Proofpoint, Inc.
Q4 2019 Earnings Call Transcript

Published: 30 Jan 2020

[Operator:]

Good day, and welcome to the Proofpoint Fourth Quarter 2019 Earnings Results Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the call over to Jason Starr, Vice President-Investor Relations. You may begin.

[Jason Starr:]

Thanks, Jenny. Good afternoon, and welcome to Proofpoint’s Fourth Quarter 2019 Earnings Call. Today, we’ll be discussing our results for not only the fourth quarter, but also the full year 2019 as detailed in the press release that we issued after the market closed this afternoon. A copy of which is available on the Investor Relations Section of our website. Joining me here on the call are Gary Steele, Proofpoint’s Chief Executive Officer and Chairman of the Board; and Paul Auvil, Proofpoint’s Chief Financial Officer. 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 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 January 30, 2020. 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 releases 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 fourth quarter results, which closed out another year of great execution for Proofpoint, both financially and strategically. Our overall business momentum remained strong, driven by the continuing 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.

[Paul Auvil:]

Thanks Gary. We were quite pleased with our operating results this quarter. Revenue totaled $243.4 million up 23% year-over-year and well above our guidance range of $237.5 million to $239.5 million. We believe that these results are particularly compelling when considering that approximately 99% of this revenue is recurring which just us apart as the leader on this metric across all publicly traded SaaS companies. As expected at the time that we announced the acquisition, ObserveIT contributed nominally to these results to the tune of roughly $3.4 million in total based on the combination of both perpetual and time-based licenses along with a contribution from legacy deferred revenue that was added to the balance sheet and recognized during the quarter. Absent this impact, we would have recorded revenues of roughly $240 million or 21% growth still above the high end of our guidance range for the quarter and a very good result when viewed in the context of the challenging comparison measured against the results that we recorded during the fourth quarter of 2018. As we had expected the year-end calendar proved to be quite challenging with many companies marking their final working day of the year on December 23 and in some cases even sooner. That said, our sales and administrative teams executed an excellent form proactively working with each customer prospect to get their paperwork submitted before their company closed down for the holiday, enabling us to deliver billings in the fourth quarter of $347.2 million, an increase of 29% year-over-year and above the high end of our guidance range of $339 million to $343 million. Gary and I would like to take this opportunity to thank all of our teams around the world for their extraordinarily long hours and hard work throughout the holiday season in delivering this billings record for the company and for our shareholders. Note that as expected, our fourth quarter billings represented nearly 1/3 of total billings for the year, reflecting a quarter-to-quarter sequential increase of nearly 25% from the preceding quarter and further underscoring the increasing seasonality, we are seeing in this metric. As noted on prior calls under ASC 606, the derivation of our billings metric now requires adjustments to reflect unbilled accounts receivable activity during the quarter as well as any right of refund liability. For Q4, the adjustment related to these two items had a positive impact to billings of $1.4 million. Our duration over the course of the year continued to underscore the high quality of our free cash flow generation as we operated within our historical range of 14 to 20 months across the arc of the entire year. Fourth quarter was consistent with the duration that we recorded during the prior quarter as some of our larger customers chose to execute multiyear prepaid transactions as part of committing to the purchase and deployment of larger bundles of Proofpoint solutions. This trend in terms of duration is further reflected in our deferred revenue balances, which ended the quarter at $784 million, up $109 million sequentially with short term growing by $73 million and long term increasing by only $36 million. Note that this growth in long-term deferred revenue only contributed to 33% of the overall sequential increase in deferred revenue for the quarter, down from 41% in Q3 of this year. And it is also worth noting that our short-term deferred revenue balance grew by 26% when measured year-over-year. Before turning to expense and profitability metrics, I'd like to provide some final commentary as it relates to our segment reporting. As we've shared on prior calls, our bundling initiative has become a key element in our strategy to drive further customer adoption of our growing portfolio of solutions. As Gary noted, over 20% of the ARR that was added in 2019 was driven by this new approach and we are encouraged with our early traction. As we expect to continue to drive adoption of these bundles in the years ahead, they will become an increasingly meaningful contributor to our revenue with the allocation of value of individual products becoming increasingly subjective as a result. With that in mind and given our evolving operating structure as a business, we will no longer provide segment reporting between our advanced threat and our overall compliance-oriented products as we believe that it is not informative in terms of measuring the performance of the business nor does it reflect how we run the business in terms of reporting our operating structure. Turning to expenses and profitability for the fourth quarter. On a non-GAAP basis our total gross margin was 80% above our expectations, driven primarily by our strong revenue performance. During the fourth quarter, total non-GAAP operating expenses increased 23% over the prior year period to $157.1 million, representing 65% of total revenue. In terms of profitability for the quarter, we reported non-GAAP net income of $33.2 million above our guidance range of $30 million to $32 million. And note that the nominal addition of revenues from ObserveIT were effectively offset by additional operating expenses contributed by their operations. And as such, as expected the acquisition had no material impact on the net income recorded for the quarter. Moving on to EPS, non-GAAP earnings per share for the quarter was $0.52 per fully diluted share above our guidance range of $0.47 to $0.50 based on 64.9 million shares. The EPS calculation applies the if-converted method to our newly issued convertible notes and as such adds back $575,000 in cash interest associated with the convertible debt. On a GAAP basis, we recorded a net loss for the fourth quarter totaling $28.7 million or $0.51 per share based on 56.5 million shares outstanding. In terms of cash flow, we generated $76.4 million in operating cash flow and invested $11.3 million in capital expenditures, resulting in free cash flow for the quarter of $65.1 million above our guidance range of $58.2 million to $60.2 million. Turning to a quick summary of the results for the full year of 2019. Total revenue was $888 million, an increase of 24% compared to 2018. Billings for the full year were $1.072 billion, up 22% year-over-year, and above the high end of our final guidance for the year. Non-GAAP net income for the year was $106.7 