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Proofpoint Announces Third Quarter 2018 Financial Results

Oct 25, 2018
  • Total revenue of $184.2 million, up 37% year-over-year
  • Billings of $221.4 million, up 33% year-over-year
  • GAAP EPS of $(0.69) per share, Non-GAAP EPS of $0.40 per share
  • Generated operating cash flow of $64.7 million and free cash flow of $58.2 million
  • Increasing FY18 billings, revenue and profitability guidance

SUNNYVALE, Calif., Oct. 25, 2018 (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, 2018.

“The third quarter marked another compelling example of our team’s disciplined execution and strong customer focus,” stated Gary Steele, chief executive officer of Proofpoint. “We were pleased with our quarterly results, which were again driven by the rapidly evolving threat landscape, the ongoing shift to the cloud, and continued high demand for our advanced threat and compliance capabilities. Given these ongoing trends and our proven ability to identify and block advanced threats, I believe that we are well-positioned to continue to gain share and deliver attractive returns for our shareholders.” 

Third Quarter 2018 Financial Highlights

  • Revenue: Total revenue for the third quarter of 2018 was $184.2 million, an increase of 37%, compared to $134.7 million for the third quarter of 2017.
     
  • Billings: Total billings for the third quarter of 2018 were $221.4 million, an increase of 33%, compared to $166.5 million for the third quarter of 2017.
     
  • Gross Profit: GAAP gross profit for the third quarter of 2018 was $133.2 million compared to $98.7 million for the third quarter of 2017.  Non-GAAP gross profit for the third quarter of 2018 was $144.3 million compared to $105.2 million for the third quarter of 2017.  GAAP gross margin for the third quarter of 2018 was 72% compared to 73% for the third quarter of 2017.  Non-GAAP gross margin was 78% for the third quarter of 2018, consistent with the third quarter of 2017.   
  • Operating Income (Loss): GAAP operating loss for the third quarter of 2018 was $(26.6) million compared to a loss of $(13.6) million for the third quarter of 2017.  Non-GAAP operating income for the third quarter of 2018 was $22.7 million compared to $15.8 million for the third quarter of 2017. 
  • Net Income (Loss): GAAP net loss for the third quarter of 2018 was $(36.1) million, or $(0.69) per share, based on 52.2 million weighted average shares outstanding.  This compares to a GAAP net loss of $(19.5) million, or $(0.44) per share, based on 44.4 million weighted average shares outstanding for the third quarter of 2017.

    Non-GAAP net income for the third quarter of 2018 was $22.6 million, or $0.40 per share, based on 57.0 million weighted average diluted shares outstanding.  This compares to non-GAAP net income of $15.5 million, or $0.30 per share, based on 55.4 million weighted average diluted shares outstanding for the third quarter of 2017.  Non-GAAP earnings per share for the third quarters of 2018 and 2017 included the shares associated with the company’s convertible notes, and cash interest expense (net of tax) of $0.3 million and $1.1 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, 2018, Proofpoint had cash, cash equivalents, and short term investments of $190.4 million.  The company generated $64.7 million in cash flow from operations for the third quarter of 2018 compared to $44.2 million during the third quarter of 2017.  The company’s free cash flow for the quarter was $58.2 million compared to $32.3 million for the third quarter of 2017.    

“We were pleased with our ability to exceed expectations during the third quarter, highlighted by revenue and billings growth of 37% and 33%, respectively, as well as another quarter of strong free cash flow generation,” stated Paul Auvil, chief financial officer of Proofpoint. “The investments we’re making in our team, and in expanding our product portfolio, represent strong competitive differentiators and further extend our ability to generate attractive top-line growth coupled with strong free cash flow margins.” 

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.”

New Accounting Standard

The Company adopted ASC 606, the new standard related to revenue recognition effective January 1, 2018. Prior period information has been adjusted to reflect the adoption of this new standard.

Third Quarter and Recent Business Highlights:

  • Launched Closed-Loop Email and Analysis and Response (CLEAR), which automates end-user-reported phishing remediation and reduces the time for threat triage from days to minutes.

  • Launched Targeted Attack Protection (TAP) Isolation, which diverts and isolates personal web-based email and browsing sessions via web isolation technology and integrates Proofpoint’s extensive threat intelligence capabilities.

  • Announced a new technology partnership with Okta to enable joint customers to combat email credential phishing attacks by integrating Proofpoint’s Threat Response Auto-Pull (TRAP) function with the Okta Identity Cloud to automate incident response and prevent account compromises. 

