Q2 2019 Earnings Call
Please standby.
Good day, ladies and gentlemen, welcome to the Proofpoint second quarter 2015 earnings results Conference call today's call is being recorded.
At this time I would like to hand, the conference over to Mr., Jason Starr Vice President Investor Relations. Please go ahead.
Thanks, Lisa good afternoon, and welcome to Proofpoints second quarter 2019 earnings call.
Joining <unk> joining me on the call her Gary Steele, Proofpoints, Chief Executive Officer, and Chairman of the Board and Paul Auvil, Proofpoints, Chief Financial Officer, They will 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 web site.
During the course of this call we 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 and on this conference call.
These risk factors are also more fully detailed under the caption risk factors in Proofpoints filings with the FCC, including our most recent Form 10-Q .
These forward looking statements are based on assumptions that we believe to be reasonable as of today's date July 25 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 that neither reiterate nor do adjusted financial guidance provided on today's call unless it has also done through a public disclosure of such as a press release or through the filing of the form 8-K.
Additionally, we will present, both GAAP and non-GAAP financial measures on today's 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 and a list of the reasons why the company uses these non-GAAP measures are included in today's press release.
Finally in addition to read in our press releases and SEC filings. We encourage investors to also monitor the investors section of our website at investors Dot Proofpoint Dot com as we routinely post investor oriented information such as news and events financial filings webcast presentations and other relevant materials to it so that said I will turn the call to Gary.
Thanks, Jason I'd like to thank everyone for joining us on the call today, we're very pleased with our Q2 results with our team delivered yet another quarter of solid topline and bottom line financial results Q2 revenues were 214.4 million ahead of expectations and representing 25% annual growth.
Our results demonstrate strong operating leverage embedded in our business with our guided profitability metrics such as gross margin operating income and free cash flow all coming in ahead of our targets.
Our overall business momentum remains strong driven by a number of key factors, including the demand for our next generation cloud security and compliance platform the ongoing migration to the cloud and our unique visibility into the rapidly evolving threat landscape the competitive 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 rates 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 cloud provides organizations with many well known benefits, but also provides attackers with an entirely new and often unprotected vectors that they can exploit to compromised individuals for financial gain.
To deal with these evolving challenge as companies 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 new approach has become.
And imperative for security teams globally, and Proofpoint is uniquely positioned to deliver it by combining our excellence in email security and threat intelligence with our broadening reach across a wide array of critical cloud applications.
Our exceptional visibility into the threaten that threat landscape provide security teams with unique an actionable data to enable them to implemented additional adaptive controls to improve their overall security posture, such as deploying browser isolation are conducting advanced security awareness training and phishing simulation to further protect users that are the most frequently targeted by threat actors.
To extend these people centric capabilities in May of this year, we acquired met in networks and innovator in zero TRASM network access.
This transaction will provide us with additional adaptive controls to make it far easier for security teams to precisely limit employee and contractor access to specific authorized on premise cloud and consumer applications.
And as such further reduce in enterprises exposure to a full breach do the compromise of an individual employee or contractor.
We are extremely excited about the potential that met it brings to our people centric vision, we do not expect that it will generate any meaningful contribution to revenue in 2019.
Before providing a review of some of our key Q2 wins I'd like to touch on some exciting new product enhancements that we announced earlier this week.
Specifically, we launched a significant enhancement to our Proofpoint E mail and browser isolation bias, where isolation offerings called tapp isolation, which enables seamless integration between our tap advanced threat detection system and our browser isolation solution in order to further enhance the protection of every end user.
This new capability provides security teams with the ability to establish policies and customize when the isolation system is involved for example, they can deploy a risk based approach to.
Selectively isolate a user's youre out clecs based on risk factors, such as they're very attack people our VIP designation.
Similarly, they can choose to isolate high risk Youre ALS.
For all users based on categorization, such as unknown or on scanned web content. We believe that Proofpoint is the only security company that cannot customize isolation and other programmable metrics based on each user's risk profile, which greatly simplifies how organizations govern their risk while evaluating their overall security posture.
In terms of functionality. This new isolation solution provides an additional zero trust adaptive control to protect their environment by redirecting these higher risk users to an isolated environment whenever they click on the link with virtually no impact to their experience.
And as such protecting them, while they interact with content on personal email web and cloud based collaboration services, all of which have the risk of being exposed to malicious youre ALS.
While the users isolated proofpoints isolation engine fetches web content and conducted a deep scan to detect mitigate and resolve any threats for that particular set of online content all while operating within Proofpoints cloud to protect the users endpoint from potential compromise.
What's the system deems the content to be safe the user can choose to either remain in isolation or automatically exit the environment and directly interact with the web page.
Now turning to some of our key operating results during the second quarter, the rapidly changing threat landscape and the ongoing transition to the cloud and the migration to AWS. Microsoft Office 365 in particular continued to be dual long term catalysts that are helping to drive demand for proofpoints full suite of security and compliance solutions as existing on premise infrastructure by definition cannot meet the challenges of this new generation of cloud systems and infrastructure.
We also continue we also continue to effectively demonstrate the strength of proofpoints products when compared to the baseline security solutions provided by Microsoft as part of their Officethree hundred 65 bundles.
Examples of customers, who had moved to office 365, and subsequently decided to upgrade their security capabilities with Proofpoint. During the second quarter included a private manufacturing company that purchased protection and tap for 20000 users.
Medical services organization that purchased protection and tap threat response, and internal mail, but thats for 15000 users and a fortune 500 financial services company that purchased the PD, one bundle and privacy for 10000 users.
We are 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 are very encouraged by the ongoing strength in demand for our emerging products led by strong demand for email fraud defense or FD threat response, and notably Proofpoint security awareness training or piece that which we believe represents yet another attractive opportunity for proofpoint to drive meaningful growth and an exciting new segment of the cyber security market. Overall, we're seeing strong customer interest with piece that was success selling into our existing base as well as driving new account wins.
