GAAP. For example, as noted above, non-GAAP operating income excludes stock-based compensation expense. In addition, the components of the costs that we exclude in our calculation of non-GAAP operating income 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 income and evaluating non-GAAP operating income together with operating loss calculated in accordance with GAAP.

Non-GAAP net income. We define non-GAAP net income 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. 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 income.

Starting January 1, 2019, we changed the calculation of our non-GAAP provision for income taxes in accordance with the SEC’s Non-GAAP Financial Measures Compliance and Disclosure Interpretations. Our current and deferred income tax expense is commensurate with the non-GAAP measure of profitability using a non-GAAP tax rate of 17% for the three and nine months ended September 30, 2019. We use an annual projected tax rate in a computation of the non-GAAP income tax provision, and exclude the impact of stock-based compensation, intangible amortization expenses, costs associated with acquisitions and litigations, and non-cash interest expense related to the debt discount and issuance costs for the convertible notes. The projected rate considers other factors such as our current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where we operate.

Billings. We define billings as revenue recognized plus the change in deferred revenue and customer prepayments less change in unbilled accounts receivable from the beginning to the end of the period, but excluding additions to deferred revenue from acquisitions. Customer prepayments represent billed amounts for which the contract can be terminated and the customer has a right of refund. Unbilled accounts receivable represent amounts for which the company has recognized revenue, pursuant to its revenue recognition policy, for subscription software already delivered and professional services already performed, but billed in arrears and for which the company believes it has an unconditional right to payment. 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,
 
        2019       2018       2019       2018    
Revenue:                    
Subscription     $ 224,275     $ 181,505     $ 634,639     $ 509,311    
Hardware and services       3,110       2,674       10,122       9,204    
Total revenue       227,385       184,179       644,761       518,515    
Cost of revenue:(1)(2)                    
Subscription       52,308       45,679       151,208       133,495    
Hardware and services       7,573       5,258       21,744       15,271    
Total cost of revenue       59,881       50,937       172,952       148,766    
Gross profit       167,504       133,242       471,809       369,749    
Operating expense:(1)(2)                    
Research and development       60,060       45,917       168,494       137,176    
Sales and marketing       105,502       90,006       305,343       252,814    
General and administrative       26,388       23,877       80,094       60,431    
Total operating expense       191,950       159,800       553,931       450,421    
Operating loss       (24,446 )     (26,558 )     (82,122 )     (80,672 )  
Interest expense       (3,698 )     (9,746 )     (3,698 )     (16,761 )  
Other income, net       2,180       224       3,565       941    
Loss before income taxes       (25,964 )     (36,080 )     (82,255 )     (96,492 )  
(Provision for) benefit from income taxes       (18,376 )     20       (19,276 )     13,978    
Net loss     $ (44,340 )   $ (36,060 )   $ (101,531 )   $ (82,514 )  
Net loss per share, basic and diluted     $ (0.79 )   $ (0.69 )   $ (1.82 )   $ (1.61 )  
Weighted average shares outstanding, basic and diluted       56,014       52,184       55,708       51,214    
                     
(1) Includes stock‑based compensation expense as follows:                    
Cost of subscription revenue     $ 4,519     $ 3,503     $ 12,663     $ 10,402    
Cost of hardware and services revenue       1,043       474       3,003       1,636    
Research and development       13,735       9,678       37,756       29,699    
Sales and marketing       16,515       13,191       46,068       37,075    
General and administrative       9,871       11,250       32,864       24,153    
Total stock-based compensation expense     $ 45,683     $ 38,096     $ 132,354     $ 102,965    
(2) Includes intangible amortization expense as follows:                    
Cost of subscription revenue     $ 7,886     $ 7,121     $ 22,153     $ 20,141    
Research and development       -       15       -       45    
Sales and marketing       3,632       3,982       10,803       10,379    
Total intangible amortization expense     $ 11,518     $ 11,118     $ 32,956     $ 30,565    
                     



