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

“The third quarter marked another strong quarter for Proofpoint,” stated Gary Steele, chief executive officer of Proofpoint.  “Our ability to exceed expectations across all of our key operating metrics was once again driven by enterprise cloud migration, the rapidly evolving threat landscape and the company’s proven ability to identify, block, and remediate advanced threats.  The combination of ongoing traction from emerging products, robust new and add-on activity, and consistently high renewal rates positions Proofpoint to maintain momentum for the remainder of the year and into 2018.”

Third Quarter 2017 Financial Highlights

  • Revenue: Total revenue for the third quarter of 2017 was $134.3 million, an increase of 35%, compared to $99.8 million for the third quarter of 2016.
  • Billings: Total billings were $166.5 million for the third quarter of 2017, an increase of 33%, compared to $124.8 million for the third quarter of 2016.  
  • Gross Profit: GAAP gross profit for the third quarter of 2017 was $98.3 million compared to $72.5 million for the third quarter of 2016.  Non-GAAP gross profit for the third quarter of 2017 was $104.9 million compared to $77.2 million for the third quarter of 2016.  GAAP gross margin for the third quarter of 2017 was 73%, consistent with the third quarter of 2016.  Non-GAAP gross margin was 78% for the third quarter of 2017 compared to 77% for the third quarter of 2016.
  • Operating Income (Loss): GAAP operating loss for the third quarter of 2017 was $(16.0) million compared to a loss of $(11.8) million for the third quarter of 2016.  Non-GAAP operating income for the third quarter of 2017 was $13.3 million compared to $10.5 million for the third quarter of 2016. 
  • Net Income (Loss): GAAP net loss for the third quarter of 2017 was $(22.0) million, or $(0.49) per share, based on 44.4 million weighted average shares outstanding.  This compares to a GAAP net loss of $(18.4) million, or $(0.44) per share, based on 42.1 million weighted average shares outstanding for the third quarter of 2016.  Non-GAAP net income for the third quarter of 2017 was $13.0 million, or $0.25 per share, based on 55.4 million weighted average diluted shares outstanding.  This compares to a non-GAAP net income of $9.4 million, or $0.19 per share, based on 54.1 million weighted average diluted shares outstanding for the third quarter of 2016.  Non-GAAP earnings per share for the third 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 September 30, 2017, Proofpoint had cash, cash equivalents, and short term investments of $459.6 million.  The company generated $44.2 million in net cash from operations for the third quarter of 2017 compared to $27.3 million during the third quarter of 2016.  The company’s free cash flow for the quarter was $32.3 million compared to $18.0 for the third 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.”

“Our strong third quarter results were highlighted by revenue and billings growth of 35% and 33% year-over-year, respectively,” stated Paul Auvil, chief financial officer of Proofpoint.  “During the quarter, we were particularly pleased with our ability to exceed our profitability and free cash flow expectations while continuing to grow the top line.”

Third Quarter and Recent Business Highlights:

  • Launched Proofpoint Domain Discover solution to proactively stop lookalike domain email attacks before they strike.
  • Launched the integration between Proofpoint’s Email Protection and Email Fraud Defense which expands visibility, tools, and services to better protect from email fraud attacks.    
  • Successfully completed initial deployments of TAP SaaS Defense with customers around the world.

Financial OutlookAs of October 19, 2017, Proofpoint is providing guidance for its fourth quarter and increasing full year 2017 guidance as follows:

  • Fourth Quarter 2017 Guidance: Total revenue is expected to be in the range of $138.0 million to $140.0 million.  Billings are expected to be in the range of $180.0 million to $182.0 million.  GAAP gross margin is expected to be 72%.  Non-GAAP gross margin is expected to be 77.5%.  GAAP net loss is expected to be in the range of $(28.6) million to $(25.7) million, or $(0.64) to $(0.57) per share, based on approximately 44.9 million weighted average diluted shares outstanding.  Non-GAAP net income is expected to be in the range of $9.5 to $10.5 million, or $0.19 to $0.21 per share, using 55.7 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 during the quarter is expected to be in the range of $25.0 million to $27.0 million, which assumes capital expenditures of approximately $13.0 million. In addition, the company has decided to transfer the intellectual property related to the FireLayers acquisition from Israel to the United States which will result in a one-time tax payment of approximately $4.0 million, which is included in our fourth quarter free cash flow guidance.
  • Full Year 2017 Guidance: Total revenue is expected to be in the range of $508.0 million to $510.0 million.  Billings are expected to be in the range of $630.0 million to $632.0 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 $(102.0) million to $(98.9) million, or $(2.31) to $(2.24) 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 $36.1 million to $37.1 million, or $0.73 to $0.75 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 for the full year is expected to be in the range of $101.5 million to $103.5 million, which assumes capital expenditures of approximately $48.0 million. In addition, our free cash flow guidance includes the approximate $4.0 million impact from the intellectual property tax payment mentioned above which was not included in our previous guidance range.  
  • Full Year 2018 Guidance: Total revenue is expected to be in the range of $644.0 million to $648.0 million.  Billings are expected to be in the range of $798.0 million to $802.0 million.  Non-GAAP net income is expected to be in the range of $50.0 million to $54.0 million, or $0.96 to $1.03 per share, using 56.3 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 approximately $135.0 million, which assumes capital expenditures of approximately $45.0 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 third quarter ended September 30, 2017.  To access this call, dial (877) 795-3599 for the U.S. or Canada, or (719) 325-2177 for international callers with conference ID #2246702.  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 2, 2017, by dialing (844) 512-2921 for the U.S. or Canada or (412) 317-6671 for international callers, and entering passcode #2246702.