million, or $1.77 per share based on 60.7 million weighted average diluted shares outstanding and above our guidance of $103.5 million to $105.5 million, or $1.72 to $1.75 per share. The EPS calculation applies the IF-converted method and such adds back $818,000 in cash interest associated with our convertible debt. We generated $242.5 million in operating cash flow and invested $35.2 million in capital expenditures, resulting in free cash flow for the year of $207.3 million. Excluding the one-time payment of $8.4 million for the transfer of intellectual property associated with our acquisition of Meta Networks, free cash flow would have been $215.7 million, or 24% of revenue, up from the 22% recorded in 2018, highlighting the company's ability to generate strong free cash flow, growth, while at the same time delivering compelling top line results at scale. I'd like to take a moment to provide everyone with an update regarding our annual customer statistics, which underscore the significant progress we've made in both expanding our customer base, while driving the sale of additional services over the past 12 months. In terms of enterprise customer count, we are up 31% over the past 12 months, ending the year with approximately 7,100 enterprise customers, each of which contributes a minimum of $10,000 in annual recurring revenue to our business. As in past years, this metric continues to exclude the tens of thousands of smaller customers that are below this annually recurring revenue threshold most of whom access our solutions through our SMB-oriented Essentials platform. Now as a reminder, Proofpoint Essentials is our cloud-based multitenant email security solution targeted at smaller businesses that want the same world-class email security that is available with our Proofpoint Protection and TAP solutions, but don't need the dedicated infrastructure and other features provided as part of our enterprise platform. This Essentials solution is primarily sold through MSSP partners and has steadily gained traction and market share in the market over the past several years. In fact, as of the end of the fourth quarter, we are pleased to report that the Essentials platform now provides services to over 100,000 customers around the world through these partners. And going forward, we believe that our Essentials solution is poised for continued growth in the years ahead. Another important factor fueling our growth is our success in driving additional sales to our existing customers by leveraging our broadening product line, which now stands at 20 unique services and continues to represent an opportunity of well over $1 billion in annual recurring revenue, if we were to sell these products into our installed base. This expanding product portfolio is also important as many of these solutions, such as, PSAT Insider threat management CASB additional risk, create additional opportunities to engage prospects and land new customers beyond our traditional entry point leveraging protection in TAP. Overall, we continue to make great progress with add-on sales with just over 60% of recorded in 2019 coming from add-on and further exemplified by the fact that over the past 12 months, the number of customers with three or more products has increased from 2,900 to 4,000, an increase of 38%. And yet this statistic also highlights that just under half of our customers still only have one or two products providing substantial headroom to drive revenue growth, through add-on sales into our customer base. We ended the year with approximately 540 enterprise customers from the Fortune 1000, so just over half of that index each of whom has at least one significant enterprise scale deployment with Proofpoint. It's important to note, however, that even with this ongoing success, we still have substantial opportunity to further grow our revenues with these customers through the add-on sale of additional Proofpoint capabilities, while also winning new customers in this category through our best-in-class security and compliance solutions. And as a point of reference, of these Fortune 1000 customers roughly 3/4 of them are Proofpoint protecting customers which means that many of these customers joined Proofpoint through an initial purchase of a solution outside of our core email security product line, demonstrating yet another benefit of our broad product suite. Internationally, we ended the year with 24% of the Global 2000 further highlighting that the addressable market outside of the United States in both EMEA and Asia Pacific represents a compelling future growth opportunity for Proofpoint. We're quite pleased with the progress we've made in expanding our global customer base and further penetrating it with our comprehensive portfolio of security and compliance products. We plan to provide an even deeper dive regarding our traction with bundles add-on sales and expanding our global customer base at our 2020 Analyst Day which we expect to hold sometime during the second half of this year. With 2019 behind us, let's move on to guidance for 2020. As we start the New Year, we remain well positioned with a broad product line, a loyal customer base, a favorable competitive environment, and a line of sight to generating revenues in excess of $1 billion a milestone that has been achieved by only 5% of public tech companies that were founded since the year 2000. In terms of billings as we shared on our Q3 call in October, after 32 consecutive quarters of consistently exceeding our billings guidance, we have decided that we will no longer be providing guidance for this metric with our operational activities now evolving to carry more of an emphasis on the timing of cash flow rather than the timing of billings. For those investors and analysts who choose to continue to model this metric, we'd like to reiterate our previous commentary that billings growth will likely be equal to or slightly less than revenue growth in 2020 depending on duration of build contracts which we would expect to remain somewhere in our range of 14 to 20 months. And in terms of timing should follow a seasonal pattern similar to past years given the timing of sales and customer renewal cycles with approximately 35% to 40% of billings invoiced in the first half of the year and approximately 1/3 being invoiced during the fourth quarter. Please refer to the detailed commentary that we provided during our call in October for additional model and commentary on this topic. In terms of revenue guidance for 2020 we are increasing our original range of $1.05 billion to $1.0625 billion to a new range of $1.06 billion to $1.067 billion which raises the midpoint by just over $7 million and reflects an annual growth rate of 20%. When factoring in our Q1 guidance that I will outline shortly of approximately 22% growth and adjusting for the $3.4 million in revenues contributed by ObserveIT in Q4 2019, the high end of this annual guidance range suggests approximately 20% growth for each of the final three quarters of the year 2020. As Gary noted, we are excited about our acquisition of ObserveIT and their world-class Insider threat platform and I'd like to take a moment to provide some additional modeling points on this topic. As we noted in the November release announcing the acquisition, we are immediately moving their business from a model based on perpetual licenses to a model based on subscription licenses in order to directly align with the rest of our solutions. Under standard acquisition accounting, over the course of 2020 we will recognize a total of $3.7 million in deferred revenue associated with our legacy support and maintenance contracts to be recognized as follows