Financial Outlook
As of October 25, 2018, Proofpoint is providing guidance for its fourth quarter and increasing full year 2018 guidance as follows:

  • Fourth Quarter 2018 Guidance: Total revenue is expected to be in the range of $191.0 million to $193.0 million.  Billings are expected to be in the range of $266.5 million to $268.5 million.  GAAP gross margin is expected to be 72%.  Non-GAAP gross margin is expected to be approximately 78%.  GAAP net loss is expected to be in the range of $(35.2) million to $(32.1) million, or $(0.64) to $(0.59) per share, based on approximately 54.8 million weighted average diluted shares outstanding.  Non-GAAP net income is expected to be in the range of $18.5 million to $20.5 million, or $0.33 to $0.36 per share, using 56.9 million weighted average diluted shares outstanding.  Free cash flow during the quarter is expected to be in the range of $43.0 million to $45.0 million, which assumes capital expenditures of approximately $7.0 million.
     
  • Full Year 2018 Guidance: Total revenue is expected to be in the range of $709.5 million to $711.5 million.  Billings are expected to be in the range of $872.0 million to $874.0 million. GAAP gross margin is expected to be 71%.  Non-GAAP gross margin is expected to be approximately 78%.  GAAP net loss is expected to be in the range of $(117.7) million to $(114.6) million, or $(2.27) to $(2.21) per share, based on approximately 51.9 million weighted average diluted shares outstanding.  Non-GAAP net income is expected to be in the range of $71.9 million to $73.9 million, or $1.29 to $1.32 per share, using 56.7 million weighted average diluted shares outstanding, and adding back the $1.2 million in cash interest expense as prescribed under the “If-Converted” method. Free cash flow for the full year is expected to be in the range of $149.6 million to $151.6 million, which assumes capital expenditures of approximately $30.1 million for the full year.   

Quarterly Conference Call

Proofpoint will host a conference call today at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time) to review the company’s financial results for the third quarter ended September 30, 2018.  To access this call, dial (888) 394-8218 for the U.S. or Canada and (323) 794-2588 for international callers with conference ID 7026516.  A live webcast of the conference call will be accessible from the Investors section of Proofpoint’s website at investors.proofpoint.com, and a recording will be archived and accessible at investors.proofpoint.com.  An audio replay of this conference call will also be available through November 8, 2018, by dialing (844) 512-2921 for the U.S. or Canada or (412) 317-6671 for international callers, and entering passcode 7026516.

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, mobile, and cloud applications, protect the information their users create from advanced attacks and compliance risks, and respond quickly when incidents occur. More information is available at www.proofpoint.com.

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

Forward-Looking Statements

This press release contains forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements regarding momentum in the company’s business, market position, win rates and renewal rates, future growth, and future financial results. It is possible that future circumstances might differ from the assumptions on which such statements are based. Important factors that could cause results to differ materially from the statements herein include: failure to maintain or increase renewals and increased business from existing customers and failure to generate increased business through existing or new channel partner relationships; uncertainties related to continued success in sales growth and market share gains; failure to convert sales opportunities into definitive customer agreements; risks associated with successful implementation of multiple integrated software products and other product functionality; competition, particularly from larger companies with more resources than Proofpoint; risks related to new target markets, new product introductions and innovation and market acceptance thereof; the ability to attract and retain key personnel; potential changes in strategy; risks associated with management of growth; lengthy sales and implementation cycles, particularly in larger organizations; the time it takes new sales personnel to become fully productive; unforeseen delays in developing new technologies and the uncertain market acceptance of new products or features; technological changes that make Proofpoint's products and services less competitive; security breaches, which could affect our brand; the costs of litigation; the impact of changes in foreign currency exchange rates; the effect of general economic conditions, including as a result of specific economic risks in different geographies and among different industries; risks related to integrating the employees, customers and technologies of acquired businesses; assumption of unknown liabilities from acquisitions; ability to retain customers of acquired entities; and the other risk factors set forth from time to time in our filings with the SEC, including our Quarterly Report on Form 10-Q for the three months ended June 30, 2018, 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 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,
    2018       2017       2018       2017  
Revenue:              
Subscription $   181,505     $   130,534     $   509,311     $   362,328  
Hardware and services    2,674        4,152        9,204        10,434  
Total revenue    184,179        134,686        518,515        372,762  
Cost of revenue:(1)(2)              
Subscription    45,679        31,211        133,495        89,895  
Hardware and services    5,258        4,800        15,271        12,985  
Total cost of revenue    50,937        36,011        148,766        102,880  
Gross profit    133,242        98,675        369,749        269,882  
Operating expense:(1)(2)              
Research and development    45,917        32,477        137,176        94,389  
Sales and marketing    90,006        66,406        252,814        182,452  
General and administrative    23,877        13,388        60,431        36,223  
Total operating expense    159,800        112,271        450,421        313,064  
Operating loss    (26,558 )      (13,596 )      (80,672 )      (43,182 )
Interest expense    (9,097 )      (5,733 )      (15,105 )      (17,547 )
Other (expense) income, net    (425 )      829        (715 )      884  
Loss before income taxes    (36,080 )      (18,500 )      (96,492 )      (59,845 )
Benefit from (provision for) income taxes    20        (977 )      13,978        (3,410 )
Net loss $   (36,060 )   $   (19,477 )   $   (82,514 )   $   (63,255 )
Net loss per share, basic and diluted $   (0.69 )   $   (0.44 )   $   (1.61 )   $   (1.44 )
Weighted average shares outstanding, basic and diluted    52,184        44,418        51,214        43,850  
               