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 June 30, 2017, and the other reports we file with the SEC, copies of which are available free of charge at the SEC's website at www.sec.gov or upon request from our investor relations department.  All forward-looking statements herein reflect our opinions only as of the date of this release, and Proofpoint undertakes no obligation, and expressly disclaims any obligation, to update forward-looking statements herein in light of new information or future events.

Computational Guidance on Earnings Per Share Estimates

Accounting principles require that EPS be computed based on the weighted average shares outstanding ("basic"), and also assuming the issuance of potentially issuable shares (such as those subject to stock options, convertible notes, etc.) if those potentially issuable shares would reduce EPS ("diluted").

The number of shares related to options and similar instruments included in diluted EPS is based on the "Treasury Stock Method" prescribed in Financial Accounting Standards Board ("FASB") ASC Topic 260, Earnings Per Share ("FASB ASC Topic 260"). This method assumes a theoretical repurchase of shares using the proceeds of the respective stock option exercise at a price equal to the issuer's average stock price during the related earnings period. Accordingly, the number of shares includable in the calculation of diluted EPS in respect of stock options and similar instruments is dependent on this average stock price and will increase as the average stock price increases.

The number of shares includable in the calculation of diluted EPS in respect of convertible senior notes is based on the "If Converted" method prescribed in FASB ASC Topic 260. This method assumes the conversion or exchange of these securities for shares of common stock. In determining if convertible securities are dilutive, the interest savings (net of tax) subsequent to an assumed conversion are added back to net earnings. The shares related to a convertible security are included in diluted EPS only if EPS as otherwise calculated is greater than the interest savings, net of tax, divided by the shares issuable upon exercise or conversion of the instrument. Accordingly, the calculation of diluted EPS for these instruments is dependent on the level of net earnings. Each series of convertible securities is considered individually and in sequence, starting with the series having the lowest incremental earnings per share, to determine if its effect is dilutive or anti-dilutive.

Non-GAAP Financial Measures

We have provided in this release financial information that has not been prepared in accordance with GAAP. We use these non-GAAP financial measures internally in analyzing our financial results and believe they are useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial results with other companies in our industry, many of which present similar non-GAAP financial measures to investors. 

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures below. As previously mentioned, a reconciliation of our non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the financial statement tables included below in this press release.

We do not provide a reconciliation of full year 2018 non-GAAP financial measures to our comparable GAAP financial measures because we could not do so without unreasonable effort due to unavailability of information needed to calculate reconciling items and due to variability, complexity and limited visibility of the adjusting items that would be excluded from the non-GAAP financial measures in 2018. When planning, forecasting and analyzing 2018, we do so primarily on a non-GAAP basis without preparing a GAAP analysis as that would require estimates for items such as stock‑based compensation, acquisition-related expenses, and litigation-related expenses, which are inherently difficult to predict with reasonable accuracy. Stock-based compensation expense, for example, is difficult to estimate because it depends on the company’s future hiring and retention needs, as well as the future fair market value of the company’s common stock, all of which are difficult to predict and subject to constant change. In addition, for purposes of setting annual guidance, it would be difficult to quantify stock-based compensation expense for the year with reasonable accuracy in the current quarter.

