Billion Dollar Unicorns: Proofpoint Steadily Building Through Acquisitions

According to a Markets and Markets research report, the global cyber security market is expected to grow at a CAGR of 10.2% from $152.71 billion in 2018 to $248.26 billion by 2023. The growth is expected to be driven by the growing need for cloud-based solutions among SMBs. Sunnyvale-based Proofpoint (Nasdaq: PFPT) is a cloud-based enterprise email security, e-discovery, and compliance service provider that continues to see strong revenue growth.

Proofpoint’s Financials
For the recently announced fourth quarter results, Proofpoint saw revenues grow 35% over the year to $198.5 million, significantly ahead of the market’s forecast of $193 million. Non-GAAP earnings of $0.51 per share were also significantly ahead of the Street’s forecast of $0.35 and previous year’s performance of $0.37 per share.

During the quarter, billings under review grew 43% over the year to $269.9 million. Renewal rates were beyond 90% during the reported quarter.

By segment, subscription revenues grew 35% over the year to $195.1 million. Hardware and services revenues increased 17% to $3.4 million.

On the basis of solutions, revenues from Advanced Threat which includes Targeted Attack Protection, grew 34% to $147.4 million, and Compliance revenues grew 38% to $51.1 million.

Proofpoint ended fiscal 2018 with revenues growing 38% to $717 million and non-GAAP earnings of $1.47 per share, compared with $1.10 a year ago. Subscription revenues for the year grew 39% to $704.4 million. Hardware and services revenues fell 6% to $12.6 million.

For the current quarter, ProofPoint forecast revenues of $198-$200 million and billings of $211.5-$213.5 million. Non-GAAP EPS is expected to come in at $0.31-$0.35. For fiscal 2019, it expects revenues of $870-$874 million, billings of $1.058-$1.062 billion and non-GAAP EOS of $1.60-$1.67. The Street was looking for revenues of $198.1 million for the quarter with an EPS of $0.31 and revenues of $875.4 million for the year with an EPS of $1.65.

Proofpoint’s Product Growth
As part of Proofpoint’s continued expansion of its product offerings, it released the industry’s first ever Targeted Attack Protection’s (TAP) Attack Index last quarter. The index is the first solution of its kind to provide security teams with a people-centric view of their organization’s security posture. The Index will provide security administrators with the ability to identify the users tagged as very attacked people (VAPs) within their organization so that they can modify policies and controls to secure those users.

The Attack Index is calculated as a weighted composite score of all threats sent to an individual in an organization. It measures threats based on four key parameters – cybercriminal sophistication, spread and focus of attack targeting, attack type, and overall attack volume. By using the index, organizations will be able to rank individuals and groups within the organization that need more security controls and awareness training.

It is these impressive products that have helped Proofpoint win several accolades during the year. It was positioned as a leader in Gartner’s Magic Quadrant for Enterprise Information Archiving for the seventh consecutive year and in Gartner’s Magic Quadrant for Security Awareness Computer-Based Training for the fifth consecutive year. Its Cloud Access Security Broker was also named a 2018 CRN Product of the Year Winner.

Proofpoint has been able to deliver its products not only through in-house development, but also by adding capabilities through acquisitions. Since being founded in 2002, Proofpoint has made 15 acquisitions. Its latest acquisition was made last year when it acquired Wombat Security Technologies for $225 million. Wombat’s products helped deliver information security awareness and training software to organizations. It was privately held and had raised $10.8 million in funding prior to the acquisition. Wombat was privately held and did not disclose its detailed financials. But Proofpoint expected to add nearly $30-$32 million in annual revenues through the acquisition. This is a capital-efficient company and a very successful exit for the founders and investors.

Two years ago, Proofpoint had acquired Cloudmark, another privately held security service provider that provided carrier-grade messaging security and infrastructure solutions for fixed, mobile, and social networks. Cloudmark had raised $39 million prior to the acquisition and was bought by Proofpoint for an estimated $110 million. Cloudmark was expected to add $20-$25 million in revenues to Proofpoint’s financials. But the deal was made to expand customer reach and data sources to be able to analyse and combat malicious attacks more effectively.

Some of the other older acquisitions include FireLayers, Socialware, and Emerging Threats. FireLayers delivered a policy-based platform for controlling, protecting, and analyzing cloud applications and data. Proofpoint had acquired the company in 2015 at an estimated $55 million. Firelayers’ financial details prior to the acquisition are not known. It had raised an undisclosed amount from Akamai and YL Ventures. The acquisition was expected to help Proofpoint extend its TAP service to SaaS applications, thus enabling customers to protect their employees from advanced malware.

Socialware was another smaller player that provided software and services for social media compliance. It had raised $14 million prior to the acquisition, and was acquired for an estimated $9 million. Proofpoint integrated Socialware’s compliance workflow and content capture and review capabilities with its own Social Media Security and Compliance service. Owler estimates Socialware’s revenues at $5.2 million prior to the acquisition.

Emerging Threats was a security research organization that had raised $2.4 million prior to being acquired for nearly $40 million in 2015. Emerging Threats was a leading provider of advanced threat intelligence that leveraged expert threat researchers and an automated collection and analysis system to produce actionable threat intelligence for detecting, blocking and addressing cyberattacks. Post the acquisition, Proofpoint integrated these advanced threat intelligence capabilities with its existing TAP and Threat Response security solutions to deliver improved threat management solutions. Prior to the acquisition, analysts expected Emerging Threats to be operating at revenues of $8.1 million.

The security services industry has witnessed several acquisitions in the last few years. Other security players including Okta, FireEye, and Palo Alto Networks have all been steadily building up their arsenal by acquiring comparatively smaller firms that offer niche products and capabilities. Proofpoint is no different. It ended the current year with cash and cash equivalents of $185 million and could continue to acquire other smaller players in the current year as well. What other players do you think it should look at acquiring? What are the capabilities that it is currently missing that it should scout for in its next acquisition?

Its stock is trading at $117.52 with a market capitalization of $6.5 billion. It had touched a high of $130.27 in July last year. It has recovered from the year low of $75.92 that it had fallen to in December last year.

This segment is a part in the series : Billion Dollar Unicorns