PFPT Proofpoint Inc

Proofpoint, Inc. (NASDAQ:PFPT), a leading next-generation security and compliance company, today announced financial results for the second quarter ended June 30, 2017.

“Our strong second quarter results were driven by the rapidly evolving threat landscape and the demand for Proofpoint’s advanced threat solutions,” stated Gary Steele, chief executive officer of Proofpoint.  “During the quarter, the company also benefitted from the transition to the cloud, ongoing traction from new emerging products, robust new and add-on activity, and consistently high renewal rates.  Looking forward, the broad demand drivers benefitting the company remain firmly in place which we believe position Proofpoint to maintain the momentum and gain share in the over $10 billion total addressable market.”

Second Quarter 2017 Financial Highlights

• Revenue: Total revenue for the second quarter of 2017 was $122.3 million, an increase of 36%, compared to $89.9 million for the second quarter of 2016.
• Billings: Total billings were $146.3 million for the second quarter of 2017, an increase of 45%, compared to $101.2 million for the second quarter of 2016.  
• Gross Profit: GAAP gross profit for the second quarter of 2017 was $87.8 million compared to $63.2 million for the second quarter of 2016.  Non-GAAP gross profit for the second quarter of 2017 was $94.4 million compared to $67.5 million for the second quarter of 2016.  GAAP gross margin for the second quarter of 2017 was 72% compared to 70% for the second quarter of 2016.  Non-GAAP gross margin was 77% for the second quarter of 2017 compared to 75% for the second quarter of 2016.
• Operating Income (Loss): GAAP operating loss for the second quarter of 2017 was $(19.3) million compared to a loss of $(32.0) million for the second quarter of 2016.  Non-GAAP operating profit for the second quarter of 2017 was $9.1 million compared to $3.7 million for the second quarter of 2016.
• Net Income (Loss): GAAP net loss for the second quarter of 2017 was $(25.9) million, or $(0.59) per share, based on 43.9 million weighted average shares outstanding.  This compares to a GAAP net loss of $(38.3) million, or $(0.92) per share, based on 41.6 million weighted average shares outstanding for the second quarter of 2016.Non-GAAP net profit for the second quarter of 2017 was $8.0 million, or $0.17 per share, based on 55.0 million weighted average diluted shares outstanding.  This compares to a non-GAAP net profit of $2.5 million, or $0.06 per share, based on 45.1 million weighted average diluted shares outstanding for the second quarter of 2016.  Non-GAAP earnings per share for the second quarter of 2017 included the shares associated with the company’s convertible notes, and cash interest expense (net of tax) of $1.1 million was added back to net income as the “If-Converted” threshold during the period was achieved.
• Cash and Cash Flow: As of June 30, 2017, Proofpoint had cash, cash equivalents, and short term investments of $429.5 million.  The company generated $26.5 million in net cash from operations for the second quarter of 2017 compared to $8.3 million during the second quarter of 2016.  The company’s free cash flow for the quarter was $15.9 million compared to approximately breakeven for the second quarter of 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.”

“We were pleased with our ability to exceed expectations during the second quarter, evidenced by revenue and billings growth of 36% and 45%, respectively, as well as strong free cash flow generation,” stated Paul Auvil, chief financial officer of Proofpoint.  “Our overall financial results highlight the ongoing leverage we are seeing in the business while at the same time driving top line growth.”

Second Quarter and Recent Business Highlights:

• Won Best Fraud Prevention with Email Fraud Defense and Best SME Solution for Proofpoint Essentials at SC Awards Europe 2017.
• Announced its cloud Email Protection and Information Protection solutions have achieved in-process status for the Federal Risk and Authorization Management Program (FedRAMP), under the sponsorship of the Federal Communications Commission (FCC).
• TAP SaaS Defense became generally available and is designed to give customers protection from malware when accessing cloud office collaboration solutions such as Box, OneDrive, Salesforce.com and SharePoint.

Financial Outlook

As of July 27, 2017, Proofpoint is providing guidance for its third quarter and increasing full year 2017 guidance as follows:

• Third Quarter 2017 Guidance: Total revenue is expected to be in the range of $130.0 million to $132.0 million.  Billings are expected to be in the range of $162.0 million to $164.0 million.  GAAP gross margin is expected to be 72%.  Non-GAAP gross margin is expected to be 77%.  GAAP net loss is expected to be in the range of $(28.2) million to $(24.8) million, or $(0.64) to $(0.56) per share, based on approximately 44.4 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 $0.16 to $0.18 per share, using 55.4 million weighted average diluted shares outstanding, and adding back the $1.1 million in cash interest expense as prescribed under the “If-Converted” method.  Free cash flow is expected to be in the range of $26.0 million to $28.0 million, which assumes capital expenditures of approximately $12.0 million for the quarter.
• Full Year 2017 Guidance: Total revenue is expected to be in the range of $503.0 million to $506.0 million.  Billings are expected to be in the range of $625.0 million to $628.0 million. GAAP gross margin is expected to be 72%.  Non-GAAP gross margin is expected to be 77%.  GAAP net loss is expected to be in the range of $(112.4) million to $(104.1) million, or $(2.55) to $(2.36) per share, based on approximately 44.1 million weighted average diluted shares outstanding.  Non-GAAP net income is expected to be in the range of $30.0 million to $31.5 million, or $0.62 to $0.64 per share, using 55.4 million weighted average diluted shares outstanding, and adding back the $4.2 million in cash interest expense as prescribed under the “If-Converted” method.  Free cash flow is expected to be in the range of $100.0 million to $107.0 million, which assumes capital expenditures of $44.0 million to $46.0 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 second quarter ended June 30, 2017.  To access this call, dial (877) 852-6573 for the U.S. or Canada and (719) 325-2326 for international callers with conference ID #7942677.  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 August 10, 2017, by dialing (844) 512-2921 for the U.S. or Canada or (412) 317-6671 for international callers, and entering passcode #7942677.

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 March 31, 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, 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, and non-cash interest expense related to the convertible debt discount and issuance costs for the convertible debt offering.

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 June 30,								Six Months Ended June 30,
			2017				2016				2017				2016
Revenue:
Subscription		$	118,928			$	87,318			$	229,853			$	164,715
Hardware and services			3,401				2,586				5,726				4,192
Total revenue			122,329				89,904				235,579				168,907
Cost of revenue:(1)(2)
Subscription			30,363				23,198				58,684				44,880
Hardware and services			4,130				3,460				8,185				6,602
Total cost of revenue			34,493				26,658				66,869				51,482
Gross profit			87,836				63,246				168,710				117,425
Operating expense:(1)(2)
Research and development			32,306				23,588				61,912				46,241
Sales and marketing			62,454				48,664				121,186				95,187
General and administrative			12,348				22,999				22,835				33,603
Total operating expense			107,108				95,251				205,933				175,031
Operating loss			(19,272	)			(32,005	)			(37,223	)			(57,606	)
Interest expense			(5,848	)			(5,809	)			(11,814	)			(11,609	)
Other income (expense), net			184				(302	)			55				(300	)
Loss before provision for income taxes			(24,936	)			(38,116	)			(48,982	)			(69,515	)
Provision for income taxes			(999	)			(185	)			(2,433	)			(442	)
Net loss		$	(25,935	)		$	(38,301	)		$	(51,415	)		$	(69,957	)
Net loss per share, basic and diluted		$	(0.59	)		$	(0.92	)		$	(1.18	)		$	(1.69	)
Weighted average shares outstanding, basic and diluted			43,890				41,605				43,562				41,349
(1)  Includes stock‑based compensation expense as follows:
Cost of subscription revenue		$	2,863			$	1,721			$	5,239			$	3,359
Cost of hardware and services revenue			469				392				908				745
Research and development			7,744				5,877				14,794				11,479
Sales and marketing			8,230				6,718				16,127				13,536
General and administrative			5,198				4,000				9,810				8,072
Total stock-based compensation expense		$	24,504			$	18,708			$	46,878			$	37,191
(2)  Includes intangible amortization expense as follows:
Cost of subscription revenue		$	3,189			$	2,118			$	6,377			$	4,235
Research and development			15				15				30				30
Sales and marketing			949				1,236				1,916				2,509
Total intangible amortization expense		$	4,153			$	3,369			$	8,323			$	6,774

 

Proofpoint, Inc.
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
		June 30,				December 31,
			2017				2016
Assets
Current assets:
Cash and cash equivalents		$	392,886			$	345,426
Short-term investments			36,599				51,325
Accounts receivable, net			75,568				72,951
Inventory			497				598
Deferred product costs			1,488				1,829
Deferred commissions			20,516				21,168
Prepaid expenses and other current assets			12,411				17,498
Total current assets			539,965				510,795
Property and equipment, net			64,712				52,523
Deferred product costs			292				310
Goodwill			167,270				167,270
Intangible assets, net			53,386				61,708
Long-term deferred commissions			4,356				4,496
Other assets			10,725				4,558
Total assets		$	840,706			$	801,660
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	14,273			$	15,297
Accrued liabilities			40,267				50,765
Capital lease obligations			31				32
Deferred rent			460				409
Deferred revenue			297,446				259,109
Total current liabilities			352,477				325,612
Convertible senior notes			377,422				366,541
Long-term capital lease obligations			75				91
Long-term deferred rent			3,186				2,413
Other long-term liabilities			10,877				9,008
Long-term deferred revenue			62,903				53,072
Total liabilities			806,940				756,737
Stockholders’ equity
Common stock, $0.0001 par value; 200,000 shares authorized; 44,337 and 43,015 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively			4				4
Additional paid-in capital			555,287				514,034
Accumulated other comprehensive loss			(3	)			(7	)
Accumulated deficit			(521,522	)			(469,108	)
Total stockholders’ equity			33,766				44,923
Total liabilities and stockholders’ equity		$	840,706			$	801,660