Proofpoint, Inc.
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
             
      September 30,   December 31,  
        2019       2018    
Assets            
Current assets:            
Cash and cash equivalents     $ 1,020,183     $ 185,392    
Short-term investments       31,327       46,307    
Accounts receivable, net       204,769       199,194    
Inventory       425       481    
Deferred product costs       2,078       1,800    
Deferred commissions       42,473       37,391    
Prepaid expenses and other current assets       19,053       16,872    
Total current assets       1,320,308       487,437    
Property and equipment, net       70,285       70,627    
Operating lease right-of-use asset       53,719       -    
Long-term deferred product costs       349       303    
Goodwill       543,143       460,425    
Intangible assets, net       124,689       136,645    
Long-term deferred commissions       79,488       69,989    
Other assets       16,045       7,592    
Total assets     $ 2,208,026     $ 1,233,018    
Liabilities and Stockholders’ Equity            
Current liabilities:            
Accounts payable     $ 17,819     $ 20,237    
Accrued liabilities       103,573       90,719    
Deferred rent       -       829    
Operating lease liabilities       20,529       -    
Deferred revenue       542,429       490,296    
Total current liabilities       684,350       602,081    
Convertible senior notes       741,367       -    
Long-term deferred rent       -       3,757    
Long-term operating lease liabilities       36,835       -    
Other long-term liabilities       18,571       6,812    
Long-term deferred revenue       132,174       107,834    
Total liabilities       1,613,297       720,484    
Stockholders’ equity            
Common stock, $0.0001 par value; 200,000 shares authorized; 56,204 and 55,149 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively       6       6    
Additional paid-in capital       1,291,580       1,107,953    
Accumulated other comprehensive income (loss)       3       (7 )  
Accumulated deficit       (696,860 )     (595,418 )  
Total stockholders’ equity       594,729       512,534    
Total liabilities and stockholders’ equity     $ 2,208,026     $ 1,233,018    
             

 


Proofpoint, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
                     
      Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
        2019       2018       2019       2018    
Cash flows from operating activities                    
Net loss     $ (44,340 )     $ (36,060 )     $ (101,531 )     $ (82,514 )  
Adjustments to reconcile net loss to net cash provided by operating activities:                    
Depreciation and amortization       20,220       19,437       58,457       54,315    
Stock-based compensation       45,683         38,096         132,354         102,965    
Change in fair value of contingent consideration       -       -       -       (79 )  
Amortization of debt issuance costs and accretion of debt discount       3,455       2,230       3,455       8,383    
Amortization of deferred commissions       12,763       9,413       36,434       26,121    
Noncash lease costs       5,869       -       17,216       -    
Loss on conversion of convertible notes       -       7,207       -       7,207    
Deferred income taxes       (1,884 )     (373 )     (2,494 )     (15,269 )  
Other       627       327       1,594       1,147    
Changes in assets and liabilities:                    
Accounts receivable       (34,069 )     (3,476 )     (6,209 )     (26,501 )  
Inventory       (69 )     29       55       359    
Deferred products costs       (229 )     (51 )     (324 )     (304 )  
Deferred commissions       (20,036 )     (19,289 )     (51,014 )     (41,218 )  
Prepaid expenses       2,199       270       (5,496 )     (2,344 )  
Other current assets       55       (445 )     514       1,212    
Long-term assets       (253 )     (102 )     (876 )     248    
Accounts payable       559       (1,555 )     (2,607 )     2,655    
Accrued liabilities       38,401       14,977       28,030       10,479    
Deferred rent       -       (32 )     -       29    
Operating lease liabilities       (6,477 )     -       (17,925 )     -    
Deferred revenue       46,124       34,101       76,474       82,799    
Net cash provided by operating activities       68,598       64,704       166,107       129,690    
Cash flows from investing activities                    
Proceeds from maturities of short-term investments       26,853       13,805       81,902       51,237    
Proceeds from sales of short-term investments       -       -       -       11,931    
Purchase of short-term investments       (25,268 )     (23,763 )     (67,036 )     (47,457 )  
Purchase of property and equipment       (10,006 )     (6,497 )     (23,856 )     (23,108 )  
Receipts from escrow account       -       2,766       -       3,321    
Acquisitions of business, net of cash acquired       -       -       (104,503 )     (223,786 )  
Net cash used in investing activities       (8,421 )     (13,689 )     (113,493 )     (227,862 )  
Cash flows from financing activities                    
Proceeds from issuance of common stock       827       2,897       15,518       15,898    
Withholding taxes related to restricted stock net share settlement       (6,585 )     (7,327 )     (41,590 )     (41,967 )  
Proceeds from issuance of convertible senior notes, net of costs       901,293       -       901,293       -    
Purchase of capped calls       (84,640 )     -       (84,640 )     -    
Repayments of equipment loans and capital lease obligations       -       (13 )     -       (29 )  
Repayment of convertible notes       -       (142 )     -       (142 )  
Contingent consideration payment       -       -       -       (555 )  
Net cash provided by (used in) financing activities       810,895       (4,585 )     790,581       (26,795 )  
Effect of exchange rate changes on cash, cash equivalents and restricted cash       (584 )     (139 )     (505 )     (352 )  
Net increase (decrease) in cash, cash equivalents and restricted cash       870,488       46,291       842,690       (125,319 )  
Cash, cash equivalents and restricted cash                    
Beginning of period       158,354       115,050       186,152       286,660    
End of period     $ 1,028,842     $ 161,341     $ 1,028,842     $ 161,341    
                     



