Proofpoint, Inc.
Q2 2019 Earnings Call Transcript

Published: 26 Jul 2019

[Operator:]

Good day, ladies and gentlemen and welcome to the Proofpoint Second Quarter 2019 Earnings Results Conference Call. Today’s conference 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.

[Jason Starr:]

Thanks, Lisa. Good afternoon, and welcome to Proofpoint’s second quarter 2019 earnings call. Joining me on the call are Gary Steele, Proofpoint’s Chief Executive Officer and Chairman of the Board; and Paul Auvil, Proofpoint’s Chief Financial Officer. Today, we’ll be discussing the results announced in our press release that was issued after the market closed this afternoon, a copy of which is available on the Investor Relations section of our website. During the course of this call, we’ll 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 Proofpoint’s filings with the SEC, 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 Proofpoint’s policy to neither reiterate nor to adjust the financial guidance provided on today’s call, unless it is also done through a public disclosure, such as a press release or through the filing of a 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 as 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 Proofpoint’s 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 reading our press release and SEC filings, we encourage investors to also monitor the investors section of our website at investors.proofpoint.com as we routinely post investor-oriented information such as news and events, financial filings, webcasts, presentations and other relevant materials to it. So, with that said, I’ll turn the call over to Gary.

[Gary Steele:]

Thanks, Jason. I’d like to thank everyone for joining us on the call today. We are very pleased with our Q2 results with our team delivering yet another quarter of solid top-line and bottom line financial results. Q2 revenues were $214.4 million ahead of expectations and representing 25% annual growth. Our results demonstrate the 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.

[Paul Auvil:]

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 ASC 606, 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 $0.6 million. Our duration for the quarter was down sequentially from Q1, landing at the lower end of our targeted range of 14 months 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 in 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 Advanced Threat revenues on a year-over-year basis, it is important to keep in mind the impact of the wind down of Cloudmark’s OEM business as we have discussed on our prior calls. As a reminder over the course of 2018, we eliminated Cloudmark’s 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% of 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 million 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 1, 2019, we are now calculating non-GAAP net income in accordance with the SEC’s non-GAAP financial measures, compliance and disclosure interpretations C&DI Section 102.11. This quarter’s calculation includes $4.7 million in non-cash tax expense and an implied tax rate consistent with last quarter of 17%. Non-GAAP earnings per share for the quarter was $0.41 per fully diluted share, nicely above the high end of our guidance range of $0.34 to $0.37 based on 58.1 million shares. on a GAAP basis, we recorded a net loss for the quarter totaling $28.9 million or $0.52 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 in short-term investments and in terms of cash flow, we generated $43.4 million in operating cash flow and invested $8.4 million in capital expenditures resulting in free cash flow for the quarter of $35 million, well ahead of our guidance range of $25 million 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 $274 million to $276 million resulting in year-over-year growth of 24% at the midpoint and in line with our prior commentary. For the full year, we are increasing our billings guidance by $2 million and now expect a range of $1.064 billion 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 ASC 606 as we discussed in January, which creates a challenging baseline for the coming year and absent a similar effect this year, we expected 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 $0.37 to $0.40 earnings per share based on 58.6 million fully diluted shares outstanding as our 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&DI 102.11 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 C&DI 102.11. in terms of free cash flow, please keep in mind that as we had indicated in our press release on May 6 announcing the Meta acquisition, we do expect to repatriate the acquired intellectual property associated with the acquisition from Israel to the United States with a one-time 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 2019 earnings call on April 25, 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 payment for the repatriation of intellectual property of approximately $10 million expected during Q3 results in an updated guidance range of $196 million to $198 million with the expected breakdown in the second half of the year of $40 million 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 proofpoint’s disciplined operating strategy, and is further corroborated 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 Meta Networks, we are still delivering a figure of 45 under the rule of 40 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 a strong secular trends considering the ongoing migration of workloads and content to the cloud and the ongoing severity of the threat landscape, we believe that we can maintain a rule of 40 metric in the mid-40s by driving revenue growth in excess of 20% while maintaining free cash flow margins in the mid-20s. In conclusion, we continue to execute well delivering strong top and bottom-line operating results in the second quarter and believe the Proofpoint remains well positioned to continue to drive disciplined growth with increasing free cash flow margins built on our proven capability to defend enterprises against today’s advanced security and compliance threats. Before turning it over to the operator for questions, I would like to 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 today’s 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?