We're also pleased to announce that for the six time at our six time in a row Gartner placed piece that in the leaders quadrant of its magic quadrant for security awareness computer based training, highlighting our superior vision and ability to execute.
We believe our product roadmap is compelling and we are seeing meaningful adoption of several new features we recently released.
As we shared in our call in April our closed loop email analysis and response are clear integration between piece at and threat response is gaining momentum and im pleased to share. We now have hundreds of customers that have either enable this integration are or are in the midst of it.
Implementation.
As a reminder, this feature enables end users to report suspicious emails with official arm analyzer plug in from piece that which are then further evaluated using the full breadth of Proofpoint threat intelligence. If a message is determined to be malicious that is automatically extracted from not only that users mailbox, but also anyone else in the organization that received it all within minutes. This automation is highly valuable to overburden security teams as it eliminates the need for manual investigation, thereby freeing them.
Freeing them to focus on other pressing matters.
Overall, our emerging products continue to be an excellent source of growth meaningfully outpacing the rest of our product portfolio and again contributing over one third of the total new and add on business closed during the quarter.
A few of the key emerging product wins in Q2 included an agricultural conglomerates that have purchased ft and threat response for 80000 users a fortune 100 insurance company that added piece that for 100000 users a fortune 100 chemicals company that added piece that for 50000 users and a leading private university that added ft and threat response for 70000 users.
In terms of segment reporting our compliance segment recorded yet another quarter of solid growth driven by a record quarter for our archiving business paired with the accelerating momentum of our piece that products as well as continued interest in our digital risk solutions.
As we shared over the past several quarters, we have seen increased interest in many of the new archiving features we've introduced such as 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 specifically I am very pleased to report that in the second quarter, we closed our largest archiving and supervision when ever.
Fortune 100 financial institution, you contracted with us for an initial five year term in the mid eight figure range, a small portion of which was built here in the second quarter.
Our archiving pipeline continues to strengthen given our cloud based delivery model in many 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 position in this market is important to note that given the size and complexity of these larger opportunities. It can take many quarters for them to mature and meaningfully contribute to our results.
In addition to the significant deal that I just noted other examples of archiving deals converting in the second quarter included a fortune 500 technical professional services firm with 20000 users and International Energy Services company with 20000 users and a financial services firm with 10000 users.
As we shared last quarter, our product portfolio has steadily grown and with the addition of met and now represent 18 unique services.
A key initiative for our go to market. This year was the launch of our solutions bundles piece zero P., one p. two and three.
We believe that these bundles make it easier for customers to consume these broad capabilities, eliminating the need for multiple sales cycles and greatly simplifying the selling process for our team and importantly for the channel.
While this effort is still early bundled products again contributed nicely to our Q2 results, reflecting solid customer interest in this approach, particularly in the entry level, Peterborough and Pete one bundles.
Im also pleased to report that we closed a handful of key to NP three wins in Q2 ahead of our expectations. When we first launched this program at the start of the year examples of customers that purchase bundles. During the second quarter included a fortune 1000 hospitality company that purchased our P. One bundle and added privacy and browser isolation for 65000 users.
Good Fortune 500 retailer that purchased our P. One bundled for 15000 users a video game developer the purchased RP to bundle for 6000 users and a non profit hospitals that purchased our peak three bundle for 7000 users.
We also continued to make progress towards further expansion abroad and are pleased with the quarter quarterly results in our international business, which grew 33% year over year and represented 19% of total revenue overall, we believe the operations outside the United States are executing well as highlighted by notable international deals closed during the quarter such as a global 2000 food and services company that purchased protection for 120000 users a global 2000 testing and services company that purchased protection tap and threat response for 60000 users.
And it's a city subsidiary of a global 2000 equipment company that purchased our peak to bundle with email fraud defense and Proofpoint email isolation for 3000 users.
We plan to continue to invest in our international opportunity, including opening additional geographies in order to capitalize on the burgeoning demand for people centric security around the world.
I'm also pleased to report that we are making excellent progress in our efforts to secure fed rep certification for our protection and tap and DLP solutions, all three of which have now achieved the milestone authority to operate in cooperation with the Federal Communications Commission and existing customer who is serving as our sponsor for this endeavor. This milestone is the final step before full certification as such we expect to receive this final certification in the next several weeks. This progress as highlighted earlier this week by the closing of our first new fed ramp customer a federal agency with more than 200000 employees and one that we believe will serve as a lighthouse account in helping us drive further wins within the federal government.
In addition, our Proofpoint security awareness train solution has achieved in process designation under the sponsorship of the United States Department of Commerce.
And our team is working towards receiving its authority to operate which we expect to occur within the next 12 months.
And recall that our archiving solution has helped out ramped status for several years now so all in all our team has made great progress regarding fed ramp and why we believe that the government vertical represents another important growth driver for Proofpoint overtime beyond this new agency that we closed here in July we believe that the federal vertical will be a moderate contributor to our overall business here in the third quarter given that we are in the early stages of ramping our sales efforts around these soon to be fully certified solutions.
Before turning it over to Paul I'd like to provide you with a quick update on some news regarding our board of directors.
First I could not be more pleased to announce the dania, Evan who is been Proofpoint Board member since 2008, and currently serves as our lead independent director was named the 2019 director for the year by the National Association of corporate directors.
This award recognizes Dana for the integrity leadership and courage that she displays across all of our board appointments and I want to thank her for her excellent work in many contributions to Proofpoint and I look forward to our ongoing service to the company and to our shareholders.
Im also pleased to announce that Pointman at two new members to our board of directors effective July 24th.
The first new member as Labour Saco Layla spent the last the past 11 years at Salesforce, where she led App exchange, the world's largest and longest running business app marketplace.
Our expertise and go to market product management product marketing and business operations will be valuable insights to our board.
The second new members Peter leave Peter was the President and CEO of BMC software and prior to that served as the president and CEO of Polycom.
Peter has in depth experience in scaling and leading multibillion dollar enterprise technology businesses and will be a great addition to the board on behalf of the board I welcome both Layla MP and Peter to the Proofpoint team.