[Operator:]

Thank you. And we will go first to Rob Owens of Piper Sandler Corporation.

[Rob Owens:]

Great and thank you guys for taking my question. Gary in your prepared remarks you did talk about email remaining a top attack vector. And you talked about your unique vantage point of billions of emails daily and how that helps feed the entire system and also pointed out that the new ARR from Microsoft to Proofpoint was hitting record levels. But if you just strategically look at where Microsoft sits in the ecosystem, they're also seeing even more emails daily. And so, I guess over the long run what keeps you ahead of them? And where is the competitive moat? And why haven't they been able to catch up in your opinion at this point?

[Gary Steele:]

Well, I think that the one advantage that we have is, this is what we do for a living. This is what we wake up and think about every single day. And what is critical in this world is to have a high level of agility. And as I noted in our prepared remarks as we've seen the threat landscape move, we've responded with capabilities that then better protect our customers. And I think at the end of the day agility is the absolute critical element here that ultimately creates that competitive moat. And if you look at the history, Microsoft has been in this market for a long time. They originally bought Salesforce in the '04 '05 timeframe that turned into EOP. EOP has been a core part of every single bundle that they've had when it was on-prem and then when it was in the cloud. And that's still over that 14-year period 15-year period they still haven't been able to respond with the agility required. And then they introduced ATP, Advanced Threat Protection in 2015 in June. It's been out almost 5 years and we just haven't seen the agility required to keep up with the change in the threat landscape and the threat actors. And because this is all we do, we've been able to continue to stay well ahead of what Microsoft's been able to deliver.

[Rob Owens:]

Thanks.

[Operator:]

And our next question comes from Walter Pritchard of Citi.

[Walter Pritchard:]

Hi, thanks. Quite a question for you Gary. I think ObserveIT is the first product that you have really a substantial footprint on the end point. And I know you mentioned it's kind of a minimal agent, but it was sort of thought as almost a host product. How do you think about the build -- your ambitions on the end point further building that out? And is that something that's just inevitable as you sort of expand your -- the sort of ambition of what your company is trying to do around people-centric security?

[Gary Steele:]

Yes. No, great question. So we viewed having an endpoint presence as critical as we bring together all the capabilities required for a unified DLP offering. And in particular, one of the key use cases that you can only identify through having an endpoint would be to say, for example, be able to identify a user who downloads information from Salesforce and then wants to take that information and put it out on an unsanctioned web app like Dropbox. So those are critical use cases where we see an endpoint is super strategic in our overall product portfolio. Now the other part of your question, do we see ourselves moving that endpoint agent into EDR? We do not see that. So we do not have intention of going out and competing against the endpoint security vendors like cross vector or others. And we continue to see our partnership having great benefit there. We want to be able to use this endpoint strategically from a DLP perspective.

