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Proofpoint Announces Strong First Quarter 2016 Financial Results

The following excerpt is from the company's SEC filing.

Total revenue of $79.0 million, up 37% year-over-year

Billings of $98.3 million, up 48% year-over-year

Generated positive adjusted EBITDA of $1.3 million

Generated free cash flow of $9.6

million or 12% of total revenue

Increasing FY16 billings, revenue, adjusted EBITDA and free cash flow guidance

SUNNYVALE, Calif., April 21, 2016

Proofpoint, Inc. (NASDAQ: PFPT), a leading next-generation security and compliance company, today announced financial results for the first quarter ended March 31, 2016.

The first quarter marked a very strong start to the year . Our ability to once again exceed expectations across all key metrics was primarily driven by the continued demand for Proofpoints advanced threat solutions, ongoing high competitive win rates and robust renewal and add-on activity, stated Gary Steele, chief executive officer of Proofpoint. Our best-of-breed cloud-based platform, commitment to innovation and proven capability in handling todays advanced security threats, positions the company to maintain the momentum and grow market share globally.

First Quarter 2016 Financial Highlights

Revenue

: Total revenue for the first quarter of 2016 was $79.0 million, an increase of 37% compared to $57.8 million for the first quarter of 2015.

: Total billings were $98.3 million for the first quarter of 2016, an increase of 48% compared to $66.4 million for the first quarter of 2015.

Gross Profit:

GAAP gross profit for the first quarter of 2016 was $54.2 million compared to $38.5 million for the first quarter of 2015. Non-GAAP gross profit for the first quarter of 2016 was $58.3 million compared to $41.2 million for the first quarter of 2015. GAAP gross margin for the first quarter of 2016 was 69% compared to 67% for the first quarter of 2015. Non-GAAP gross margin was 74% for the first quarter of 2016 compared to 71% for the first quarter of 2015.

Operating Loss

: GAAP operating loss for the first quarter of 2016 was $25.6 million compared to a loss of $17.5 million for the first quarter of 2015. Non-GAAP operating loss for the first quarter of 2016 was $2.5 million compared to a loss of $1.6 million for the first quarter of 2015.

Net Loss:

GAAP net loss for the first quarter of 2016 was $31.7 million or $0.77 per share based on 41.1 million weighted average shares outstanding. This compares to a GAAP net loss of $21.7 million or $0.56 per share based on 39.0 million weighted average shares outstanding for the first quarter of 2015.

Non-GAAP net loss for the first quarter of 2016 was $3.5 million or $0.09 per share based on 41.1 million weighted average shares outstanding. This compares to a non-GAAP net loss of $3.6 million or $0.09 per share based on 39.0 million weighted average shares outstanding for the first quarter of 2015.

Adjusted EBITDA

: Adjusted EBITDA for the first quarter of 2016 was $1.3 million compared to $1.2 million for the first quarter of 2015.

Cash and Cash Flow

: As of March 31, 2016, Proofpoint had cash, cash equivalents and short term investments of $409.8 million, an increase of $3.5 million from the end of the prior quarter primarily due to the generation of free cash flow.

The company generated $17.4 million in net cash from operations for the first quarter of 2016 compared to $12.5 million during the first quarter of 2015. The company generated $9.6 million in free cash flow for the quarter compared to $7.9 million for the first quarter of 2015.

Our strong execution during the first quarter was highlighted by revenue and billings growth of 37% and 48%, 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 at the same time driving top line growth.

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.

First Quarter and Recent Business Highlights:

Announced the availability of a new imposter email classification that enables organizations worldwide to protect themselves from socially-engineered imposter emails, also known as business email compromise (BEC) or CEO fraud.

Proofpoints security researchers discovered a previously unreported zero-day Adobe Flash Player vulnerability which had the potential to expose more than 1 billion connected desktops to ransomware.

Announced a technical partnership with Palo Alto Networks whereby the companies have collaborated to provide customers with extended protection from and intelligence into the sophisticated attacks targeting users, data, and content via email and social media.

