Q2 2020 Proofpoint Inc Earnings Call

Please standby.

Hi.

Gentlemen, and welcome to the <unk> second quarter 2020 earnings results Conference call. This call is being recorded.

The conference over to Mr., Jason Starr, Vice President Investor Relations. Please go ahead.

Thanks, Lisa good afternoon, and welcome to performance second quarter 2020 earnings call today, we'll be discussing our results for certain quarters detailed in the press release, the we issued after market close this afternoon.

Which is available on the Investor Relations section on our website.

Joining me on the call.

[laughter], Chief Executive Officer, and Schirmer, The Board Oh, No one chief Financial Officer <unk>.

And of course this call will make forward looking statements regarding future events in future financial performance of the company, which are subject to material risks and uncertainties that could cause actual results could differ materially.

We believe that the cold at 19 crisis creates additional complexity when it comes forward looking your the business, we're providing guidance on a good faith based us a recent does he see recommendations.

We caution you to consider the important risk factors contained in the press release on this conference call.

These risk factors are also more fully detailed under the caption risk factors for sports 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 July Thirtyth 2020, we undertake no obligation to update these statements as a result of new information or do you target.

So it has performed policy to need to reiterate nor jumped the financial guidance provided on todays call unless it has done through public disclosure such as the press release, what do the final form 8-K.

We will present, both GAAP and non-GAAP financial measures on today's call non-GAAP measures exclude a number of items as set forth on release. These non-GAAP measures are not trying to be considered in isolation from substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing proofpoints performance.

Conciliation of GAAP to non-GAAP measures analyst for the reasons why the company uses these non-GAAP measures are included in today's press release. Finally in addition, or reading or press releases in FCC filings. We encourage investors also monitored the investor section is number one site that investors don't Proofpoint Dot com, that's we routinely coast industrial worried that information such as news and events.

Financial filings, what jobs presentations and other relevant materials to it.

Now I'll turn the call to guarantee.

Thanks, Jason I'd like to thank everyone for joining us on the call today, we're very pleased with our second quarter results, which came in above our expectations on all metrics and we're excited to raise guidance for the year as Paul will detail shortly.

Troublesome home environment mandates and our unique visibility into an increasingly active threat landscape continue to highlight the importance of proof points people centric security and compliance services.

Overall demand for services was quite strong the quarter with continued momentum.

No security offerings as well as strong performance from emerging services like our email fraud defense or 50 cloud apps security broker cascading security awareness training or piece that and insider threat management. All rights you have solutions. We're also pleased to maintain our air Arbor no rate at over 90%.

Yes.

The competitive environment remains favorable at our people centric approach the cyber security and compliance is resonating with our customers and prospects alike as evidenced by our continued high win rates robust demand for emerging products and the ongoing traction with our product bundles.

During the coping banking crisis, our top priority remains the health and safety of our employees, while maintaining our world class operational readiness to continue to support and protect our customers.

I'm pleased to report that our overall productivity levels remain high and our overall engagement with our customer base has never been better I'd like to thank our teams around the world for their continued dedication and hard work throughout this challenging time.

At dinner prices around the world remaining to work from home environment and employees often beyond the reach of traditional on premise security controls mini security teams are increasingly realizing that the traditional enterprise parameter has affected we shifted from big network to their individual employees in other words people.

Not infrastructure are the new perimeter, making quick points unique people centric approach the cyber security compliance even more relevant for security teams efforts to protect their end users and safeguard the sensitive data they interact with.

Well you know remains the primary method of attack in the last 12 months, we've seen them more aggressively we keep it move more aggressively towards account takeovers, including email account compromise and also spoke email impersonation also known as business email compromise as the basis for launching as opposed to.

I mean sophisticated attacks.

According to the FDR I'd specific forms of attack have resulted in over $26 billion and losses worldwide since June of 2016.

Primary reason for de staggering numbers, you've got these malicious messages are extremely difficult to detect as they often carry no malicious payloads at all but aren't affected not that sits right. After a C trick and winning users into changing the instructions for wire came at or payroll information moving to ship of shipping location for a delay.

Very capital equipment or sitting malware through legitimate corporate email accounts to other employees or supply chain partners.

Our competitors often fail to detect these new methods of attack, particularly since many of them have not made adequate investments in advancing their capabilities over the years.

And often struggle to keep up with the rapidly changing threat landscape as a result.

By comparison that many investments Proofpoint is made in email security web isolation can be an email fraud defense provides us with unique threat intelligence and a set of comprehensive controls give better protect our customers and also for I'd also further reinforces our old world class visible.

<unk> for example threat intelligence from Caskey, Uncompromised accounts and post logging malicious behavior feeds into our machine learning models and detection for inbound email security threats, while our fished it's actually from email enables us to map, a takeaway infrastructure and improve our cozby compromised accounts.

Actually Additionally, our combination of Proofpoint isolation with our email protection sweep flights yet another line of defense.

Beyond World Class threat protection security meters also increasing we need to need the visibility to understand not only who in their organization has been targeting but also the sensitivity of the information and their resources that those individuals can access and whether that information is being handled appropriately as enterprises also.

The risk of data last summer the employees that maybe knowingly compromised by threat actors or ones that are indeed, malicious disgruntled or simply mentally Chad.

Their daily activities.

The complementary technology gain through our acquisition of observed at last year per point is now able to provider customers. This additional visibility through our insider threat management offering.

Services delivered through a lightweight sensor that runs on the endpoint and communicate back to a central on premise server, which empowers security teams to detect investigate and protect and prevent potential insider threat incidents by delivering real time alerts and actionable insights into user activity.

As we discussed on last quarter's call. The work from home mandates have generated solid solid customer interest in our ATM capabilities as company search for added visibility into their remote employees, resulting in a handful of additional wins in Q2.

