Proofpoint, Inc.
Q4 2014 Earnings Call Transcript

Published: 30 Jan 2015

[Operator:]

Good day and welcome to the Proofpoint Fourth Quarter and Full Year 2014 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Paul Auvil, Chief Financial Officer. You may begin, sir.

[Paul Auvil:]

Thanks. Good afternoon and welcome to Proofpoint’s fourth quarter and full year 2014 earnings call. Today, we will be discussing the results announced in our press release that was issued after the market closed today. I am Paul Auvil, Chief Financial Officer of Proofpoint. And with me today on the call is Gary Steele, Proofpoint’s Chief Executive Officer. During the course of this call, we will be making forward-looking statements regarding future events and future financial performance of the company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in the press release and this conference call. These risk factors are described in our press release and more fully detailed under the caption Risk Factors in Proofpoint’s most recent Form 10-K and Form 10-Q filed with the SEC and the company’s other filings with the SEC. During this call, we will present both GAAP and non-GAAP financial measures. These non-GAAP measures exclude stock-based compensation expenses, acquisition-related costs, accretion of the debt discount and amortization of the debt issuance costs associated with our convertible debt, additions to deferred revenue from acquisitions, cost associated with litigation as well as the amortization of intangibles related to acquisitions, non-recurring income tax benefits, other income and expense. 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 is included in today’s press release regarding our fourth quarter and full year 2014 results, which can be found in the Investor Relations section of our website. In addition, please note that the date of this conference call is January 29, 2015 and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. So, with that, I will turn the call over to Gary.

[Gary Steele:]

Thanks, Paul. I would like to thank everyone for joining us on the call today. The fourth quarter 2014 capped off a strong year of growth for Proofpoint as evidenced by our ability to achieve record revenue, billings and free cash flow. Throughout 2014, we experienced significant demand for our advanced threat protection solutions driven by the ongoing acceleration of sophisticated attacks by hackers who target high value company and client data. Our ability to grow our targeted attack protection solution by more than 100% year-over-year every quarter during 2014 highlights the sustained momentum of the product resulting from the increasing amounts, frequency and type of highly advanced persistent threats. This overall increase in demand combined with our ongoing broad-based shift of the competitive landscape in our favor has resulted in an increase in market share for Proofpoint. Taking a quick look at our financial results for the fourth quarter, total revenue increased 38% year-over-year to $56.2 million and was driven by a 34% increase in subscription revenue. This represented our 46th consecutive quarter of sequential revenue growth. We also reported record billings of $74.9 million, up 53% on a year-over-year basis as well as record free cash flow of $10.9 million, all of which exceeded our fourth quarter guidance ranges. Now, turning to some of our key accomplishments during the fourth quarter. As I mentioned, we are very pleased to report that we had another strong quarter with Proofpoint’s targeted attack protection as we once again grew the TAP business over 100% year-over-year in Q4. We ended the year with more than 500 customers using the products, including some of the most important global brands across the financial services, healthcare and retail verticals. Demand continues to be driven by enterprises’ growing need to be protected against the increasing frequency of highly targeted attacks. In addition, the advantage of leveraging our broad threat intelligence and big data analytics in the cloud is the key and unique differentiator in driving the effectiveness of the products. Some of the noteworthy TAP wins during the quarter included a large healthcare services company that purchased TAP and protection for 55,000 users, a Fortune 100 industrial manufacturing company, which added TAP for 85,000 users and a Fortune 100 insurance services company which added TAP for 80,000 users. As TAP continues to gain market momentum, we are also starting to see growing interest in and synergies with Proofpoint Threat Response through our remediation solution introduced in May through our acquisition of NetCitadel. During the fourth quarter we closed a number of deals including a Fortune 50 financial institution that we mentioned on the Q2 call. This financial institution expanded its license to include all of its global operations which are standardizing on Proofpoint Threat Response in its security operations center to drive all threat remediation across the enterprise. We also closed add-on deals with two healthcare services companies and a large retailer. Demand is being driven by its ability to provide broadened threat verification and containment capabilities via an open platform that unifies threat intelligence from Proofpoint and other vendors. These capabilities enable companies to remediate events in a matter of minutes rather than days or weeks. While it is still early we expect the requirements surrounding threat remediation to be a long-term growth driver for the company. In our core protection business momentum continued as our high win rates versus our competition once again resulted in new customer additions. A few examples of new protection accounts that moved to Proofpoint during the quarter included one of the world’s largest industrial companies which purchased protection, privacy and TAP for 60,000 users. A Fortune 100 global health insurance company which purchased our protection and TAP solutions for 25,000 users. And a leading global financial services company which also bought our protection and TAP solutions for 22,000 users. Further during the quarter, we were encouraged by the increase in demand of our privacy solution evidenced by deals won with a large healthcare services organization which purchased privacy, protection and TAP for over 30,000 users. One of the nation’s largest financial services firms which also purchased privacy, protection and TAP for 20,000 users and a leading provider of human resource services which purchased privacy for 12,000 users. I am pleased to report that during the fourth quarter we continue to see traction selling the entire product line in the context of Office 365, which highlights the value that we can deliver to customers irrespective of their e-mail deployment model. The transition to the Office 365 cloud continues to be a compelling catalyst for Proofpoint as enterprise customers seek to replicate their former on-premise security and compliance infrastructure for their exchange deployments in the cloud. Some of the Office 365 deals won this quarter included a leading global energy services company which purchased protection and TAP for 25,000 users and a Fortune 1000 industrial services company which also purchased protection, privacy and TAP for 12,000 users. We also had another strong quarter in our cloud-based archiving business where a number of key wins included a Fortune 500 global financial services company with over 12,000 users, in addition to a municipal school system with 2,500 users. We also continue to see traction with our social media archiving solution as evidenced by a key win with a leading investment services company for 12,500 users. We are proud to be positioned in the leaders’ quadrant in Gartner’s 2014 Magic Quadrant for enterprise information archiving for the third consecutive year. We view this as further confirmation of the company’s proven ability to execute in the archiving market and our ability to enable organizations to significantly reduce costs, comply with regulations and streamline eDiscovery for all their data. In addition, during the fourth quarter we completed our acquisition of Nexgate, an early innovator in cloud-based security and compliance for social media. With this product Proofpoint customers can protect their online brand presence and social media communication infrastructure by automatically identifying and immediately remediating fraudulent social media accounts, social account hacks and social media content that contains malware, spam and abusive language. The Nexgate solution also monitors authorized accounts and posts for compliance with a wide range of social media regulatory requirements. While it is still early, we believe we are well-positioned to take advantage of the growing opportunity especially given the increasing number of highly visible social media hacks. In particular we closed a handful of deals in Q4 for this new platform including a Fortune 100 global telecommunications company. Finally, international operations met expectations during the quarter as we continue to make progress for further expansion abroad and some good momentum in the Europe in particular. The international revenues in 2014 grew 58% year-over-year and accounted for 19% of total revenues compared to 17% last year. Some of the international deals one include our global energy services company which bought TAP for 120,000 users, a leading international healthcare services company, which is also one of our largest European archiving customers chose to renew for 5 more years as well as add more users, and a large European legal authority which purchased our Protection, Privacy, TAP and Threat Response solutions for over 2,000 users. The addressable market outside the United States in both EMEA and Asia-Pacific continue to represent an ongoing growth opportunity for Proofpoint and we plan to further grow market share in these regions going forward. Before turning it over to Paul, I wanted to provide you with an update on the progress the company has made, growing our customer base over the last year. Specifically, we ended 2014 with 231 customers in the Fortune 1000, each of whom has a significant enterprise scale deployment. This is an average increase of roughly 40% from the 180 that we had at the end of 2013 and the 119 in 2012 demonstrating the traction we have with these large accounts. It is important to note however that it still only represents 23% of the Fortune 1000 leaving us with substantial opportunity to further grow our best-in-class security and compliance solutions. It is also important to note that we ended 2014 with 45 customers in the Fortune 100, up from 38 at the end of 2013 and 27 at the end of 2012, further highlighting our success in gaining share with the largest enterprises in the world. In addition, we are very pleased with our success in driving additional sales to our existing customers as evidenced by the fact that at the end of 2014, 40% of our customers were using two or more products up from 33% at the end of 2013 and 30% in 2012. We are also pleased to say that at year end 2014, 11% of our customers had more than two products, up from 6% in 2013. During the fourth quarter, we saw add-on strength across our entire suite of products as highlighted by the key wins that I discussed earlier. This is further evidence of the strong execution by our major account teams and add-on specialist, whose sole role is to drive the sale of additional products to our existing customers. And with 60% still running a single Proofpoint product, there is substantial opportunity for us to drive revenue growth through continued add-on sales. Looking at 2015, Proofpoint is well-positioned to maintain momentum as we benefit from ongoing favorable market trends. This coupled with our superior sales and support team enables us to continue to deliver best-in-class products and services as well as maintain consistent world-class renewal rates in excess of 90%. As a result, I am confident that the combination of product and service excellence, market opportunity, and go-to-market leadership as well as strong – as well as a strong balance sheet positions the company for further market share gains in the $6.7 billion total addressable market during 2015 and beyond. So, in summary, I am very pleased with our fourth quarter performance, which contributed to a strong finish to the year. We entered 2015 with continued momentum and a proven ability to defend enterprises against today’s increasingly advanced security threats. In addition, we continue to benefit from our superior go-to-market strategy and our world class set of highly differentiated cloud-based data protection solutions. As a result, I believe that Proofpoint remains well-positioned to grow market share and extend this technology leadership. With that, let me turn it back over to Paul.