[Walter Pritchard:]

Okay. Thank you.

[Operator:]

And moving on we'll go t o a question from Sarah Hindlian, Macquarie.

[Sarah Hindlian:]

Great. Thank you guys so much for taking my question. I wanted to get into the view is, we've really very much been looking forward to fed ramp certification. And seeing it come through, I believe over the last week on top and on core email was obviously really good news. So there's also a massive amount of migration in federal government over to both Office 365 and Azure as well. And I'm wondering how you're thinking about your place attacking that business with your Fed ramp certification today? And how large of an opportunity you think it could be?

[Gary Steele:]

Yes. Good question. So we're very excited about the opportunity within the federal government. As we noted in our prepared remarks, we've had FedRAMP certification for our archiving solutions since 2017. And now with the certification of our core Protection & TAP solution, we think that there's a great opportunity there as the broader federal government moves from a widely on-prem environment to increasingly a cloud environment with Office 365 or even Google G suite. So we're super excited about the enablement that we've been focused on is building out our go-to-market capabilities with a larger and more robust sales team. That's been happening over the course of last year. And so that team is ramping and we feel very good about this opportunity. If you look today across our business, all governance has been roughly 5% to 7% total. And it's up here to break federal out which we haven't done in the past, it's some smaller percentage of that. So if you think where could that be over time, could that double over time? Sure. And so while we don't necessarily anticipate a massive federal year in 2020, while we ramp our team, we do see that as a really important and really interesting investment opportunity for Proofpoint. And we think there's a tremendous amount of opportunity as the broader federal government moves to cloud.

[Sarah Hindlian:]

Awesome. Thank you very much. Appreciate it.

[Operator:]

And our next question comes from Jonathan Rukhaver of R.W. Baird.

[Jonathan Rukhaver:]

Yes. Good afternoon, guys. So regarding the bundled initial – the bundling initiative, I think you talked about smaller organizations moving from P0 to P1. But I'm more interested in what you're seeing around enterprise adoption what your expectations are for enterprise adoption as we move through 2020. And do you have certain expectations around what the uplift to ACV could look like on renewal within that set of customers?

[Gary Steele:]

Yes I'll start and I'll let Paul dive in here. So the one motion that we see Jonathan is customers that have our core capabilities, so they're either with a P0 or P1, so they have Protection TAP and our threat response solution. We see a lot of interest today in moving – adding to that our CASB solution for example. So that would be a natural move to a P2 or potentially even a P3. And over the course of both Q3 and Q4, we saw a number of really good examples where the customers did exactly that. So we think that through the course of 2020 we'll see a lot more motion that way. And I think frankly our sales team is getting more effective at promoting the benefits of that move. I'll let Paul talk a little bit about the pricing opportunity there and the value that can be delivered through that.

[Paul Auvil:]

Yes. Thanks, Gary. I think one thing that I'm particularly pleased with quite frankly is as all of you know we – the first launched bundles at the beginning of 2019. And so in the first quarter things were really just getting rolling. So the fact that over the course of 2019, over 20% of our ARR that we added during the year came from bundles, I thought was actually quite impressive. I was really pleased with that. And if you step back and you think about the things that we talked about in terms of examples on both the third quarter call as well as the fourth quarter call, we had some fairly large customers buying bundles. Some of which were brand-new to the company and buying a large bundle not just a P0 or P1, but a P2 or P3 for the first time, as well as upgrades. So I think that as we look at 2020, I'd say that we have modest expectations built into the current plan in terms of how our installed base might upgrade to these larger bundles. But obviously, many of our sales people, especially the ones in the enterprise side of the business have been now already working for many months in discussions with customers around the idea of starting with whatever platform they currently have with Proofpoint and upgrading to a larger bundle. So it will be very interesting in the first half of the year to see how it plays out. But there's quite a bit of potential there and something that, when I mentioned that the statistics around the number of customers that have one, two and three products, even the customers that have three or more products are still great candidates to upgrade to a P2 or P3 bundle. So there's well over $1 billion of add-on business that we can generate in terms of recurring revenue, just selling into our installed base. And so I think that given the fact that 60% of our new and add-on recurring revenue this year came from add on, I think that statistic could continue to move upward over the next few years as bundles really take hold. But again, we'll see, the next few quarters should be interesting.

[Jonathan Rukhaver:]

That's great. Thanks guys.

[Operator:]

And moving on we'll go to a question from Alex Henderson of Needham.