As we recently announced we released the cloud based version of this solution in June which enables customers to seamlessly redirect inpoint sensors to communicate that store the data collection and analytics directly in our highly scalable cloud infrastructure instead of a centralized on premise Sir.

You often leads to accelerate incident response and broader unified visibility across user activity data interaction a threat information.

This call case ITM capability is also the foundational element of our forthcoming enterprise data loss protection or DLP, offering, which integrates DLP across email cloud and endpoints and fundamentally we imagine how organization should protect their most critical information.

We expect to launch the enterprise DLP by the end of the third quarter.

Did you will see industry has historically taken a data centric view the problem tried to classify and protect information aircrafts and in motion across the places it should be and worked shouldn't be.

The cloud is revealed the shortcomings about approach.

But it also creates an opportunity to solve the problems much more effectively.

Data doesn't just get up and walk away it moves because of a negligent compromised or malicious user.

With a cloud native people centric solution enterprises will finally be able to use not only not just content classification, but also user behavior and threat contacts to figure out rapidly what users are doing what they are critical data and whether it's appropriate.

We believe this could be a potential game changer, when compared to other legacy on premise DLP solutions that are currently deployed in the market and represents an opportunity in excess of $3 billion, when including our Kathy and insider threat management functionality.

Enterprise DLP represents another Great example of our ongoing innovation and mission she provider customers with an integrated comprehensive people centric security and compliance platform to protect their users and sensitive data from people based attacks now turning to some of our key operating results during the second quarter.

The rapidly changing threat landscape and the accelerating transition to the cloud and the migration to Microsoft Office 365 in particular continued to be the key secular trends 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 generation of cloud systems and infrastructure.

The work from home environment continues to reinforce email security as one of the most important vectors for security teams to protect and we had a solid quarter of new protection and tap wins, including our largest transaction in the quarter, a large financial firm with nearly 300000 users and another fortune 100 consumer.

Good company with 130000 users.

We 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.

Samples of customers, who had moved to office 365, and subsequently decided to upgrade their security capabilities with good point during the second quarter included a fortune 100, helping sure that added protection and tap for 65000 users.

Global 2000 manufacturing company purchased protection and tap for 45000 users.

Fortune 500, consumer goods companies that purchase of keys, or a bundle and added email fraud defense for 25000 users.

Fortune 1000 financial services firm that purchase that keep one bundle for 10000 users an expanded their insider threat management deployment.

We're also pleased with the success of our add on sales into our customer base, which contributed approximately 60% of our new annual recurring revenue growth. This quarter in particular, we're very encouraged by the ongoing strength in demand for our emerging products, which you have again represented over one third of the total new.

I don't basin add on business closed during the quarter led by strong demand for Proofpoint security awareness training email fraud defense cloud security broker threat response insider threat management.

We also continued to make progress.

In our bundling initiatives in support of these emerging products through the launch of ARPU zero Threepi Threep offerings. We believe that these bundles make it easier for customers, who consume our broad set of capabilities, eliminating the need for multiple sales cycles and greatly simplifying the selling process for our sales team and importantly.

For the channel.

In fact during the current pandemic many customers have expressed their desire to consolidate spend around strategic vendors to simplify their security purchasing and operations that have cited our bundles ability to help accomplish this.

While this effort is still early bundled products again contributed nicely to our Q2 results, reflecting solid customer interest in this approach in fact, we close over 300 bundled deals and are making further progress with our higher end teach you and T. Three bundles examples of customers that purchased bundles during this.

Second quarter included a fortune 100 health care company that upgraded to the P. three bundle for 30000 users.

University Medical center that upgraded to the P. three bundle for 20000 users a fortune 500, food and beverage as a company that upgraded to the Pete you gotten all for 15000 users at a fortune 500 health care company that purchase to bundle for 12000 users.

In our archiving business, we're seeing good demand for midsize companies and we won several new financial as Hawker customers into second quarter. We also continue to make progress with several large deals that are maturity and our pipeline, but these are still expected to likely pushing that 2021 do the coping Nike related headwinds that we discuss.

Just last quarter.

Our technology ecosystem partnerships continue to drive our pipeline expand our market reach and increase our overall value to customers by delivering it integrated framework across a family of best in class security solutions, including crowd strike Cyberark Octa Palo Alto networks since block we had.

Several wins this quarter that were influenced by these integrations, including a fortune 500 insurance company that purchased protection tap DFT threat response, Cascade internal mail defense isolation and keep that for 30000 users.

And a University medical center that purchased protection and tap for 100000 users.

Turning to our international operations, we are encouraged at the progress being made against Cobot 19 in Europe, and the recovery appears better than our assumptions back in May.

Overall international revenue increased to 21% of total revenue grew 28% year over year. We closed several notable international deals during the quarter such as a global communications equipment manufacturer that added protection for 250000 users.

Global 2080 services company that added protection and tap and piece out for 40000 users had a global 2000 retail and financial services company purchased protection and tap for 15000 users.

As we look to the rest of 2020, we expect our international demand to moderate somewhat in Q3 as is typical for that region in the technology industry that we're also optimistic to see the increase over the fourth quarter as the recovery in Europe takes hold.

So in summary, we're very pleased with our strong Q2 results in our market momentum as we entered the second half of 2020, our operating strategy is progressing very well even in the face cover Nike headwinds and our product roadmap is exceptional and we believe the investments we're making good day, coupled with the strong secular.

Trends driving our market opportunity five is well positioned to gain share reinforce our competitive position and bill.

The leading people centric cyber security and compliance franchise in the years ahead with that let me turn it over to Paul.

Thanks, Gary.

We were quite pleased with our operating results this quarter, which beat our updated guidance on all metrics revenue totaled 258 million up 21% year over year and above our guidance range of 251 to 255 million.