So in summary, we continue to execute well as demonstrated by our strong Q2 results and our market momentum our unique people centric approach to cyber security and compliance is clearly resonating with our customers and prospects alike, and we believe we are well positioned to further capitalize on the opportunity to gain share in the over $13 billion total addressable market 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 on all of our key financial metrics with many thanks to the hard work of our teams around the world.
Revenue totaled 214.4 million up 25% year over year and above our guidance range of $210 million to $212 million.
Billings for the second quarter were $232.1 million, an increase of 17% year over year and above the high end of our guidance range of $228 million to $230 million.
As noted on prior calls under assay success ex 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 Q2, the adjustment related to these two items was negative $2.6 million.
Our duration for the quarter was down sequentially from Q1 landing at the lower end of our targeted range of 14 to 20 months and continues to underscore the high quality of our free cash flow generation.
This trend in terms of duration is further reflected in our deferred revenue balances, which ended the quarter at $628.5 million up 18.2 million sequentially with short term growing by $16 million and long term increasing by only $2.2 million.
In terms of a bit more detail on revenue during Q2 revenues from our advanced threat segment grew 21% year over year and represented 73% of total revenue our compliance segment grew 36% year over year and represented 27% of revenue.
Note that when analyzing our pass through revenues on a year over year basis. It is important to keep in mind the impact of the wind down of cloud marks OEM business as we have discussed on our prior calls as a reminder, over the course of 2018, we eliminated crowd marks historical practice of selling perpetual licenses and we also elected to wind down several legacy OEM relationships that were part of their historical business model.
When coupled with the negligible revenue growth across the rest of their installed revenue base. The resulting effect has been an estimated 100 basis point reduction in the comparative annual growth over the course of 2019, which is of course, even more pronounced when considering in the context of our advanced threat segment reporting.
Turning to expenses and profitability for the second quarter on a non-GAAP basis. Our total gross margin was 79% above our expectations, primarily driven by our strong revenue performance.
I would also like to highlight that at 79%. We are now at the high end of our targeted range for 2020 of 77% to 79% up full year ahead of schedule and a target that we first outlined for investors during our analyst day in June of 2016.
During the second quarter total non-GAAP operating expenses increased 20% over the prior year period to $141.1 million, representing 66% of total revenue.
Our non-GAAP operating income for the second quarter was $28.4 million, reflecting an operating margin of over 13%.
Bringing us into our 2020 targeted range of 13% to 15% again, a full year ahead of schedule.
non-GAAP net income for the second quarter was 24.1 million nicely above our guidance range of 19.5 to 21.5 million driven by both the revenue performance as well as our lower than expected spending in both sales marketing and R&D.
As we discussed last quarter beginning January Onest 2019, we are now calculating non-GAAP net income in accordance with the Fccs non-GAAP financial measures compliance and disclosure interpretations see anti section one of 2011.
This quarter's calculation includes 4.7 million in noncash tax expense at an implied tax rate consistent with last quarter of 17%.
non-GAAP earnings per share for the quarter was 41 cents per fully diluted share nicely above the high end of our guidance range of 34 to 37 cents based on 58.1 million shares.
On a GAAP basis, we recorded a net loss for the quarter.
Totaling 28.9 million or 52 cents per share based on 55.8 million shares outstanding.
Moving to the balance sheet, we ended the quarter with 182.7 million in cash cash equivalents and short term investments and in terms of cash flow, we generated 43.4 million in operating cash flow and invested 8.4 million and capital expenditures, resulting in free cash flow for the quarter of $35 million well ahead of our guidance range of 25 to 27 million.
This strong result was partially driven by better than expected billings and collections within the quarter.
Now moving on to guidance for the second half of the year.
We expect Q3 billings to be $274 million to $276 million, resulting in year over year growth of 24% at the midpoint and inline with our prior commentary.
For the full year, we are increasing our billings guidance by $2 million and now expect to range of 1.064 to 1.068 billion, representing nearly 22% growth at the midpoint.
This guidance range implies Q4 billings of approximately $345 million, reflecting year over year growth of 28%.
We expect our Q3 revenue to be in the range of $223 million to $225 million or nearly 22% at the midpoint.
For the full year, we are increasing our revenue guidance to $878.5 million to $880.5 million, increasing the midpoint by $3.5 million and representing nearly 23% growth year over year at the midpoint.
As a reminder, recall that the very strong performance in the fourth quarter of 2018 was driven in part by roughly $3 million in revenue acceleration under assay six or six as we discussed in January .
Which creates a challenging baseline for the coming year and absent a similar effect. This year, we expect the growth rate of 20% in the fourth quarter of 2019 or roughly 238 million.
In terms of gross margin guidance, we expect non-GAAP gross margin to be approximately 79% for both Q3 and Q4, representing a slight raise for our annual guidance.
For the third quarter, we expect non-GAAP net income of $21.5 million to $23.5 million or 37 to 40 cents earnings per share based on 58.6 million fully diluted shares outstanding as their spending catches up with revenue during the quarter.
Note that this Q3 guidance assumes capital expenditures of $10 million depreciation of approximately $9 million and an income tax provision of approximately $4.6 million calculated in accordance with C and D. One or two that 11 at an effective tax rate of 17%.
For the full year, we are increasing our net income guidance from our prior range of $83.5 million to $87 million to an updated range of $94 million to $96 million or $1.61 to $1.64 earnings per share based on 58.5 million fully diluted shares outstanding.
Note that this guidance for the year assumes capital expenditures of $38 million depreciation of roughly $32 million to $34 million and an income tax provision of approximately $19.5 million calculated in accordance with CND I want to 2011.
In terms of free cash flow. Please keep in mind that as we had indicated in our press release on May six announcing the Mehta acquisition, we do expect to repatriate the acquired intellectual property associated with the acquisition from Israel to the United States with a onetime tax payment, which we now estimate to be approximately $10 million likely to be paid during the third quarter of this year.