[Alex Henderson:]

Great. Thank you very much. Just wanted to see, if you could talk a little bit about how often you're running into NoviFlow been pretty impressed with their growth rate. They talked about it being a very large market in the training space. Obviously, you're doing well with it. But I just wanted to think through a little bit to what extent you run into them when you win when you don't win? Do you see them in your accounts where your platform is dominant? Or do you just run into the new accounts a little bit of detail around that would be very helpful. Thank you.

[Gary Steele:]

Yeah. So, NoviFlow clearly as a competitor in the security awards and training business, our strategy has been pretty simple is to demonstrate the value of the integration between our security awareness training in this broader people-centric framework. And so simple things that are incredibly high-value to customers. For example, when a user reports a phish, we can automate that whole process from front end to back end and we can demonstrate the economic argument to the customer of why that integration has tremendous value. So for example in the second half of 2019, we moved the customer over. They had six people doing all that work manually and we replaced all that with the automation of this capability. It's known as CLEAR we've referenced it in previous earnings call. So – and then you combine that with all the threat intel that we have where we can basically use that threat intel to help identify, who are the users that ultimately need training. So where someone is high – has a high click rate, we can then put people into training automatically and create a more integrated experience across this whole thing. So what we're encouraged by broadly is this is a very big market. It's moving fast. I think the reference Alex that you made around NoviFlow growth. I think it just demonstrates that this is a fast-moving market. And so we're extremely enthusiastic about, how this plays a role with our broader offering. And yes NoviFlow is definitely a competitor out there, but we view this market to be large. We view it to be international and there's frankly not a lot of players there. So we feel really good about the opportunity.

[Operator:]

And our next question from Matt Hedberg of RBC Capital Markets.

[Matt Hedberg:]

Hello. Hey, great. Hi, guys. Thanks for taking my question. In regards to ObserveIT it really seems like you guys have a good opportunity to disrupt really the legacy DLP market, there hasn't been a lot of innovation there over the years. But I guess for Paul a point of clarification. It sounds to me like you might start to generate some revenue later in 2020 from the acquisition, but I just wanted to confirm in your initial guide outside of the $3.7 million of DR that will convert to revenue, you aren't assuming any other contribution from the acquisition this year? In other words, if you do get some later in the year should that be considered upside to the guide?

[Paul Auvil:]

Yes. As we look at it and I outlined it a little bit in the transcript. We're doing a complete reset on their business model by shutting down their perpetual licensing. So other than this legacy deferred revenue that we're bringing over and the opportunity to renew some of the existing contracts which totaled about $5 million as I referred to, we're selling all over again in terms of driving pipeline around a subscription rented license. Now we'll continue to sell the ITM, the Insider Threat management platform. We think it's a great platform with tremendous potential. But as Gary talked about there's also this emphasis on integrating it fully with the rest of our DLP capabilities and rolling out an enterprise DLP product. So there's some amount of contribution one would expect from going out and driving the subscription business around that. And so as I think about our new and add-on recurring revenue model and our sales team out selling the products, certainly part of what I expect to deliver over the course of the year will be around that legacy IT platform, but converted over to a subscription model. But it's one of 20 products. So it's -- we view it really as a kind of starting from scratch sales effort that we have to go out and execute on here now starting in January.

[Matt Hedberg:]

Got it. Thanks.

[Operator:]

And our next question comes from Andrew Nowinski of D.A. Davidson.

[Andrew Nowinski:]

Great. Thank you and congrats on a great quarter. So on the call you touched on many different catalysts for growth this year including the increasing adoption Office 365, the ramping at option on your high-end bundles, the add-on opportunity to sell some of your new solutions like ObserveIT. And so I'm just wondering if you could possibly rank order, how we should think about those catalysts now that we're heading into 2020 and which ones will have perhaps the most impact on revenue and the potential upside to your guidance? Thanks.

[Gary Steele:]