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 September 30,   Nine Months Ended September 30,  
      2017   2016   2017   2016  
Revenue:                    
Subscription     $   131,038     $   97,163     $   360,891     $   261,878    
Hardware and services        3,274        2,621        9,000        6,813    
Total revenue        134,312        99,784        369,891        268,691    
Cost of revenue:(1)(2)                    
Subscription        31,211        23,987        89,895        68,867    
Hardware and services        4,800        3,293        12,985        9,895    
Total cost of revenue        36,011        27,280        102,880        78,762    
Gross profit        98,301        72,504        267,011        189,929    
Operating expense:(1)(2)                    
Research and development        32,477        24,493        94,389        70,734    
Sales and marketing        68,518        51,467        189,704        146,654    
General and administrative        13,388        8,393        36,223        41,996    
Total operating expense        114,383        84,353        320,316        259,384    
Operating loss        (16,082 )      (11,849 )      (53,305 )      (69,455 )  
Interest expense        (5,733 )      (5,920 )      (17,547 )      (17,529 )  
Other income (expense), net        829        (228 )      884        (528 )  
Loss before provision for income taxes        (20,986 )      (17,997 )      (69,968 )      (87,512 )  
Provision for income taxes        (977 )      (370 )      (3,410 )      (812 )  
Net loss     $   (21,963 )   $   (18,367 )   $   (73,378 )   $   (88,324 )  
Net loss per share, basic and diluted     $   (0.49 )   $   (0.44 )   $   (1.67 )   $   (2.12 )  
Weighted average shares outstanding, basic and diluted        44,418        42,109        43,850        41,604    
                     
(1)  Includes stock‑based compensation expense as follows:                    
Cost of subscription revenue     $   2,876     $   2,080     $   8,115     $   5,439    
Cost of hardware and services revenue         493         375         1,401         1,120    
Research and development         7,803         6,019         22,597         17,498    
Sales and marketing         8,943         7,174         25,070         20,710    
General and administrative         5,222         4,315         15,032         12,387    
Total stock-based compensation expense     $   25,337     $   19,963     $   72,215     $   57,154    
(2)  Includes intangible amortization expense as follows:                    
Cost of subscription revenue     $   3,190     $   2,223     $   9,567     $   6,458    
Research and development        15        15         45         45    
Sales and marketing        875        1,429         2,791         3,938    
Total intangible amortization expense     $   4,080     $   3,667     $   12,403     $   10,441    
                     
Proofpoint, Inc.
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
             
      September 30,   December 31,  
      2017   2016  
Assets            
Current assets:            
Cash and cash equivalents     $   416,006     $   345,426    
Short-term investments        43,620        51,325    
Accounts receivable, net        91,478        72,951    
Inventory        457        598    
Deferred product costs        1,654        1,829    
Deferred commissions        21,458        21,168    
Prepaid expenses and other current assets        14,380        17,498    
Total current assets        589,053        510,795    
Property and equipment, net        66,563        52,523    
Deferred product costs        294        310    
Goodwill        167,270        167,270    
Intangible assets, net        49,306        61,708    
Long-term deferred commissions        5,476        4,496    
Other assets        8,170        4,558    
Total assets     $ 886,132     $ 801,660    
Liabilities and Stockholders’ Equity            
Current liabilities:            
Accounts payable     $   9,646     $   15,297    
Accrued liabilities        54,548        50,765    
Capital lease obligations        34        32    
Deferred rent        511        409    
Deferred revenue        325,070        259,109    
Total current liabilities        389,809        325,612    
Convertible senior notes        381,149        366,541    
Long-term capital lease obligations        63        91    
Long-term deferred rent        3,495        2,413    
Other long-term liabilities        11,215        9,008    
Long-term deferred revenue        67,436        53,072    
Total liabilities        853,167        756,737    
Stockholders’ equity            
Common stock, $0.0001 par value; 200,000 shares authorized; 44,736 and 43,015 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively        4        4    
Additional paid-in capital        576,446        514,034    
Accumulated other comprehensive loss        -         (7 )  
Accumulated deficit        (543,485 )      (469,108 )  
Total stockholders’ equity        32,965        44,923    
Total liabilities and stockholders’ equity      $ 886,132     $ 801,660    
             

  