Note that our revenue for the quarter benefited from approximately 3 billion of accelerated revenue under assay six so six it was not expected at the time that we provided guidance in many driven by the sale of solutions that were deployed on premises by our customers and hence triggering requirement to recognize the majority of the subscription revenue starting to sale.

That said all of this business was based on our standard subscription contract structure and that's such will renew in future periods similar to our other recurring revenue business.

We believe that these results are particularly compelling when considering the approximately 98% at this revenues recurrent which sets us apart as a leader on this metric across all publicly trading SaaS companies.

Well, we no longer provide guidance on billings. Our Q2 results of 250 billing was solid, particularly given the headwinds we continue to face from sectors more significantly impacted by the current crisis, such as retail travel energy and parts of the healthcare industry, which collectively represent just over 20% of our balance.

In particular I would like to highlight that we were pleased that our air or renewal rate remained above 90% during the quarter. A very good result, given that a number of our renewals were impacted by layoffs and furloughs across our customer base, which ultimately serve to lower the value of those particular renewals.

As we look to the second half in 2020 as discussed during our call in May we continued to see the potential for this metric to dip modestly below 90% in future quarters due to impacts related to cobot.

As we stated last quarter, we expect that the overall employment rates at these impacted customers will improve over time similar to the recovery from the great recession back in 2009, enabling an eventual returned to growth for these customers as the crisis essentially abates.

A final point regarding billings I would like to note, while we saw a modest increase integration during the quarter when compared to Q1, we expect this will likely remain under pressure for the remainder of the year as companies try to preserve cash given the current economic environment around the world.

Turning to expenses from profitability for the second quarter on a non-GAAP basis. Our total gross margin was 80% above our expectations driven primarily by our strong revenue performance.

This gross margin performance puts us in the top Cortile all publicly traded SaaS companies in stands as a testament to the efficiency with which we operate our global cloud operations.

During the second quarter total non-GAAP operating expenses increased 18% over the prior year period to 167 million, representing 64% total revenue.

Moving down the income statement on a GAAP basis, we recorded a net loss for the second quarter totaling 23 million or 39 cents per share based on 57 million outstanding shares. This result included a noncash gain a 14 million, resulting from the reversal of stock compensation expense related to performance.

They stock awards.

These amounts have been accrued in prior periods based on progress towards the target metrics associated with these performance grants, but based on the impact of the crisis as reflected in our updated guidance. We no longer believe it's likely that these targets will be achieved against these accruals had been reversed accordingly.

We reported non-GAAP net income of 33 million well above our guidance range of 24 to 26 million.

Moving onto S. non-GAAP earnings per share for the quarter was 51 cents per fully diluted share above our guidance range of 38 41 cents based on 65 million shares.

EPS calculation applies the gets converted method to our convertible notes due in 2024 and as such assumes the conversion of approximately 6 million shares an add back just under half a million in cash interest associated with this debt instrument.

In terms of cash flow, we generated 31 billion and operating cash flow, which included a $4 million reimbursement from tenant improvements associated with our corporate headquarters project.

We invested 12 million in capital expenditures of which 7 million was associated with our new headquarters, resulting in free cash flow for the quarter of 19 million well above the high end of our guidance range of breakeven to 10 million.

This upside was principally driven by the strong billings linearity during the second quarter, which helps accelerate some cash collections into Q2 that otherwise would have been collected in Q3.

So with that let's move onto guidance for 2020.

Recall that back in May of this year as a result of the corporate 19 pandemic, we opted to take a very different approach to our guidance as such instead of providing our traditional guidance range for the year, we chose to outlined two very different scenarios based on potential production. So again, it could take and how that might impact our business.

In the first scenario, where the cobot 19 crisis during the second quarter with a gradual return to normalcy over the rest of year. We bought revenues of 1.03 billion absorbing the impact of a 5% reduction in our new and add on business as compared to 2019.

In the second scenario, where the pedantic continued to meaningfully impact the global economy over the entire here, we modeled revenues of 1.5 billion absorbing the impact of a 40% reduction potentially in our new would add on business as compared to prior year.

As Gary already noted our business remains well positioned despite the continued uncertainty regarding the recovering some because the 19 pandemic and the resulting impact to the global as well.

While the overall operating environment.

Remains challenging compared to northern standards and the current crisis has yet to stabilize in many of our markets around the world.

Given our stronger than expected Q2 operating results are solid pipeline and our good linearity. During July we no longer view the second more dire scenario is likely and as such we're spending that aspect of our outlook so year.

We're also pleased to be able to raise the top end of our guidance range on all metrics with a return to a more traditional products to guidance for the year, though we are being particularly thoughtful given the current environment in how we provide this guidance.

In terms of revenue guidance for 2020, we're increasing our range to 1.035 to 1.037 billion with a midpoint that implies an annual growth rate of approximately 17% to the year.

We expect full year 2020, non-GAAP gross margins to be approximately 80% modestly improved when compared to our prior guidance of 79%.

In terms of non-GAAP net income, we're raising our guidance to a range of 106 to 110 billion from our prior range of 91 to 101 million.

This new range translates to approximately a $1.64 to $1.70 per share using 66 million shares outstanding.

In terms of tax rate under Cmdr for 2020, we expect a rate of approximately 17%.

This guidance also assumes depreciation for the year of roughly 37 to 39 million.

At 4 million in net cash interest income.

In terms of cash flow for the year, we're raising our free cash flow estimate to an updated range of 130 to 140 million.

This guidance assumes capital spending of approximately 75 million down from our prior expectations and 95 million.

This is comprised of approximately 40 million in capital spending associated with the build out of our new headquarters and partially offset by approximately $16 million in the form of tenant allowance reimbursements that we get negotiated with the landlord and as a reminder, this reimbursement runs through the operating cash line the cash flow statement as opposed to netting against capital expense.

Yes.