So with that as a backdrop recall that during our Q1 19 earnings call on April 20, Fiveth two weeks prior to the announcement of the acquisition.
We raised our free cash flow guidance for the full year to a range of $200 million to $204 million.
Absent this tax payment for the repatriation of IP here in July we are again, raising our guidance for the full year with an expected range of $206 million to $208 million, representing a free cash flow margin of roughly 24%, bringing us into our 2020 target range of 24% to 26% again, a full year ahead of schedule.
Adjusting this guidance for the acquisition related effects of the estimated tax payments the repeat creation of intellectual property of approximately 10 million expected during Q3 results and an updated guidance range of $196 million to $198 million with expected breakdown in the second half of the year of 40 to 42 million in Q3, and approximately 72 million in Q4.
We believe that this outlook is particularly compelling given our commitment to innovation and our ongoing investments to pursue the key opportunities in the market.
As a final comment I would like to highlight that this guidance for 2019 reflects our dual objectives are driving attractive growth.
In both revenue and free cash flow, which remains a hallmark of Proofpoints disciplined operating strategy and is further CRE operated under the rule of 40 metric as discussed in prior quarters.
When discussing and considering our 2019 outlook of 23% revenue growth and 22% free cash flow margins, which again absorbs 100 basis points of additional costs associated with the tax impact from the acquisition of Metro networks. We are still delivering a figure of 45 under the rule afford to construct which places us prominently in the top quartile of all publicly traded SaaS companies.
We remain committed to our strategy of driving attractive growth in terms of revenue and free cash flow. So as we think about our opportunity over the next several years, given our significant opportunity to add new customers throughout the world, while selling add on into our ever expanding installed base combined with the strong secular trends considering the ongoing migration of workloads and content to the cloud and the ongoing severity threat landscape. We believe that we can maintain a rule 40 metric in the mid fortys by driving revenue growth in excess of 20%, while maintaining free cash flow margins in the mid twentys.
In conclusion, we continue to execute well delivering strong top and bottom line operating results in the second quarter and believe that Proofpoint remains well positioned to continue to drive disciplined growth with increasing free cash flow margins. Both 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 request that everyone to 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 todays discussion.
Thank you very much for taking the time to join us on our call today and with that we will be happy to take your questions now operator.
Thank you, Sir ladies and gentlemen, if you have a question. Please press star one telephone.
If you are using a speaker phone. Please make sure your mute button is turned off.
Your signal to reach our equipment.
Once again, everyone. It is star one if you have a question today well go first to Phil Winslow Wells Fargo.
Hey, Thanks, guys and congrats on another great quarter.
Just wanted to focus in on the emerging products.
Would you highlighted continued adoption of but really focusing on on on piece that you want to.
Just an update on sort of where you stand I guess from a kind of a couple of perspectives first in terms of just sort of the technology integration.
You into the broader broader portfolio and also just the go to market motion in terms of just you. Your training the sales force how to sell that Damon ramped up et cetera sort of technical and then I'll go to market.
You bet so.
Broadly speaking, we're really excited about this market and the broader competitive landscape.
One of our key values and Differentiators in the market has been this technical integration that we've done.
So it's really it's really twofold. So one is weve integrated our threat Intel.
And so we can do simulations today on the threats that were seen in those types of companies and their type of environment. So we can make the maker stimulations incredibly real world, which has been of high value to customers.
And second as I referred to in our prepared remarks.
This integration that we call clear.
Allows for someone who reports to fish that.
That user reported.
Email can then be evaluated against our full portfolio of threat analytics and threat Intel to then determine whether it's malicious and then we can automatically reach into the mailstore, whether its office 365 or on Prem and pull it out if it's malicious. So this integration between our core.
Detection environment and Thats also proven to be high value and so when we look at the competitive landscape. We're really far out ahead in terms of our offering because we're not just a standalone fish simulation and security awareness training company.
And so in terms of go to market to answer the second part of your question Phil So the way in which we have approaches is basically every seller across the globe has been trained and then we have a very small team of specialists slashed expert that then support the broad sales team and it's been incredibly efficient and I think the only thing I'd add there is that yes, we find in the market is because we are the largest player in the space right now in terms of scale and global reach we have a reach across the globe that is unique in this market, which we think is a real advantage for us as well because we've worked for many years to develop our relationship with the channel and have.
We think a very good set of channel relationships. We are working very hard to enable the channel to go and help drive in tandem of course with our account managers business not only in the us but around the world. So we think thats an advantage for us in the marketplace at this time.
Great. Thanks, guys.
Thanks, so much.
Your next question comes from Ted.
Jogging Guggenheim partners.
Hey, guys. Thanks for taking my question, if I look at the guidance and your performance in the first half of the bank.
Inflection in growth coming in the second half I think the average 4% was about 16% and the guidance implies second half growth was 25.6% can you remind us again, what's driving that big inflection in the second half why is that you are getting more back end loaded and then also if you can comment on what the seasonality of Walmart. This is one that were back end loaded than the core business.
Yes, so a couple of things.
To your question and I think what you're referring to is is the relative billings growth rate right first half versus second half.
Yes, and so is there a few things there one I would say that the acquired properties of both on bat and cloud Marc tend to be a bit more back end loaded and so you're seeing that effect is we're renewing their activity here in 2019 as compared to 18, So thats one impact.
Second impact is that.
As I think you and I've probably discussed before we have.
By definition like disproportion amount of business that happened in the second half of the year and especially in the fourth quarter driven by budget flush and so each year of course, we are closing business in those quarters, and then that business for news and we have not only of course business that we closed in 2018 that renews in 19, but we of course have one year deals to close in 17 that renewed in 18 that renewed 19, but we also have multiyear deals that were done in prior periods in both 16 and 17 that are now renewing in 19 that then add to that overall billings growth rate and then of course, we do do more new and add on business in the fourth quarter than we do in any other quarter during year. So it's a combination of all those effects. It's not one thing it's a variety of things that together drive that higher growth rate in the second half of the year and in Q4 in particular.