(1)  Includes stock‑based compensation expense as follows:              
Cost of subscription revenue $   3,503     $   2,876     $   10,402     $   8,115  
Cost of hardware and services revenue     474         493         1,636         1,401  
Research and development     9,678         7,803         29,699         22,597  
Sales and marketing     13,191         8,943         37,075         25,070  
General and administrative     11,250         5,222         24,153         15,032  
   Total stock-based compensation expense $   38,096     $   25,337     $   102,965     $   72,215  
(2)  Includes intangible amortization expense as follows:              
Cost of subscription revenue $   7,121     $   3,190     $   20,141     $   9,567  
Research and development    15        15         45         45  
Sales and marketing    3,982        875         10,379         2,791  
   Total intangible amortization expense $   11,118     $   4,080     $   30,565     $   12,403  
               


 
Proofpoint, Inc.
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
       
  September 30,   December 31,
   2018      2017  
Assets      
Current assets:      
Cash and cash equivalents $   160,561     $   286,072  
Short-term investments    29,829        45,526  
Accounts receivable, net    143,859        107,696  
Inventory    372        730  
Deferred product costs    1,789        1,541  
Deferred commissions    32,840        26,249  
Prepaid expenses and other current assets    19,274        18,669  
Total current assets    388,524        486,483  
Property and equipment, net    73,518        73,617  
Deferred product costs    316        259  
Goodwill    460,596        297,704  
Intangible assets, net    147,237        95,602  
Long-term deferred commissions    60,459        51,954  
Other assets    7,064        12,813  
Total assets $   1,137,714     $   1,018,432  
Liabilities and Stockholders’ Equity      
Current liabilities:      
Accounts payable $   14,931     $   12,271  
Accrued liabilities    81,578        65,503  
Capital lease obligations    31        34  
Deferred rent    799        586  
Deferred revenue    444,051        364,521  
Total current liabilities    541,390        442,915  
Convertible senior notes    -         197,858  
Long-term capital lease obligations    30        55  
Long-term deferred rent    3,918        4,102  
Other long-term liabilities    7,241        11,069  
Long-term deferred revenue    81,287        63,318  
Total liabilities    633,866        719,317  
Stockholders’ equity      
Common stock, $0.0001 par value; 200,000 shares authorized; 54,483 and 50,325 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively    5        5  
Additional paid-in capital    1,078,028        787,572  
Accumulated other comprehensive loss    (2 )      (9 )
Accumulated deficit    (574,183 )      (488,453 )
Total stockholders’ equity    503,848        299,115  
Total liabilities and stockholders’ equity $   1,137,714     $   1,018,432  
       