 

Proofpoint, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
		Three Months Ended June 30,								Six Months Ended June 30,
			2017				2016				2017				2016
Cash flows from operating activities
Net loss		$	(25,935	)		$	(38,301	)		$	(51,415	)		$	(69,957	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			9,848				7,385				19,147				14,621
Loss on disposal of property and equipment			346				99				357				288
Amortization of investment premiums, net of accretion of purchase discounts			(38	)			(15	)			10				35
Stock‑based compensation			24,504				18,708				46,878				37,191
Change in fair value of contingent consideration			(284	)			-				(1,730	)			-
Amortization of debt issuance costs and accretion of debt discount			5,484				5,172				10,888				10,268
Foreign currency transaction (gain) loss			(228	)			259				(86	)			35
Changes in assets and liabilities:
Accounts receivable			(13,166	)			(2,403	)			(2,725	)			(3,299	)
Inventory			(25	)			279				101				183
Deferred products costs			268				271				359				435
Deferred commissions			(1,880	)			(860	)			791				621
Prepaid expenses			(838	)			(276	)			(1,686	)			(533	)
Other current assets			(84	)			48				260				104
Deferred income taxes			239				(41	)			(2,116	)			(167	)
Long-term assets			190				48				(3,710	)			51
Accounts payable			211				4,487				(1,374	)			5,959
Accrued liabilities			3,363				2,113				4,014				(755	)
Deferred rent			532				(21	)			824				(12	)
Deferred revenue			23,979				11,341				48,168				30,643
Net cash provided by operating activities			26,486				8,293				66,955				25,711
Cash flows from investing activities
Proceeds from sales and maturities of short-term investments			23,159				14,261				56,081				68,900
Purchase of short-term investments			(28,705	)			(26,762	)			(41,360	)			(53,742	)
Purchase of property and equipment			(10,616	)			(8,356	)			(22,867	)			(16,194	)
Receipts from escrow account			2,054				-				4,620				-
Net cash used in investing activities			(14,108	)			(20,857	)			(3,526	)			(1,036	)
Cash flows from financing activities
Proceeds from issuance of common stock			10,893				8,463				13,218				10,335
Withholding taxes related to restricted stock net share settlement			(10,612	)			(5,874	)			(25,122	)			(12,572	)
Repayments of equipment loans and capital lease obligations			(8	)			(8	)			(16	)			(16	)
Holdback payments for prior acquisitions			-				-				-				(1,397	)
Contingent consideration payment			(2,054	)			-				(4,620	)			-
Net cash (used in) provided by financing activities			(1,781	)			2,581				(16,540	)			(3,650	)
Effect of exchange rate changes on cash and cash equivalents			427				(198	)			571				30
Net increase (decrease) in cash and cash equivalents			11,024				(10,181	)			47,460				21,055
Cash and cash equivalents
Beginning of period			381,862				377,441				345,426				346,205
End of period		$	392,886			$	367,260			$	392,886			$	367,260

 