And then.
Yes, and then remind me again, what what did you what about what about specifically there is won by a more.
More seasonally backend loaded than the core business.
Yet.
Yes, yes, I touched on that yes, so the business as it was acquired was definitely a bit more back end loaded with third and fourth quarter compared to the first half so that plus cloud Mark which is very back end loaded into Q4 those effects are youre seeing flow through here in 19 compared 18.
Thank you.
Our next question comes from Gur Talpaz Stifel.
Okay, great. Thanks for taking my questions and congrats guys on another nice quarter.
I wanted to ask about Metro networks here, how natural adjacency as Mehta to what you're doing with your kind of with your core business and then secondarily. When you think about the budgets youre going after here with Matt you can keep capital spend from VPN related buckets or is it more evangelical in nature. Thank you.
Yes couple of things. So one is we are excited about netted method because of the tight adjacency and so we see met as a nice adaptive control that a customer can adopt that wants to protect higher risk communities of people. So one of the classic used cases would be putting contractors on the network. There risky group because you don't necessarily controller endpoint, you don't want to single endpoint into in fact, the entire network and third through metal you could use them as used the adaptive control admitted to give them.
Access without exposing them to your entire network. So we see that Jason see is quite good we see the buyers is the same so we're quite excited about it having said that as we talked about in the prepared remarks, we don't expect contribution from that in 19, we see that as further out into 20.
But we're we're definitely excited about where this fits and then in terms of budget and budget dollars.
Because of the tight adjacent C. I think those dollars come from existing projects. These people trying to figure out. This problem. So these are budgeted to use cases, and so we feel pretty confident although its quite early we feel quite confident that we will be tapping into budgets that exists versus budgets that have to be created.
Lisa will go to our next question.
Thank you, we'll go to Jonathan Ruykhaver <unk>, Robert W. Baird.
[noise] Yeah. Good afternoon, guys congrats on the on the execution.
I'm wondering if we can I can go back to the productivity issues you faced amongst some of the newer sales rep late last year. When it was first brought up in your <unk>.
Help us understand what those issues were back then and what Youre seeing today from that from that cohort.
Yes, so I'll start and Paul probably has a couple of comments one was we recognize the fact that we needed a broader enablement program. So our time to get a wrap up to speed wasn't it wasn't what we thought it could or should be we basically put in place a comprehensive global enablement program that has proven to be quite effective to take reps that are new to proofpoint and help them understand how to sell our broad set of products and how to be effective with customers. So that was one of the critical things and then.
I think the second thing was just hiring and I think weve address both of those we've had very good success meeting meeting or hiring targets and then combining that with his enablement. So those issues that we cited were in our Q3 call last year. So is over nine months ago, and we feel like we're well beyond that.
Good thank you.
Next up we'll hear from Rob Walter Pritchard Citi.
Hi, Paul wondering if you could talk about in the second half of this year here, what sort of duration billings duration, you're looking for I know last year that that popped up in the fourth quarter and I think even this quarter, we've heard some confusion from folks around.
Duration this quarter it looks like it was it was down but wondering if you could help us understand that trend is as you look.
Forward to what your your your forecast in the second half.
Yes. Good question. So as I commented on the prepared remarks, our duration was lower than we expected here in Q2 and down near the low end of the range you can see that with the fact that long term deferred revenue only grew by 2 million. This quarter. So I was pleased that we delivered the billings results. We did despite the compression in duration. So as I look at the second half of the year and the current guide I'm, assuming duration maintains kind of in the middle of the range. So up a little bit from where we are today Q2 felt like a little bit of an aberration, but again. This is one of the things about our business, it's very hard to predict at any given time.
Which customers will do one year two year three year deals I may have customers coming off a three year renewal that decide to move to one year renewal, even though they pay.
Almost 20% more they choose to do that because they're trying to free up absolute budget dollars to work on other projects, so duration can be but bit unpredictable, but I feel good about our guidance here for the second half of the year, but to your specific question I'm, assuming that our duration maintains kind of right in that middle of our historical range in the numbers that I guided to.
Thanks, Paul.
Yes next step is Rob Owens Keybanc capital market.
Great. Thanks for taking my question I was wondering if you could elaborate a little bit on the strength you're seeing in the archiving business. You mentioned one of your largest wins ever a mid eight figure range deal, but you only took some billings in the second quarter. So can we expect follow on in the back half relative to that deal and then is this coming from the strength from new customers existing customers maybe can elaborate there. Thanks.
Yes, so just specifically on the mechanics of the deal that we closed here in the second quarter.
We had a modest amount that was built here in the current quarter. There may be small little bits that we bill later this year, but those will be very small amounts and so think of it as something that will likely roughly on the anniversary each year. So it's a it's kind of a Q2 billings item each year.
In 2020, 122 et cetera, so thats the way the deal is structured so don't look for any meaningful contributions to billings from this particular contract between now and the end of 2019.
And then in terms, Rob in terms of mix of customers new versus existing.
This particular deal that we referenced that was with a customer that had been a security customer for quite some time and they knew us and how we built a strong reputation with that account through the long established relationships that weve built on the security side.
And if you look more broadly at the examples of customers that we won.
I think there if I look at it really quickly the mix is about half were.
Existing customers and half are brand new customers. So we're winning brand new customers looking for a next generation archiving solution that haven't had no relationship with us in the past, but we're also winning customers over that had long established relationships on the security side.
Great. Thanks, gentlemen.
You bet.
Steve Clinic with this securities is that Mac.
Hey, guys. Thanks for taking my question.
So as we look down the road.
Say next couple of years.
And you guys drive towards that 20% plus revenue growth objective.
What what growth drivers, whether its go to market drivers product et cetera.
Start to really come in before next year, and then and then what do you.
Of the of your solution set now on your initiatives there you're pursuing now which of those seeds are going to be more prominent in fiscal 21, if it's possible to even think that far out.
Yes so.
