Proofpoint (PFPT) Down 15.3% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Proofpoint (PFPT). Shares have lost about 15.3% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Proofpoint Q4 Earnings & Revenues Beat Estimates

Proofpoint Inc. reported fourth-quarter 2019 non-GAAP earnings of 52 cents per share, which beat the Zacks Consensus Estimate by 10.6% and increased 1.9% year over year.

Revenues came in at $243.4 million, which beat the consensus mark by 1.6% and increased 23% year over year.

The top-line growth can be attributed to strong customer wins and solid progress in the company’s emerging products. Strong demand for its next-generation cloud security and compliance platform, ongoing migration to the cloud, solid international growth and high renewal rates were the other tailwinds.

Top-Line Details

Total billings during the quarter jumped 29% year over year to $347.2 million. Also, renewal rates again soared above 90%.
Subscription revenues (98.7% of total revenues) came in at $240.4 million, up 23.2% from the year-ago quarter. Hardware and services revenues (1.3%) declined 9.7% year over year to $3 million.

The company stopped reporting for its advanced threat and compliance-oriented products as it believes that the data is not informative in terms of measuring business performance.

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, Proofpoint Security Awareness Training (PSAT) and Threat Response.

Notably, PSAT Management remains optimistic about the prospects of PSAT, which is expected to drive growth and boost its capabilities in the new segment of the cybersecurity market.

Proofpoint continues to expand abroad. Its international business grew 30% year over year and accounted for 20% of its total revenues in the fourth quarter.

The company won many international deals during the quarter. These include a Global 2000 pharmaceutical firm that purchased Protection TAP Isolation and threat response for 140,000 users, a Global 2000 financial services firm that purchased a P1 bundle with isolation for 70,000 users and a Global 2000 retailer that purchased Protection TAP and EFD for 60,000 users.

Moreover, Proofpoint’s partnerships with Okta (OKTA) and CrowdStrike (CRWD) resulted in several client wins, leading to implementation of the companies’ joint solutions.

Proofpoint’s archiving pipeline continued to strengthen due to the completion of several deals during the quarter. These include a Fortune 500 financial services firm that added additional compliance services for their 80,000 users, a Fortune 100 retailer that added archiving for 11,000 users, a large asset management firm that purchased archiving and PSAT for 4,500 users and the U.S. government’s health services department that purchased archiving for 13,000 users.

Operating Details

Non-GAAP gross profit advanced 23.9% from the year-ago quarter to $194.1 million. Non-GAAP gross margin improved 100 basis points (bps) to 80%, driven by strong revenue performance.

Proofpoint’s non-GAAP operating income surged 26.3% to $37 million. Non-GAAP operating margin expanded 40 bps to 15.2%.

Balance Sheet & Cash Flow

As of Dec 31, 2019, cash, cash equivalents and short-term investments of $890.9 million compared with $1.05 billion as of Sep 30, 2019.

The company generated operating cash flow of $76.4 million compared with $68.6 million in the previous quarter. Free cash flow was $65.1 million compared with $58.6 million reported in the third quarter of 2019.

Guidance

Proofpoint raised its full-year 2020 revenue guidance. The company now expects revenues of $1.060-$1.067 billion, up from the previous projection of $1.050-$1.062 billion.

Non-GAAP gross margin is projected to be 80%.

Non-GAAP earnings per share are anticipated in the band of $1.42-$1.48, which includes an estimated $40 million expense from the acquisition of ObserveIT, offset by $3.7 million of deferred revenues from the acquisition.

Free cash flow is envisioned in the range of $178-$182 million, down from $225 million expected previously, due to an estimated expense of $25 million to be used for the construction of the new company headquarters.

It also includes an estimated $20 million cash tax payment for the transfer of intellectual property from Israel to the United States, and approximately $40 million of cash spending pertaining to the acquisition of ObserveIT.

Capital expenditures are expected to be approximately $93.5 million for full-year 2020.

For the first quarter of 2020, Proofpoint anticipates revenues of $246-$248 million.

Non-GAAP gross margin is estimated to be 79%. Non-GAAP earnings per share are anticipated in the band of 25-29 cents.

Free cash flow is estimated in the range of $52-$54 million.

Capital expenditures are expected to be approximately $11 million for first quarter 2020.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -80.93% due to these changes.

VGM Scores

At this time, Proofpoint has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

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

Outlook

Proofpoint has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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