Q3 2019 Earnings Call
Hope for the proof points third quarter 2019 earnings results conference call at this time or something today's audience sampling tremendously shortly.
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Jumping on hold for the proof points third quarter 2019 earnings results conference call at this time or something today's audience sampling and when it was shortly we appreciate your patience in please remain on the line.
Ladies and gentlemen, please standby we're about to begin.
Good day and welcome to the Proofpoint third quarter 2019 earnings results Conference call Today's conference is being recorded.
I'd like to turn the conference over to Mr., Jason Starr, Vice President Investor Relations. Please be please begin sir.
Good afternoon, and welcome to proof points third quarter 2019 earnings call joining me on the call or Gary Steele, Proofpoints, Chief Executive Officer, and Chairman of the Board and Paul Auvil proof points Chief Financial Officer.
Today, we'll be discussing the results announced in our press release that was issued after the market close. This afternoon, a copy of which is available on the Investor Relations section of our website.
During the course of this call will make forward looking statements regarding future events and future financial performance of the company, which are subject to material risks and uncertainties that could cause actual results to differ materially.
We caution you to consider the important risk factors contained in the press release add on this conference call.
These risk factors are also more fully detailed under the caption risk factors and proof points filings with the FCC, including our most recent Form 10-Q .
These forward looking statements are based on assumptions that we believed to be reasonable as of today's date October 24th 2019.
We undertake no obligation to update these statements as a result of new information or future events of note. It is proof points policy the need to reiterate nor to adjust the financial guidance provided on todays call unless it has also done through a public disclosure such as a press release or through the filing of a form 8-K I.
Additionally, we will present, both GAAP and non-GAAP financial measures on todays call. These non-GAAP measures exclude a number of items are set forth in our release. These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing proofpoints performance.
A reconciliation of GAAP to non-GAAP measures analysts are the reasons why the company uses these non-GAAP measures are included in today's press release. Finally in addition to read our press releases in FCC filings. We encourage investors to also monitor the investor section of our web site at investors Dot Proofpoint Dot com as we routinely post investor oriented information.
Just news and events financial filings Webcasts, <unk> presentations and other relevant materials to it so with that I'll turn the call to Gary.
Thanks, Jason I like to thank everyone for joining us on the call today.
We're very pleased with our Q3 results with their team delivering yet another quarter of solid topline and Bottomline financial results Q3 revenues were 227.4 million ahead of expectations and represent a 23% annual growth.
Our results also demonstrate the strong operating leverage embedded in our business model with our guided profitability metrics such as gross margin operating income and free cash flow all coming in ahead of our targets.
In addition, we're also pleased to have completed a 920 million dollar convertible note offering providing significant longer term strategic operating flexibility, which Paul will discuss shortly.
Our overall business momentum remained strong driven by a number of key factors, including to demand for our next generation cloud security and compliance platform the ongoing migration to the cloud our effectiveness identifying and blocking the most complex and malicious threats and our unique visibility into the rapidly evolving threat landscape that compare.
To give environment remains favorable and our people centric approach to cyber security is resonating with our customers and prospects alike as evidenced by our continued high win rate robust demand for our emerging products and our world class renewal rate, which remains nicely above 90%.
The ongoing migration of enterprise applications and workloads to the Quad provides organizations with many well known benefits, but also provides attackers with an entirely new and often unprotected doctors that can that they can exploit to compromise individuals' for financial gain.
To deal with these evolving challenges companies need a comprehensive set of people centric cyber security and compliance capabilities to better safeguard their employees whenever and wherever they interact with content beyond the firewall.
This is a fundamental shift from the previous paradigm security leaders increasingly need the visibility to understand not only who in their organization is being targeted but also how likely they are to be tricked into succumbing to an attack and the sensitivity a company information or resources that they have access to.
Additional information such as the sophistication that the attackers for instance are there hacker or a state sponsored threat actor or whether the attack is targeted or part of a broader campaign can all help security teams take appropriate steps to prioritize their security to their highest risk most privileged or most vulnerable users.
Proofpoint is uniquely positioned to solve all of these challenges by combining our excellence in email security and threat intelligence with our broadening reach across a wide array of critical cloud applications.
Right intelligence and visibility delivered through a proof points targeted attack protection dashboard provide security teams with unique an actionable data down to did apartment and employee level, enabling them to implement additional adaptive controls to prove improve their overall security posture, such as deploying browser isolation are conducting advanced security.
Furnace training and fishing simulation in order to further protect users who are the most frequently at targeted by threat actors.
This intelligence is a tremendous competitive differentiator for Proofpoint and has elevated our discussions with security teams from customers and prospects alike, making it an even more strategic partner for enterprises around the globe.
Over the past several years, we've witnessed a profound shift in the threat landscape moving away from infrastructure based attacks towards socially engineered attacks that our curated to target specific individuals.
These targeted attacks now represent the number one threat factor.
Our many investments in R&D and M&A over the years have delivered a span of innovation that has kept our solutions well ahead of the ever evolving threat landscape, enabling us to protect our customers from these rapidly evolving angles of attack the latest generation of which include business email compromise and account takeover attacks.
Our email fraud defense or if the offering has proven to be an effective way for security teams to protect against increasing B C attacks over the past few years and more recently, our innovative Kathy offering can provide additional visibility into account takeover is an important DLP or data loss per protection capabilities include leading cloud venue.
It's like office 365, Salesforce Dot com box and Dropbox [noise].
For example in one recent sales engagement at a fortune 500 retailer our casualty service detected over 1600 compromise Officethree hundred 65 accounts, putting them at significant risk to either from Exfiltration, a sensitive data within the accounts or through internal attacks being launched by threat actors from within their own.
Corporate domain.
Across our customer base and prospects alike, we have seen as steady increase in the number of compromised accounted tax in 2019 and as a result, we have seen increasing traction with our cathree operating over the course of course of the year. This increased interest in cozby naturally drive along with that interest in both our advanced threat protection.
And DLP capabilities in fact in its most recent magic quadrant for cloud access security brokers Gardner SCOTUS highly in these two categories that also recognize our improved ability to execute in this particular market and of note DLP in particular is increasingly important to protect against not only in Burton data leakage from where.
All intended employees, but more importantly, the escalating challenges posed by insider threats, where either a rug employ or a threat actor our operating inside the company infrastructure accessing and eventually Exfiltration sensitive company data.
These types of attacks in compromise had have become more prevalent in damaging over the past several years in fact, the FBI recently issued an updated estimate that business email compromise and account compromise attacks have resulted in over $26 billion in cumulative losses since June of 2015 with over half of that amount.
Occurring since may of 2018.
These forms of attack or widespread and have been reported in all 50, U.S. States and 177 countries and have now overtaken ransom, whereas the number one threat for cyber insurance.