I know Gary has a couple of comments you'd like to make here, but this is one of the things that I really like about our setup going into next year as well.
What we do.
This year, we're over $1 billion of bookings scale looking to drive toward that number on a revenue basis for next year and then beyond based on our analyst day outlook for 2020 from back in 2016 2017, what I like about our setup going into this next step for the company's growth is the breadth of opportunities that we have whether its going out driving new business. Both in the us for the remainder other half the fortune 1000, where we have no business or whether it's the global 2000, particularly in Europe , where we're really just getting started today, whether it's driving then add on business across the 17 really 18 to conclude a met met in networks products. Our average customer has under three products right. Now. So there is a ton of add on opportunity and then of course, just as we look at it I think we've really got potentially a tiger by the tail with some of our newer product categories as we talked about so.
I know Gary probably has a few things to add on top of that I think Paul captured the only thing I'd add to that is as we noted in our prepared remarks, we're just getting started on federal with this investment that we made in fed ramp and the cause for comprehensive nature that we've taken to ensure that we have breadth across all of our products on fed ramp.
I think we're well positioned there and we're just getting started we noted one large deal, but like theres plenty of opportunity there to last for a long time in the coming years ahead, and then I think.
From a product strategy point of view, we've been thoughtful about what products can play a role in the short term and what products have opportunities, we get further out and we're making investments thinking through what the next five and 10 years look like and so we are fundamental believers that this rule 40 that we can sustain compelling numbers for a long time.
All right. Thanks, guys.
You bet.
Well go to Alex Henderson Needham.
Great. Thank you very much I wanted to just go back to the competitive landscape a little bit.
Just completed a survey and we were surprised at how few people.
Cited any willingness to use Microsoft.
As a.
Security supplier, particularly for E mail or anything related to.
Identity, So I was.
No you guys have done a little bit more work around recent.
Trends there can you just update us on what you're hearing from the field in terms of their change in efficacy versus your performance.
Give us some detail that allow us to.
States that to our customers.
Sure I think.
It's very natural as customers make the transition from an on premise environment to office 365.
That day actively task the base capabilities provided by Microsoft the combination of.
Enterprise online protection, which is included in Eathree and ATP.
Which is included in the five and we get tested against those capabilities literally on a daily basis and the strength of our numbers and the results that we put up our in light of the fact that we consistently can demonstrate to customers that we can deliver not only more effectiveness, but also give them more insight and visibility and then they would get if they chose the Microsoft solution. So it's really what's driving it today is the combination of efficacy and that is.
That's everything from.
APTP stifle.
Fish that come through from potentially state actors to or running the mill stuff and then it's this broader visibility and insight given people centric approach we've taken in the data that you can get from our systems that and then inform how to drive a broader and better security posture I think it's a combination of those things that's enabling us to create value for Microsoft office 365 customers.
Great. Thanks.
You bet.
We'll go to Ken Talanian Evercore ISI.
Hi, guys. Thanks for taking the question.
I was wondering how are you trending against your internal plans for the international expansion and what are some of the key milestones. We can look for in the back half of the year and into next.
Yes.
Obviously, our internal plans typically exceed what we would guide pro for Wall Street.
So with that in mind I would say that we're generally pleased with how the teams are executing.
I think that there's we talked a little bit about being a bit behind on building out some of that core capacity last year.
I felt the team's done a good job driving hiring activity, but we always said high goals for ourselves are always looking to add more capability in all of our territories around the world.
Both in the us as well as internationally. So that continues to be something that everybody is driving toward hard, but I'd say, we're pleased with the staffing that we've had thus far.
But we continue to execute literally every week every month every quarter on driving scaling of that team. While also doing things to improve how we do enablement for example in Europe , where we now have a large team so.
Trying to think a little bit about regional differences in how we train and what products are kind of front and center in of greatest interest to diving into a new account in one of the many countries in Europe as opposed to a sales motion has worked well in the U.S. So there are a lot of moving parts there, but I feel like we're we feel like we're executing well and things moved along nicely. This year anything that I'm Super excited about and what was what's been notable for me is we pursued a path to expand the number of territories, where we have three point employees. So again within the last nine months, we opened Italy open Spain extended Benelux open Nordics opened middle East and we're seeing contribution across all those specific territories and that contribution then gives me confidence that the investments that we're making in the expansion of territories will have great impact over the course of the next several years because we're putting people on the ground that are delivering value to us.
Great. Thank you.
We'll hear from Andrew.
Keith Piper Jaffray.
Great. Thank you I was just wondering if you could provide any more color on the bundles and their impact specifically on deal sizes. In your revenue growth I know you mentioned a handful of customers deploy the high end P to P. Three bundles.
But I think you said the only involved about five to 6000 users, which seemed like it was well below the minimum.
Deployment size you typically target. So just wondering if you could comment on some traction on bundles and what youre seeing there. Thanks.
Yes, so yes keep in mind that we have a middle enterprise and the small middle enterprise team that focuses on customers all the way down into kind of the high hundreds to thousand range. So those customers are well within the range of customers that we go after but of course, we love close in business in the global 2000 for sure and that's where we get a lot of leverage so I think as Gary talked about in his prepared remarks.
We were pleased about is a couple of things one the low end bundles piece their own PD. One we closed a very large number of deals in the second quarter based on those bundles. So that just creates simplification and executing through the channel modest uplift on deal value, but for us it helps make those customer sticky as well because they are buying a broader package of proofpoint products, albeit a relatively smaller package compared to peak to peak rate and then with P to P. Three we put Uh huh.
Yet another large number of quotes out in the second quarter and what we were pleased by is when we first rolled this out at the beginning of the year at our sales kickoff, we didnt really expect to be able to close any P to P. Three deals in the first half of the year. So the fact that we got a few over the line. We were we were pretty happy with so with that Gary probably a couple of things that no I would just say that.