[Paul Auvil:]

Thanks, Gary. We are very pleased with our excellent execution during the fourth quarter, which resulted in our ability to once again exceed our expectations for revenue billings, adjusted EBITDA and cash flow on both the quarterly and annual basis. These noteworthy results were driven by strong demand for Proofpoint’s cloud-based platform coupled with a world-class renewal rate remains well over 90%. During the fourth quarter, total revenue was $56.2 million well above our previously announced guidance range of $52 million to $53 million and up 38% year-over-year. During the fourth quarter, we had a spike in hardware revenue of roughly $1 million over our expected run-rate driven by several large Sendmail customers who chose to refresh their MTA appliance [ph] infrastructure. Without the benefit of these unexpected hardware purchases, we still had exceeded guidance for the quarter with overall revenue growth of approximately 35% year-over-year. Looking at the revenue breakdown by a solution, during the fourth quarter our protection and privacy solutions comprised 79% of total revenues growing 41% annually, while our archiving and governance solutions made up the remaining 21%, growing 26% over the prior year. Billings for the fourth quarter totaled $74.9 million reflecting growth of 53% on a year-over-year basis and significantly exceeding the high end of our previously announced guidance range of $63 million to $64 million. During the fourth quarter, billings benefited from over a dozen early renewals that were originally scheduled to be renewed during the first part of 2015 adding over $5 million of billed activity to the quarter. As well we also saw a modest lengthening in duration of approximately 10% as compared to the prior quarter moving the overall average to just below the midpoint of our historical range of 17 to 22 months and contributing approximately $3 million to billings for the quarter. Absent these two effects, billings would have been roughly $67 million or 37% growth year-over-year, still well ahead of our guidance for the quarter. The impact of these two effects is clearly reflected in our deferred revenue balances which increased by $19 million over the prior quarter to end at $163 million with $5 million of this increase being long-term deferred. It is worth noting that the catalyst for many of these early renewals was add-on sales activity with the customer choosing to buy additional solutions from Proofpoint at the close of the year. With their legacy contract renewal less than 90 days away, these customers chose to renew their existing contracts concurrently with these add-on purchases rather than wait and process the second transaction only a few months later. Keep in mind that early renewals are carrying on our balance sheet as deferred revenue with no revenue recognized on the income statement until the original contract lapses. In terms of modest lengthening of contract duration, while our sales competition plan specifically incent our sales team to close short duration deals. Ultimately customers make their own decisions for a variety of reasons and their choice to execute longer duration agreements simply reinforces the strong commitment that our customers are comfortable making to the Proofpoint platform. Turning to expenses and profitability for the fourth quarter, on a non-GAAP basis our total gross margin was 69% during the fourth quarter, which was slightly below our prior guidance due primarily to the one-time increase in hardware purchases associated with the legacy Sendmail and GA platform which carry a lower margin than our subscription business. In terms of our operating expenses, we continued our investment in sales and marketing as well as research and development to support future growth. During the fourth quarter total non-GAAP operating expenses increased 29% over the prior year period to $41 million representing 73% of total revenue, down from 78% during the same period last year demonstrating our ability to drive continued growth while also creating leverage from these investments. Non-GAAP net loss was $3.6 million or $0.09 per share based on 38.3 million weighted average shares outstanding and was better than our guidance range of a loss of $0.10 to $0.12 per share. Non-GAAP net loss during Q4 2014 included an impact from foreign currency translation related to our cash held in local currencies overseas of approximately $0.9 million. And hence we were pleased to deliver our results above the high end of our range despite this effect. Fourth quarter 2014 adjusted EBITDA was $0.5 million marking our third consecutive quarter of profitability on adjusted EBITDA basis and markedly better than our original guidance of negative $0.5 million to negative $1 million primarily driven by our upside revenue during the quarter which similar to the last quarter outpaced the rate at which we were able to productively invest in operating expenses despite taking on the added operating expenses associated with the Nexgate operations for 61 days during the quarter. On a GAAP basis, GAAP net loss for the fourth quarter totaled $17.4 million or $0.45 per share based on 38.3 million weighted average shares outstanding. Turning to a quick summary of financial results for the full year 2014, total revenue was $195.6 million, an increase of 42% compared to 2013. This growth was driven by a 42% increase in subscription revenue which accounted for 96% of total revenue during the year, consistent with 2013%. This $7 million contribution from Sendmail deferred revenue recorded during the year contributed approximately 3.5% to these full year results. Hence, our overall organic growth rate was approximately 37% for the year. Billings for the full year 2014 were $233.7 million, up 46% year-over-year and well above our final guidance for the year primarily due to the early renewals and extended contract durations that I mentioned earlier. Absent the early renewals, billings growth for the year would have been 42%. For 2014, our adjusted EBITDA loss of $0.5 million was a significant improvement over 2013. Non-GAAP net loss for the year was $15 million or $0.40 per share based on 37.4 million weighted average shares outstanding. In terms of cash flow, I am pleased to report that we again posted positive results for the quarter as we generated $15.5 million in operating cash flow and invested $4.6 million in capital expenditures. This resulted in positive free cash flow for the quarter of $10.9 million well above our guidance of approximately $5 million and equaling 19% of revenues for the quarter providing a clear demonstration of our ability to meet our goal stated at the time of our initial public offering achieving free cash flow of 18% to 20% of revenues by the second half of 2017. On a full year basis, we generated $21.3 million in operating cash flow and invested $15 million in capital expenditures resulting in free cash flow generation of $6.3 million for the year as compared to $5 million in 2013 and above the high-end of last quarter’s guidance. Turning to balance sheet, we ended the fourth quarter with $215 million in cash and short-term investments and $162.3 million in debt compared to $232.8 million in cash and short-term investments and $160.5 million in debt as of September 30, 2014. This sequential decrease in cash during the quarter was driven by the cash disbursement associated with the purchase of Nexgate offset by cash flow generated from operations, ongoing stock option exercises and the contributions to capital from our employee stock purchase plan. We ended the fourth quarter with an accounts receivable balance of $40.9 million resulting in DSOs of 50 days during the fourth quarter consistent with the third quarter as we continue to have strong collections during the fourth quarter. Before turning to our guidance for 2015, we plan to continue to provide a handful of metrics that we update at the end of each year and as such share our annual updates to those metrics that were not already covered by Gary earlier in the call. Regarding overall customer growth, we ended the year with approximately 3,300 customers, up from 3,100 at the end of 2013. Over the course of the year, we added almost 500 new accounts across the large and mid enterprise space, including 51 of the Fortune 1000 and 7 from the Fortune 100. However, during the fourth quarter, we made the strategic decision to wind down a legacy OEM partnership with the competitor focused on the SMB market that included roughly 200 customers carrying an average recurring revenue per customer of under $5,000. Note that these customers and their associated revenue contributions are included in the figures that we used to drive churn and even with the ending of this relationship, we still delivered a churn rate based on our standard calculations of well under 10%. In terms of revenue mix for the year, 77% of revenues came from protection and privacy solutions, up from 73% in 2013 and growing 50% for the year reflecting our ability to capitalize on the urgency that enterprises felt throughout the year to upgrade and enhance their capabilities to defend their businesses from malicious activity. Our archiving and governance solutions represented 23% of total revenues, down from 27% in 2013, yet still growing 20% for the year well above the average growth rates in those industries. Given the progress that Gary noted