Yes that's an interesting question. And quite frankly, I wouldn't say that we necessarily spend a lot of time in this next executive team trying to rank order them. We're more focus on these broad categories and then run marketing and go-to-market campaigns around all of them. So obviously, there's still a large number of enterprise customers that haven't moved to Office 365. So when I think about our net new customer acquisition vector most of it is driven by that still. Although as we talked about in the Fortune 1000 accounts over 25% of them we got not through our kind of classic Protection & Tap play, but through selling different products as an initial starting point. So anyway I think our net new account acquisition for the next year will probably still the preponderance will still come from our classic Protection Tap go to market. But as I think then about business coming from the add-on plays, it's hard to handicap one versus another as being primary drivers. I think we look at bundling is a great strategy. We look at individual products whether it's in the CASB space, whether it's PSA for example, as we look across all those different products, it's a great opportunity. And of course one of the things that we touched on as well is, we're quite pleased with the international growth rate which we recently recorded a 30% year-over-year. So we have very small current penetration globally, but with tremendous opportunity. And of course last, but not least, the train is finally leaving the station, if you will on archiving and we talked about some really nice wins here in 2019. I would expect that 2020 will likely be another year of interesting archiving opportunities that help drive our top line and our cash flow and bottom line as well. So I know that's a more generic answer than you might have been looking for but it's hard for us to actually rank these one by one, because at this stage in the year, it's hard to say exactly which ones will be the most compelling catalyst for growth. It's easier to look at it in retrospect. But what I like is that there aren't many companies even at this scale, it's a $1 billion company that have so many different levers to help drive growth. And so I really like our setup not only going into 2020. But again as we look to the 2023, 2024 time frame where we're running at a $2 billion annualized run rate. We have lots of levers to go make that happen.

[Andrew Nowinski:]

Understood. Keep up the good work guys.

[Gary Steele:]

Thanks.

[Paul Auvil:]

Thanks.

[Operator:]

And we'll hear next from Phil Winslow of Wells Fargo.

[Phil Winslow:]

Hey, thanks, guys for taking my question. So I'm going to close the year. Just I did want to focus in on just your international efforts. Obviously, you called out some of the growth there. But I'm wondering if you could walk us through just sort of some of the initiatives that you have for 2020 if there are any changes versus 2019 across those markets? Thanks.

[Gary Steele:]

Yes. I think Phil for us I think the main thing is we made investments in 2019, where we began to get good presence in newer markets. So Spain, Italy, Middle East, Nordics, where we traditionally go back to 2018, we didn't have anybody there. And so leadership is very much focused now. How do we deepen pipeline, drive productivity in these new markets, which we're super enthusiastic about. We just came off of our sales kickoff which went phenomenally well. I've actually never seen the team so charged up. And I think in particular I think the international team feels incredibly optimistic because we've been underrepresented in a lot of these markets. So it's really about blocking and tackling in new spaces where we traditionally haven't had people and we are super enthusiastic about it.

[Operator:]

And we'll go to our next question from Gur Talpaz of Stifel.

[Gur Talpaz:]

Great. Thanks for taking my question. With ObserveIT, can you walk us through the thoughts here around migrating the architecture to the cloud? You talked about a potential hybrid architecture going forward. So is the idea here to be hybrid on a go-forward basis with some parts going to the cloud and then supporting an appliance framework for the foreseeable future?

[Gary Steele:]

Sure. So at a very simple level today the way solution works, there's this endpoint sensor that runs on an end user's laptop or desktop that today communicates to a back-end server that collects all the alerts that come from the endpoints. The future looks like you can take that back in server. You can move that entire platform to the cloud. And so the agents then speak directly to the cloud with all of that user activity and information about what an end user is doing out then flows to the cloud. So that's the most basic move. And then you can also run in an environment where that server still stayed – on-premise server sits in the environment but then communicates to the cloud as well. So you'll have a variety of configurations. And what we're excited about is that back-end cloud platform will be our back-end investigative platform that brings together our unified DLP solution. So think about that endpoint sensor and all that information coming from that information from our CASB and information from our email environment, all within a single environment and seeing all those alerts in advance in a single cloud-based environment. Does that help Gur?

[Gur Talpaz:]

That’s helpful. Thank you. It’s helpful. Yes, thank you.

[Operator:]

And our next question comes from Jonathan Ho, William Blair.

[Jonathan Ho:]

Hi. Good afternoon. It sounds like you executed well in 4Q around sort of that challenging calendar timeframe. Were there any deals that maybe slipped out into 1Q or anything that was worth noting on the linearity outside of sort of things working out as you expected?

[Gary Steele:]

Yeah. I mean, there's always a few deals that push out and Q4 was no exception, particularly given the fact that again most of the customers went incommunicado on the 23rd of December, some even sooner. But those things obviously have now been picked up and completed and dealt with. We often have room to give the customer a handful of days a grace period, if they don't quite get their paper working on time. But there was no meaningful push out. I think it's because we were very, very focused on the fact that, we knew this is going to be a very complicated last couple of weeks of the quarter. And so quite frankly, a combination of sales and the administrative teams were just all over the details of not only getting all the renewals done on-time, but also working with customers, looking to buy newer add-on business and making sure they were clear on the timing of what were their calendars, when would they no longer going to be available. And with that in mind, we're here through 12/31 at midnight. But what timing works for you in order to get this paperwork done. So, yeah, it was as complicated a quarter end as we had expected, but we were really pleased with how everybody executed as we worked our way through that.

[Jonathan Ho:]

Great. Thank you.