I'm really excited about the traction we've had and the deals that we noted that he won deals that we noted in the script. One was 65000 users. The other was 15000 and on the P. to MP three vessels that was 6000 7000. So these are pretty significant and 6000 7000 is straight down the fairway for a field sales rep for us so while they are not a 100000 CTO, they're really good meaningful deals and if you look at the broad value that we're delivering the size of organization, we're super excited and I think to get from.
Standing start in January to closing business.
In acute in the second quarter, it's really quite good. So we're super encouraged about where we are clearly lots of opportunity ahead of us, but super encouraged by where we are.
Great. Thank you guys. Thank you.
Thanks.
Matt Hedberg RBC capital markets is next.
Sure. Thanks, guys, Hey, there's there's a lot of talk about sort of I think you know.
Paul you mentioned some of the enthusiasm as you look towards next year.
I guess I'm wondering just from a high level Blake solvent in the seat it's coming up on a year I believe in October .
From a sales perspective, we can you can you sort of reflect on some of the some of the positive changes had on the organization. Obviously it seems like hiring has been better but and then maybe broadly speaking as you look forward for the next year.
Are there any or as you look towards longer term goals, maybe differently said are there any other sort of structural changes to the sales force as you think about scaling this business.
Yes, so if I look back over the three quarters that Blake's been at the helm.
He's really done a phenomenal job and I think if you were to ask any single salesperson across the whole company. They would all concur that he is.
Incredible enthusiasm and lead from the front style has been a has been a a welcomed approach by every single sales person.
He's just incredibly enthusiastic and what he's driven is a couple of a number of things that had been meaningful so one was.
Getting the global enablement in place Paul described it for Europe , but there is a lot of work to be done there. We've done a lot of work in the you as to is driving a strong cadence in hiring because clearly making sure that we had our hiring targets is a critical thing and continuing to drive growth.
The Lake has been.
Instrumental and helping us get adoption of the emerging products through the way in which weve.
Built the sales organization and the expertise we put in place. So he's had a pretty significant impact in the short period of time he's been in seat having said that as we look further out.
There's really no big structural changes that we anticipate as we think about.
2020, or even beyond that what what Blake is focused on is ensuring that we're continuing to drive a broader internet international footprint that we think will pay off.
Next year, the following year and years after so that would probably be top of mind for him.
Great. Thanks, guys.
You bet.
Next step is Catherine Trebnick Dougherty.
Oh, Thanks for taking my question could you how are you doing with the global 2000 on your prepared remarks, you had some larger deals and some more mid market 6000 7000 seats that.
How are how well are you penetrating the global 2000. Thank you.
Kevin I don't have the exact stat, we did not publish our exact global 2000 staff, but we continue to have really good traction internationally in those accounts and continue to make traction in the fortune 1000 in the us and we break catheters, Jason but we break it out it's an annual step for us, but at the end of last year. It was over 24% of the global 2000, and then again the Fortune 1000 staff that we shared was over 50%, 53% specifically.
Alright, thank you.
And we'll go next week, we'll take questions.
William Blair.
John .
Yes, hi, sorry about that can you talk a little bit about the interest level and traction that you're seeing for isolation and maybe the opportunity that you see I guess for expanded use cases for the product.
Yes, it's been really interesting so with the introduction of the integration of tap our advanced threat detection system and browser isolation, where based on policy you can determine what users will be isolated or what kinds of yourselves to be isolated. We've been this just went GA and we've been in early conversation with lots of customers and the reception has been really really good and so we are quite encouraged about the opportunity to bring this capability to our broad customer base through this integration and while we're just getting started on as we we feel pretty optimistic about that opportunity because you've got the choice. Unlike a lot of other organizations that sell browser isolation, there really taking people down a path, where you should isolate everything and we're taking a very different path, where we're using the richness of our threat Intel and visibility insight we have across.
What users are being attacked to help organizations determine who they want to isolate and in doing that it's much easier to get broader adoption of isolation.
So we're pretty enthusiastic.
Thank you plans will have an advantage that Nick.
Hi, guys. Thank you for taking the question.
Going in here for most the Frankie.
I wanted to ask about net of networks and.
I think a little bit deeper into that one.
In in helping you to better understand like the competitive environment seems like there's a lot of vendors out there who are talking about access control more more and sort of.
Whether it's the scale or optimize or cloud player or whatnot can you talk about sort of where where you look to compete and sort of how you guys look to fit into that that broader ecosystem.
You bet.
So as I indicated before I think though our approach is really in keeping with our broader people centric framework and using that as an adaptive control where.
Organizations can use the access the zero tries to access to better secure groups of people as defined under a people centric model and so we see ourselves just helping organizations use met as a vehicle to ensure that a single individual doesn't affect the entire network. So a risky individual like a contractor doesn't get on the network. In fact, everyone. So we're taking a very much a use case view versus you can think of.
People, who have competitive offers offers as trying to re frame and restructure some of his entire corporate network. We're not trying to do that we're really trying to help solve very specific problems that we think are budgeted and then we can go capture those budget dollars to drive broader adoption of our people centric model.
Got it Thats Super helpful.
Our next question will come from Cheryl.
Oppenheimer and company.
Thank you hi, good afternoon, guys. Congrats on the consistent execution I had a question on the piece that you weren't as training.
So it appears.
As you know the former warm, but with another successful acquisition.
Now that it's been about probably give or take 18 months into this transaction.
Do you feel it is probably exceeding your internal expectation and can you also remind us about the drivers.
Behind it thank you.
Sure.
So it's been 15 months the transaction was finalized basically in March of last year. So were at 15 months.
And this is exceeded our expectations I think the things that we have seen our one.
This market is moving faster than I think everybody anticipated in terms of the broad demand that organizations.
Our showing in terms of need or desire to do raise the awareness of the user community. This market. It continues to accelerate in terms of demand. So that is probably the number one thing that we've been super enthusiastic excited about and then I think the thing that has been really important is the opportunity to bring together our core detection environment with the training and thinking of.
The wombat capabilities as a very important adapted control in that whole message it works extremely well.