earlier in terms of the number of customers using two or more of our solutions, we believe that our broad product line enables us to be an increasingly strategic supplier to our customers while improving the overall leverage that we can drive from our operating model and positioning us to further improve on our already world-class retention rates with our existing customers. Now, turning to our financial outlook starting with the full year 2015. We entered the year with good momentum as the competitive landscape continues to lead in our favor. We believe that we are in a position to increase market share and extend our technology leadership as we continue to invest in new product development and expand our sales and marketing resources worldwide. As a result, we are increasing our outlook for the full year 2015 as compared to the initial views that we shared on last quarter’s call. From a full year perspective, we now expect billings to be in the range of $288 million to $292 million, well above the preliminary guidance that we provided in October. At the midpoint of the range, this represents an annual growth rate of approximately 29% when adjusted to reflect the $5 million in early renewals that were pulled into the fourth quarter of 2014 from the first quarter of 2015. With this billings guidance, we are increasing our total revenue guidance to a range of $245 million to $247 million reflecting an annual growth rate of 26% in the midpoint of the range. While this is 1 percentage point lower than our starting point in January of last year, it is well above the preliminary guidance that we provided last quarter. We believe that this guidance is a strong starting point for the year given the high growth rates we delivered over the course of 2014 and as a result the challenging year-over-year comparisons that we faced here in 2015. As well I would like to remind everyone that as we enter the year, we are expecting a headwind of approximately 4 to 5 full percentage points due to the ever strengthening U.S. dollar as well as the $4 million decline in legacy deferred revenue recognized from the Sendmail acquisition in 2015 as compared to 2014. Given the company’s relatively small footprint internationally, we believe we have less exposure to many other companies to changes in exchange rates. And at this point for every 5% the euro declines against the U.S. dollar, we experience a 1% to 2% headwind on our top line with the impact being felt immediately in billings, but taking several quarters to be reflected in the revenue given our average contract duration of roughly 18 months. As a point of reference, the current guidance reflects an exchange rate of approximately 1.15 to the euro, 1.5 to the British pound and 120 for the yen. As such, we expect our growth rate to decline sequentially over the course of the year when including this effect in our 2015 revenue outlook. We expect full year 2015 non-GAAP gross margins to be approximately 70%, including the cost associated with the build-out of infrastructure for the newest platform solutions associated with the Nexgate acquisition along with our ongoing investments in threat analytics and big data infrastructure that form the foundation of our efforts to find, analyze and most importantly block these advanced threats from reaching our customers. Adjusted EBITDA for the full year 2015 is now expected to be $1 million to $2 million for the full year starting the first quarter at approximately breakeven with modest profits on an adjusted EBITDA basis in the remaining quarters of the year. We expect full year 2015 non-GAAP net loss to be $15.3 million to $14.3 million or a loss of $0.38 to $0.36 per share based on approximately 40 million weighted average shares outstanding. This assumes depreciation of approximately $12.5 million up 39% from 2014 and cash interest expense associated with convertible debt of roughly $2.5 million. As well, the income tax provision, exclusive of potential discrete items, is expected to be approximately $0.9 million to $1 million for 2015. I would like to highlight again that we are currently generating a net loss and as such our weighted average share count for the quarter of $38.3 million did not include the impact of vested stock options. If we were profitable today, our fully diluted share count would have been approximately 41.8 million shares when applying the treasury stock method to these vested options. In addition, our convertible notes if converted would add approximately 5.2 million shares. Finally, given the strong cash flow performance over the past two quarters, I am pleased to update our cash flow guidance in the coming year with a reasonably significant increase. Given the leverage we have seen in our model over the past few quarters, we expect that free cash flow will be in the range of $20 million to $25 million or 8% to 10% of revenues for the full year 2015 representing roughly $0.50 per share. I think it is important to highlight that this guidance, which pairs compelling top line growth with meaningful free cash flow generation puts Proofpoint in an elite category within the SaaS industry left by only a few other subscription businesses of our size and scale. Note that this cash flow guidance assumes capital expenditures of $18 million to $20 million for the full year. Given the strong billings performance during the fourth quarter, for the first quarter, we expect to report free cash flow of approximately $2 million to $4 million, also a significant improvement from the preliminary guidance provided last quarter and representing a very strong start to the year. Note that as in past periods to the extent that we can deliver upside to the revenues as outlined in our guidance, we do expect to reinvest in most or all of that upside back into the company in the form of initiatives that we believe will deliver differentiated solutions for our customers and improve the long-term growth for the business overall. Now, turning to guidance for the first quarter of 2015, we currently expect billings to be $61 million to $63 million resulting in year-over-year growth of approximately 33% at the midpoint of the range. This performance is particularly noteworthy given our earlier observation that roughly 5 million of renewals that were originally expected in first quarter were closed during the fourth quarter of 2014. Regarding revenue for the first quarter, we are targeting total revenue of $56 million to $57 million or 32%growth year-over-year at the midpoint of the range. Recall this sequential revenue growth tends to be a bit lower than usual in the first quarter of the year as compared to the fourth quarter given that we employ a daily revenue recognition methodology with respect to releasing subscription revenues from our deferred revenue accounts. Given that Q1 has only 90 days of revenue to recognize as compared to 92 days in Q4, the result of sequential decline in subscription revenue from existing business of approximately 2%, which equates to roughly $1 million at our current size and scale and works as a headwind against the net new and add-on business closed over the course of the first quarter. Also note that we do expect a meaningful sequential decline in revenues derived from hardware sales as the orders from legacy Sendmail customers recorded during the fourth quarter are not expected to recur. We expect first quarter non-GAAP gross margin to be approximately 70% consistent with our full year guidance. And with regards to adjusted EBITDA, we are currently targeting breakeven to positive $0.5 million for the first quarter given our typical increase in costs early in the year associated with payroll taxes, sales kickoff, our first full quarter of expenses from the Nexgate acquisition and initial sales and marketing investments for the year. This juxtaposed with our relatively flat sequential revenue guidance. This is nicely improved from our expectations three months ago when we expected to generate losses of $2.5 million to $3.5 million on an adjusted EBITDA basis during the first half of the year. We expect first quarter non-GAAP net loss to be negative $3.6 million to negative $3.1 million or a loss of $0.09 to $0.08 per share based on approximately 38.9 million weighted average shares outstanding. And this assumes an income tax provision exclusive of discrete items of $0.2 million to $0.3 million during the quarter. In summary, we continue to experience strong execution during the fourth quarter and full year 2014 and believe that Proofpoint remains well-positioned to maintain momentum through 2015 as the worldwide demand for our integrated cloud-based data protection solutions continues. And importantly, we are pleased that with our expected performance for the coming year, Proofpoint will join the exclusive ranks of the few publicly-traded SaaS companies that can deliver compelling top line growth, along with the ability to generate meaningful free cash flow. Before turning it over to the operator for questions, I wanted to mention that we are planning to host an Investor Day in San Francisco on Thursday, June 4 and will be providing additional details as we get closer to that date. With that, I want to thank everyone for taking the time to join us on our call today and we’d be happy to take your questions at this time. Operator?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Philip Winslow with Credit Suisse.