[Operator:]

And we'll move to our next question from Melissa Franchi of Morgan Stanley.

[Melissa Franchi:]

Great. Yeah. Thanks for taking my question. I wanted to follow-up Paul on your guidance for $2 billion in 2023-2024 that's adding an additional $1 billion in revenue. And I'm wondering, if you could help us parse out where that $1 billion is going to come from across the legacy email security market just given there's a lot of legacy deployments to displace and/or the new add-on solutions particularly as you're executing to the people-centric strategy? Thanks.

[Paul Auvil:]

Yeah. That's a good question. I mean, right now, the TAM across all of our products is roughly $15 billion and it's actually higher, if you include these new enterprise DLP capabilities that we'll look to deliver later in the year. And so we're really only talking about picking up another six or seven points of share of that overall TAM over the next several years in order to go make that happen. So with that in mind, as we look at it, I do think that, we'll probably see an increasing amount of the recurring revenue growth from here, come from the existing customer base not dramatically. But as we saw in 2019, it was about 60%. I think as we drive more bundles and drive lots of these products into our installed base and becoming more and more strategic of these accounts, you'll see more growth come from there. But that said, as I touched on earlier, international is a huge untapped opportunity. And I think, we'll execute, I believe quite well on that. And I do think that with 540 of the Fortune 1000, while we'll never probably get 100% share that doesn't happen in most markets. I think there's still room for us to add a meaningful number of those customers to the fold, even if not with email security to sell them other products. And as I've mentioned, 25% of that Fortune 1000 customer base that 540 are currently Proofpoint Protection or TAP customers. So we could easily see relationships with these Fortune 1000 accounts, where maybe they're CASB and enterprise DLP and may not use our email security solution in the near-term. That's perfectly fine. There's significant revenue opportunity, significant in terms of gross margin and cash flow contribution. So we're not overly focused on necessarily driving additional growth in email security market share per se, as part of driving this path from $1 billion to $2 billion over the next several years.

[Operator:]

And our next question comes from Nick Yako of Cowen & Company.

[Nick Yako:]

Great. Thank you. Some of the third-party research firms out there are increasingly talking about the importance of scanning internal emails and communications. Just curious to hear how you're thinking about that opportunity and if you're seeing elevated interest from customers?

[Gary Steele:]

So today Proofpoint offers a solution called Internal Mail Defense that allows us to apply all of our threat detection capabilities as well as our compliance-oriented, policy-oriented scanning to internal e-mails. So that's something that we've had available for --I think it's roughly two years. And it's done quite well as more organizations worry about malicious content spreading if you have a compromised account. And so frankly we've seen more interest in this because of the rampant compromised accounts that happen to Office 365 these days. And we're finding more and more threat actors focused on in filtering Office 365, taking over an account and then launching campaigns within Office 365. So that's a very real and real concern for companies today. And that's why we launched this solution two years ago.

[Operator:]

And we'll hear next from Gregg Moskowitz of Mizuho. One moment while we – looks like there…

[Gary Steele:]

We have lost him on the – in the queue we can try and get him back. But lets go to our next question.

[Operator:]

Okay. Thank you. And we'll hear next from Steve Koenig of Wedbush Securities.

[Steve Koenig:]

Hey guys. Hey I was really interested in Okta's report that they put out just recently. Their data showed Proofpoint was one of the top three fastest-growing apps at any time. In 2019 app usage was up over 100% for their data. And internally as well, the top three were all user-focused security apps. So I'm kind of curious, Gary as you talk to customers and as Proofpoint goes to market in the field, are those conversations involving people-centric security in the extended portfolio particularly around isolation CASB maybe Insider threat. Are they coming to you on these products? Are you -- how much are you having to educate them, how does this differ and add-on versus new customer sales and bundles, how are they helping in the unified DLP like how will this help this whole motion. So kind of how is this people-centric security -- how is it being reflected in your conversations, what's the tone of those?

[Gary Steele:]

Yes. No it's really interesting. So with existing customers, customers are really loving that because we're giving the visibility and insight they never had and then they can think more proactively about what are those additional controls they wanted to put in place to impact these highly targeted users. So that within the customer base, we're starting to see more and more dialogue today. And I'm amazed that the number of CSOs where we're doing their board decks for them because we have such great visibility and insight. And it's very easy to then digest that information for board members, et cetera. So that's really working. When we talk to new prospects, people that haven't been exposed to the people-centric model, what they understand fundamentally though is that the risk from a security perspective comes from what an end user may do and where an end user is getting targeted. So what we're finding in some of the more sophisticated organizations, they're doing their own version of threat modeling and user risk modeling and so we provide basically all of that in an automated fashion. So it's really worked well for us. And I think that as we broaden our product line and we extend it for example into insider threats. That's another key thing that these companies are thinking about. It really plays into this broader model. And I think that all culminates as CSOs think about how do they reduce the number of vendors that they're dealing with. And we're constantly hearing about the opportunity to want to buy more from Proofpoint and consolidate spend around our broader platform. So I think it's really – it's been super encouraging as we closed out 2019 and we spent a lot of time with CSO today. And I think we see the opportunity to bring a broad people-centric platform to bear across these large customers.