This cash flow guidance for the year also includes the tax payments for the transfer of intellectual property associated with our acquisition of observe it which we now estimate to be no more than 15 million down from our prior estimate of 20 million.

Now, let's discuss our financial outlook, specifically for the third quarter, we expect revenue to range between 260, and 260 million, reflecting 15% growth at the midpoint.

I would like to note that this outlook when viewed in conjunction with our guidance for the full year implies Q4 revenue of approximately 267 billion for the fourth quarter.

It's a year over year growth rate of 10% for the final quarter of year.

As I noted earlier for 2020, we're currently modeling an actual decline in new and add on business of roughly 5% as compared to the prior year as precipitated by the corporate 19 crisis and his general impact on the global economy and more specifically the relatively stifling effect. It has had on the roughly 20% of our customers operating in.

In the hiring impacted industries in particular.

This decline into an add on business by definition create some pressure on relative revenue growth for the year.

Assuming an improved operating environment in 2021, where our new an add on business returns to growth year over year, we would expect that the fourth quarter of 2020 will mark a low point for our revenue growth with a reacceleration playing out across the arc of 2021.

For third quarter, we expect non-GAAP gross margin to be roughly 80%.

We expect non-GAAP net income to be 24 to 26 million or 37 to 40 cents per share. This assumes depreciation of approximately 10 million.

And less than 1 billion in net cash interest income and the share count 66, smelling fully diluted shares outstanding.

We expect free cash flow to be 16 to 21 million for the third quarter, which includes capital expenditures of roughly 25 million, which 16 million is associated with spending on the new headquarters this being partially offset by 10 million in expected leasehold improvement reimbursement that will flow through the operating cash flow line.

Note that given some of the construction delays associated with the shelf replace orders here in California that occurred earlier in the year, a larger percentage of Capex for this project approximately $60 million total will fall into the fourth quarter, though note that our reimbursement allowance is expected to be fully used during the third quarter.

And as a result, the final phase spending on the new headquarters will impact Q4 free cash flow by a full 16 million, which has a significant step up as compared to the 6 million of net impact during Q3.

Our Q3 free cash flow guidance also includes the aforementioned cash payments associated with the observe it intellectual property transfer.

As a final note on guidance, while we had been pleased to be able to continue to provide our quarterly and full year guidance. Despite the crisis.

Note that we do not expect to provide an initial outlook for the fiscal year 2021.

Third quarter earnings call later, this year, given the pandemic and its impact on our ability measured over the somewhat longer time horizons have visibility into the business.

In conclusion, despite a challenging operating environment, we continue to execute well delivering strong top and bottom line results in the second quarter and we believe that we remain well positioned to drive disciplined growth with increasing free cash flow margins in the years ahead built on our proven ability to defend enterprises against today's advanced security compliance threats.

We are well positioned to weather the carbon 19 crisis over the coming quarters, with a 98% or better.

Portion of our revenues coming from recurring business.

Cash balance of nearly $1 billion.

Healthy free cash flow generation strong secular drivers a favorable competitive environment and our broad people centric product set.

We continue our targeted investments with discipline and.

And we expect fees to help us emerge from this uncertain period stronger than ever.

With the goal of returning to our reporting operating paradigm targeting the score a 40 or better as the crisis. Eventually resolves and we were turned to a more normal operating environment at some point in the future.

I will now turn it over to Jason to review, our upcoming Investor Relations schedule for the quarter before taking questions from the sell side. They fall 14 out of that just wanted to mentioned I've heard that the webcast service provider for today's call had an issue with multiple companies our call today.

So from a transparency standpoint, we're going to try to post the transcript or the.

Thanks, and descriptive the west Investor website as soon as we can just as a quick heads up everybody.

From a marketing standpoint signed a third quarter two points management team will be presenting at D.A. Davidson software and Internet Virtual conference on September nine and cities Global Technology Conference on September 10, a webcast of these presentations will be will be paid available on investor relations page that investors Proofpoint dot com and hopefully today's call will be too.

We will now take questions from or sell side analysts in the interest of maximizing the number of analysts that are included in the portion of this portion of the call I would like to request participants. Please limit themselves to just one question. Thank you for taking the time to join us on our call today and with that we'd be happy to take your questions now Lisa.

And ladies and gentlemen, if you have a question. Please press star one on your telephone keypad.

Speakerphone. Please make sure your mute button is turned off your signal three charclub.

And it is star one to ask a question, we'll go first to Rob Owens Hypersound like.

Good afternoon, guys. It's a good thing thats multi part questions. So.

Gary wanted to touch a little bit on the enterprise DLP products.

And secondly, what that brings I know that that's been kind of them.

A legacy market, where students local vendors at Symantec is dominated there and does that feel hanging wall.

Security or is it honestly separately that you're engaging with some of the symantec customers.

Type solution that could potentially shake more of them. Thanks.

Yeah, we're very excited about the opportunity around enterprise DLP and helping customers think about this differently ticket if people centric approach, where we believe we can fundamentally deliver.

A whole different category of time to value in terms of implementation and thats been whether historical issues, where we find that theres incredible leverage is many customers already uses for.

Singled vector DLP, so email DLP as something that we've always had very good success on but we're seeing with the momentum broadly in our cast be solution and the early.

Early indications that are super positive on observe it we believe that bringing all together into a complete enterprise solution really positions us uniquely in the market, it's big and I think that market's been underserved I think it creates is a tremendous opportunity for us.

Great. Thank you.

Next up is Jonathan Ruykhaver Baird.

Yeah, good afternoon guys.

That does solution bundles can you just talked about your expectations, you mentioned, a potentially larger enterprise adoption or P to P. Threeds, we move into the second half. So I'm just wondering in particular.

What you are expecting and then you get any color on what's driving that expected adoption, probably not from a modular use case perspective would be helpful.

Yeah, I would say hey, John a good good here.