Proofpoint, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
               
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
    2018       2017       2018       2017  
Cash flows from operating activities              
Net loss $   (36,060 )   $   (19,477 )   $   (82,514 )   $   (63,255 )
Adjustments to reconcile net loss to net cash provided by operating activities:              
Depreciation and amortization    19,437        10,139        54,315        29,286  
Stock-based compensation    38,096        25,337        102,965        72,215  
Change in fair value of contingent consideration    -         (67 )      (79 )      (1,797 )
Amortization of debt issuance costs and accretion of debt discount    2,230        5,603        8,383        16,491  
Amortization of deferred commissions    9,413        7,445        26,121        20,720  
Loss on conversion of convertible notes    7,207        -         7,207        -   
Deferred income taxes    (373 )      143        (15,269 )      (1,831 )
Other    327        (605 )      1,147        (466 )
Changes in assets and liabilities:              
  Accounts receivable    (3,476 )      (15,706 )      (26,501 )      (18,452 )
  Inventory    29        40        359        141  
  Deferred products costs    (51 )      (169 )      (304 )      190  
  Deferred commissions    (19,289 )      (11,619 )      (41,218 )      (29,242 )
  Prepaid expenses    270        (163 )      (2,344 )      (1,849 )
  Other current assets    (445 )      52        1,212        312  
  Long-term assets    (102 )      272        248        (3,438 )
  Accounts payable    (1,555 )      (540 )      2,655        (1,914 )
  Accrued liabilities    14,977        10,904        10,479        15,469  
  Deferred rent    (32 )      360        29        1,184  
  Deferred revenue    34,101        32,266        82,799        77,406  
      Net cash provided by operating activities    64,704        44,215        129,690        111,170  
Cash flows from investing activities              
Proceeds from maturities of short-term investments    13,805        22,722        51,237        78,803  
Proceeds from sales of short-term investments    -         -         11,931        -   
Purchase of short-term investments    (23,763 )      (29,736 )      (47,457 )      (71,096 )
Purchase of property and equipment    (6,497 )      (11,889 )      (23,108 )      (34,756 )
Receipts from escrow account    2,766        496        3,321        5,116  
Acquisitions of business, net of cash acquired    -         -         (223,786 )      -   
Net cash used in investing activities    (13,689 )      (18,407 )      (227,862 )      (21,933 )
Cash flows from financing activities              
Proceeds from issuance of common stock    2,897        3,710        15,898        16,928  
Withholding taxes related to restricted stock net share settlement    (7,327 )      (6,117 )      (41,967 )      (31,239 )
Repayments of equipment loans and capital lease obligations    (13 )      (9 )      (29 )      (25 )
Repayment of convertible notes    (142 )      -         (142 )      -   
Contingent consideration payment    -         (496 )      (555 )      (5,116 )
Net cash used in financing activities    (4,585 )      (2,912 )      (26,795 )      (19,452 )
Effect of exchange rate changes on cash, cash equivalents and restricted cash    (139 )      460        (352 )      1,035  
Net increase (decrease) in cash, cash equivalents and restricted cash    46,291        23,356        (125,319 )      70,820  
Cash, cash equivalents and restricted cash              
Beginning of period    115,050        393,001        286,660        345,537  
End of period $   161,341     $   416,357     $   161,341     $   416,357  
               
               


Reconciliation of Non-GAAP Measures
(In thousands, except per share amounts)
(Unaudited)
               
   Three Months Ended    Nine Months Ended
   September 30,    September 30,
    2018       2017       2018       2017  
               
GAAP gross profit $   133,242     $   98,675     $   369,749     $   269,882  
GAAP gross margin   72 %     73 %     71 %     72 %
Plus:              
Stock-based compensation expense     3,977         3,369         12,038         9,516  
Intangible amortization expense     7,121         3,190         20,141         9,567  
Non-GAAP gross profit     144,340         105,234         401,928         288,965  
Non-GAAP gross margin   78 %     78 %     78 %     78 %
               
GAAP operating loss   (26,558 )     (13,596 )     (80,672 )     (43,182 )
Plus:              
Stock-based compensation expense     38,096         25,337         102,965         72,215  
Intangible amortization expense     11,118         4,080         30,565         12,403  
Acquisition-related expenses     -         (56 )       1,433         (1,810 )
Non-GAAP operating income     22,656         15,765         54,291         39,626  
               
GAAP net loss   (36,060 )     (19,477 )     (82,514 )     (63,255 )
Plus:              
Stock-based compensation expense   38,096       25,337       102,965       72,215  
Intangible amortization expense     11,118         4,080         30,565         12,403  
Acquisition-related expenses     -         (56 )       1,433         (1,810 )
Interest expense - debt discount and issuance costs     2,230         5,603         8,383         16,491  
Loss on conversion of convertible notes     7,207         -         7,207         -  
Income tax (income) expense (1)     26         43         (14,668 )       671  
Non-GAAP net income $   22,617     $   15,530     $   53,371     $   36,715  
Add interest expense of convertible senior notes, net of tax (2)     309         1,060         1,172         3,180  
Numerator for non-GAAP EPS calculation $   22,926     $   16,590     $   54,543     $   39,895  
Non-GAAP net income per share - diluted $   0.40     $   0.30     $   0.96     $   0.72  
               