Our innovations in the areas that Ftn cozby approving critical in preventing these new forms of attacking compromise and another great example of Proofpoints innovation and unique ability to stay ahead of the constantly changing threat landscape without as a backdrop, let's turn to some of our key operating results for the third quarter.
Rapidly changing threat landscape in the ongoing transition to the cloud and the migration to Microsoft Office 365 in particular continue to be dual long term catalysts that are helping to drive demand for proof points full suite of security compliance solutions as existing on premise infrastructure by definition cannot meet the challenges of this new generate.
One of cloud systems and infrastructure. We also continue to effectively demonstrate the strength of proof points products when compared to the baseline security solutions provided by Microsoft as part of their office 365 bundles.
Examples of customers, who had moved to office 365, and subsequently decided to upgrade their security capabilities with Proofpoint. During the third quarter included a fortune 500 retailer that purchase our piece there are a bundle which includes protection cap and threat response, along with internal mail defense Caspian isolation for 60000 users.
A fortune 500 mining company that purchased piece zero and also privacy for 20000 users a fortune 500 semiconductor manufacturing company that purchased protection and tap for 17000 users and a large municipality that purchase are key to bundle for 15000 users.
We all we're also pleased with the success of our add on sales into our customer base, which contributed nicely to our growth. This quarter in particular, we're very encouraged by the ongoing strength in demand for our emerging products, which yet again represented over one third of the total new an add on business closed during the quarter led by strong demand for email fraud.
Fencer Ft threat response, and notably Proofpoint security awareness training or piece that.
Overall, we're seeing strong customer interest in piece that with success selling into our existing base as well as driving new account wins and this is becoming a key driver in our ongoing traction with our bundling strategy in Q3, we delivered exciting new enhancements to piece that including new video based awareness content, we believe that our product roadmap for piece that is compelling.
Represents yet another attractive opportunity for Proofpoint to drive meaningful growth in exciting new segment of the cyber security market.
We were also pleased to announce that for the sixth consecutive year piece that was named a leader in Gartners Magic quadrant for security, where it as computer based training.
Another recent innovation in our emerging services portfolio is top isolation, which we launched in Q3.
And seamlessly integrates our browser isolation technology into our tap advanced threat detection system in order to further enhance the protection of end users. This new capability provides security teams with the ability to establish policies and customize how and when the isolation system is a boat, particularly for their very attack people and further per 10.
Lets users from malicious Youre elynx.
In the quarter, we saw good early traction for tap isolation with a number of customer wins in the third quarter and we believe this further extends our competitive lead in the advance threat market.
In terms of segment reporting our compliance segment recorded yet another quarter of solid growth driven by strength in our archiving business paired with the accelerating momentum.
Of our piece that products as well as continued interest in our digital risk solutions.
For the past several quarters, we've seen increased interest in many of the new archiving features that we've introduced including supervision E discovery and analytics visualization, particularly from firms and regulated industries, such as healthcare and financial services and the features are starting to drive demand.
Our archiving pipeline continues to strengthen given our cloud based delivery model and the mini investments in innovation, we're making as compared to legacy on premise competitors and while we're clearly optimistic in terms of our prospects and positioning this market. It is important to note that given the size and complexity of these larger opportunities. It can take many quarters for them.
The mature and meaningfully contribute to our results examples of archiving deals converting in third quarter included a large north American bank that purchased a three year prepaid subscription to archiving service for a high seven figure amount for 18000 users a large Canadian bank that purchased a three year prepaid subscription for archive.
The service for a high seven figure amount for 55000 users.
And leading technology company that expanded their archive deployment for their 50 50000 users.
As we shared on prior calls our product portfolio has steadily grown and now represent 18 unique services at key initiative for our go to market. This year was the launch of our solutions bundles P. zero PD, one PD two and be three we believe that these bundles make it easier for customers consume our broad set of capabilities, eliminating the need for much.
A couple sales cycles and greatly simplifying the selling process for our sales team and importantly for the channel.
While this effort is it's still early bundled products again contributed nicely to our Q3 results, reflecting solid customer interest in this approach in fact, we closed over 100 deals with the entry level piece Arrow and PD, one bundles as quarter and also made further progress with our higher in P to P. Three bundles additional.
Examples of customers that purchased bundles during the third quarter included a fortune 100 investment bank that upgraded to the P to bundle along with the for 45000 users.
Didier you have a global 2000 communication company that purchase PD, one for 50000 users and lastly, I was particularly pleased to see one of our long time Fortune 100, healthcare customers with 80000 users choose to upgrade to the P. three bundled with a three year prepaid service commitment for a low eight.
Figure amount now turning to our federal opportunity.
As we shared last quarter, we received our authority to operate or ATM go under fed ramp for our protection tap and DLP offerings. This was quickly followed by our first fed ramp when a large agency with over 200000 users that booked early in the quarter and was discussed in our call back in July .
Beyond this leading trends transaction as we expected we had a solid but not overly significant contribution from this vertical in Q3, and we continue to believe we have a very large opportunity to expand our presence in the government vertical over the next several years. We also continue to make progress towards further expansion abroad and are pleased with.
The quarter quarterly results in our international business, which grew 28% year over year and represented 20% a total revenue.
Overall, we believe the operations outside of United States are executing well as highlighted by notable international deals closed during the quarter such as a global 2000 financial services firm that purchased protection for 160000 users.
Global 2000 financial services firm that purchased protection and tap for 18000 users a leading transportation services company that purchased RP three bundle for 5000 users and a large privately owned distributor of electronically electro mechanical products that purchased protection tap threat response.
An internal mail defense for 16000 users.
We tried to continue to invest in our international opportunities, including opening additional geographies to capitalize on the burgeoning demand for people centric security and compliance around the world.
Finally, turning to our ecosystem partnerships, we recently announced a new technology partnership with crowd strike, a leading a leader in cloud delivered endpoint protection. This technical integration protects our customers are advanced threats across email and endpoints through cloud to cloud CPI is established between tap and cross strike Falcon. This.
Five customers with automated context and visibility to ensure all endpoints are protected from malicious attachments and receive automatic notification if related malicious content tries to execute on a device.
We also announced an expansion of our technology partnership of Octa, leading independent provider of identity access management for the enterprise to enhance Howard joint customers protect their most at risk users from sophisticated cyber attacks through this integration customers can leverage taps attack index, which identifies and organizations very attack.
People and scores the threats they face.
On their criticality and in turn provide actionable data to apply stronger access control controls through Oct as identity cloud to better protect those users.
So in summary, we continued to execute well as demonstrated by our strong Q3 results in our market momentum our unique people centric approach to cyber security and compliance is clearly resonating with customers and prospects alike, and we believe we are well positioned to further capitalize on our opportunity to gain share in the over $13 billion total addressable mark.
Okay in the coming years with that let me turn it over to Paul Thanks, Gary.
We were quite pleased with our operating results this quarter, which exceeded our guidance across the board. Many thanks to the hard work of our teams around the world who delivered these results.
