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Why Is Proofpoint (PFPT) Down 9.5% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Proofpoint (PFPT). Shares have lost about 9.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Proofpoint due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Proofpoint Q2 Results Surpass Estimates

Proofpoint reported second-quarter 2019 non-GAAP earnings of 41 cents per share, which outpaced the Zacks Consensus Estimate of 36 cents. The bottom line also came ahead of the year-ago quarter figure of 26 cents.

Proofpoint reported total revenues of $214.4 million, up 25% year over year. The top line also surpassed the consensus estimate of $212 million.

The top-line growth can be attributed to strong customer wins and a solid progress in the emerging products. High renewal rates were another tailwind.

Top-Line Details

Total billings during the quarter jumped 17% year over year to $232.1 million. Also, renewal rates again soared above 90%.

Subscription revenues (98.3% of total revenues) came in at $210.8 million, up 24.7%. Hardware and services revenues (1.7%) grew 27.6% to $3.7 million.

On the basis of solutions, revenues from Advanced Threat (73%), which includes Targeted Attack Protection or TAP offering, rose 21% from the year-earlier quarter to $156.6 million. Compliance revenues (27%) of $57.9 million surged 36%.

Emerging products, which contributed to more than 33% of total new and add-on businesses closed during the quarter, steadily surpassed the company’s remaining product portfolio. This upside was led by robust demand for Email Fraud Defense (EFD) and Threat Response.

Proofpoint continues to expand abroad by dint of its international business, which grew 33% year over year and accounted for 19% of its total revenues in the second quarter.

Among the emerging product wins during the quarter were an agricultural conglomerate that adopted the EFD and Threat Response for 80,000 users; a Fortune 100 insurance company that added PSAT for 100,000 users. It also included a Fortune 100 chemicals company that added PSAT for 50,000 users; and a private university that added EFD and Threat Response for 70,000 users. These contributed considerably to the overall results of the company.

Notably, the pipeline in Proofpoint’s digital risk products area remained strong. Increased interest in new archiving features like supervision, eDiscovery and analytics visualization, particularly from firms in regulated industries such as healthcare and financial services and the features are driving demand.

Proofpoint’s archiving pipeline continued to strengthen on the back of its cloud-based delivery model. However, given the complexity of these deals, the company expects that it might take a few quarters for them to mature and contribute to results.

Additionally, archiving deals maturing in the second quarter included a Fortune 500 technical professional services firm with 20,000 users, an international energy services company with 20,000 users, and a financial services firm with 10,000 users.

Operating Details

Non-GAAP gross profit advanced 28% from the year-ago quarter to $169.4 million. Non-GAAP gross margin improved 200 basis points (bps) to 79%, driven by a strong revenue performance.

Proofpoint’s non-GAAP operating income surged 90.6% to $28.4 million. Non-GAAP operating margin expanded 450 bps to 13.2%.

Balance Sheet & Cash Flow

Proofpoint exited the quarter with cash and cash equivalents and short-term investments of approximately $182.7 million compared with the previous quarter’s balance of $216.6 million.

The company generated operating cash flow of $43.4 million compared with $54.1 million in the previous quarter. Free cash flow for the same period summed $35 million compared with $48.6 million reported in the first quarter of 2019.

Guidance

Encouraged by its strong second-quarter performance, Proofpoint raised full-year 2019 guidance. For 2019, the company expects revenues of $878.5-$880.5 million, up from the previous projection of $874-$878 million. Billings are now expected in the range of $1.064-$1.068 billion compared with $1.062-$1.066 billion guided earlier. Non-GAAP gross margin is projected to be 79%.

Non-GAAP earnings per share are now anticipated in the band of $1.61-$1.64. Previously, the company had projected this metric at $1.43-$1.49.

Free cash flow is envisioned in the range of $196-$198 million, down from $200-$204 million expected previously, which includes $10 million tax payment associated with the acquisition of Meta Networks, expected in the third quarter.

Capital expenditures are expected to be approximately $38 million for full-year 2019.

Management is confident about retaining an annual revenue growth of 23% or more while maintaining free cash flow margins at 22%.

For the third quarter of 2019, Proofpoint anticipates revenues of $223-$225 million and billings of $274-$276 million.

Non-GAAP gross margin is estimated to be 79%. Non-GAAP earnings per share are anticipated in the band of 37-40 cents. Free cash flow is estimated in the range of $40-$42 million.

Management states that the full impact of the wind down of Cloudmark OEM business will be realized throughout the year.

Capital expenditures of $10 million and depreciation of $9 million are expected to remain overhangs on the margins in the third quarter.

Management is optimistic about its progress to increase its total addressable market to more than $13 billion in the coming years.
 

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months.

VGM Scores

Currently, Proofpoint has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Proofpoint has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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