[Philip Winslow:]

Hi, thanks guys. Congrats on what was a great quarter and great year. If I look at the metrics that you just ran through that you give annually, it seems that you had still good churn, good new customer acquisition and good up-sell driving obviously this billings. When you look at the 2015 guidance and kind of think about the revenue and the billings terms, how are you sort of prioritizing what you are focusing on and what’s sort of driving that growth, is it churn, new customer acquisition, deepening penetration of products into the customers, how do you kind of balance those?

[Paul Auvil:]

Yes. Let me make a couple of comments, Phil and then Gary can chime in. So, the one thing that I would say is we were very pleased with how the churn number has played out for 2014. We continue to make investments there both in terms of technology to make sure the customers quite frankly love our products and then other things just handhold customers when they the occasional issue. So, aside from the wind down of this legacy OEM relationship, the retention of customers was quite extraordinary in 2014. So, we are excited about that for 2015, but that said, we are balancing our investment and as we build out the sales organization to drive both new account acquisition and you saw great production in the Fortune 1000 for us as well as driving growth in the teams to go and do add-on and again, you saw good production in our growth of customers that add two or more and three or more products. So, both of those themes are very important for us as we think of growing the revenue base and doing it in the very efficient manner as we scale the company.

[Gary Steele:]

Yes. And just one other comment, Phil, as we look at the market conditions today, there is clearly a broad concern amongst enterprise buyers around security and we are uniquely positioned given the capabilities we can deliver with TAP. So, we see that playing out with new customer acquisition. That is the key story that we are telling new customers. And that’s one of the drivers for us in our growth and we see that continuing through 2015. But at the same time there is balance there because we also see that same demand from our customer base of those individual customers that have not yet purchased half. And so what we expect in 2015 is this balance between very strong and new customer acquisition, selling to organizations that have brought security concerns as well as taking our – these new product capabilities that we have been outselling and delivering them to our install base. So I think that you are going to see some balance there and we are pretty excited about it.

[Philip Winslow:]

Great. Thanks guys and congrats again.

[Paul Auvil:]

Thanks Phil.

[Operator:]

Thank you. Our next question comes from Rob Owens with Pacific Crest Securities.

[Rob Owens:]

Thank you and good afternoon guys. Paul I want to focus on the early renewals and if you can quantify them at $5 million, first of all, is it second and third quarter in a row that’s happened. So does this become common place and you think that happens throughout 2015 as well. Second, if I take the $5 million out of Q4 and put in it Q1, your billings would then be showing an acceleration, so help me understand I guess on an apples-to-apples basis maybe what you are thinking, is there more early renewal in that number or what does duration look like as you look at Q1 as well?

[Paul Auvil:]

Yes. So a couple of things, I think that right now as we look at things, it’s a little hard to say whether or not early renewals become commonplace at the level that we saw in Q4. So the guidance as we think about first quarter reflects some early renewal activity, but not something nearly as extraordinary as the fourth quarter activity. So if we think about that coupled with duration going forward, we are assuming that duration stays kind of roughly where it is right now. It’s always a little bit tricky to discern exactly how those pieces are going to fit together. But one of the things that I think we have leaned from the fourth quarter activity was there are just a lot of customers who would say move over to the Proofpoint platform irrespective of the way we structure our comp plans with the sales team. The customers just look at it and say look this is such a definitively better solution than what is otherwise available. I am not going to come back and look at this in the year. So I don’t want to deal with that. I just simply wanted to make that commitment like that check move forward. So it’s a little hard to say but for now to your point about your billings expectations, as I look at the guide that I just provided for Q1 I am assuming durations to stay a bit higher than they have historically just given the anecdotal evidence that we had in the fourth quarter.