GAAP weighted-average shares used to compute net loss per share, diluted     52,184         44,418         51,214         43,850  
Dilutive effect of convertible senior notes (2)     2,099         7,938         2,649         7,938  
Dilutive effect of employee equity incentive plan awards (3)     2,767         3,082         3,044         3,355  
Non-GAAP weighted-average shares used to compute net income per share, diluted     57,050         55,438         56,907         55,143  
               
(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 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,
    2018       2017       2018       2017  
               
Total revenue $   184,179     $   134,686     $   518,515     $   372,762  
               
Deferred revenue and customer prepayments              
Ending     534,309         373,326         534,309         373,326  
Beginning     496,315         341,687         431,371         295,996  
Net Change     37,994         31,639         102,938         77,330  
               
Unbilled accounts receivable              
Ending     1,886         306         1,886         306  
Beginning     1,090         475         603         486  
Net Change     (796 )       169         (1,283 )       180  
               
Less:              
Deferred revenue contributed by acquisitions     -          -          (14,700 )       -   
Billings $   221,377     $   166,494     $   605,470     $   450,272  
               


 
Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows
(In thousands)
(Unaudited)
               
   Three Months Ended    Nine Months Ended
   September 30,    September 30,
    2018       2017       2018       2017  
               
GAAP cash flows provided by operating activities $   64,704     $   44,215     $   129,690     $   111,170  
Less:              
Purchases of property and equipment     (6,497 )       (11,889 )       (23,108 )       (34,756 )
Non-GAAP free cash flows $   58,207     $   32,326     $   106,582     $   76,414  
               


Revenue by Solution
(In thousands)
(Unaudited)
                             
   Three Months Ended     
  September 30, 2018   June 30, 2018   March 31, 2018   December 31, 2017   September 30, 2017   June 30, 2017   March 31, 2017  
                             
Advanced Threat $   137,953   $   129,208   $   123,613   $   109,831   $   99,551   $   88,680   $   83,502  
Compliance   46,226     42,667     38,848     37,088     35,135     33,761     32,133  
Total revenue $   184,179   $   171,875   $   162,461   $   146,919   $   134,686   $   122,441   $   115,635  
                             

 


         
Reconciliation of Non-GAAP Measures to Guidance
(In millions, except per share amount)
(Unaudited)
         
     Three Months Ending    Year Ending
     December 31,    December 31,
    2018   2018
         
Total revenue   $191.0 - $193.0   $709.5 - $711.5
         
GAAP gross profit   137.0 - 138.7   506.7 - 508.4
GAAP gross margin   72%   71%
Plus:        
Stock-based compensation expense   5.2 - 5.0   17.2 - 17.0
Intangible amortization expense   6.8   26.9
Non-GAAP gross profit   149.0 - 150.5   550.8 - 552.3
Non-GAAP gross margin   78%   78%
         
GAAP net loss   $(35.2) - $(32.1)   $(117.7) - $(114.6)
Plus:        
Stock-based compensation expense   43.0 - 42.0   146.0- 145.0
Intangible amortization expense   10.6   41.2
Acquisition-related expenses   -   1.4
Interest expense - debt discount and issuance costs   -   8.4
Loss on conversion of convertible notes   -   7.2
Income tax expense    0.1 - 0.0    (14.6) - (14.7)
Non-GAAP net income    $18.5 - $20.5    $71.9 - $73.9 
Add interest expense of convertible senior notes, net of tax (if dilutive)   -   1.2
Numerator for non-GAAP EPS calculation    $18.5 - $20.5    $73.1 - $75.1
Non-GAAP net income per share - diluted    $0.33 - $0.36    $1.29 - $1.32
Non-GAAP weighted-average shares used to compute net income per share, diluted   56.9   56.7
         
         
     Three Months Ending    Year Ending
     December 31,    December 31,
    2018   2018
         
GAAP cash flows provided by operating activities    $50.0 - $52.0    $179.7 - $181.7
Less:        
Purchases of property and equipment   (7.0)   (30.1)
Non-GAAP free cash flows    $43.0 - $45.0    $149.6 - $151.6
         

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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Source: Proofpoint, Inc.

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