[Operator:]

And we'll go next to Gregg Moskowitz with Mizuho.

[Gregg Moskowitz:]

Hi, guys. Can you hear me this time?

[Gary Steele:]

We can.

[Gregg Moskowitz:]

Terrific. Thank you for circling back. So Gary I was just wondering if you've begun to benefit from disruption associated with Broadcom, Symantec and email security and/or archiving? Or would you say it's still too early at this stage.

[Gary Steele:]

Yes. No good question. Just as a reminder, the archiving solution that was enterprise vault under Symantec went to Veritas. So Broadcom doesn't own the archiving solution there. What we've seen is a fair amount of discussion and dialogue from those Broadcom email customers, because no specific statement has been made about their commitment to e-mail. And so those customers are trying to figure out what they're going to do. One of the things we learned from our experience with McAfee as the customers typically move in there at the time when their subscription is up with their existing supplier. So we suspect that the opportunity for us comes not in the next quarter but frankly over the next three years with all those subscriptions that had been with Symantec kind of due for renewal. And we're obviously working very hard and aggressively to ensure that customers rethink what their platform is as those subscriptions comes to exploration.

[Gregg Moskowitz:]

Perfect. Thank you.

[Operator:]

And we'll go next to Taz Koujalgi of Guggenheim Partners.

[Taz Koujalgi:]

Hey, guys. Thanks for taking my question. I had a clarification on your billings number, you had a strong billing speed this quarter was there any contribution from ObserveIT on the billings number?

[Gary Steele:]

Yes. No it's a good question. And I should have just added a blurb in the prepared remarks. It was a few million. As I talked about there was a bit of perpetual license. There's a little bit of recurring that we invoiced in December with them. And then we had that right on to the balance sheet of their acquired deferred revenue which was another piece. So maybe I can answer the other question that's inferred, we would have beat the high end of our range with or without ObserveIT.

[Taz Koujalgi:]

Thank you.

[Operator:]

And we'll go next to Daniel Bartus of Bank of America.

[Daniel Bartus:]

Hey, guys. Thanks for taking the question. I just had two on competition. Curious if the Office 365 customers that come back to you guys, if you have a sense of – are they using both Microsoft and you in a lot of cases? Or are they turning off any Microsoft security then switching to you? And then just curious, if you're seeing Mimecast a little bit more as they might be moving up-market to larger enterprises? Thanks.

[Gary Steele:]

Yeah. With respect to Office 365, what we typically see is customers were probably spending money either on E5 or specifically on ATP. And, if they go to Proofpoint they typically don't run both. They typically just run us, because they don't want to incur the cost price. And then, with respect to Mime, we really haven't seen any changes competitively. I think as we talked about I think Aspiration indeed like to move up. We just don't see them much in our customer base. We run into them from time to time, but it's not something that happens much.

[Operator:]

And our last question comes from Catharine Trebnick of Dougherty.

[Catharine Trebnick:]

Thanks for taking my question. Are you there?

[Gary Steele:]

Yes we are.

[Catharine Trebnick:]

Okay. I thought – no I though I hung up on you. Okay. Yeah. Mine has to do with your remarks on the Essentials package. You had said, you had over 100,000 customers now on that. And who are you gaining share from in that market? Is it some of Mimecast customers, Legacy customers, Barracuda? Just could you fill some more information on that? Thank you.

[Gary Steele:]

I think it's mattering of all those. So, I think its Office 365. It's a little bit of Mime. It's a little bit of Barracuda. It's a little bit of random smaller players that were maybe legacy players that we don't need ever talk about. So it's being sold today as Paul referenced in his prepared remarks, being sold through MSSPs. And so whoever those MSSPs have been on previously that they moved them over.

[Operator:]

And I would now like to turn the call back to Gary Steele for closing remarks.

[Gary Steele:]

Great. Thanks. I want to take a moment and thank everyone for joining us on the call today. We're very pleased with our Q4 results and excited about the continued progress with our people-centric approach to cybersecurity. We believe we're well positioned to drive attractive returns for our shareholders. We look forward to talking to you on our next call and to seeing many of you on the conference circuit this quarter. Thanks so much for joining us today.

[Operator:]

And again, that does conclude the call. We would like to thank you for your participation. You may now disconnect.