[Rob Owens:]

Great. And then as a follow-up just with your customers that you talked about success with Office 365, are those customers that have migrated to Office 365 with Proofpoint, are there new customers, you typically experienced a lag if they are trying the free capability for Microsoft, just more color will be appreciated? Thanks guys.

[Gary Steele:]

Yes. Robert I can see the blend. So we are seeing people that our existing Proofpoint customers and they want – they want the Proofpoint experience when they go to Office 365. We see customers that were not Proofpoint customers that went to Office 365 and come to us for more advanced, better security capability, that’s a very common theme. And we see people who often times probably came off the on – an non-premise system like maybe they are running Cisco IronPort or something they went to Office 365 and felt oh my god, what got to do something different. So Office 365 continues to be very nice catalyst for us. And we see that continuing. If you look across the course of the year it was a broad theme in ‘14 and I suspect it will continue to be a broad theme in ‘15 as well.

[Paul Auvil:]

Yes. And I think the one thing I would add to that is we do see our existing customers moving to the cloud. But one thing that we are not seeing is people doing what I would describe as the trust fall which is wants to see if Microsoft will work and if doesn’t we will come back and renew with Proofpoint. And I am not sure whether it has to do with how they are able to do testing before they actually move over to the cloud framework. But people choose to keep the Proofpoint infrastructure in place as part of essentially moving a location of their e-mail systems from non-premise into the cloud.

[Rob Owens:]

Great. Thanks.

[Operator:]

Thank you. Our next question comes from [indiscernible] with Deutsche Bank.

[Unidentified Analyst:]

Hi guys. Thanks for taking my question. I have two questions. One on TAP, I know you spoke about how TAP drove your outperformance in this year and knowing what you guys know about TAP what is implied TAP’s growth in your 2015 guidance?

[Paul Auvil:]

Yes. So I would say TAP had an extraordinary year here in 2014. And well, as a CFO and the rest of guys who are in the business it’s always fun to believe in never ending prosperity. We also have a view that good things don’t always continue with quite the same rate year-after-year. And so I would say we have an optimistic, but not overly eager view of what TAP will contribute as we look at the 2015 numbers. So, maybe said differently, I think there is room for TAP to deliver some upside in the year if it exceeds our expectations, but it will be an important driver of bookings and revenue cycle for 2015 over 2014. So, we did expect it to grow in a meaningful way.

[Gary Steele:]

And we are also selling a broader advanced threat story and suite. So, as you think about Proofpoint threat response, we are in the very early days there. It’s very hard to predict how that will play out in terms of revenue for the year, but what we are seeing is a greater demand and coming from enterprises just trying to figure out what they are going to do about threat remediation. And I think we are hitting a lot of the key points that those organizations want to – the problems that they want to solve. And so again very, very early, but it’s part of that overall story and will contribute overall to the growth at TAP in ‘15.

[Unidentified Analyst:]

Now, are you – this threat response need to be used in conjunction with TAP or can customers buy threat response without being TAP customers?

[Gary Steele:]

You can use Proofpoint threat response without being a TAP customer. The customer that we referenced the Fortune 50 financial institution that purchased Proofpoint threat response is not a TAP customer today as an example.

[Paul Auvil:]

Yes. And maybe just to further elucidate that, you can buy threat response separate from TAP, separate from protection. So, each of those products can be sold without any of the loans on the other two, although there are compelling reasons to run-off rate.

[Gary Steele:]

And clearly, our sales team is going to try to get a customer to buy out the rate.

[Paul Auvil:]

Yes.

[Unidentified Analyst:]

Right. And then one follow-up, so you referenced some customers for Nexgate in this quarter, what is the – how is the Nexgate being priced? What’s the licensing policy for Nexgate? I am assuming it’s not based on a per seat model like your other products?

[Gary Steele:]

Yes. So to be clear at subscription just for the benefit of everybody, I am sure you get that, but I just wanted everyone on the call to understand that, while Nexgate and sometimes on a smaller legacy acquisitions will be using perpetual licensing we would immediately move into subscription. In terms of the pricing methodology, I will tell you that, that’s still in flux. So, you are right, it’s not – it doesn’t lend itself to classic per user per year pricing. And we have a few different models out there. I am reluctant to talk about it on the call right now, because it’s still sort of evolving, but I think probably in the April call, we will be able to give people some more definitive characteristics about how we priced the product as we scale it, but it is a 100% subscription business with a small amount of professional services associated with helping with the initial configuration and install.

[Unidentified Analyst:]

Okay, thank you.

[Paul Auvil:]

Right, thanks.

[Operator:]

Thank you. Our next question comes from Matt Hedberg with RBC Capital Markets.

[Matt Hedberg:]

Yes, thanks for taking my questions guys and congrats on the quarter. I had a follow-up question on TAP, the ability to cross-sell it into the base, it looks like, I think you said you have got 500 customers now, which looks I guess about 15% of your total customer basis. Roughly, how many of those are using TAP only at this point?

[Paul Auvil:]

I can’t actually tell you that number right off the top of my head. We do have a large percentage that will run both TAP as well as protection, because it’s sort of a natural parent, but there is a measurable percentage, I would say, certainly on the order of 10%, but not greater where they will buy TAP standalone. And part of it is that we do and I think Gary has alluded to this in prior calls, we will often have an initial sales cycle, where the customer has heard about TAP. They are excited about if they want to evaluate it. And what will happen is that in evaluating TAP, they decide to take a look at our protection solution as well and so the two gets sold together, even though the initial sales cycle was originally just going to be a TAP standalone sale.

[Matt Hedberg:]

Got it. That’s helpful. And then I had a follow-up question on Office 365, can you give us a sense for the go-to-market strategy for that suite? In other words, is it going to differ you’re your other products, can you leverage perhaps the Microsoft sales channel here to deliver additional add-on sales there?

[Gary Steele:]

So, our go-to-market motion has been very similar to our traditional go-to-market motion. So, we are aggressively pursuing those customers identifying those individual companies going to Office 365 and engaging with them. We are using our channel as well. So, the channel partners that we have traditionally relied on the fish [indiscernible] the CDWs and other others. And so we engage there. And then more broadly, we are working to engage with more Office 365 partners, so that’s an initiative that we are working on for 2015, because we think there is more opportunity there.

[Matt Hedberg:]

Great, thanks a lot guys.

[Gary Steele:]

Thanks.

[Operator:]

Thank you. Our next question comes from Jonathan Ruykhaver with Stephens Capital.

[Jonathan Ruykhaver:]

Hey, guys. Congratulations once again.

[Gary Steele:]

Thanks.