[Operator:]

Thank you, sir. We’ll go first to Phil Winslow, Wells Fargo.

[Phil Winslow:]

Hey, thanks guys and congrats on another great quarter. just want to focus on the emerging products, Gary what you highlighted your continued adoption of it. Really, we are focusing on PSAT. I want if you guys do 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 into the broader portfolio, then also just the go-to-market motion in terms of just you’re training the sales force how to sell that getting it ramped up et cetera. It’s sort of technical and then, call it go to market.

[Gary Steele:]

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. and so it’s really – it’s really two-fold. So, one is we’ve integrated our threat Intel. and so we can do simulations today on the threats that we’re seeing in those types of companies and their type of environment. So, we can make our simulations incredibly real world, which has been of high value to customers. And second, as I refer to in our prepared remarks, this integration that we call clear, allows for someone, who reports a phish 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 mail store, whether its Office 365 are on-prem and pull it out if it’s malicious. So, this integration between our core detection environment and PSAT, that’s 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 phish 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’ve approached this is basically every seller across the globe has been trained and that we have a very small team of specialists/experts that then support the broad sales team. And it’s been incredibly efficient.

[Paul Auvil:]

Yes. And I think the only thing I’d add there is that the other thing that 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 U.S., but around the world. So, we think that’s an advantage for us in the marketplace at this time.

[Phil Winslow:]

Great. Thanks, guys.

[Paul Auvil:]

Thanks, Phil.

[Operator:]

Our next question comes from Imtiaz Koujalgi, Guggenheim Partners.

[Imtiaz Koujalgi:]

hey guys. Thanks for taking my question. If I look at the guidance and your performance in the first half of the year, there’s a big inflectional growth coming to the second half. I think the average for first half was about 16% and the guidance implies second half growth of about going 25%, 26%. Can you remind us again what’s driving that big inflection in the second half? why is it you’re getting more backend loaded and then also if you can comment on what the seasonality of Wombat. Is Wombat a lot were backend loaded than the core Proofpoint business?

[Paul Auvil:]

Yes. So, a couple of things, to your question, and I think what you’re referring to is the relative billings growth, right, first half versus second half.

[Imtiaz Koujalgi:]

Yes.

[Paul Auvil:]

Yes. And so there are a few things there. One, I would say that the acquired properties of both Wombat and cloudmark tend to be a bit more backend loaded. And so you’re seeing that effect is we’re renewing their activity here in 2019 is compared to 2018. So that’s one impact. Second impact is that is I think, you and I probably discussed before, we have, by definition, like disproportionate amounts of business that happened in the second half of the year and especially in fourth quarter driven by budget flush. And so each year of course, we’re closing business in those quarters and then that business renews. And we have not only of course, business that we closed in 2018 that renews in 2019, but we of course, have one-year deals that closed in 2017 that renewed in 2018 that renewed in 2019, but we also have multiyear deals that were done in prior periods in both 2016 and 2017, they’re now renewing in 2019 that then add to that overall billings growth rate. And then of course, we do do more new nano business in the fourth quarter than we do in any other quarter during the 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 remind me again, what did you want about Wombat specifically?

[Imtiaz Koujalgi:]

Is Wombat is more seasonally backend loaded in the core Proofpoint business? How it’s compared in the Wombat…

[Paul Auvil:]

Yes, yes, I touched on that. Yes. So, the business as it was acquired was definitely a bit more backend loaded with third and fourth quarter compared to the first half. So that plus cloudmark, which is very backend loaded into Q4, those effects are, you’re seeing flow through here in 2019 compared to 2018.

[Imtiaz Koujalgi:]

Thank you.

[Operator:]

Our next question comes from Gur Talpaz, Stifel.

[Gur Talpaz:]

Okay, great. Thanks for taking my questions and congrats guys on another nice quarter. I wanted to ask about meta networks here. How natural adjacency is Meta to what you’re doing with your kind of – with your core business. And then secondarily, when you think about the budgets you’re going half year with Meta, do you think you can cap your spend from VPN related buckets or is it more evangelical in nature? Thank you.