Reviewing the numbers I would like to provide a quick overview and some additional modeling points regarding our recent $920 million convertible bond offering, which we were pleased to have completed in August .
In terms of some background given the compelling pricing and the convertible bond market, both our leadership team and our board of directors felt that it was a good time to access this funding resource primarily to support future M&A projects.
We closed the funding on August 20, Threerd structured as a five year note.
These notes are due in August of 2024, and carry annual cash interest expense, a 0.25% or 2.3 million per year payable in equal by annual installments in February in August and it's also carry a three year provisional call that can be exercised anytime after August 2022, assuming.
Runs or Matt.
The conversion price associated with these notes is $153.99, which represented a 37.5% premium at the time that issue and the convertible into approximately 6 million shares.
Importantly, we took approximately 85 million of the net proceeds editor and entered into a cap call transaction with certain financial institutions. This enables the company to participate in any upside beyond the conversion price up to $223.98, which in turn reduces dilution by up to 1.9 million shares taking.
I'd like to point out that just as we did with our previous two series and convertible notes that we retired in 2017 in 2018, respectively.
The shares associated with these new 2024 notes will now be included in our EPS calculations when they are dilutive.
We have included a brief summary in todays press release outlining the associated accounting treatment for EPS under the if converted methodology to be applied going forward. The same methodology that we used for our previous series a convertible notes.
Now turning to our financial results revenue for the third quarter totaled 227.4 million up 23% year over year and above our guidance range of 223 to 225 million.
Billings for the third quarter were 277.8 million, an increase of 26% year over year and above the high end of our guidance range of 274 276 million.
As noted on prior calls under AMC success, six the derivation of our billings metric requires adjustments to reflect unbilled accounts receivable activity during the quarter as well as any right of refund liability for Q3, the adjustment related to these two items was $4.3 million.
Recall that from our many acquisitions, we've assumed certain legacy customer contracts, which include terms and conditions they require different accounting treatment than our typical proofpoint customer agreements and this quarter. We had one fairly large transaction in particular that fell into this category.
We saw a rebound in contract duration of roughly 10% this quarter a modest reversal from our relative low point recorded earlier in the year.
This increase in duration was primarily driven by the two large archiving deals and also the significant pre transaction all three of which Gary mentioned earlier, where all three of these organizations chose to execute multiyear prepaid contracts as part of locking in their commitment to deploy and leverage our technology across our global operations.
This trend in terms of duration is further reflected in our deferred revenue balances, which ended the quarter at 674.6 million up 46.1 million sequentially with short term growing by 27.4 million and long term increasing by 18.7 million note that on a year over year basis short term deferred revenue grew by 22%.
Great and 40 million to 542 million.
It is also worth noting that on a year to date basis. Our total increase in long term deferred revenue equals a modest 3.4% of total billings up nominally as compared to the 3% and 3.2% recorded over the same periods during the past two years.
In terms of a bit more detail on revenue during Q3 revenues from our advanced threat segment grew 19% year over year and represented 72% of total revenue and our compliance segment grew 37% year over year and represented 28% of revenue.
Turning to expenses and profitability from third quarter on a non-GAAP basis, our total gross margin was 80%.
Our expectations, primarily driven by strong revenue performance note that this result was above our 2020 target range of 77% to 79%.
Foremost this quarter was also benefiting nominally from a slower than expected ramp in our datacenter investments during the quarter.
Total non-GAAP operating expenses during the quarter increased 21% over the prior year period to 147 million, representing 65% of total revenue.
Our non-GAAP operating income for the third quarter was 33.9 million, reflecting an operating margin of 15%, bringing us into the high end of our 2020 targeted range of 13% to 15% of full year ahead of schedule.
non-GAAP net income was 29.8 million nicely above our guidance range of 21, and a half to 23 and a half million.
Driven by both the revenue outperformance as well as our lower than expected spending in sales marketing R&D and the aforementioned slower ramp in datacenter investments.
Also it is important to note that $1 million of upside net income during the quarter was directly attributable to the convertible notes issued in late August with 1.4 million of additional interest expense our income rather earned on the cash balances from funds raised netted against point 2 million accrued interest expense payable to the note holders and that adjusted for the 17%.
CND tax rate.
As we discussed on our past two calls beginning in January Onest of 2019, we are now calculating non-GAAP net income in accordance with the Fccs non-GAAP financial measures compliance and disclosure interpretations section 102 down 11.
This quarter's calculation includes 6.1 million in tax expense undersea anti at an applied tax rate consistent with last quarter of 17%.
non-GAAP earnings per share for the quarter was 49 cents per fully diluted share as I noted the EPS calculation applies the if converted method to our newly issued convertible notes and as such adds back the point 2 million in cash interest associated with the convertible debt.
For Q3, specifically as the notes were issued on August 20, Threerd only 2.5 million of these shares were included in the calculation as we used the weighted average outstanding calculation, which represented a fully diluted share count of 61.2 million shares.
Adjusting to eliminate the impacts from the convert transaction, which of course wasn't contemplated in our guidance back in July the result for the quarter still otherwise would have been 49 cents per share so still above the high end of our guidance range of 30 740 cents.
On a GAAP basis, we recorded a net loss for the third quarter totaling 44.3 million or 79 cents per share based on 56 million shares outstanding.
Of note the expected Q3 tax payment for the repatriation of intellectual property from Israel to the United States associated with our acquisition of men and networks Wasnt fact deferred until October so as a result, while the repatriation did in fact impact Q3 current and deferred GAAP tax expense by 17.6 million.
And its impact on cash flow was delayed until the fourth quarter as I will discuss in more detail later in my prepared remarks.
Moving to the balance sheet, we ended the quarter with 1.1 billion in cash cash equivalents and short term investments compared to 183 million in Q2. This significant increase was primarily driven by the convertible notes offering that we closed in August .
In terms of cash flow for the quarter, we generated 68.6 million in operating cash flow and invested $10 million capital expenditures, resulting in free cash flow of 58.6 million well ahead of our guidance of 40 to 42 million.
While we had a very strong collection cycle within the quarter that helped to deliver. This result is also important to note that our original guidance for the quarter assumed a onetime payment to repatriate the intellectual property associated with our acquisition of Mehta networks of roughly 10 million.
So per my earlier comment this did not get completed in the quarter and hence the equivalent guidance for the third quarter would have been 50 to 52 million when adjusted for this effect.
Viewed in this context, our 58.6 million in free cash flow recorded during the quarter was still a very good result, and nicely ahead of our guidance, reflecting a free cash flow margin of nearly 26%.
Moving on to guidance for the rest of the year.
For the full year, we're maintaining our billings guidance range of 1.064 to 1.068 billion, representing nearly 22% growth at the midpoint. This guidance implies Q4 billings range of approximately 339 to 343 million and also reflects a year over year growth rate of 26% for the fourth quarter at the midpoint.