[Jonathan Ruykhaver:]

I am kind of curious if you could talk a little bit about the market strategy with Nexgate, it appears to be a different buyer from e-mail, so will that require some kind of an overlay strategy and what does the channel opportunity look like over time?

[Gary Steele:]

Yes. The buyers are little bit different. So there is really two key constituents that are involved in the purchase of Nexgate. So one is CISO which is our traditional buyer, the chief information security officer, but there is also a business buyer. So it’s the individual within the enterprise that owns the social presence and branding. That often – that person might carry that title of head of digital marketing. And so it’s really a collaboration between those two organizations. And as such as we bring Nexgate into the Proofpoint world, we are using a special team led by the Nexgate sales team and working with our broader sales force. So we think there is a lot of synergy there, but we want to continue to leverage the knowledge and skills that the Nexgate team has to ensure that we really capitalize on the opportunity. I think over time what I would suspect is that CISO will play a greater and greater role in the ultimate purchase, because the exposures that are happening today as a result of social media hacks are absolutely killing people and the CISO is the person that’s going to be held accountable of that.

[Jonathan Ruykhaver:]

Maybe you have seen those discussions shift with the CISO yet or is that something you anticipate over time?

[Gary Steele:]

We are seeing every day, actually it’s very fascinating and as you guys all know even in the month of December there were probably one every other day as a highly visible social media reach or hack.

[Jonathan Ruykhaver:]

Great, okay. And then looking at Nexgate and Threat Response, which were those acquisitions do you think can lead to the bigger opportunity over time?

[Gary Steele:]

Really hard question, they are really different. So with Threat Response we are seeing a lot of synergy with TAP. And so that synergy with TAP drives a higher value proposition to that overall customer. And Nexgate it’s so new. We are really in the very early stages of what we expect to be a very interesting fast frame [ph] market. So I think they are hard to compare. I think we will see – we have got a little more maturity in terms of understanding on the Threat Response side. So I think that will have more impact in 2015 as it relates to TAP. And then Nexgate we are just beginning to understand that.

[Jonathan Ruykhaver:]

Alright, okay.

[Gary Steele:]

Certainly we will have to talk about churn equally.

[Jonathan Ruykhaver:]

Good to hear. Thanks guys.

[Operator:]

Thank you. Our next question comes from Robert Breza with Sterne Agee.

[Robert Breza:]

Hi, thanks for taking my question. Two questions, one Gary we would love to get a little bit more insight in Q in terms of how you think about the geographic opportunity, obviously you had very great success there. And then two, one for you Paul, as you think about the EPS, we think about the guidance here $0.08 to $0.09, it would appear from the full year numbers that we would be having a little bit more additional investments in the second half of year, one of you kind of just talk us through how we should think about modeling expenses in the second half? Thanks.

[Paul Auvil:]

I will take that on first. So I think the investors as we think about driving the company go forward really it’s a good balance between R&D investment and sales and marketing. But that’s probably on a absolute dollar basis, more growth in the sales and marketing spend particularly as we look to put more shoulder to the wheel international for example and start to really build out some capabilities in Europe as well as some new investments we are making in the channel to help build up our channel presence and capability, we saw very good progress there over the last couple of quarters and we want to make sure we take advantage of that momentum. And so there will be growth in both categories, but sales and marketing will be disproportionately higher spend level across the arc of the year.

[Gary Steele:]

Okay. And then on your geographic question, so we continue to heavily invest in the U.S. We still view there to be a very great opportunity to continue to penetrate U.S. companies. So the sales team continues to grow in the U.S. As we have talked about in the past our top priority internationally is Europe, we are starting to see good progress there. We have made a big investment in terms of giving the right leadership in place and in each country as well as continuing to hire in those regions with local people. So we should see the beginning of good progress on the European side in ‘15. And then as we look to other regions outside of Europe, we will likely expand our overall presence internationally in the year likely in some territories where you had no presence in the past. And so we will update you as we make those investments throughout the year.

[Robert Breza:]

Great, nice quarter.

[Gary Steele:]

Thanks.

[Operator:]

Thank you. We will move to Tim Klasell with Northland Securities.

[Tim Klasell:]

Yes. My congratulations there as well guys. Question around you have just mentioned expanding internationally and with the channel and as your product set gets broader and more complete, do you have to do something separate or different with the channels, often they prefer somewhat simpler product sets. And maybe you can walk us through your thinking with that?

[Paul Auvil:]

One thing I would say just to get started is that’s a very relevant observation. One of the things that’s interesting and a little bit unique about Proofpoint is when you look at our core products in protection, privacy and TAP, it’s all the same buyers. So we are actually doing a favor if you will to the channel, when they – just like with our sales team when they get it and they sell that initial solution, they can leverage that relationship and the very happy experience that that customer has can drive add-on sales. So it’s one of the things that actually makes Proofpoint quite attractive to the channel from that perspective. As you look at kind of broadening into Threat Response, which does tie into those products but with a little bit more of a reach. And then things like the Nexgate capabilities, that does require somewhat different channel dynamics which are things that we are considering as we are going out with 2015 initiatives.

[Gary Steele:]

Yes, I would say that the interestingly I think the number one driver today has been effectiveness in catching malware. And so one other things that’s actually working across size, through across channel is people are desperate to find solutions that work well. And that’s been helpful because in other markets often times have to – you would sort of reframe the product, etcetera for different sizes of the customers of different channels and all that stuff. We are seeing very good interest across a range of customer sizes across a range of go to market opportunities for the products we have. And so I feel good as we expand. We are not going to do a lot of work on product to orient ourselves to various channels. And some of that’s just frankly SaaS. SaaS gives you a more capability that way.

[Tim Klasell:]

Okay. That’s very helpful. And then just a quick follow-on, the 200 customers that were end-of-life, had that 200 number been fairly flat through if we sort of look historically that the customer growth?

[Gary Steele:]

It’s literally, it’s one of those things that ramped many years ago and it’s been flat, it’s been a nice to kind of productive little revenue stream for us. But since we got our own efforts around the essentials platform, which is still very small part of our revenue stream but nevertheless our go to market initiative. In the old days we said no time dealing with SMB, but increasingly it’s a market that’s of interest to us kind of beyond maybe just the hobby level. And so in this particular case the competitor who was our OEM partner could see that we were ultimately going to end up with some conflict there and just didn’t want to have our alliance and someone that were ultimately going to have to see on the field a battle everyday, that made perfect sense, it was an ethical unwinding of the relationship.

[Tim Klasell:]

Okay, perfect. Thank you.

[Operator:]

Thank you. Our next question comes from Jonathan Ho with William Blair.

[Jonathan Ho:]

Hey guys. Can you give us a sense of how to think about the archival business as we look into 2015 and perhaps some thoughts around the growth rates there?