[Paul Auvil:]

Yes, a couple of things. So one is we’re excited about meta, because of the tight adjacency. And so we see Meta 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 at risky group, because you don’t necessarily control their endpoint. you don’t want a single endpoint then to infect the entire network. And through Meta, you could use them as – use the adaptive control of Meta to give them access without exposing them to your entire network. So, we see the adjacency is quite good. We see the buyers as the same. So, we’re quite excited about it. Having said that, as we talked about it in the prepared remarks, we don’t expect contribution from that in 2019, we see that as further out into 2020. But we’re definitely excited about where this fits. And then in terms of budget and budget dollars, because of the tight adjacency, I think those dollars come from existing projects, because people tried to figure out this problem. So, these are budgeted used cases. And so we feel pretty confident, although it’s quite early, we feel confident that we’ll be tapping into budgets that exist versus budgets that have to be created.

[Jason Starr:]

Lisa, we’ll go to our next question.

[Operator:]

Thank you. We’ll go to Jonathan Ruykhaver, Robert W. Baird.

[Jonathan Ruykhaver:]

Yes. Good afternoon guys. Congrats on the execution. I’m wondering if we can go back to the productivity issues you’ve faced amongst some of the newer sales rep late last year when it was first brought up and help us understand what those issues were back there and what you’re seeing today from that cohort.

[Gary Steele:]

Yes. So I’ll start and Paul probably has a couple of comments. So, one was we recognized the fact that we needed a broader enablement program. So, our time to get a rep up to speed 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 we’ve addressed both of those. We’ve had very good success meeting our hiring targets and then combining that with this enablement. So, those issues that we cited were in our Q3 call last year so as over nine months ago and we feel like we’re well beyond that.

[Jonathan Ruykhaver:]

Good. Thank you.

[Operator:]

Next up, we’ll hear from Walter Pritchard, Citi.

[Walter Pritchard:]

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 in this quarter, we’ve heard some confusion from folks around duration this quarter, it looks like it was down, but wondering if you could help us understand that trend as you look forward to what your forecasting in the second half.

[Paul Auvil:]

Yes. Now, it’s a good question. So yes, 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. And 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 induration. So, as I look at the second half of the year in 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 we’ll do one-year, two-year, three-year deals. I may have customers coming off a three-year renewal that decided to move to a 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 a 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.

[Walter Pritchard:]

Thanks, Paul.

[Paul Auvil:]

Yes.

[Operator:]

Next up is Rob Owens, KeyBanc Capital Markets.

[Rob Owens:]

Great. Thanks for taking my question 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 and 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 you can elaborate there. Thanks.

[Gary Steele:]

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 bill likely roughly on the anniversary each year. So it’s a – it’s kind of a Q2 billings item each year, in 2021, 2022 et cetera. So that that’s 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.

[Paul Auvil:]

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 as and we’d built a strong reputation with that account through the long established relationship that we’d 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 were brand new customers. So, we’re winning brand-new customers looking for a next generation archiving solution that had no relationship with us in the past. but we’re also winning customers over that had long established relationships on the security side.

[Rob Owens:]

Great. Thanks, gentlemen.

[Paul Auvil:]

You bet.

[Operator:]

Steve Koenig, Wedbush Securities is up next.

[Steve Koenig:]

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 growth drivers, whether it’s go to market drivers, product, et cetera start to really come in before next year and then what do you of the – of your solution set now in your initiatives that you’re pursuing now, which of those seeds are going to be more prominent in fiscal 2021, if it’s possible to even think that far out?

[Paul Auvil:]

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’d really like about our setup going into next year is what we – this year, we’re over $1 billion of a booking 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 it’s going out and driving new business both in the U.S. for the remaining other half of 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 2017, really 2018 if you include Meta Networks’ products, our average customer has under three products right now. So, there’s a ton of add-on opportunity. And then of course, just as we look at it, I think we’ve really got potentially the 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.

[Gary Steele:]

No, 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 FedRAMP in the concept of comprehensive nature that we’d taken to ensure that we have breadth across all of our products on FedRAMP. I think we’re well positioned there and we’re just getting started. We noted one large deal, but like there’s plenty of opportunity there to last for a long time and 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 of 40 that we can sustain compelling numbers for a long time.

[Steve Koenig:]

Great. Hey, thanks guys.

[Paul Auvil:]

You bet.

[Operator:]

We’ll go to Alex Henderson, Needham.

[Alex Henderson:]

Great. Thank you very much. I wanted to just go back to the competitive landscape a little bit. We just completed a survey and we were surprised that how few people cited any willingness to use Microsoft, as a security supplier, particularly for email or anything related to identity. So, I know 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 restate that to our customers.