Were increasing our 2019 revenue guidance to 882.3 to 884.3 million, increasing the midpoint by 3.8 million, reflecting 23% growth year over year at the midpoint. This infers arrange for the fourth quarter of 237.5 to 239.5 million.
Representing 20% growth year over year for Q4.
As a reminder to very strong revenue performance in the fourth quarter of 2018 was driven in part by roughly 3 million in revenue acceleration to under AMC success six as we discussed back in our January call.
And this creates a challenging baseline in Q4 absent a similar acceleration this year and so adjusting for this effect guidance implies 22% growth for the fourth quarter.
In terms of gross margin guidance, we expect annual and fourth quarter non-GAAP gross margin to be approximately 79%.
In terms of guidance for net income for the fourth quarter. We expect non-GAAP net income of 30 to 32 million or 47 to 50 cents and earnings per share based on 64.9 million fully diluted shares outstanding as spending catches up to revenue and some expenses that were originally expected to be incurred in Q3 will now fall into Q4.
Also is important to note that this fourth quarter guidance includes 2 million of upside directly attributable to the convertible notes issued in late August with 3 million additional interest income earned by the cash balances from the funds raised netted against point 6 million in accrued interest expense payable to the note holders and then adjusted for the 17% see a DIY tax rate.
No. This Q4 guidance assumes capital expenditures of $14 million depreciation of approximately $9 million, an income tax provision of approximately $6.3 million calculated in accordance with CSPI, one or two that 11 at an effective rate of 17%.
For the full year, we're increasing our net income guidance by 9.5 billion at the midpoint from our prior range of 94 96 million to an updated range of 103.5 to 105.5 million, which equates to $1.72 to $1.75 earnings per share based on 60.6 million fully diluted to.
Landing.
As I just noted this updated full year guidance includes a favorable impact from the issuance of the convertible notes of approximately $3 million across the third and fourth quarter as such as the $9.5 million increase in guidance. Just noted 3 million is attributable to convertible notes and 6.5 million is attributable to our approved.
Operational outlook.
Note that this guidance for the year assumes capital expenditures of 38 million depreciation of roughly 32 to 34 million an income tax provision of approximately 21.4 million calculated in accordance with C and D one or 2011.
In terms of free cash flow given the strong linearity during the third quarter. The cash collections that otherwise would have been expected in Q4 were actually accelerated into Q3 and with that in mind in terms of free cash flow for the fourth quarter. We're now expecting this to range between 58.2 and 60.2 million.
Note that this now includes the onetime tax payment associated with the repatriation of intellectual property from other networks, which we now expect to be 8.4 million a bit lower than the original estimate of $10 million that we provided last quarter.
For the full year, we are increasing the range by 4.5 million with a new outlook for free cash flow of 200.5 to 202.5 million.
This represents a free cash flow margin of 23% or approximately 24% when excluding the $8.4 million IP transfer tax payment.
Note that this updated range includes approximately 2 million incremental interest income receipts from our increased cash balances, resulting from our recent capital raise from the issuance of convertible notes.
We believe that this outlook is particularly compelling given our commitment to innovation as well as our ongoing investments to pursue the key opportunities in the market.
Why we're still in the early stages of our planning process I would now like to share a preliminary view regarding our 2020 financial outlook.
I'd like to highlight that this is a baseline target for modeling purposes with similar assumptions being made at this stage of our planning process as in prior years.
As we complete our 2020 planning we will provide a more detailed outline of our operating assumptions on our next earnings call.
Overall, our business remains well positioned the competitive environment favorable and the strong secular drivers of the move to the cloud and an active threat landscape are firmly in place so with that as a backdrop. Our preliminary view on 2020 is as follows we're providing an initial revenue range of 1.05 to 1.06 too.
5 billion or baseline revenue growth rate of approximately 20% when measured against the midpoint of our updated 2019 guidance.
In terms of billings guidance after seven years of beating our guidance on this metric as a public company as we look to the cadence of how we intend to operate the business now that our billings scale has exceeded $1 billion annually, we've decided that going forward. We will end our practice of guiding on this particular metric.
In terms of some background here. We've concluded that it is the combination of revenue growth and the delivery of cash flow that drives how investors value our business and as such the actual timing of billings per se is not an important metric in how we run the business, particularly as the vast majority of our billings activity. Our renewals that are increasingly accumulating towards the end of each of our quarterly.
Areas based on our customers buying patterns.
With all that in mind, the timing of whether these renewals are builds on the last few days of one quarter as opposed to the first few days at the next has no relevant impact on either the recording of revenue or the timing of cash flows, particularly when viewed in the context of our operating model where over 95%. Our revenues are derived from recurring subscription contracts.
So with that said for those investors, who still choose to model. This metric. Let me provide a few pointers first we'd expect billings growth to be equal to or slightly less than revenue growth in 2020, depending on duration of don't contracts, which we would continue to expect to remain somewhere and our historical range of 14% to 20 months.
Given the seasonal timing of sales and customer renewal cycles, we would remind investors to expect a pattern similar to prior years, where approximately 35% to 40% of our business is booked in the first half of the year.
Drilling down as we intend to focus our efforts more on the timing of cash flow rather than billings, we would reasonably expect that a portion of Q1 renewal billings activity would have traditionally closed at the end of Q1 will move into Q2 under our new protocol. This of course has no impact on revenue or cash flow that will be recorded in 2020 and simply reflects an ease.
Of how we handle quarter end activity with some deals moving by handful of days from the end of March early April .
We would still expect approximately one third of billings to occur in Q4, as we've seen over the past several years.
For 2020 operating income modeling, we're expecting the low end target range that we have shared on prior calls at 13% to 15%.
In terms of considerations for net income keep in mind that with our recent convertible note offering our interest expense will be 2.3 million and offset by interest income on our cash balances, which are held in highly liquid assets, where we hope to hold and interest rate of approximately 1% over the course of year.
Also note as well that future M&A activity over the course of next year would serve to lower these cash balances and as such would have a nominal adverse impact on our net income and EPS accordingly.
In terms of tax rate undersea anti we expect our tax rate for 2019 and for 2020 to both be consistently at 17%.
Now turning to free cash flow as we shared on our Q3 call in 2018, we've outgrown our current Sunnyvale campus, where we've operated for over 12 years now and as noted on that call. We signed an 11 year lease for a new headquarters location, just a few blocks away to accommodate our planned growth over the next decade.
This project remains on schedule with a targeted opening in the fourth quarter of 2020.
As part of its bill that we indicated that we plan to make modest investments in order to bring the building into compliance with our office standards and we currently expect an approximate investment of 25 million in onetime net tenant improvements at the lower end of our prior estimate of $25 million to $30 million.
For modeling purposes, the capital expenditures in total that will be incurred for the project will be 43.5 million. So this will be offset by approximately $18.5 billion in the form of a tenant allowance that we've negotiated with the landlord.