[Gary Steele:]

Sure. So as we look at 2015, we continue to be very optimistic about that opportunity. What we are seeing is that the innovation that’s happening in that market, it’s happening in the cloud. We believe that we are extremely well positioned given the scale that we can offer and the core capabilities that we deliver to customer today. We believe we are uniquely positioned there. We also think that the larger incumbent that owned many of the on-premise customers, those customers feels stranded and want to do something different. We don’t know how fast that market will move like how fast people actually moved to the cloud. But we feel like we are really well positioned. And I think there is just a lot of growth opportunity in that particular market segment over the coming years. I will let Paul comment on the specific growth rates.

[Paul Auvil:]

Yes. I mean honestly as we look at the numbers and we are putting it together at the leadership team for 2015. We do a little bit of ballparking of what we think the growth rates where the contributions come from by product line. And I can tell you that baseline we had very healthy expectations of what the archiving business will contribute. But ultimately our sales team is confident on a completely neutral basis along with the channel to go out and drive and post business. And so depending on which segments are heating up and where we are seeing strong demand, sales people can’t be everywhere at all times. And so the market kind of dictates how they spend their time and ultimately where we see growth come from. So in the most recent year, while we are very pleased with the performance of the archiving business, it actually grew a little bit more slowly than I think we had originally anticipated, but it was because our other products grew at such an outside pace that the sales team have their hands full fulfilling demand in that area instead.

[Jonathan Ho:]

Got it. And further follow-up aside from the obvious carrying on the protection side, what products you often see paired together in terms of the multi-product sales? And how should we think about the trajectory of multi-product growth in 2015? Is this something that just stay fairly similar relative to ‘13 to ‘14 or do you think there would be a further salvation?

[Paul Auvil:]

So, protection and TAP naturally go together and we also find that protection and privacy often go together and so we are increasingly also seeing deals, where it’s a combination of protection, privacy and TAP also together. With archiving, we find that it’s often sold by itself either when it’s new or as it’s a standalone add-on later, it’s a different sales cycle to some degree. The same buyer is at the center of all of it. You have got other constituents like the legal team and the HR team that weigh in on the decisions around archiving. And so except for very small customers, it kind of runs it’s own sales cycle. Gary, you want to add?

[Gary Steele:]

Yes. The one thing that I would say on archiving side is we are selling – it’s sold separately and there are separate SKU and separate prices all of the social capabilities for archiving. So, what we do oftentimes see is as people move, they not only want to archive e-mail and file, but they also want to archive social, so that’s creating a broader opportunity there. So, if you look at the natural bundles across the product line, it’s privacy and protection, protection and TAP are all three together archiving and archiving social, those are natural combinations. And I think that with Nexgate, we don’t know the answer to that. I suspect we will see synergy across all of our products frankly, but it’s just too early to call that at this point.

[Jonathan Ho:]

Congratulations again on a strong quarter.

[Gary Steele:]

Thank you.

[Operator:]

I think we move to Walter Pritchard with Citi.

[Walter Pritchard:]

Hi, thanks. Gary for you just you have been fairly acquisitive over the last 18 months or so and it feels like some of your peers in the security space are ramping that up as well? I am wondering as we look at 2015 how are you thinking about acquisitions and we have got quite a bit to manage in terms of making some of the things you have acquired successful? How should we think about the pace of acquisitions as we move forward this year?

[Gary Steele:]

Yes. We have had great success with the acquisitions we have done. I am thrilled with everything that we have been successful acquiring and the role that it’s played in the company leaves as a business, I think one of the things that has worked really well is we have built the core competence around doing acquisitions and getting those acquisitions integrated and doing so at a relatively rapid pace. So, as we look at 2015, we are going to continue to work on building a pipeline of acquisition candidates. The one thing I would say is there is a lot of venture money is flowed into security. There is a lot of expectations that are probably further out of alignment with where we would want to pay, but that doesn’t mean that we are not going to continue to look. I think the typical profile for Proofpoint has been small teams, phenomenal people, incredible technology and categories where it creates more value for the customer that we typically serve. And so we will look for those opportunities in 2015. It’s hard to predict whether we will find any of those frankly. And with the sort of escalated prices that we see in the market, I think where we will continue to be a very disciplined buyer. So, we will look, I won’t make any commitments that we will actually execute any transactions that we continue to look, but we want to do so with discipline.

[Walter Pritchard:]

And then Paul, we have been on couple of calls here in the last two days, where not necessarily competitors, but again kind of your peers in the space have either meaningfully or dramatically uptick their level of investment. And I got your commentary around looking to spend any upside, but as you look at your mix in the marketer, you are not competing directly in network security, but as you look at that market, do you feel a need or does it feel like the volume of spending from some of the guys you go up against is turning up and you may need to respond or are you leading that enough that you feel like that level of spending at this point is adequate or what you have guided to is adequate?

[Paul Auvil:]

I think what we have guided to is adequate. We actually spent a lot of time talking about this as a leadership team on a regular basis. And we were pleased year-over-year to have operating expenses drop from 78% to 73%. I look at the free cash flow guide of 8% to 10% for 2015. I feel like we are really at a point where we can grow the business at a compelling rate and also deliver cash flow. And then ultimately, they have given our average contract durations, cash flow naturally proceeds profitability, but we think those two move along kind of an appropriate step as we grow business from here. So, we do see businesses that are spending significantly more quickly in sales and marketing. We think there is a natural way which you can scale yourselves in marketing in a way where those people in those teams are efficiently productive. And I think the only way we would see a stepwise change in that quite frankly is that we are engaged back to the earlier question on M&A if we were to engage in some M&A where we use more of an industry consolidation play, you might see a step function increase in sales and marketing spend, but in the end, we would – how should I say, we architect that deals that would actually be incremental and accretive to profitability if we were to do something like that. So, while you might see a nice step function in our total go-to-market presence, it would only be done in the way where we actually be delivering more cash flow and profitability in the process.

[Walter Pritchard:]

Great, thank you.

[Paul Auvil:]

Thanks.

[Operator:]

Thank you. We moved to Matthew Niknam with Goldman Sachs.

[Matthew Niknam:]

Hey, guys. Thank you for taking the question. Just one on the competitive landscape, if you could just give us an update just in light of some of the strength in share gains, you continue to see in recent quarters, any uptick you can give us what you are seeing in terms of core e-mail protection in terms of share shifts or maybe a little more of an uptick in competitive activity from any of your peers? Thanks.

[Gary Steele:]

Yes, that’s a short answer. We have seen no change in the competitive landscape. I mean, literally we have benefited from an incumbent base that has not been investing in its market and we haven’t seen that change. And that clearly gives us confidence as we think about 2015 in the core protection world. Obviously, there is lots of investment happening in the advanced threat space. And what has helped Proofpoint specifically is more well-differentiated by focused – by focusing on these advanced threats coming through e-mail and taking any unique approach with the cloud and big data analytics to be able to protect those and then adding capabilities rather like threat response. So, I think that there hasn’t been a fundamental shift in that overall threat landscape and in the core protection world it just feels exactly the same.