Financial Outlook

As of April 21, 2016 Proofpoint is providing guidance for its second quarter and increasing full year 2016 guidance as follows:

Second Quarter 2016 Guidance

: Total revenue is expected to be in the range of $83.5 million to $84.5 million. Billings are expected to be in the range of $94.0 million to $96.0 million. Adjusted EBITDA is expected to be in the range of $2.0 million to $2.5 million. Non-GAAP EPS loss is expected to be in the range of $0.07 to $0.08 per share based on approximately 41.6 million weighted average shares outstanding. Free cash flow, defined as operating cash flow less capital expenditures, is expected to be approximately breakeven.

Full Year 2016 Guidance

: Total revenue is expected to be in the range of $350.5 million to $353.5 million. Billings are expected to be in the range of $435.0 million to $438.0 million. Adjusted EBITDA is expected to be in the range of $15.5 million to $16.5 million. Non-GAAP EPS loss is

expected to be in the range of $0.13 to $0.15 per share based on approximately 41.9 million weighted average shares outstanding. Free cash flow is expected to be in the range of $32.0 million to $36.0 million, which assumes capital expenditures of $28.0 million to $30.0 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 companys financial results for the first quarter ended March 31, 2016. To access this call, dial (888) 277-7114 for the U.S. or Canada and (913) 312-1524 for international callers with conference ID #7439380. A live webcast of the conference call will be accessible from the Investors section of Proofpoints 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 May 5, 2016, by dialing (877) 870-5176 for the U.S. or Canada or (858) 384-5517 for international callers, and entering passcode #7439380.

About Proofpoint, Inc.

Proofpoint, Inc. (NASDAQ:PFPT) is a leading next-generation security and compliance company that provides cloud-based solutions for comprehensive threat protection, incident response, secure communications, social media security, compliance, archiving and governance. Organizations around the world depend on Proofpoints expertise, patented technologies and on-demand delivery system. Proofpoint protects against phishing, malware and spam, while safeguarding privacy, encrypting sensitive information, and archiving and governing messages and critical enterprise information. 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 companys business, market position, future growth, market share 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 Proofpoints products and services less competitive; security breaches,

which could affect our brand; 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 Annual Report on Form 10-K for the year ended December 31, 2015, and the other reports we file with the SEC, copies of which are available free of charge at the SECs 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.

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 stock-based compensation expense and the amortization of intangibles associated with 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. 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. 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. We believe that $0.3 million, exclusive of potential discrete items, is a reasonable estimate of the near-term non-GAAP quarterly tax expense under our current global operating structure.

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.

Adjusted EBITDA.

We define adjusted EBITDA as net loss, adjusted to exclude: depreciation, amortization of intangibles, interest income (expense), net, provision for income taxes, stock-based compensation, acquisition- and litigation-related expense, other income (expense), net. We believe that the use of adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We use adjusted EBITDA in conjunction with traditional GAAP operating performance measures as part of our overall assessment of our performance, for planning purposes, including the preparation of our annual operating budget, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance. We do not place undue reliance on adjusted EBITDA as our only measure of operating performance. Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using this non-GAAP financial measure, including that other companies may calculate this measure differently than we do, that it does not reflect our capital expenditures or future requirements for capital expenditures and that it does not reflect changes in, or cash requirements for, our working capital.

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 managements 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 Managements 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.

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended

March 31,

Revenue:

Subscription

77,397

55,856

Hardware and services

79,003

57,763

Cost of revenue:(1)(2)

21,682

16,334

Total cost of revenue

24,824

19,288

Gross profit

54,179

38,475

Operating expense:(1)(2)

Research and development

22,653

15,708

Sales and marketing

46,523

32,951

General and administrative

10,604

Total operating expense

79,780

55,992

Operating loss

(25,601

(17,517

Interest expense

(5,800

(2,853

Other income (expense), net

(1,180

Loss before provision for income taxes

(31,399

(21,550

Provision for income taxes

Net loss

(31,656

(21,712

Net loss per share, basic and diluted

Weighted average shares outstanding, basic and diluted

41,093

38,957

(1) Includes stock-based compensation expense as follows:

Cost of subscription revenue

Cost of hardware and services revenue

Total stock-based compensation expense

18,483

12,426

(2) Includes intangible amortization expense as follows:

Cost of subscription revenue

Total intangible amortization expense

Consolidated Balance Sheets

Assets

Current assets:

Cash and cash equivalents

377,441

346,205

Short-term investments

32,344

60,032

Accounts receivable, net

55,414

54,522

Inventory

Deferred product costs

Deferred commissions

17,857

19,314

Prepaid expenses and other current assets

Total current assets

491,585

488,481

Property and equipment, net

37,973

34,501

Goodwill

133,769

Intangible assets, net

37,925

41,330

Long-term deferred commissions

Other assets

Total assets

709,050

705,616

Liabilities and Stockholders Equity

Current liabilities:

Accounts payable

15,082

14,081

Accrued liabilities

26,207

35,053

Capital lease obligations

Deferred rent

Deferred revenue

203,142

182,195

Total current liabilities

244,976

231,857

Convertible senior notes

350,796

345,699

Long-term capital lease obligations

Long-term deferred rent

Other long-term liabilities

Long-term deferred revenue

39,886

41,531

Total liabilities

638,986

622,431

Stockholders equity

Common stock, $0.0001 par value; 200,000 shares authorized at March 31, 2016 and December 31, 2015; 41,413 and 40,840 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively

Additional paid-in capital

459,618

441,104

Accumulated other comprehensive loss

Accumulated deficit

(389,556

(357,900

Total stockholders equity

70,064

83,185

Total liabilities and stockholders equity

Consolidated Statements of Cash Flows

(In thousands)

Cash flows from operating activities

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

Loss on disposal of property and equipment

Amortization of investment premiums, net of accretion of purchase discounts

Recovery of allowance for doubtful accounts

Stock-based compensation

Amortization of debt issuance costs and accretion of debt discount

Foreign currency transaction (gain) loss

Changes in assets and liabilities:

Deferred products costs

Other current assets

Deferred income taxes

Long-term assets

(2,868

(5,410

19,302

Net cash provided by operating activities

17,418

12,524

Cash flows from investing activities

Proceeds from sales and maturities of short-term investments

54,639

11,012

Purchase of short-term investments

(26,980

Purchase of property and equipment

(7,838

(4,584

Acquisitions of business, net of cash acquired

(28,114

Net cash provided by (used in) investing activities

19,821

(21,686

Cash flows from financing activities

Proceeds from issuance of common stock

Withholding taxes related to restricted stock net share settlement

(6,698

(4,137

Repayments of equipment loans and capital lease obligations

Holdback payments for prior acquisitions

(1,397

Net cash used in financing activities

(6,231

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

31,236

(10,332

Cash and cash equivalents

Beginning of period

180,337

End of period

170,005

Reconciliation of Non-GAAP Measures

GAAP gross profit

GAAP gross margin

Stock-based compensation expense

Intangible amortization expense

Non-GAAP gross profit

58,287

41,224

Non-GAAP gross margin

GAAP operating loss

Acquisition-related expenses

Litigation-related expenses

Non-GAAP operating loss

(2,514

(1,604

Interest expense - debt discount and issuance costs

Income tax benefit

Non-GAAP net loss

(3,495

(3,593

Shares used in computing non-GAAP net loss per share, basic and diluted

Non-GAAP net loss per share, basic and diluted

Reconciliation of Net Loss to Adjusted EBITDA

Amortization of intangible assets

(18,363

(13,233

Other (income) expense, net

Reconciliation of Total Revenue to Billings

Ending

243,028

171,966

223,726

162,675

Net Change

Deferred revenue contributed by acquisitions

98,305

66,354

Reconciliation of GAAP Cash Flows from Operations to Free Cash Flows

GAAP cash flows provided by operating activities

Purchases of property and equipment

Non-GAAP free cash flows

Revenue by Solution

March 31, 2016

2015

September 30,

June 30, 2015

March 31, 2015

Protection and Advanced Threat

56,462

53,544

47,920

43,128

38,458

Archiving, Privacy and Governance

22,541

21,395

21,229

20,418

19,305

74,939

69,149

63,546

MEDIA CONTACT

INVESTOR CONTACT

ROGER KNOTT

SETH POTTER

PROOFPOINT, INC.

ICR, INC. FOR PROOFPOINT, INC.

408-850-4110

646-277-1230

RKNOTT@PROOFPOINT.COM

SETH.POTTER@ICRINC.COM

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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Other recent filings from the company include the following:

Proofpoint's Chief Executive Officer just cashed-in 1,900 options - April 18, 2016
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