Proofpoint, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
                     
      Three Months Ended September 30,   Nine Months Ended September 30,  
      2017   2016   2017   2016  
Cash flows from operating activities                    
Net loss     $   (21,963 )   $   (18,367 )   $   (73,378 )   $   (88,324 )  
Adjustments to reconcile net loss to net cash provided by operating activities:                    
Depreciation and amortization        10,139        8,092        29,286        22,713    
Loss on disposal of property and equipment        31        17        388        305    
Amortization of investment premiums, net of accretion of purchase discounts        (5 )      17        5        52    
Stock‑based compensation        25,337        19,963        72,215        57,154    
Change in fair value of contingent consideration        (67 )      -         (1,797 )      -     
Amortization of debt issuance costs and accretion of debt discount        5,603        5,248        16,491        15,516    
Foreign currency transaction (gain) loss        (573 )      224        (659 )      259    
Changes in assets and liabilities:                    
Accounts receivable        (15,850 )      (11,570 )      (18,575 )      (14,869 )  
Inventory        40        (128 )      141        55    
Deferred products costs        (169 )      (31 )      190        404    
Deferred commissions        (2,062 )      (255 )      (1,271 )      366    
Prepaid expenses        (163 )      (1,936 )      (1,849 )      (2,469 )  
Other current assets        52        357        312        461    
Deferred income taxes        85        144        (2,031 )      (23 )  
Long-term assets        272        (3 )      (3,438 )      48    
Accounts payable        (540 )      (3,053 )      (1,914 )      2,906    
Accrued liabilities        11,530        3,688        15,544        2,933    
Deferred rent        360        (91 )      1,184        (103 )  
Deferred revenue        32,158        24,970        80,326        55,613    
Net cash provided by operating activities        44,215        27,286        111,170        52,997    
Cash flows from investing activities                    
Proceeds from sales and maturities of short-term investments        22,722        34,162        78,803        103,062    
Purchase of short-term investments        (29,736 )      (27,491 )      (71,096 )      (81,233 )  
Purchase of property and equipment        (11,889 )      (9,333 )      (34,756 )      (25,527 )  
Payment to escrow account        -         (9,645 )      -         (9,645 )  
Receipts from escrow account        496        -         5,116        -     
Acquisitions of business, net of cash acquired        -         (8,351 )      -         (8,351 )  
Net cash used in investing activities        (18,407 )      (20,658 )      (21,933 )      (21,694 )  
Cash flows from financing activities                    
Proceeds from issuance of common stock        3,710        4,811        16,928        15,146    
Withholding taxes related to restricted stock net share settlement        (6,117 )      (4,443 )      (31,239 )      (17,015 )  
Repayments of equipment loans and capital lease obligations        (9 )      (8 )      (25 )      (24 )  
Holdback payments for prior acquisitions        -         -         -         (1,397 )  
Contingent consideration payment        (496 )      -         (5,116 )      -     
Net cash (used in) provided by financing activities        (2,912 )      360        (19,452 )      (3,290 )  
Effect of exchange rate changes on cash, cash equivalents and restricted cash        460        (66 )      1,035        (36 )  
Net increase in cash, cash equivalents and restricted cash        23,356        6,922        70,820        27,977    
Cash, cash equivalents and restricted cash                    
Beginning of period        393,001        367,332        345,537        346,277    
End of period     $   416,357     $   374,254     $   416,357     $   374,254    
                     

 

Reconciliation of Non-GAAP Measures  
(In thousands, except per share amounts)  
(Unaudited)  
                       
       Three Months Ended     Nine Months Ended     
       September 30,     September 30,     
      2017   2016   2017   2016    
                       
GAAP gross profit     $   98,301     $   72,504     $   267,011     $   189,929      
GAAP gross margin       73 %     73 %     72 %     71 %    
Plus:                      
Stock-based compensation expense         3,369         2,455         9,516         6,559      
Intangible amortization expense         3,190         2,223         9,567         6,458      
Non-GAAP gross profit         104,860         77,182         286,094         202,946      
Non-GAAP gross margin       78 %     77 %     77 %     76 %    
                       
GAAP operating loss       (16,082 )     (11,849 )     (53,305 )     (69,455 )    
Plus:                      
Stock-based compensation expense         25,337         19,963         72,215         57,154      
Intangible amortization expense         4,080         3,667         12,403         10,441      
Acquisition-related expenses         (56 )       464         (1,810 )       586      
Litigation-related expenses         -         (1,716 )       -         12,941      
Non-GAAP operating income         13,279         10,529         29,503         11,667      
                       
GAAP net loss       (21,963 )     (18,367 )     (73,378 )     (88,324 )    
Plus:                      
Stock-based compensation expense       25,337       19,963       72,215       57,154      
Intangible amortization expense         4,080       3,667         12,403       10,441      
Acquisition-related expenses         (56 )       464         (1,810 )       586      
Litigation-related expenses         -         (1,716 )       -         12,941      
Interest expense - debt discount and issuance costs         5,603         5,248         16,491         15,516      
Income tax expense (1)         43         118         671         73      
Non-GAAP net income      $   13,044     $   9,377     $   26,592     $   8,387      
Add interest expense of convertible senior notes, net of tax (2)         1,060         1,060         3,180         -      
Numerator for non-GAAP EPS calculation     $   14,104     $   10,437     $   29,772     $   8,387      
Non-GAAP net income per share - diluted     $   0.25     $   0.19     $   0.54     $   0.18      
                       