I would say first and foremost there's a definite focused on vendor consolidation. So people looking for a way to operate with fewer vendors see thinking to get some savings, particularly from internal efficiencies associated with operating with fewer vendors fewer people, having a minute matters different solutions, but the other side of this of course is that when you look at pro.

Points broader people centric security compliance framework their incredible benefits from having all of these capabilities delivered by a single vendor in this case per point.

Having a single pane of glass to manage and essentially.

88 compliance issues, but also see the threat landscape broadly beyond just the aperture of email, but looking broadly across all these different cloud properties, where you're being attacked and understand who your VIP and you're very tech people are being able to manage in response to that understand through the threat actors are and what thereafter, so it's a combination of all.

All these things that are very much playing in a favorable way toward our opportunities to sell these larger P to P. Three models I think it became much more pronounced undergo that were csos are really thinking about who their strategic partners are how many vendors they really want to deal with and that's been a key catalyst for us to help drive level sales.

Okay helpful. Thanks, guys.

Thank you next question today from Andrew Nowinski D.A. Davidson.

Great. Thank you and congrats on a great quarter.

So I just wanted to ask me on their email tracker that we published we picked up on more wins for Proofpoint this quarter than maybe we've seen in the past. So I'm wondering if you could provide any color on the rate of new logo acquisition this quarter relative to last quarter and perhaps how it compared your internal expectation thing.

I'll start and possibly as content.

One of the things that we saw was as what you mean mentioned this in her prepared remarks that our core protection and tap business had a really good quarter and we referenced some very large deals the large financial services firm.

That was a customer actually coming off of Symantec and so I think broadly speaking we see.

Alwyn from.

In our core simply because we're seeing.

This email being such a high priority and people are rethinking what they traditionally done and so I think we've been well positioned and that's why I think thats why its showing up the weight isn't your tracker.

Yeah, I don't have anything that I I would agree with that.

Thank you very much as people to good work.

Walter Pritchard of Citi has the next question.

Hi, I'm wondering if you could.

Give us a little bit more color around you're seeing some consolidation into bundles, which which makes sense given the environment.

Are you see the most benefit there, especially as you talk a P. P to P green what areas are.

Various other areas in the market 13, standalone that are interesting consolidation into that.

I'd say on one of the primary areas would be Kathy.

You know that market is very fluid requirements and moved around and we've made significant investments and so it just as a natural part to think about natural.

Components, including that broader bundle.

Got any others.

I would I would highlight guys is a primary why and then obviously in the lower bundles you have our security weren't as training.

That has been a natural adder and all the integration work that we've done there make it very compelling to buy it with the rest of solution.

Thank you.

Next up is Jonathan Ho William Blair.

Hi, good afternoon I.

Yeah, one thing I wanted to understand a little bit better with started the dynamic that you're seeing on you around some of the net expansion and some of the headwinds there, particularly given headcounts and do you see that potentially bouncing back if we see a recovery on it it just helping us understand maybe the pace of that and what those headwinds.

Like in the in the back half of your might be helpful. Thanks.

Yeah.

Thanks, Jonathan I'll start and Gary ties a few things to add I would say that within our installed base highly impacted industries definitely you've got the furloughs and the layoffs that are that impacting our renewals accordingly.

Gary and I were both here, leading the company back during the great recession. So we know what this pattern it looks like.

Most of these businesses will eventually recover their formal former levels of output and success. It just takes some time in as they do so hire folks back and then we'll move our subscription levels back up to those.

Original levels of employment in the subscription values accordingly, so so with all that said.

With regards to specifically the second half the year, it's a little hard to tell but I would say, we all have sort of our own anecdotal experience here, but you know as I look at travel related services. For example, it doesn't feel like there's going to be much of a recovery for those industries in the second half of the year, but let's all hope that sometimes we work our way through 21, they'll be a better recovery.

Some parts of retail maybe a little more successful here in the second half the year, depending on how things come together, you'll health care was already starting to see a bit of a rebound, but now with the kind of resumed lockdown lot of elective surgeries, but put on hold but let's hope with the with the new.

Lockdowns that you've seen in different states they seem to be getting the better of case count increases maybe we get back to an increasing elective activity again, maybe mid to late Q3, which then brings head count back into those healthcare provider. So I think it's going to depend industry by industry, but the good news is it then kind of bakes in some uplift.

In terms of new an add on recurring if you will that will pick up over the next I would guess probably 12 to 18 months as those companies I'll come back on line to their former levels of deployment, yes, the only thing I'd add to that is.

I feel really good about is these companies that have maybe died in temporary reductions in headcount. We do believe they come back because these are large enterprise companies. They have long term sustainability. These are not companies in.

To be world that may not ever come back. So we feel very good given the segments that we serve that we will see a rebound debt as Paul said it would be nationally there basically be built into our uplift over time versus company that just fundamentally are going away, which I think people, we'll see in the SMB world.

Thank you.

Next up from Wells Fargo instilling flow.

Okay.

Hi, Steve This is rich hilliker on for Phil Thanks for taking my question here.

We talked a little bit earlier in your prepared remarks entered the cumin, a about vendor consolidation and some new logo acquisition I was wondering if we can double click they're a little bit on your competitive win rates specifically if you can again, some recently acquired vendors. Thanks.

When you said recently acquired vendors can you elaborate a little bit more I want to make sure. We're answering your question you repurchase amount that Oh.

Exactly yes, okay, alright, thanks decades.

[laughter].

Yes no.

Our win rates have been extremely high we reference that in our.

Our prepared remarks, and our win rates I would say.

Where is steady to increasing frankly over the course Q2, and so we feel very good about our positioning our market momentum and I think frankly, one of the things that we saw with reference a little bit of this in the prepared remarks as well.