[Gary Steele:]

Sure. I think, it’s very natural as customers make the transition from an on-prem environment to Office 365 that they actively test the base capabilities provided by Microsoft. The combination of EOP, enterprise Online Protection, which is included in E3. And that ATP, which has included in E5, 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 are 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 than 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 ATP style phish that come through from potentially state actors to more run in the mill stuff. And then it’s this broader visibility and insight given a people-centric approach we’ve taken and the data that you can get from our systems that and that 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.

[Alex Henderson:]

Great. Thanks.

[Gary Steele:]

You bet.

[Operator:]

We’ll go to Ken Talanian, Evercore ISI.

[Ken Talanian:]

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?

[Gary Steele:]

Yes. obviously, our internal plans typically exceed what we would guide 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’ve talked a little bit about being a bit behind on building up some of that quota capacity last year. I felt like the team’s done a good job driving hiring activity, but we always set high goals for ourselves or we’re always looking to add more capability in all of our territories around the world, both in the U.S. as well as internationally. So that continues to be something that everybody’s 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, I’m 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 that’s 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.

[Paul Auvil:]

Yes. And the thing that I’m superexcited about and what was – what’s been notable for me is we pursued a path to expand the number of territories, where we have Proofpoint employees. So again, within the last nine months, we opened Italy, opened Spain, expanded Benelux, opened Nordics, opened Middle East, and we’re seeing contribution across all those specific territories. And that contribution then gives me confidence that the investment that that we’re making in the expansion of territories well 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.

[Ken Talanian:]

Great. Thank you.

[Operator:]

We’ll hear from Andrew Nowinski, Piper Jaffray.

[Andrew Nowinski:]

Great, thank you. I was just wondering if could provide any more color on the bundles and their impacts specifically on deal sizes and your revenue growth. And I know you mentioned the handful of customers deployed the high-end P2 and P3 bundles, but I think you said the only involved about 5,000 to 6,000 users, which seems 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 you’re seeing there? Thanks.

[Paul Auvil:]

Yes. So yes, keep in mind that we have a middle enterprise and a small middle enterprise team that focuses on customers all the way down into kind of that high 100s to 1000 range. So, those customers are well within the range of customers that we go after. But of course, we love closing 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, is a couple of things; one, the low end bundles P0 and P1, we closed a very large number of deals in the second quarter based on those bundles. So that just creates simplification in executing through the channel, modest uplift on deal value. But for us, it helps make those customers sticky as well, because they’re buying a broader package of Proofpoint products albeit a relatively smaller package compared to P2 and P3. And then with P2 and P3, we put a yet another large number of quotes out in the second quarter and what we were pleased by is when we first rolled all this out at the beginning of the year at our sales kickoff. We didn’t really expect to be able to close any P2 or P3 deals in the first half of the year. So, the fact that we got a few over the line, we were pretty happy with. So, with that, Gary probably has a couple of things to add.

[Gary Steele:]

No, I would just say that I’m really excited about the traction we’ve had. And the deals that we noted, the P1 deals that we noted in the script one with 65,000 users, the other was 15,000 and on the P2 and P3 bundles, that was 6,000 and 7,000. So, these are pretty significant. 6,000 and 7,000 is straight down the fairway for a field sales rep for us. So while they’re not 100,000 deals, they’re really good meaningful deals. And if you look at the broad value that we’re delivering to that size of organization, we’re superexcited and I think to get from a standing start in January to closing business in the Q2 – in the second quarter, it’s really quite good. So, we’re superencouraged about where we are, clearly lots of opportunity ahead of us, but superencouraged by where we are.

[Andrew Nowinski:]

Great. Thank you, guys.

[Gary Steele:]

Thanks.

[Operator:]

Matt Hedberg, RBC Capital Markets is next.

[Matt Hedberg:]

Oh, sure. Thanks guys. Hey, there’s a lot of talk about sort of, I think, Paul, you mentioned some of the enthusiasm as you look towards next year. I guess, I’m wondering just from a high level Blake has now been in the seat. it’s coming up on a year, I believe in October, from the head of sales perspective. Can you sort of reflect on some of the – some of the positive changes he has had on the organization. Obviously it seems like hiring’s 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 may be differently said, are there any other sort of structural changes to the sales force as you think about scaling this business?