GAAP weighted-average shares used to compute net loss per share, diluted         44,418         42,109         43,850         41,604      
Dilutive effect of convertible senior notes (2)         7,938         7,989         7,938         -       
Dilutive effect of employee equity incentive plan awards (3)         3,082         3,977         3,355         3,820      
Non-GAAP weighted-average shares used to compute net income per share, diluted         55,438         54,075         55,143         45,424      
                       
(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, and non-cash interest expense related to the debt discount and issuance costs for the convertible debt offerings. 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     Nine Months Ended     
       September 30,     September 30,     
      2017   2016   2017   2016    
                       
Total revenue     $   134,312     $   99,784     $   369,891     $   268,691      
                       
Deferred revenue                      
Ending         392,506         280,539         392,506         280,539      
Beginning         360,349         254,370         312,181         223,726      
Net Change         32,157         26,169         80,325         56,813      
Less:                      
Deferred revenue contributed by acquisitions         -          (1,200 )       -          (1,200 )    
Billings     $   166,469     $   124,753     $   450,216     $   324,304      
                       

 

                     
Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows
(In thousands)
(Unaudited)
                     
       Three Months Ended     Nine Months Ended   
       September 30,     September 30,   
      2017   2016   2017   2016  
                     
GAAP cash flows provided by operating activities     $   44,215     $   27,286     $   111,170     $   52,997    
Less:                    
Purchases of property and equipment         (11,889 )       (9,333 )       (34,756 )       (25,527 )  
Non-GAAP free cash flows     $   32,326     $   17,953     $   76,414     $   27,470    
                     

 

Revenue by Solution  
(In thousands)  
(Unaudited)  
                           
     Three Months Ended   
    September 30, 2017   June 30, 2017   March 31, 2017   December 31, 2016   September 30, 2016   June 30, 2016  
                           
Protection and Advanced Threat   $   101,434   $   90,376   $   84,480   $   78,698   $   72,664   $   64,797  
Archiving, Privacy and Governance       32,878       31,953       28,770       28,107       27,120       25,107  
Total revenue   $   134,312   $   122,329   $   113,250   $   106,805   $   99,784   $   89,904  
                           

 

           
Reconciliation of Non-GAAP Measures to Guidance  
(In millions, except per share amount)  
(Unaudited)  
           
     Three Months Ending     Year Ending   
     December 31,     December 31,   
    2017    2017   
           
Total revenue   $138 - $140   $508 - $510  
           
GAAP gross profit   99.7 - 101.4   363.8 - 365.6  
GAAP gross margin   72%   72%  
Plus:          
Stock-based compensation expense   4.1 - 3.9   14.6 - 14.3  
Intangible amortization expense   3.2   12.8  
Non-GAAP gross profit   107.0 - 108.5   391.2 - 392.7  
Non-GAAP gross margin   77.5%   77%  
           
GAAP net loss   $(28.6) - $(25.5)   $(102.0) - $(98.9)  
Plus:          
Stock-based compensation expense   28.5 - 26.6   100.7- 98.8  
Intangible amortization expense   4.0   16.4  
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)   0.5  
Non-GAAP net income   $9.5 - $10.5   $36.1 - $37.1  
Add interest expense of convertible senior notes, net of tax (if dilutive)   1.1   4.2  
Numerator for non-GAAP EPS calculation   $10.6 - $11.6   $40.3 - $41.3  
Non-GAAP net income per share - diluted   $0.19 - $0.21   $0.73 - $0.75  
Non-GAAP weighted-average shares used to compute net income per share, diluted   55.7   55.4  
           
           
     Three Months Ending     Year Ending   
     December 31,     December 31,   
    2017    2017   
           
GAAP cash flows provided by operating activities    $38.0 - $40.0     $149.3 - $151.3   
Less:          
Purchases of property and equipment   (13.0)   (47.8)  
Non-GAAP free cash flows    $25.0 - $27.0     $101.5 - $103.5   
           

Media ContactKristy CampbellProofpoint, Inc.408-517-4710kcampbell@proofpoint.com

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

Seth PotterICR for Proofpoint, Inc.646-277-1230seth.potter@icrinc.com 

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