Into covered world, we've seen that threat landscape move and it if you didnt demonstrate ingevity you had a hard time, keeping up with the threat environment and I think our technical team did a really good job of ensuring their customers wall protected and I can't say that necessarily across that are the competitors and we saw in the market.

Great Thanks, guys and congrats.

Thanks Ryan.

In Essex of Goldman Sachs is next.

Hi, good afternoon. Thank you very much and take on a question.

I was wondering if maybe you could comment a little bit on contract contract duration is there anyway to quantify the impact of that in the quarter and then.

With regard to contracts that come up for renewal on a more frequent basis, if you've been able to quantify any potential lift and attach rates is now that's an opportunity obviously for upsell them up for renewal basis.

Yeah, it's it's hard to quantify we haven't put specific numbers out there, but obviously contractually duration does put a little bit of the headwind in billings number and hence we were pleased with the $250 million. We recorded as a result to that clearly with somewhat longer duration, you would've seen a higher billings number by definition.

But it's hard to put the exact number on what that otherwise might look like.

But to your point, we we've always been advocates for shorter duration go back and look at any of our transcripts for the last eight years, our compensation plans actually focus on the sales team doing chartered out longer duration contracts and the reason for that is twofold first on a shorter duration contract to get less of a discount or said differently. If you do a three year prepaid contract.

We do give you would typically a 10% discount which is kind of the industry standard.

I'd, rather not give you that 10% discount I'd rather have it be a one year deal because we generate more revenue profitability net income and ultimately cash flow by renewing the same customer year after year on on those single year terms and as well to your point those shorter duration contracts just create one more touch point, where you can go in and drive an add on sales.

Whether its upgrading the customer to one of our newer larger bundles or just simply selling a third or fourth if product and so we like moving shorter duration. There obviously, some near term impacts to billings, but in the long run it actually creates a more significant cash flows frame for shareholders over time.

That makes a lot of sense. Thank you very much.

Thanks.

Your next question is Alex Henderson Needham.

Thank you very much.

You can give us a little bit of more granularity around the.

Personnel training on a security training side of the business.

What kind of scale has just gotten up to and what kind of growth rate are you seeing within that particular segment of your business. Thanks.

Yeah, I'll start and Gary May want to China, and we've seen really good success with our security awareness training product.

As you probably are familiar we picked it up through an acquisition back in 2018 of a company called one back we've now rebranded Proofpoint security awareness training, but it continues consistently each quarter to be one of the caught top contributors to new an add on recurring revenue that we bring into the company each quarter.

We were really pleased last quarter, we close to small acquisition.

In Europe called Defense works, which added some additional content capability of the platform. So it's an area, where we continue to invest both organically with large team developers primarily in the Pittsburgh area as well as the most recent acquisition and who knows that may be another acquisition or to at some point down. The road. We think it's a really important area. It's a critical part of helping build out.

You overall strategy for defending the enterprise.

Getting your employees and making sure they understand what press look like and know how to identify them into is an important part of the overall defense paradigm that all companies need to adopt large or small.

So with all that said I think we've been pleased with the performance. The business has grown reasonable scale, we don't break it out separately as a specific division with externally reported revenues and part of which is frequently sold as a bundle with other products naturally as you can imagine if you're buying our protection at advanced threat capability buying our security awareness training isn't.

Natural third piece of that equation, if you well, but I would say that generally we see that our customers are really pleased with the capability and it fits very nicely together our portfolio I'd just add that strategically we feel like we're well differentiated from the independent companies in in the sector.

And our differentiation has come from the fact that we've done some very interesting integration, bringing together our core.

With the fish simulation security awareness training and there's a lot of very demonstrably benefits of having these two products together and so we think we're really well positioned relative to into that independent players in this particular market.

Thank you very much that's very helpful.

Next we'll go to Sarah Hindlian bowler Mcclary.

Great. Thank you so much Gary and I appreciate it.

How can you drill down a little bit more on the duration comments you were just going over.

It will be up this quarter, which is a bit of a surprise to me, but you're guiding to them to continue to come down and then Gary just a follow up for you on international isn't that you guys think you need to do there to really move the needle.

Yeah, So I'll start Sir I I would say that the fact that we had a modest uptick in duration. This quarter was a surprise to me as well as I look at it in retrospect with something that's clear as it was primarily companies in the financial services space, where we were seeing this and I think if you can imagine in the current interest rate environment and the degree to.

Which the defense basically shoveling money into defaults, the banks and getting them to do something useful with that one of the useful things to do is to get your 10% discount due a three year prepay with portfolio and so as a result finish services in particular, which as you know as a one of the important segments for per point.

Proved to have somewhat higher duration than I ever would have anticipated going into the quarter.

With that said, it's hard to say exactly what behaviors will be week to week month to month quarter quarter, and so for modeling purposes for now we're assuming that the duration for the second half the years more consistent with what we saw in Q1 and then we'll see maybe we'll be possibly surprised and see an uptick in third and fourth quarter, but for now I just want to set.

Expectations at a lower level until we see now.

Third quarter plays out and Sarah with respect to international we were very pleased with the result, so 20% growth in the quarter, we're very happy with and we feel like that momentum carried through the second half lending it was.

Interesting in Q2 were seeing broader participation out of our APAC team, which we think can be as that business begins to grow we think that could be a catalyst certainly next several years as well. So we can really get about international we feel like rather I talked.

Awesome guys. Thank you very much appreciate it.

Next is gray Powell BC AG.

Okay, great. Thanks for taking the question, maybe just a follow up on Symantec. So it sounds like the pace of wind begin Symantec is picking up I just want to make absolutely certain that I'm reading that correctly and then when a customer does switch over what's sort of like a typical price uplift that you see like they're spending $100 per user or do something.

$100, but symantec.

Most of the end up spending the proof points or what sort of but that's the product uplift.

Yeah, Great question, no we've definitely seen an uptick in Symantec, we feel really good about the kinds of customers were winning we reference to fortune 500 companies in the script, but obviously.