Reconciliation of Non-GAAP Measures
(In thousands, except per share amounts)
(Unaudited)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
			2017				2016				2017				2016
GAAP gross profit		$	87,836			$	63,246			$	168,710			$	117,425
GAAP gross margin			72%				70%				72%				70%
Plus:
Stock-based compensation expense			3,332				2,113				6,147				4,104
Intangible amortization expense			3,189				2,118				6,377				4,235
Non-GAAP gross profit			94,357				67,477				181,234				125,764
Non-GAAP gross margin			77%				75%				77%				74%
GAAP operating loss			(19,272	)			(32,005	)			(37,223	)			(57,606	)
Plus:
Stock-based compensation expense			24,504				18,708				46,878				37,191
Intangible amortization expense			4,153				3,369				8,323				6,774
Acquisition-related expenses			(284	)			118				(1,754	)			122
Litigation-related expenses			-				13,462				-				14,657
Non-GAAP operating income			9,101				3,652				16,224				1,138
GAAP net loss			(25,935	)			(38,301	)			(51,415	)			(69,957	)
Plus:
Stock-based compensation expense			24,504				18,708				46,878				37,191
Intangible amortization expense			4,153				3,369				8,323				6,774
Acquisition-related expenses			(284	)			118				(1,754	)			122
Litigation-related expenses			-				13,462				-				14,657
Interest expense - debt discount and issuance costs			5,484				5,172				10,888				10,268
Income tax benefit (expense)			120				(23	)			628				(45	)
Non-GAAP net income (loss) (1)		$	8,042			$	2,505			$	13,548			$	(990	)
Add interest expense of convertible senior notes, net of tax (1)			1,060				-				1,258				-
Numerator for non-GAAP EPS calculation		$	9,102			$	2,505			$	14,806			$	(990	)
Non-GAAP net income (loss) per share - diluted		$	0.17			$	0.06			$	0.28			$	(0.02	)
GAAP weighted-average shares used to compute net loss per share, diluted			43,890				41,605				43,562				41,349
Dilutive effect of convertible senior notes (2)			7,989				-				5,157				-
Dilutive effect of employee equity incentive plan awards (3)			3,130				3,528				3,363				-
Non-GAAP weighted-average shares used to compute net income (loss) per share, diluted			55,009				45,133				52,082				41,349
(1) Due to the full valuation allowance on the Company's deferred tax assets, there were no tax effects associated with the non-GAAP adjustments for stock-based compensation, costs associated with acquisitions and litigations, and non-cash interest expense related to the debt discount and issuance costs for the convertible debt offering. Only GAAP deferred tax expenses or benefits related to the amortization of intangibles were excluded from the non-GAAP income tax expense.
(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								Six Months Ended
		June 30,								June 30,
			2017				2016				2017				2016
Total revenue		$	122,329			$	89,904			$	235,579			$	168,907
Deferred revenue
Ending			360,349				254,370				360,349				254,370
Beginning			336,369				243,028				312,181				223,726
Net Change			23,980				11,342				48,168				30,644
Less:
Deferred revenue contributed by acquisitions			-				-				-				-
Billings		$	146,309			$	101,246			$	283,747			$	199,551

 

Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows
(In thousands)
(Unaudited)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
			2017				2016				2017				2016
GAAP cash flows provided by operating activities		$	26,486			$	8,293			$	66,955			$	25,711
Less:
Purchases of property and equipment			(10,616	)			(8,356	)			(22,867	)			(16,194	)
Non-GAAP free cash flows		$	15,870			$	(63	)		$	44,088			$	9,517

 

Revenue by Solution
(In thousands)
(Unaudited)
	Three Months Ended
	June 30, 2017			March 31, 2017			December 31, 2016			September 30, 2016			June 30, 2016			March 31, 2016
Protection and Advanced Threat	$	90,376		$	84,480		$	78,698		$	72,664		$	64,797		$	56,462
Archiving, Privacy and Governance		31,953			28,770			28,107			27,120			25,107			22,541
Total revenue	$	122,329		$	113,250		$	106,805		$	99,784		$	89,904		$	79,003

 

Reconciliation of Non-GAAP Measures to Guidance
(In millions, except per share amount)
(Unaudited)
		Three Months Ending			Year Ending
		September 30,			December 31,
		2017			2017
Total revenue		$130 - $132			$503 - $506
GAAP gross profit		93.0 - 94.9			359.7 - 362.9
GAAP gross margin		72%			72%
Plus:
Stock-based compensation expense		3.9 - 3.6			14.8 - 14.0
Intangible amortization expense		3.2 - 3.1			12.8 - 12.7
Non-GAAP gross profit		100.1 - 101.6			387.3 - 389.6
Non-GAAP gross margin		77%			77%
GAAP net loss		$(28.2) - $(24.8)			$(112.4) - $(104.1)
Plus:
Stock-based compensation expense		27.5 - 25.5			106.0 - 100.0
Intangible amortization expense		3.1 - 2.9			16.5 - 16.0
Acquisition-related expenses		-			(1.7) - (1.8)
Interest expense - debt discount and issuance costs		5.6 - 5.5			22.2 - 22.1
Income tax expense		(0.0) - (0.1)			(0.6) - (0.7)
Non-GAAP net income		$8.0 - $9.0			$30.0 - $31.5
Add interest expense of convertible senior notes, net of tax (if dilutive)		1.1			4.2
Numerator for non-GAAP EPS calculation		$9.1 - $10.1			$34.2 - $35.7
Non-GAAP net income per share - diluted		$0.16 - $0.18			$0.62 - $0.64
Non-GAAP weighted-average shares used to compute net income per share, diluted		55.4			55.4
		Three Months Ending			Year Ending
		September 30,			December 31,
		2017			2017
GAAP cash flows provided by operating activities		$38.0 - $40.0			$144.0 - $153.0
Less:
Purchases of property and equipment		(12.0)			(44.0 - 46.0)
Non-GAAP free cash flows		$26.0 - $28.0			$100.0 - $107.0

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