[Gary Steele:]

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’d ask any single sales person across the whole company, they would all concur that his incredible enthusiasm and lead from the front style has been a welcomed approach by every single salesperson, he’s just incredibly enthusiastic. And what he’s driven is a couple of – a number of things that have been meaningful. So, one was getting the global enablement in place, Paul described it for a year, but there was a lot of work to be done there. We’ve done a lot of work in the U.S. two is driving a strong cadence and hiring, because clearly making sure that we hit our hiring targets is a critical thing and continuing to drive growth. Blake has been instrumental in helping us get adoption of the emerging products through the way in which we’ve 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 seeds. 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 Blake has focused on is ensuring that we’re continuing to drive a broader international footprint that we think will pay off next year and the following year and years after. So that would probably be top of mind for him.

[Matt Hedberg:]

All right. thanks, Gary.

[Gary Steele:]

You bet.

[Operator:]

Next up is Catharine Trebnick, Dougherty.

[Catharine Trebnick:]

Well, thanks for taking my question. Could you – how are you doing with the Global 2000 on your prepared remarks, you have some large deals and some more mid market, 6,000, 7,000 seats. But how are – how well are you penetrating the Global 2000? Thank you.

[Gary Steele:]

Catharine, I don’t have the exact stat. We did not publish our exact Global 2000 stat, but we continue to have really good traction internationally in those accounts and continue to make traction in the Fortune 1000 in the U.S.

[Jason Starr:]

So, we break – Catherine, it’s Jason, but we break it out. It’s an annual stat for us, but at the end of last year, it was over a 24% of the Global 2000 and then again, the Fortune 1000 stat that we shared was over a 50% – 53% specifically.

[Catharine Trebnick:]

All right. thank you.

[Gary Steele:]

Thank you. Lisa, we’ll take next.

[Operator:]

And we’ll go to Jonathan Ho, William Blair. Mr. Ho, your line is open.

[Jonathan Ho:]

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 used cases for the products?

[Paul Auvil:]

Yes. it’s been really interesting. So with the introduction of the integration of TAP, our Advanced Threat detection system and Browser Isolation were based on policy you can determine what users will be isolated or what kinds of URLs should be isolated. We’ve been this just when GA and we’ve been in early conversation with lots of customers and the reception has been really, really good. And so we’re 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 this, we feel pretty optimistic about that opportunity because you’ve got the choice, unlike a lot of other organizations that sell browser isolation, they’re 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 the visibility inside 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, we’re pretty enthusiastic.

[Operator:]

Thank you. Keith Weiss, Morgan Stanley is up next.

[Keith Weiss:]

Yes. Thank you for taking the question. I’m filling in here for Melissa Franchi. I wanted to ask about Meta Networks. And do you dig a little bit deeper into that one, in helping me to better understand like the competitive environment. It seems like there’s a lot of vendors up there who are talking about access control more and more and sort of whether it’s Zscaler, Okta . Can you talk about sort of where you look to compete and sort of how you guys look to fit into that broader ecosystem?

[Paul Auvil:]

You Bet. So as I indicated before, I think our approach is really in keeping with our broader people-centric framework and we using Meta as an adaptive control where organizations can use the access, the zero trust access to better secure groups of people as defined under our people-centric model. And so we see ourselves just helping organizations use Meta as a vehicle to ensure that a single individual doesn’t infect the entire network. So a risky individual like a contractor doesn’t get on the network and infect everyone. So we’re taking a very much a use case view versus you can think of people who have competitive offers as trying to reframe and restructure someone’s 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 that we can go capture those budget dollars to drive broader adoption of our people-centric model.

[Keith Weiss:]

Got it. That’s super helpful.

[Operator:]

Our next question will come from Shaul Eyal, Oppenheimer & Company.

[Shaul Eyal:]

Thank you. Hi. Good afternoon guys. Congrats on the consistent execution. I had a question on the PSAT that the awareness training, so you know, it appears as the former Wombat was 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 them about the drivers behind it? Thank you.

[Paul Auvil:]

Sure. So it’s been 15 months, the transaction was finalized basically in March of last year, so we’re at 15 months. And this is exceeded our expectations. I think the things that we have seen are one on this market is moving faster than I think everybody anticipated in terms of the broad demand that organizations, are showing in terms of need or desire to 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 adaptive control and 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’re delivering to customers. Customer feedback has been extremely positive and we think that market has lots of room to run.

[Operator:]

Thank you. Our next question will come from Erik Suppiger, JMP Securities.