Reconciliation of Non-GAAP Measures
(In thousands, except per share amounts)
(Unaudited)
                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
      2019       2018       2019       2018  
                 
                 
GAAP gross profit   $ 167,504     $ 133,242     $ 471,809     $ 369,749  
GAAP gross margin     74 %     72 %     73 %     71 %
Plus:                
Stock-based compensation expense     5,562       3,977       15,666       12,038  
Intangible amortization expense     7,886       7,121       22,153       20,141  
Non-GAAP gross profit     180,952       144,340       509,628       401,928  
Non-GAAP gross margin     80 %     78 %     79 %     78 %
                 
GAAP operating loss     (24,446 )     (26,558 )     (82,122 )     (80,672 )
Plus:                
Stock-based compensation expense     45,683       38,096       132,354       102,965  
Intangible amortization expense     11,518       11,118       32,956       30,565  
Acquisition-related expenses     56       -       909       1,433  
Litigation-related expenses     1,127       -       1,127       -  
Non-GAAP operating income     33,938       22,656       85,224       54,291  
                 
GAAP net loss     (44,340 )     (36,060 )     (101,531 )     (82,514 )
Plus:                
Stock-based compensation expense     45,683       38,096       132,354       102,965  
Intangible amortization expense     11,518       11,118       32,956       30,565  
Acquisition-related expenses     56       -       909       1,433  
Litigation-related expenses     1,127       -       1,127       -  
Interest expense - debt discount and issuance costs     3,455       2,230       3,455       8,383  
Loss on conversion of convertible notes     -       7,207       -       7,207  
Income tax expense (1)     12,277       26       4,223       (14,668 )
Non-GAAP net income     29,776       22,617       73,493       53,371  
Add interest expense of convertible senior notes, net of tax (2)     243       309       243       1,172  
Numerator for non-GAAP EPS calculation   $ 30,019     $ 22,926     $ 73,736     $ 54,543  
Non-GAAP net income per share - diluted   $ 0.49     $ 0.40     $ 1.25     $ 0.96  
                 
GAAP weighted-average shares used to compute net loss per share, diluted     56,014       52,184       55,708       51,214  
Dilutive effect of convertible senior notes (2)     2,533       2,099       854       2,649  
Dilutive effect of employee equity incentive plan awards (3)     2,617       2,767       2,604       3,044  
Non-GAAP weighted-average shares used to compute net income per share, diluted     61,164       57,050       59,166       56,907  
                 
(1) Starting January 1, 2019, the Company changed the calculation of its non-GAAP provision for income taxes in accordance with the SEC’s Non-GAAP Financial Measures Compliance and Disclosure Interpretations. The Company’s current and deferred income tax expense commensurate with the non-GAAP measure of profitability using non-GAAP tax rate of 17% for the three and nine months ended September 30, 2019. The Company uses annual projected tax rate in its computation of the non-GAAP income tax provision, and excludes the direct impact of stock-based compensation, intangible amortization expenses, costs associated with acquisitions and litigations, and non-cash interest expense related to the debt discount and issuance costs for the convertible notes. For the three and nine months ended September 30, 2018, only GAAP deferred tax expenses or benefits related to the amortization of intangible assets 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 nine months ended September 30, 2018, excluded $14,725 of deferred tax benefits related to a reduction in the Company’s deferred tax valuation allowance resulting from the Wombat Acquisition.

