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Proofpoint Set To Benefit In Fragmented Security Market

 May 23, 2012 11:36 AM

(By Mani) Proofpoint, Inc. (NASDAQ:PFPT), which went public in April 2012, is well positioned to take share in a highly fragmented security market due to its strong product set, leading strategic partnerships with industry stalwarts such as IBM (NYSE:IBM), Microsoft (NASDAQ:MSFT), and VMware (NYSE:VMW).

[Related -International Business Machines Corp. (IBM): Hardware Woes Weigh On IBM Results]

Proofpoint provides inbound email security, data loss prevention, encryption, archiving and governance solutions. The company is set to benefit from the evolving nature of the enterprise data threat landscape, which is moving beyond the traditional perimeter, and is now being targeted at business data and systems rather than infrastructure.

The company's platform is built on a cloud-based infrastructure that is optimized for scalability, performance, availability, security, customer costs, and features a big data platform for advanced data processing and analytics.

Moreover, the company is operating in a market that is expected to grow about 11 percent a year. IDC Research expects security solutions market to grow to about $8.0 billion in 2015 from $5.2 billion in 2011. Of these, network data loss prevention (DLP) and secure messaging should be the fastest growing sectors with a growth rate of over 20 percent.

[Related -Fusion-IO, Inc. (FIO): Can Fusion-IO Q2 Results Cheer Street?]

"We believe Proofpoint has a leading data security product platform and will continue to invest to maintain its technology leadership, which should lead to share gains from incumbents," RBC Capital Markets analyst Robert Breza wrote in a note to clients.

Meanwhile, Proofpoint's on-demand subscription business model leads to consistent, highly predictable results compared to a perpetual-based software sale. The majority of business is sold via one- to three-year annual contracts, with an average duration over the last three years of approximately 20 to 23 months.

In addition, annual and multiyear contracts provide visibility over the life of the contract term as invoiced amounts are reflected as deferred revenue on the balance sheet until recognized as revenue.

Subscription revenue accounted for over 85 percent of revenue in the past three years, which is expected to account for over 95 percent of revenue in 2013. As a result of the on-demand model, the company has generated 34 consecutive quarters of revenue growth and has retained over 90 percent of customers since the launch of its first product in 2003.

"Our financial projections for Proofpoint look like that of many on-demand models characterized by steady quarterly progression of revenue and decreasing operating losses on a year-over-year basis that trail cash flow," Breza added.

However, the company is yet to report a profit, given the early stage of its growth profile, and efforts to invest in and build a business that can support a much larger revenue base. The analyst said the scenario should change over the next several years as the company drives revenue growth and scales against its expense base.

"We believe Proofpoint has the potential to reach breakeven on an operating basis sometime in 2014 and expect operating margins to ramp toward the 20–22% range over the longer term," Breza noted.

For the first quarter, Proofpoint's net loss narrowed to $4.8 million or 85 cents per share from $5.1 million or $1.33 per share in the prior-year period. Excluding items, the company's adjusted loss for the quarter was 8 cents per share, compared to 12 cents per share last year. Quarterly revenues rose 31 percent to $24.6 million from $18.8 million last year.

The company projects an adjusted loss of 9 cents to 10 cents a share on revenue of $24.9 million to $25.3 million for the second quarter.

For the full year 2012, Proofpoint sees adjusted loss of 42 cents to 43 cents a share on revenue of $100.5 million to $101.5 million.

Shares of Sunnyvale, California-based Proofpoint have dropped 8 percent year-to-date. At current levels, shares of Proofpoint trade at a price to sales multiple of 3.3 times on the analyst's 2013 estimates compared to Security and On Demand peers at 4.5 times.



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