[Erik Suppiger:]

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 PSAT piece that is maybe got 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?

[Paul Auvil:]

So a couple things in terms of the most recent quarter, it certainly was one of the strongest of the emerging products. I wouldn’t characterize it 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 while we’ve had some nice success here, recall that when we first acquired Wombat 15 months ago, the overlap and the customer basis was fairly small because they mostly focused on smaller enterprises, kind of in our any SME world. They had some Fortune 1000 accounts but not a lot. And so we have a really interesting opportunity to go drive the sale of Wombat indoor install base broadly and of course, our salespeople get back are working on it diligently. I think that, as Gary touched on earlier in the call, not only do we have a great platform with PSAT 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 or large size 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 that set up is really good. And again, we’re really excited for the six 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 Wombat development team.

[Erik Suppiger:]

Very good. Thank you.

[Operator:]

Next we’ll hear from Gray Powell, Deutsche Bank.

[Gray Powell:]

Great. Thanks guys. Thanks for welcome me in. Yes. I’ll be quick. So what was the run rate revenue from Meta Networks before you acquired it? And then just how fast was it growing and then any billings contribution in the second half of 2019 that we should think about from the asset? Thanks.

[Paul Auvil:]

Yes. I mean, Meta 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 what I’d call, advanced prototype stage where they were running some number of users proving out 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 hadn’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 from Meta for the remainder of the year. I mean, I suspect opportunistically we’ll close some business particularly with some of the folks that they were working within in advanced development phase if you will. But a 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 is part of what makes it a really effective set of adaptive controls and then really broaden the aperture in terms of engaging our sales team, likely at our sales kickoff in 2020 to start pushing the initiative. So, I would encourage everyone to think about Meta as something that’s got a lot of great potential. It’s a really nice tech framework, but something that really won’t start to contribute to our results until next year.

[Gray Powell:]

Got it. That’s really helpful. Thank you.

[Paul Auvil:]

Thanks.

[Operator:]

The next question is from Daniel Bartus, Bank of America Merrill Lynch.

[Daniel Bartus:]

Hey, thanks guys. I’ll just ask 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 upsell as a core product, like say a 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 email security? Thanks.

[Paul Auvil:]

Yes. So the pricing on training and threat simulation is a bit less than what someone would pay for TAP. It’s a great product, at the low end, if you’re sub thousand users, it actually is kind of TAP level pricing, but for large scale customers that the pricing is a healthy fraction of TAP, but it’s 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 appeared 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.

[Daniel Bartus:]

Great. Thanks guys.

[Paul Auvil:]

Thanks.

[Operator:]

And our final question today comes from Nick Yako, Cowen and Company.

[Nick Yako:]

Thanks for fitting me in guys. You highlight a good demand for EFD and threat response. Just wondering if there’s anything you can share around adoption or attach rates for the email related emerging products and then maybe how they’re contributing to your overall growth? Thank you.

[Paul Auvil:]

Yes. So EFD 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 from return path and that development team that we acquired. Then in working very closely in contract with both our digital risk development team as well as our advanced threat development team has really kind of reimagine that product category and has enabled us to bring to market something that’s very different than anything else that’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 it feel like there’s still significant opportunity to drive sales and demand. And I would say that a lot of our go-to-market has been kind of U.S.-centric because that’s where the early go to market assets were that we picked up as part of the acquisition of EFD. There’s a big opportunity internationally that we’re really just starting to cultivate. That I think is a whole like of growth for that product line going forward. Gary, I don’t know whether you have anything to add to that?

[Gary Steele:]

No. I think it’s got lots of legs and we’re just getting going.

[Nick Yako:]

Great. Thanks guys.

[Gary Steele:]

Thanks.

[Operator:]

At this time, I would like to hand the conference back to Gary Steele, CEO of Proofpoint for any additional or closing remarks.

[Gary Steele:]

Great. I want to just take a moment and thank everyone for joining us on the call today. We’re very pleased with the Q2 results, the acquisition of Meta, our continued product innovation. And I’m particularly excited about the continued progress with our people-centric approach to cybersecurity. We believe we’re well – remain well positioned to drive attractive returns for our shareholders and we look forward to talking to you on our next call and seeing many of you on the conference circuit this quarter. Thanks so much for joining us today.

[Operator:]

Once again, ladies and gentlemen, that does conclude today’s conference. Thank you all for your participation. You may now disconnect.