(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,
      2019       2018       2019       2018  
Total revenue   $ 227,385     $ 184,179     $ 644,761     $ 518,515  
Deferred revenue and customer prepayments                
Ending     688,105       534,309       688,105       534,309  
Beginning     635,450       496,315       605,073       431,371  
Net Change     52,655       37,994       83,032       102,938  
Unbilled accounts receivable                
Ending     4,060       1,886       4,060       1,886  
Beginning     1,861       1,090       1,276       603  
Net Change     (2,199 )     (796 )     (2,784 )     (1,283 )
Less:                
Deferred revenue contributed by acquisitions     -       -       -       (14,700 )
Billings   $ 277,841     $ 221,377     $ 725,009     $ 605,470  
                 


                     
Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows
(In thousands)
(Unaudited)
                     
      Three Months Ended   Nine Months Ended  
      September 30,   September 30,  
        2019       2018       2019       2018    
                     
GAAP cash flows provided by operating activities     $ 68,598     $ 64,704     $ 166,107     $ 129,690    
Less:                    
Purchases of property and equipment       (10,006 )     (6,497 )     (23,856 )     (23,108 )  
Non-GAAP free cash flows     $ 58,592     $ 58,207     $ 142,251     $ 106,582    
                     


Revenue by Solution  
(In thousands)  
(Unaudited)  
                           
  Three Months Ended    
  September
30,
2019
  June 30,
2019
  March 31,
2019
  December
31,
2018
  September
30,
2018
  June 30,
2018
   
                           
Advanced Threat $ 164,182   $ 156,569   $ 151,325 $ 147,367   $ 137,953   $ 129,208    
Compliance   63,203     57,870     51,612     51,112     46,226     42,667    
Total revenue $ 227,385   $ 214,439   $ 202,937   $ 198,479   $ 184,179   $ 171,875    
                           


Reconciliation of Non-GAAP Measures to Guidance  
(In millions, except per share amount)  
(Unaudited)  
           
    Three Months Ending   Year Ending  
    December 31,   December 31,  
    2019     2019    
           
Total revenue   $237.5 - $239.5   $882.3 - $884.3  
           
GAAP gross profit   174.2 - 175.7   646.0 - 647.5  
GAAP gross margin   73%   73%  
Plus:          
Stock-based compensation expense   5.6 - 5.3   21.3 - 21.0  
Intangible amortization expense   7.8    29.9   
Non-GAAP gross profit   187.6 - 188.8   697.2 - 698.4  
Non-GAAP gross margin   79%   79%  
           
GAAP net loss   (32.7) - (28.2)   (134.2) - (129.7)  
Plus:          
Stock-based compensation expense   47.7 - 45.7   180.1- 178.1  
Intangible amortization expense   11.3    44.3   
Acquisition-related expenses     0.9   
Litigation-related expenses   0.5    1.6   
Interest expense - debt discount and issuance costs 8.3    11.7   
Income tax expense   (5.1) - (5.6)   (0.9) - (1.4)  
Non-GAAP net income   30.0 - 32.0   103.5 - 105.5  
Add interest expense of convertible senior notes, net of tax (if dilutive)   0.6    0.8   
Numerator for non-GAAP EPS calculation   $30.6 - $32.6   $104.3 - $106.3  
Non-GAAP net income per share - diluted   $0.47 - $0.50   $1.72 - $1.75  
Non-GAAP weighted-average shares used to compute net income per share, diluted   64.9    60.6   
           
           
    Three Months
Ending
  Year Ending  
    December 31,   December 31,  
    2019     2019    
           
GAAP cash flows provided by operating activities   $72.4 - $74.4   $238.5 - $240.5  
Less:          
Purchases of property and equipment   (14.2)   (38.0)  
Non-GAAP free cash flows   $58.2 - $60.2   $200.5 - $202.5  
           

Media Contact

Kristy Campbell
Proofpoint, Inc.
408-517-4710
kcampbell@proofpoint.com

Investor Contact

Jason Starr
Proofpoint, Inc
408-585-4351
jstarr@proofpoint.com

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