Note that this offset will run through the operating cash line of the cash flow statement as opposed to netting directly against capital expense.
With this in mind when excluding the onetime costs for our headquarters. We currently expect our free cash flow to grow by 24% year over year to approximately 250 million or roughly 24% of revenue demonstrating the strong free cash flow characteristics of our financial model.
On a reported basis, hence, including the investments in our new headquarters, we expect free cash flow to be approximately $225 million or 21% of revenue.
We believe that this outlook.
This initial outlook is particularly compelling given our commitment to innovation as well as the ongoing investments, we're making to pursue the key opportunities in the market as in prior years. We expect the majority of this cash flow to be delivered in the second half of the year with just under 30% generated in the first half.
This 2020 guidance assumes total capital expenditures of approximately 93.5 billion, including the just noted headquarters capital investment of 43.5 billion, which again will be partially offset by the $18.5 million WTI allowance that will run through operating cash flow.
Similar to past years, we plan to further refine our 2020 forecast as we complete our planning process and gain additional insights for our extended network of partners and channel sales, but we believe that this is a thoughtful and solid starting point.
As a final comment I would like to highlight that this guidance for 2020 reflects our dual objectives of driving attractive growth in both revenue and free cash flow, which remains a hallmark of proof points disciplined operating strategy and is further corroborated under the rule 40 metric as discussed last quarter.
When considering our initial 2020 outlook, 20% revenue growth and 24% free cash flow margins when adjusted for the onetime headquarters investment. These metrics would suggest to figure or 40 forward rule of 40 construct reflecting a very attractive financial model, which continues to place us prominently in the top quartile of all public traded SaaS company.
Yes.
In conclusion, we continue to execute well delivering strong top and bottom line operating results here in the third quarter and believe that Proofpoint remains well positioned to continue to drive disciplined growth with increasing free cash margins built on our proven capability to defend enterprises against today's advanced security and compliance threats.
Before turning it over to the operator for questions I would like to requested everyone limit themselves to just one question to help reduce the duration of our call and to ensure that everyone has a chance to be included in today's discussion.
Thank you again for taking the time to join us on our call today and with that we'd be happy to take your questions now operator.
Ladies and gentlemen, we'd like to ask a question please signal but.
One of your telephone keypad.
Using a speaker. Please make sure function is turned off all of your signal true John .
Going to one for your questions. We'll go first to Jonathan Ho with William Blair.
Hi can you hear me okay.
Yes, we can.
Perfect.
Just wanted to start out with the question around your billings guidance and particularly for the fourth quarter, just given the outperformance this quarter and maybe what you're seeing in terms of puts and takes around that guidance.
Yes.
Jonathan that's good question as we look at the overall business and again with.
Billings number for the full year being over $1 billion. Our focus is on essentially as I talked about in the reason why were versus spending the billings guidance going forward. Our focus really is on how do we deliver the revenue metric and how do we deliver the castle metric and so we're excited about raising both revenue and cash flow metrics for the year and.
We're excited about the guidance that we provided as a starting point for 2020, as we think about third quarter performance and near where we see fourth quarter coming together overall, we feel like that range that we provided last quarter was the right range for us to be operating to keep in mind that it's delivering a 26% year over year growth rate and both third and fourth quarter. So we think those numbers are compelling so.
As we've just looked at the outlook for the remainder of the year and how the pieces come together going into 2020, we felt that holding the overall billings guide for the full year was that was the right strategy at this stage.
Got it thank you.
Well go next turn it over the next question.
Yes, Sir we'll go next to Melissa Frenchie with Morgan Stanley .
Great. Thanks for taking my question, Gary I'd like to start with just maybe a high level macro question just given your one of the first security companies to report this season so.
There's obviously some concern about softening IP spending and just wondering it doesn't seem like you're seeing any of that but just wondering if any of the customer conversations have changed and then.
Paul as you're thinking about Q4 billings was there any incremental conservatism embedded just given macro uncertainty.
Yes, Great question was that we so throughout Q3, we did not see any change in macro buying conditions. So we didnt see projects pushing out we didnt see elongating sales cycles.
And that's true really globally and again, our footprint outside the us is roughly 20% of revenue so.
That would have less impact on it but we were pretty consistent around the globe things were quite healthy for us.
And your question, specifically, our Q4 and I probably should have touched on this with jonathan's question from a minute ago I mean, as we look at the fourth quarter. It's a very interesting timing in terms the holiday calendars of when Christmas and new year's come together and we have already been made aware by number of our customers that they're planning to have plant shutdowns that span a pretty meaningful period. There at the end of December and.
Given the fact that we have lots and lots of renewal business. It's due and those last couple of weeks. It does add a little bit of complexity and working with us customers and getting all those over the line and that was another consideration as we're thinking about should we raise billings guidance for the fourth quarter, Yes, our view as I can't control holiday schedules I can't control at a CIO might be out on vacation what have you.
And given the fact, a lot of our contracts are quite large they do even when they are just a renewal require a fairly complex signup process in order to get them process and so just taking the holiday into account.
It was part of how we thought about maintaining billings guide because again the timing of as the pieces come together at the end of Q4 early Q on won't affect how we record cash flow or revenue as a business.
Helpful. Thank you.
The next to Matt Hedberg with RBC capital markets.
Hey, guys. Thanks for taking my question, Gary when you think of drivers for 2020.
Could you could you sort of summarize what you think the top three items could represent.
Or that could could represent upside to the initial 20% guide and I guess I'm wondering specifically to if competitive share shift from legacy vendors.
Could be within one of those top three kind of given what's going on in the landscape.
Yes, I think.
It's a combination of thing so I think that favorable competitive environment continues to play an interesting role for us.
So that definitely factors in Windows top three.
Second for us would be the early success, we've experienced and bundles. So as we noted in our prepared remarks, where we saw good early traction in Q3 with both therapy zero in PD, one bundles and to nights early traction with a larger P to P. Three bundles with some nice transactions noted in prepared remarks.
And then I think that third is we continue to invest in international and while today as we reported 20% of our revenues coming from International I think we've got interesting opportunity there as well.
Great. Thanks for the final what I would and I would add number four which is our emerging product strength continues to be quite robust.
A bonus one thanks.
Got it.
Well go next to Jonathan Ruykhaver with Baird.
Yeah good afternoon.
Regarding the bundled packages that just curious on your view of the potential uplift ACB on renewal or is it too early to identify any pattern and then.
But large enterprise opportunity for bundling when do you think that would stack to.
Get more traction.
Yes, it's a little hard to say, obviously customer pricing varies depending on vertical depending on size for customer what have you.
Moving people to the lower end bundles like Rps LMP, 100%, some modest improvement in overall revenue, but small think.