[Matthew Niknam:]

And so is it safe to assume the outlook in that sort of status quo on that front?

[Gary Steele:]

Yeah, I think that’s safe to assume. Our view is that we don’t see anything that would be a catalyst for changing that competitive outlook over the next 12 months.

[Matthew Niknam:]

Okay, thank you.

[Gary Steele:]

Thanks.

[Operator:]

Thank you. We move to Gray Powell with Wells Fargo.

[Gray Powell:]

Great, thanks for taking the questions. Just a couple here. I may have missed this earlier in the prepared remarks, could you breakout TAP as a percentage of revenue and then can you talk about pricing your TAP solution and how it compares to appliance-based solutions from the likes of FireEye or Palo Alto and maybe not on a per seat basis, but for like for broader organization? And then just what types of considerations to customers take into account on that product and basically what do you win? Thanks.

[Gary Steele:]

Sure. So, TAP as a percentage of revenue, we didn’t break that out separately. The only stat we did provide is that we have got on the order of 500 accounts that now use it. And when we say using what we mean by paying for it. So, we actually have quite a few others that are in eve-out right now that we don’t [indiscernible] in the number. So, that is much granularity as we feel it’s appropriate to provide at this point, but it was a meaningful catalyst through driving growth last year. That’s for sure and we do expect it to be a contributor than this year. As we look at pricing for the products, the pricing is very different between our approach into clients based model and it’s one of the things that we think is helping create a tailwind for our business, because with the cloud-based infrastructure, one simple advantage is you don’t have to deploy anything in your datacenters, so you can get it up and running literally overnight by just simply steering your e-mail traffic to our cloud. So, that’s a huge plus for us. It also then allows me do in a very simple way evaluate the capabilities literally just in the handful of days and see exactly what benefits it can provide, but along with that comes a cost advantage and that we are not making to buy boxes or perpetual licenses upfront, so we will do that e-mail for free for a handful of days or a week or two and then again you can either 1, 2 or 3 years of the service all paid in advance. And so for customers that maybe are not sure of what their long-term strategy is for dealing with advanced threat and maybe that 2-week eve out didn’t totally convince them they want to be a 3-year user of the product. We are fine with that, because we know it will demonstrate its value day-in, day-out. So, we will do a 1 year deal and that 1 year deal pricing is dramatically less than you pay for a system that you would install by boxes and put in place. And so the customers like the fact that initial check is smaller and the fact that they feel that degree of flexibility if they would change their mind because they didn’t like such a big check. But we have already seen on the people coming around that horn for the first set of renewals is TAP has the renewal rates, its actually well in excess of our average renewal rate, which is very compelling, because with its dashboards, you can see literally every day everything is blocked, everything it saved you from, I mean its literally the dashboard day-in, day-out sell it. So, in the long run as a customer you probably pay in total about the same as you might for an on-premise solution depending on how that ultimately was priced. But in the short run it’s a cheaper solution and an easier bite of the apple for our customer, so it’s a win-win for everyone.

[Paul Auvil:]

And then graining the context why we win. Our typical selling strategy is we run evals and our win rate with evals is really high. And the core thing that customers are looking for is effectiveness, so our ability to detect advanced malware which we do a phenomenal job on. And that’s what drives that. And I think the other things that customers experience when they go through that eval process is that they see not only effectiveness, but they see our ability to operate on and off the corporate network. And that is something that if you an applied datacenter you can’t do. So you are out in the Starbucks you are going to be protected using TAP. So if you get a fish based or fish oriented message and you are clicking on the link, we are going to protect you no matter where you are, that has huge value today. We give you indivisibility [ph], so we will show you the whole attack chain, we will show you who the actors and give you a lot of forensic information that is critical for organizations to understand who is attacking them. And we provide just this broader set of capabilities today that customers are looking for. So it all gets learned from an e-mail and we prove out those key advantages once we have installed and get someone looking at the product.

[Gray Powell:]

Understood, that’s really helpful. Thank you very much.

[Operator:]

Thank you. We move to Aaron Schwartz with Macquarie.

[Aaron Schwartz:]

Good afternoon. Just one quick question from me. When we look at the deferred in the billings, I think Rob alluded to this earlier, but even moving around that early renewal, it’s still extremely strong billings guidance or the deferred contribution there. The question I have is I don’t know if you can help us with what are the economics you are seeing on a renewal today versus maybe 1 or 2 years ago, you are certainly having success with the add-ons, I don’t know if you can help us out with the uplift there? And then secondly on the early renewals, are you seeing magnitude higher in the economics there as well? Thanks.

[Paul Auvil:]

Sure. So, a couple of things. One when we do our renewal rate calculation and talk about churns, we actually look at just the annually recurring revenue value of the deal, it was originally booked and to what degree that dollar value was retained. We do include the benefit of what we uplift against the user accounts, so if it’s 100,000 users at $10 a user a year, you use a math and it’s $1 million. If I uplift that 5% that does get included as a benefit in my churn calculation, but if that 10,000 users that’s not included, that’s separately recorded as our add-on. So, in the context to that, we are seeing good uptake on kind of our standard uplift, but our uplift isn’t huge. So, it depends on where the customer was originally priced versus where we see the market, but uplift can range anywhere from no uplift for small set of customers, where we believe they are at or above market to anywhere from 2% to 4% in many other cases. And I would say the average uplift across all renewals is 2 or 3 percentage points in any given quarter as compared to what they paid in the prior period. So, that’s the uplift dynamics. Now that said, we do see a lot of customers that buy add-on at the time of renewal. TAP is a very positive add-on as is privacy and sometimes archiving, but we don’t really conflate the two, because we run a separate add-on team and the majority – vast majority of add-ons that get done are done outside of the renewal cycle, which we think actually makes perfect sense. And we will eventually co-term all about at some point down the road if it’s not done at the time of that initial deal. So, with all that said, the overall dynamics of the rural business have been strong. Our pricing when we look at 5 and 12 quarter historical averages has come up just slightly over the last several quarters compared to historical norms. And yes, I don’t think it reflects the fact that the market pricing is going to move up dramatically in the near future, but it continues to reaffirm the fact that in the current competitive environment, I think pricing bottomed out probably several years ago now and it just slowly drifts up a little bit over time. And we are happy with those pricing dynamics and we think it’s a very compelling market to somebody that can provide a solution with the caliber of capabilities that we have put into the market.

[Aaron Schwartz:]

Great, thank you.

[Gary Steele:]

Thanks.

[Operator:]

And this concludes today’s question-and-answer session. At this time, I would like to turn the conference back to management for any additional or closing remarks.

[Gary Steele:]

Great, thank you very much. I just want to take a moment and thank everyone for joining us on the call today. We had a great 2014 and we look forward to talking to you in the coming quarters. Thanks so much.

[Operator:]

This does conclude today’s presentation. We thank you for your participation.