We had very good momentum and sort of across the broad customer base.

When someone switches year, it's very much like what happened.

In the Mcafee transition, where we see the core email security dollars transferring sort of dollar for dollar and then our sales team, we'll work hard to put them into a bundle, which will ultimately get get ads.

Two or three.

Or four times, what they have traditionally been.

In pain. So it's how do we do that what we're trying to move them into a bundle I got P. One bundle or even if he to bundle. So we're including things like security weren't as training that bring the price up.

And adding other products.

Got it that's really helpful. Thank you very much.

Thanks, Stephanie Erik Suppiger JMP Securities.

Yeah. Thanks for taking the question.

The stuff and just curious.

Can you talk a little bit about whether you'd seen any acceleration in business coming from office to 65.

But just the a pandemic is has accelerated any business to them in there for creating additional opportunities for you then secondly.

Anticipate any efficiencies.

During the pandemic that you can.

Continue endemic passes which which might create upside to long term margin targets.

I'll start and then Paul probably has a couple of comments so with respect to office 365 weeks. We've just seen continued momentum of moving to Optumthree hundred 65, and that's been a contributor of growth for us pre pandemic during pandemic and I think it'll be with us for a long time as more and more customers finally get to the cloud I do believe that.

Coveted put more pressure on people to rethink what their cloud strategy is I think there will be continued momentum that direction.

We've also seen as we noted this is a script there there are a number of things that I think are.

Raised the visibility in the importance of our capabilities and our work from home environment I think with users sitting at home, it's everything they customers now that they need to protect their employees with respect to a good email solutions I think that's been a positive. We've also seen as we noted.

More interest again.

Our insider threat management solution, because you're getting you have a whole set of users at home off the corporate network companies want to understand what those users are doing how they're managing data and so we've seen ticking interest and frankly I think even if as covered subsides I think we continue to see this momentum because people are are seeing the value of.

We can deliver an important that isn't there overall security posture. So I don't anticipate a slowdown in demand I think we're just raising the visibility of the kind of work that we do for customers. During this period, which I think that's all no I think just to the other part of the question which is related to.

Are there things that we're doing in terms, how our operating the business today in the middle of a pandemic that as we emerge from the pandemic will that change the operating profile, how we run a business.

I would say that in our case and I don't believe so.

Obviously pretty much everyone's working from home at this stage I expect that to continue for the foreseeable future, but with that said, we very much believe in the power of having people working together in offices and so while the productivity. The teams of Merck has remained remarkably high over the this stretch where people have been working from home we very much.

Or to bring everyone back into the office, when it's safe and get the power of having teams working together and just that the benefits of the camaraderie if people working under the same rove.

As well well travel, but it's obviously are roughly running a zero right now.

Unless we see a behavior change in our customers themselves, where if for whatever reason they decided that they no longer want to meet with our executives or salespeople and we'll continue to just make decisions you know be assume and virtual meetings unless that were happened I think we'll be back toward normal travel activities. When we come back around again.

I suspect that's still ways out but.

But that that's what I see so again I don't see any changes to our business model in the long term as a result of this but obviously there is short term impacts to our spending profile.

Good thank you.

Well now go to Matt Hedberg RBC capital markets.

Hey, guys. Thanks for taking my questions.

Paul.

Good linearity, which was really good to hear I'm wondering if you can maybe you can expand on not a bit in terms of the piece of business and also comment on the pipeline build through this uncertainty and I assume it's probably the pipeline is strong, but maybe it's the close rate assumptions or sort of what you know we're all watching.

Yeah, I think linearity was very very good in the second quarter and Ranieri. So far here in Q3 has been good as well.

It's hard for me to attribute specifically what that might be related to I do think there is a heightened understanding and and concern on the part of both customers and prospects about the threat environment when people working from home the need to make sure that they are properly protected so that obviously.

Tips things on the margin in our favor, but I wouldn't call. It a sea change in buying behavior, but it'd probably maybe creates a little more vigilance in a little more urgency on the part of our customers on average.

So with all that said I think that.

The pipeline entering the quarter I think we felt good about obviously in the context the guidance that we provided we haven't changed assumptions are of course right. So I think our close rates are kind of following our traditional pattern or at least that's what we've seen thus far.

In the second quarter, and what we would expect to see in Q3, so it's a little bit business as usual other than of course, the sales team. It doesn't get to go out and actually see the customers in person so almost all of our interactions or virtual at this stage.

But our our solid paradigm seems to have transitioned fairly effectively to that and and again, we were really pleased with how Q2 came together and.

Hopeful for us and some good results here the second half.

Excellent. Thanks.

Next up is Ham Fodderwala Morgan Stanley.

Hi, guys. Thank for taking my question just kind of quick one on the recent partnership that you guys made with the crowd tried to netscout.

To secure a remote work can you give a little bit more color as to what that involves from an additional integration standpoint as well as the go to market standpoint, with some of the benefit that you foresee though.

Yes, we've been we've been on this mission to do technical integrations with critical partners and we've had very good success, most recently with crowd strike and with octa and so when the opportunity came along to bring together all all of this in a.

And is there a trust framework. It just made it kind of sense and so again, we're leveraging the technical work that we've been doing with these vendors and bringing and bringing it out to the market with channel partners as well as Jerry marketing activities with each of these organization than we think this that broad power across these vendors.

Give us some lift in the market.

Thank you.

[noise] shocks <unk> of Northland capital markets.

Yeah. Thank you.

Paul they're getting your script you talked about it they see simplicity formulation can you just.

Click on what happened there.

And then just clarify that the for guided does that include a benefit from the it's 86 cents flourish.

Yeah.

Yes, I'm sure you're familiar for under the new accounting standards not actually.

At this stage, but relatively new over the last couple of years.