5% to 15% typically but Pete you would be three levels are very very significant step ups and as Gary noted in his prepared remarks. This large pthree transaction that we did with one of our long time customers in financial services was a low eight figure three or transaction. So there is significant accretive value as we move people from kind of a standard email or.
Rented threatened DLP framework to a full P to repeat redeployment. So we're quite encouraged given the early success that we're seeing here this year with the Betwo and Bethree upgrades in particular in terms the potential for them to help meaningful secular driver of growth for US is we'll work our way into 2020 and beyond.
Helpful. Thank you.
Well go next to Gray Powell with Deutsche Bank.
Great. Thanks for taking the question.
Maybe sort of a high level one so how do you feel about the potential to gain share against Symantec given their sale to Broadcom is there an incremental opportunity there and then when you look at it did you have a sense as to how much of their email business is maintenance revenue on a previously purchased appliance versus pure subscription that sort of apples to apples with what you do thanks.
Yes on that second question Gray, we don't have any specifics on the exact breakdown as description versus maintenance I think the one thing that is encouraging is there is a regional amount of recurring revenue there across their on Prem maintenance plus their cloud subscription.
And then in terms of the overall opportunity we've had we've had good success.
Over a long period of time moving customers from Symantec over to Proofpoint and Joe with the changes that are occurring at Symantec, We think thats pretty interesting opportunity. We don't think those things happen overnight. We think that takes some time, but we're encouraged over the long haul about customers who.
Our on Symantec and are looking for next generation product. We think we're a great alternative and we think that that can play out over the course in the next three years, Yes, I think the other thing that I'd add to if for those of you open.
Following proof point for a number of years what are the things that was very interesting when mcafee, formerly exited the business up we found that for many of the opportunities we could go in and sell a comparable offering to replace existing mcafee capability, but in that sales engagement sell additional products and so.
Might have been <unk> dollar that Maxi was receiving for every dollar day, what had been getting we might get $1.50 or $2 or more and so given the breadth of our product line and our bundling strategy in particular, even for the customers that might be operating on a current maintenance renewal base. There is a significant opportunity for us to monetize that in a way that's well above beyond.
Wes Symantec was ever ever able to accomplish without install base of customers.
Got it okay. That's very helpful. Thank you.
We'll go next to Phil Winslow with Wells Fargo.
Hey, Thanks, guys were taking my question I just wanted to focus going on the emerging products you highlighted that again again this quarter.
Gary in Paul when you look out into next year, how you sort of factoring.
Those and.
$2020.
What are you sort of most optimistic on.
Yes, so as we talked about over the last few quarters, they've been over a third of the new and add on recurring revenue that we booked and we definitely see ongoing momentum actually across a pretty broad set of those products. So we think it does give us a nice set up going into 2020, whether customers want to buy those individual emerging products.
Our own or whether they end up getting included in up in a p. two or three pithree bundle. So again the setup for us going into 20 with that broader product line and the emerging products. In particular, we think is pretty compelling in terms of products that are kind of stand outs I don't know Gary with you want to provide some color there, yes, I would go back to some of the comments we made in prepared remarks that we're seeing.
Really high interest levels in our security awareness training to though my bad business.
I think we now have all of our seller is actively selling and prospecting on that and because that market is relatively nascent in fast growing I think where we can actively participate in that growth second is.
Ft, a threat response, and then great staples and they represent opportunities as we think about bundling and then finally, we referenced caz Avi and the opportunity there associated with data loss prevention, I think with the changes the broader structural changes happening within the industry I think we're well positioned there to go see nice growth in Twoq.
Housing 20.
Great. Thanks, guys.
We'll take our next question from Ken Talanian with Evercore ISI.
Hi, guys. Thanks for taking the question.
I was wondering if you could comment on your M&A pipeline, and where you think asset prices are relative to history.
Yes, Thats. Good question, Yes, I think overall the M&A landscape continues to be interesting to us.
We continue to look at a reasonable number of opportunities as we always have.
It's hard to say, whether your overall pricing has meaningfully changed in the market maybe on the margin are seeing a handful of people that are little more rational and in their view of the valuation of the enterprises that they belt, but I would say that we're still not quite quite there yet but that doesn't keep us from looking and Theres certainly some things that we're interested in and we.
Continue on our March to look for great intellectual property developed by others that we think fits into our framework that we can add to bolster how we better defendant provide compliance for all of our customers. In this people centric security compliance mall, yet I think our strategy has been one where we have to build a very big it brought pipeline and so we are.
We have to be looking at a lot of things because.
I used very across that broad range of company. So we just have a very active approach and how we evaluate and I think we will always maintain a very disciplined approach in what we are willing to pay for thanks.
Great. Thank you.
We'll take our next question from good top has with Stifel.
Great. Thanks for taking my question just following up on Kens question, given the size of the capital raise you. Just conducted you would you consider bigger M&A or perhaps larger acquisitions, both at the what you've done in the past and then just one follow up or Paul given that you're pulling via the billings guidance would you consider giving another metric something like.
Down the line as a way to gauge the business going forward. Thank you.
Yes, I think in terms of looking at bigger things I think our.
We continue to really operate within the framework of.
Our people centric model and what what M&A fits within that broad framework, where were either enhancing our ability to identify threats or we're providing additional adaptive controls to better secure and enterprise.
And with that we're going to be extremely thoughtful about the size. The deal that we can be successful with we don't today see anything that is transformational that we would go after that's not that's not within our land that things were looking at we just continue to operate within our broad framework of how do we extend people centric deliver more value to our cost.
Summers get great teams.
And then operate with a high level of price discipline.
And your question on metrics, we're evaluating what we want to do going forward as we work our way into 2020, so to your point having decided to.
Spend our practice of providing billings metric, which as we looked across kind of all the billion dollars plus SaaS companies pretty much everyone moves away from that as they get to larger scale, whether we would introduce an air our metric Rps something like that is something we're currently considering but have made a decision on that yet.
Okay, great. Thank you.
Our next question comes from Sarah Hindlian with Macquarie.
Great. Thank you so much thanks for taking my question, Gary I wanted to dig into you with the federal win that you noted in the quarter for 200000 seat.
And you talked about fed ramp coming through across a number of areas. So I think this is really important I'd like to here a little bit more from you about how you're thinking about the timing and potential opportunity around the federal segment and we could expect to start to see this business become more meaningful for you.
Yes. So in 2019, we've continued to make federal investments both from a certification point of views are getting fed ramp obviously as you noted super important in super exciting to us and it became the catalyst for that large deal that we won in the quarter. We've also continued to build team and scale of team with respect to federal so.
So we think that we have a great opportunity.
2020 to see more results from federal and that that I think will carry us through the next 36 months. So we feel very good about that opportunity because we see this broader catalysts within the U.S. government to drive transition to cloud and we think we can be enacted participant as organizations moved to cloud to be part of their news.
Purity infrastructure. So we're quite excited about that and I think we'll see that.
Going to play out in 2020.