With our customers. So no I think this is well ahead of where we thought expectations would be and that's primarily driven by the demand environment and we feel like we bought the right asset we've been extremely happy with.
The capabilities that we are delivering to customers customer feedback has been extremely positive and we think that market has lots of room to run.
Thank you.
Our next question will come from Erik Suppiger JMP Securities.
Yes, thanks for taking the question actually just to follow up on the last one I'd be curious to get a sense. One if you can tell us what the piece that is.
Maybe get the highest attach rate of the emerging products and secondly can you give us a sense for where you think that attach rate might go.
So a couple of things in terms of the most recent quarter.
It certainly was one of the strongest of the emerging products I wouldn't characterize as the strongest but it's called top three.
With accelerating momentum over the course of the last several quarters. So we feel really good about that to your specific point on attach rate.
The great news is that what we've had some nice success here recall that when we first acquired wall about 15 months ago. The overlap in the customer bases was fairly small because it's mostly focused on smaller enterprises kind of in our Mds semi world. They had some fortune 1000 accounts, but not a lot and so we have a really interesting opportunity to go drive sale, a while back into our install base broadly and of course, our sales people get that in or are working on it diligently.
I think that it's Gary touched on earlier in the call.
Not only do we have a great platform with piece at in terms of the training capabilities as well as threat simulation, but then the integration between that platform and the rest of our gateway and what we call trap creates a really compelling overall environment for the security operations center or Soc at a typical mid and large sized enterprise to really be able to in a very optimal way manage all the different facets of training threat simulation feedback from users and then driving improved security posture broadly for the enterprise. So we think Thats set up is really good and again were really excited for the sixth year in a row to be in the leaders quadrant and we think that just reflects the ongoing great work of the team in Pittsburgh that is the wall that development team.
Very good thank you.
Next we'll hear from Gray Powell with Deutsche Bank.
Great. Thanks, Derek Thanks for working in Yeah, I'll be quick so what was the run rate revenue for Metro networks before you acquired it and then just just how fast we're growing and then.
Any billings contribution in the second half of 2019 that we should think about from the asset. Thanks.
Yeah, I mean matter was literally rounds to zero I mean literally like thousands of dollars. So they were very early they had some really interesting leadership accounts that they were working with.
Mostly in what I'd call advanced prototype stage, where they were running some number of users proving up that it worked but hadn't really gotten to revenue state. Yet. So this is really an example, where we got a great development team with some really good data points out there in terms of early adopters using the tech, but hasn't really started to pay for it yet.
So I think as Gary touched on we really don't expect much in terms of economic contribution.
On a top line basis or from billings for Mehta for the remainder of the year I mean, I suspect Opportunistically, we'll close of business, particularly with some of the folks that they were working within in advance development phase. If you will but part of this is that we want to get some users up and running at scale.
Test out some of the integrations that we're working on that part of it is part of what makes it a really effective set of adaptive controls and then really broadening the aperture in terms of engaging our sales team likely at our sales kick off in 2020 to start pushing the initiatives. So.
I would encourage everyone to think about that as something that's got a lot of great potential. It's really nice tech framework, but something that really won't start to contribute to our results until next year.
Got it Thats really helpful. Thank you.
Thanks.
The next question is from Daniel Berger Bank of America Merrill Lynch.
Hi, Thanks, guys I'll, just as a quick follow up on the awareness training so.
I was wondering after a couple of quarters, how the pricing is shaking out do you guys think it has the same potential up sell as a core product like say tap and then when customers are buying it.
Are they matching it to the number of seats for a product that they would buy like like email security. Thanks.
Yes, so the pricing on training and threat simulation is a bit less than what someone would pay for tap.
It's a it's a great product at the low end if your sub thousand users. It actually is kind of top level pricing, but for large scale customers. The pricing is a is a healthy fraction of tap, but its not tap. So the nice thing about it to your point is that.
Like tap like protection like pretty much every product we sell you either buy for all your users or you don't buy it at all.
Because again, it's one of those things, where you want to train everyone in order to.
Make sure that.
All of your links the weaker ones and the ones that may appear not to be quite so weak are properly trained in brief so that they all know how to properly handle potentially suspicious email that comes in through the gateway.
Great. Thanks, guys.
Thanks.
And our final question today comes from Nick Yacko Cowen and company.
Thanks for fitting me in guys.
You highlighted good demand for FD and threat response, just wondering if there's anything you can share around adoption or attach rates for the E mail related emerging products and then maybe how they're contributing to your overall growth. Thank you.
Yes, so if that continues to be a great seller for us. It is again one of the other top three.
In our emerging products category currently it's had a great run since we acquired those assets several years ago now.
For return path and.
That development team that we acquired.
That in working very closely in concert concert with both our digital risk development team as well as our advanced threat development team has really kind of re imagined that product category and has enabled us to bring to market something that's very different than anything else. It's really available in the market today and we're quite pleased with that and it's something that enables our sales team to go in and in a very differentiated way go and sell the product. So I think we're both pleased with the sales that we've executed on life today, but feel like there is still significant opportunity to drive sales and demand and I would say that a lot of our go to market has been kind of us centric because that's where the early go to market assets, where that we picked up as part of the acquisition of VFD, There's a big opportunity internationally that we're really just starting to cultivate that I think is a potent that leg of growth for that product line going forward here and whether you have anything to add to that no. I think it's got lots of legs and we're just getting going.
Okay, great. Thanks, guys.
Thank you at this time I would like to hand, the conference back to Gary Steele CEO of crude for any additional or closing remark.
Great I want to just take a moment to thank everyone for joining us on the call today, we're very pleased with the Q2 results. The acquisition that met our continued product innovation and then particularly excited about the continued progress with our people centric approach to cyber security. We believe are well well pads that remain well positioned to drive attractive returns for our shareholders and we look forward to talking to you on our next call and see many of you on the conference circuit. This quarter. Thanks, so much for joining us today.
Once again, ladies and gentlemen that does conclude today's conference. Thank you all for your participation you may now disconnect.