Even if you have a recurring subscription business if the product can be deployed on premise and is in fact deployed on premise by the customer and it doesn't require regular updates and upgrades from.

The vendor in order to enable that capability. Then you end up accelerating roughly 80% of the value of that subscription ended the period of time when that deal actually closes and of course when it were news a year later, you'll see that same effect again.

And so because we did have some customers who chose to deploy some of the tack on premise unexpectedly.

Which is fine we don't mind, what you know if you want to build our little private cloud where it in your data center were perfectly happy to do that.

Ended up creating some more accelerated revenue in periods. So while we were really pleased with the overall subscription business. We closed a larger amount of it got recognized in period than we would normally expect because as you can imagine if I close a 12 month contract.

Near the end of the month of June.

And it's a subscription business very little of that revenue gets taken in June and ultimately than in the second quarter, but under AC six six even if that deal closes on the last age you a lender, but 80% of it being recognized in the month of June and ultimately in the second quarter. So the result of that of course is that we had that 20 million to.

Our unexpected step up in revenues for the second quarter and that then pulls revenue out of future periods. So again, if you think of 3 million divided by four it's a negative impact actually at about $750000 a quarter to our revenues for the subsequent periods, which would be Q3 in Q4 this year in Q on Q.

Two next year and again or guidance reflects all that so six so six created a nominal benefit here in Q2 and it actually is a bit of a nominal takeaway than in the next four quarters as a result.

Excellent. Thank you very much.

[laughter] from Stifel and skirt Telpad.

Okay, great. Thanks for taking my question, Gary can you talk about the appetite for M&A in the current environment than that ultimately where you might be looking.

Sure we continue to explore the M&A market looking for interesting.

Opportunities that extend the value that we currently have what customers where we can.

Basically either.

Finally, a finding I tried to Jason's you, where we can create more value drive more economic value for us with customers or something that extends a current solution and our focus really is everything that fits in that people centric view and so we look at all M&A opportunities through that lens.

And while we had side, we would see a dip a more significant decline in private company values, we haven't seen that and so we will continue to be super disciplined and how we look at opportunities and continue to explore it.

And and see what we find but we're going to be we're going to continue to be said we're disciplined.

Okay. Thank you.

Our next question is from task.

Hi.

Hey, guys.

All other parts of southern UN handling business.

Did that it should be down 5% for that.

Acting.

Okay, and we'll put on what it was down for you to in Q1 or is the your full year got implying that the moment improved in.

The back.

Yeah, you know I didnt break that out.

So it's just the overall for the year, it's down about 5%.

Turning to the quarters, obviously has a little bit of an impact on revenue that you see that reflected in the guide so.

Obviously, we're hopeful that we not only deliver on that number luck, maybe we get that in our number back to even from the prior year, we'll see how the second half of the year plays out, but I think with current pandemic and the fact that 20% of our install base a little bit more is in this highly impacted industry, where as you can imagine.

Getting the renewals, albeit often at somewhat lower value because of either furloughs or layoffs.

Those customers have no dollar spend for add on product almost uniformly and as well because we have sales teams that focus on those markets.

There's not much in a way of new business that we're closing for new account acquisition in those impacted industries. So I'm actually quite pleased that we're able to deliver a number at this level given the effected industries and the dynamics, we see those businesses right now.

Correct.

Well now go to Daniel BARDA.

Okay.

Hey, guys. Thanks for squeezing me in here I'm just curious how that works is doing Gary maybe you can discuss which of your products in like integrate well with India has indeed been replacing existing begins recently and then Paul if there's any sense you can give us for the size your growth rate that'd be great too. Thank you.

Yeah No great question, we've been focused that on integration, where their Kathy solution, providing interesting access capabilities and this really fits within that broader sathi framework that that Gartner talks about.

There is there's a reasonable amount or development work to do there, but we've seen some good early interest and early demand and we feel good about how that really augments, our overall kaz be solution and overall competitive position.

We haven't we haven't broken out any kind of staff explicitly on the revenues or things like that we're going to the emerging color products.

[noise] that you guys.

Our last question comes from.

Oppenheimer.

Thank you for taking my questions, John and come back of the solid execution.

Hi, My.

Next question.

Great.

Because of a life it looked like.

Got it all and you could explain how economics that then that go to market to get.

Okay.

Yeah. So in terms of the economics, we don't resell their products. They don't we sell hours, it's very much. The good news. This week, we Sheryl sand channel partner. So the channel partners will get together the solutions and put together often a bundled quote that includes some combination of per point and the other solutions to the to the.

The customer in question and then of course, we sell our piece to that our resellers of the distributor accordingly.

And so obviously, there's a lot of benefit for all of US cooperating. So we find opportunity, where we think one or more of the other partners involved could benefit will bring that and won't curves. The general partner do that as well and vice versa. So there's a lot of value and in working and collaborating and it's very similar to how the Palo Alto networks relationship work.

Since our first big foray in this area years ago <unk>. When you have a common enemy theres a lot of power and working together arm in arm to go when business jointly and so I think we're pleased with the early results. We've seen from some of these newer partnerships and I think that could potentially play a pretty meaningful role in helping to drive business for us down the road.

Thank you for the color and again come back from the strong execution.

And that does begs the question and answer session today, I'll hand, the conference back to Gary Steele for any.

Closing remark.

Great I want to take a moment and thank everyone for joining us on the call today, we're very pleased with our Q2 results and our continued progress with our people centric approach to cyber security compliance will also supporting the health and safety of our employees and customers. We believe we remain well positioned to drive attractive returns for our shareholders and we look forward to talking to you on our next call.

I'll add just seen many of you virtually on the conference circuit. This quarter. We wish you all good health as we pressed forward through this crisis. Thank you so much.

[noise] and once again, ladies and gentlemen that does conclude today's conference. Thank you well for your participation today you may now disconnect.

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