Terrific. Thank you so much I appreciate that.
Well go next to Alex Henderson with Needham.
Yes.
The clarification and then last one are you said ramp medium or high and the question I wanted to ask is really on the sell side for 2020 to what extent.
You are talking about accelerating.
Okay.
Sales firing in order to penetrate international how does the split between sales spend us versus international thanks.
Yes, so maybe just starting on that second question first we've been making good baseline investments in our international over the last call. It 24 months now and I think we're pleased with attraction and progress and you can see that of course reflected in the year over year growth rate of international versus.
Versus domestic so I think as we're contemplating the numbers for that 2020 guide there will be a disproportionate amount of hiring that will likely go on a year over year growth basis into international and likely Europe in particular, where the team has definitely seeing some good momentum and some good success. So.
We will be investing in Asia Pac will probably be doing some work in around Latin America, as well, but I think Europe will be the biggest area of emphasis for us given the fact that it's a security market that rivals the U.S market in terms of size and scale, it's kind of a natural place for us to focus and of course all of these large.
Enterprises, and midsize enterprises that operate in Europe at the exact same security and compliance problems compliance could be a little bit different by country compare to the U.S., but all these enterprises have privacy issues. They have to deal with in terms of mandates both from the EU as well as often local country regulations that that overlay on top of that and so we think it's an opportune.
Okay, Thats quite compelling so we will be adding resources in the US we think it's a great market and we're still I would say to some degree under distributed there, but there'll be more of a focus on growth in sales resources internationally with Europe really being kind of first among equals and then with respect to your fed ramp question, we're better at media. That's what we focused on not fed ramp high we view that.
As the requirement across civilian even DSD for most for most organizations.
Thank you very much.
Well go next to Eric I'm here with JMP.
Yes.
Quick question on the emerging services, it's been about a third of your new an add on business for.
Three quarters as you look out to fiscal 20, where do you think that could be as you exit.
20.
No Thats a good question.
I would say that it's likely to expand we don't specifically forecast emerging products as a segment, obviously per se, but I think particularly as we see the P to P. Three bundles take off that will create further acceleration in the poll of how those products are deployed in the relative revenue allocation associated with them. So.
I guess I would say likely to increase.
But.
The thing I would like to remind people of as for our sales team we pay them on recurring revenue newer add on recurring revenue and we have no bias in terms of what they sell so we don't put any special spiffs or accelerators or gates in to the comp plan because ultimately we want our sales people to go out and sell whatever is easiest for them to go out and drive growth for the company for.
Shareholders with the idea that well get into the account once you're in the account sell the more of what they want let's not be overly prescriptively focused on product day versus product be versus product see growth as growth cash flows cash flow and we do believe that the majority of our customers will want the breadth of our full product offering measured over time, but you never want to do anything where you're.
Were overly discounting of product just to try to hit a hurdle and so we avoid putting that into any of the compensation plans for the sales team.
Would you be would you be surprised to fit the hit 40% by the end of fiscal 2000.
No I wouldn't be surprised if it got to that level.
Very good thank you.
Yes.
We'll take our next question from Gregg Moskowitz with Mizuho.
Okay. Thank you very much and good afternoon, guys. Paul I just wanted to follow up in the Q4 billings commentary if I could I.
I think back to Q4 last year.
And about an increasing amount of business that was coming up for renewal and Youre right and we saw acceleration in billings growth and of course every December we have a significant holiday season, right. So I havent had to cancel that yet, but what I'm wondering is the calendar this year set up to be logistically.
More challenging in terms of holidays, and it was last year or even factoring in more conservatism around this activity.
Yes, I would say that again its scale so network by the hone of the level of scale as compared to last year. It adds logistical complexity.
And then the holiday calendar just adds to that so they'll for example last year we had.
Kind of a weekend to clean things up before we actually that ended up with the with the last day the quarter here. There is no weekend. So we're ending on a weekday and we have until midnight of that week data process whatever comes in and add to that the complexity of the timing of.
What we see as a lot of companies that are going to have extended vacation shutdown periods. It's just it's it's a couple of different dimensions that I just want to be thoughtful about as the chief financial officer for the company and the expectations, we set for Wall Street and again as I shared in my prepared remarks.
Honestly, the timing and billings really isn't doesn't have much to do with anything in terms of how we deliver shareholder value because it doesnt affect the revenues are recorded in the quarter and moving the billings a few days between the end of December in early January Doesnt change the timing when that cash flow is going to be collected delivered to the shareholders and so.
It's from our perspective, delivering a 26% year over year growth rate, which is what the current guide is for the fourth quarter on billings is pretty substantial given our current scale in our operating so we felt good about that and see a need to move it.
Great. That's helpful. Thank you.
Well go next to Walter Pritchard with Citi.
Hi, Thanks, Im wondering Paul in terms of the way that you're guiding you've mentioned that your guidance. The initial guidance for 2020 is very similar to what you've done in the past I'm wondering if you compared to last year, though I think last year, you are coming out of some uncertainty in the third quarter is it fair to say that you're you took a more conservative Cath lab.
This year or are we thinking about are you thinking about thing. Similarly is how you guided.
Initial 2019 range, I guess year ago compared to what you're doing now.
Yes, I'd say similarly, the differences that as you said, we were working through a few issues with.
How people were ramping in the us and some things with how we're scaling up international in this case, while up I don't see those issues within the enterprise. We're just operating in this next level the scale and so we want to be thoughtful about how we're making assumptions about how all the pieces come together with the sales organization now operating at this next leg.
Well over $1 billion et cetera, and so I would say that relative mechanics that I've gone through thinking about the guide here in October for 2020 is similar to how we were thinking about the mechanics of the guide for 2019 and it's still early obviously at this point, we got quite a ways between now and the into 2020.
Okay. Thank you.
Mm.
Well take our next question from Patrick Coalville with.
Search.
Hi, Thanks for taking my question I switch.
Slightly to a more strategic question around met the networks and what the plan is pool.
Company in the acquisition and then also youre going to be competing again in in that market. Thank you.
Yes sure so.
Again, just to refresh everybody's memory or better was a acquisition that we did have a small Israel based company in May of this year. It falls in the zero tries network access category.
Our interest in Mehta was to provide additional adaptive controls in our broader people centric framework. We're very very excited about this technology. It is early in its.
Early in his wife and what we're focused on right now is early customer adoption. So while we're seeing very good interest in the market with that particular product.
We're really just working through the process of maturing the capabilities and better understanding.
How we can continue to drive interest and adoption of this new capability.
It's a little early to call out who the competitors will be because we're one of the few companies that are focused on as people centric view, we have seen the use cases that were focused on of high interest with customers. So for example.
Contractor access to network.
I mean again their contracts represent a very risky group of individuals that if one of them were infected they get in fact, the whole corporate network.
So by.
