Proofpoint: Strong Results Show Ability to Sustain Growth With Little Reliance on Postini Migration

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Proofpoint delivered another quarter of very strong results, with billings, revenue, and pro forma earnings per share above our and Street consensus. The significant acceleration in billings growth to 42.6%, from 32.9% in the prior quarter, and compared to our expectation for 32.3%, illustrates the strong demand the company is experiencing for its products, as well as solid execution on its part. Furthermore, guidance for fiscal 2014 was raised again, with management now calling for billings growth of 33.6% and top-line growth of 34.5%.

What impressed us most on the quarter was that Proofpoint was able to achieve the strong growth results despite what management characterized as a more-normalized level of activity related to the transition of the Google (GOOG $593.35; Outperform) Postini customer base. We believe the company has proven that it can sustain growth by taking share from other incumbents, such as Cisco (CSCO $25.83; Outperform)/Ironport, Symantec (SYMC $23.87; Outperform), and McAfee without any unusual benefit. We were also encouraged by the role that TAP is playing to help draw new customers from the Postini solution as a core differentiator.

We believe Proofpoint recently acquired NetCitadel offering will also broaden the company’s cross-sell and up-sell opportunities as well. In our view, Proofpoint is doing an excellent job of balancing the need for continued investments with the opportunity to broadly gain share at the expense of competitors. We continue to expect the company to reach adjusted EBITDA profitability by the end of the year and were pleased they achieved this level in the current quarter, despite increasing investments.We view the strong results delivered by Proofpoint in a quarter that relied little on Google/Postini displacement business as evidence that the company can sustain strong billings and top-line growth for years to come. In our view, the strong momentum in the business is likely to drive further positive earnings revisions as the company continues to gain share against competitors that have lost focus in the market.

We see significant opportunities to continue building out the distribution channel, up-sell new products, and increasing penetration for emerging opportunities. Proofpoint closed trading at an enterprise value of about 5.5 times our revenue forecast for calendar 2015 of $236.2 million. We believe this multiple represents an attractive valuation relative to the benchmark comparison companies we have chosen (at 4.4 times). We believe a higher valuation is warranted, based on the company’s very strong top-line growth, brand recognition in its legacy market, further opportunity for market share gains, and what we view as inherent leverage in its operating model that increases its profitability potential. We reiterate our Outperform rating.

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