Providing access through Mehta organizations policies and controls around what systems and applications. Those individuals can see and so that seems to be resonating quite well as an early use case, but I would say, it's early and we're going to operate in this very early stage for the foreseeable future probably through the first half of 2020.
Great. Thanks Simona.
Well go next to task good job you with Guggenheim partners.
Hey, guys like taking my question on a question on the.
I think a bundled versus buying the product.
You did it can you comment on what the books pricing by a bundle of buying those products separately that lower than the proceeds will be.
Yes, if you buy it.
Yes, if you buy a bundle, especially PTP three you're realizing a modest discount probably somewhere in that 10% to 15% range versus buying them individually and for us the bundles or are.
Delivering some additional value at a reasonable discount to customers, but more importantly, it's a way of really helping to frame for the customers kind of this good better best concept of Hey, I see this price list of 18 products, how do they fit together and what do I need to buy to deal with my broader people centric security compliance problem and so the bundles are really about health.
Thing to frame that for our salespeople for our channel partners and ultimately for the customer.
Got it thank you.
Mhm.
We'll take our next question from Rob Owens with Piper Jaffray.
Good afternoon guys.
Good afternoon.
Gary as you look at the success you've seen in archiving over last couple of quarters and I think if we look back at the the story for the last five years. This is always potentially being on the common it really feels like it's happening now so maybe some of the puts and takes you are seeing around the market dynamics, what's happening how pipelines are setting up and as you look at.
2020 in this being a potential catalysts for the next couple of years, just some of the puts and takes around how this market's evolving thanks.
Yes, no. Thanks, Great question. So we're super enthusiastic and excited about the opportunity around archiving and what we've seen is the larger come a players whether it be.
Microfocus.
Pardon me solution or.
Enterprise vault solution under their top there hasn't been a lot of innovation and I think customers are beginning to look at what do they want to do next.
So we see great opportunities specifically in financial services, another regulated industries like healthcare to help us customers moved to a next generation solution. We continue to see very steady pipeline build in terms of those organizations basically reaching out and working on what their plan is to do what they want to do next and I think the only.
Hey.
The only trade up here is as we've noted in our prepared remarks is very difficult to forecast when these deals actually to come to fruition and so while for example, we closed.
Very large deal that we noted in our Q2 remarks is actually a.
On.
What are the most significant deals we've ever goes in the company's history that was an archive deal I think that theyre, just very difficult to forecast. So we feel like we've got a good set up for 20 and 21.
And we are building pipeline nicely and we'll just we'll want to be conservative about.
When we think those deals ultimately come to fruition.
Thanks.
Well go next to Daniel Bardas with Bank of America.
Thanks, guys I wanted to just zero in on the Kathy opportunity because it's supposed to be such a high growth market.
So are you guys truly competing with and beating the leaders like a big Sky high or others and is this a product that you can lead within 2020 or is it more of an add on for existing customers. Thanks.
Yes so.
We've made significant investments in this particular product area over the course of last 18 months and.
We said what we saw in Q3 for example, as some good early wins against all of the Cozby players we had wins both in existing proofpoint customers as well as a leading with that in new accounts and so we feel like we're really well positioned as we enter 22020.
To go attack that market and we're optimistic and hopeful that we'll see that to be an interesting contributor in this overall emerging products cohort.
Sounds good thanks.
Well take our next question from Andrew King with Dougherty and company.
Hey, guys. Thanks for taking my question I, just wanted to focus on the bundles all bit so in the past you guys might not have seen the best when rates do you guys have expected in the sub 15000 mailbox.
Base, partially because of price competition and it sounds like that these bundles will start to help you compete against the other competitors in that area, but how do you see that affecting the revenue contribution from the segment going forward.
Yes, so I would say that.
Just just to clarify a couple things. Some 15000, we haven't really if you think about data is sort of a framework, we havent seen any sort of unique price competition in that space now if you want to get down to sub 1500 get down 7000, it's a different Ral met its one that we sort of have always to store.
Likely gone off after more opportunistically and so it's a different level of value that you deliver there when you have the likes of people like Barracuda Mimecast operating there, it's a bit more of a commodity space because a lot of people outside of financial services and healthcare can't really differentiate between good and bad email security and so we really focus on the.
Verticals, where we can.
Yet the most value.
As we look at those lower end.
Markets and then specifically for the people who don't value differentiated security, we have our central's platform and we use that to serve the low end, mostly through managed service providers and some of our channel partners. So that if it is.
Back to your question about bundles, we're excited in that the bundles apply to all the people that we have historically looked at as enterprise customers, whether as a 100 person bank in Oklahoma or whether it's a 100000 person financial institution located on the east coast and everything in between so the bundles are a great way for us to bring our differentiated technology and increased deal.
All sizes and improve how we enable our customers large and small to meaningfully change their security compliance posture for August content that operates beyond the firewall.
So hopefully that helps you see how the pieces fit together in terms of our bottle and how we think about serving the market.
Great. Thank you.
Well take our final question from Carson simple with Cowen.
Hi, Carson support on for Nick I, just wanted to circle back to the piece that offering can you comment on from the point of differentiation relative to other offerings in the market, particularly as more and more players entering space. Thanks.
Sure.
A couple of things that we focused on is one we're leveraging our threat Intel everyday to inform the kind of fish simulations that actually happened because we fundamentally believe that you need to be training your users and raising awareness of your users on the actual threats that are happening as opposed to.
Just made up fishing matures. That's one two is for customers who choose to purchase.
Our broader protections, we have done very deep integration, where when a user reports a particular fish, we can actually automate the whole backend process from grabbing the message understanding whether based on our threat detection, whether that is the malicious message.
We cannot do auto remediation if it ultimately get gotten delivered and that we can inform the user. This is what is called clear. This is the integration that we've talked about on previous calls.
So and then.
The content that Weve dealt we've really focused on.
Some key learnings principles that have guided our path through what kind of content, we want to deliver and I think collectively those things differentiates us differentiate us quite well in that market and as I indicated in our prepared remarks, we continue to invest in that pretty robust product roadmap, we released a whole set a new video content.
Last quarter and there is additional customization capabilities that we announced I'm in the quarter as well. So we've been on a very rapid path to take advantage of the growth in that market, we feel really good about our positioning.
Great. Thank you.
You bet.
Ladies and gentlemen, this does conclude our question and answer session I'll turn it back to Gary Steele for closing remarks.
Great. Thanks, I wanted to just take a moment thank everyone for joining us on the call. Today, we were very pleased with our Q3 results. Our continued product innovation and excited about the continued progress with our people centric approach as cyber security and our path beyond $1 billion in annual revenue. We believe we remain well positioned to drive attractive returns for our shareholders and we look forward to talking to.
Are you on our next call and to see many of you on the conference or could this quarter. Thanks, so much for joining us today.
Ladies and gentlemen, this does conclude today's conference. We thank you for your participation you may now disconnect.