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Proofpoint (PFPT) Down 5.4% Since Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Proofpoint, Inc. PFPT. Shares have lost about 5.4% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Proofpoint Q3 Results

Keeping its positive surprise history alive, Proofpoint reported solid results for third-quarter 2017, marking the seventh consecutive quarter of better-than-expected performance for both, the top as well as the bottom line. Also, revenues and earnings both came ahead of the company’s guidance ranges.

Apart from this, Proofpoint witnessed significant year-over-year improvement in revenues and earnings. Buoyed by overwhelming third-quarter results, the company also raised the outlook for 2017.

Quarter in Detail

Proofpoint reported total revenues of $134.3 million, up 34.6% year over year, mainly driven by customer additions, improved add-on-sales and strong renewal rate. The company’s revenues also surpassed the Zacks Consensus Estimate of $132 million as well as came ahead of its guidance range of $130-$132 million.

Total billings during the quarter also jumped 33% year over year to $166.5 million. Renewal rates also remained well over 90% during the third quarter.

Non-GAAP gross profit surged 35.9% from the year-ago quarter to $104.9 million. Moreover, non-GAAP gross margin expanded 100 basis points (bps) to 78%, primarily driven by higher sales and efficiency improvements across the company’s cloud operations.

Total non-GAAP operating expenses grew 37% year over year to $91.6 million. In addition, as a percentage of revenues, it increased to 68.2% from 66.8% in the year-ago quarter. Increased spending on hiring sales personnel mainly escalated operating expenses.

Proofpoint’s non-GAAP operating income for the quarter increased to $13.3 million from $10.5 million reported in the year-ago quarter. However, non-GAAP operating margin contracted 70 basis points to 9.9%, as benefit from higher revenues and improved gross margin were more than offset by increased operating expenses as a percentage of sales.

Non-GAAP net income increased to $13 million from $9.4 million reported in the prior-year quarter. It also came ahead of the company’s guidance range of $8.0-$9.0 million.

On a per share basis, the company reported non-GAAP earnings of 25 cents, marking a year-over-year jump of 31.6%. Quarterly earnings also came ahead of the Zacks Consensus Estimate of 18 cents as well as the company’s guidance range of 16-18 cents per share.

Balance Sheet & Cash Flow

Proofpoint exited the quarter with cash and cash equivalents, and short-term investments of approximately $459.6 million, up from the previous quarter balance of $429.5 million. Accounts receivable were $91.5 million compared with $75.6 million at the end of second-quarter 2017.

During the first three quarters of 2017, the company generated operating cash flow of $111.2 million. Free cash flow for the first three quarters came in at $76.4 million.

Outlook

Buoyed by better-than-expected third-quarter results, Proofpoint provided encouraging outlook for the fourth quarter and raised its guidance for the current year. For 2017, the company now anticipates revenues in the range of $508-$510 million, up from the earlier guidance range of $503-$506 million.

Billings’ guidance for the year has also been revised upward and is now anticipated to come between $630 million and $632 million. Earlier, it was projected to remain in the range of $625-$628 million.

Similarly, non-GAAP earnings per share are now estimated to come between 73 cents and 75 cents, up from the previous guidance range of 62-64 cents.

However, the company has revised the free cash flow estimate downward. Free cash flow for the year is now projected to be in the range of $101.5-$103.5 million (mid-point $102.5 million), down from the earlier projection of $100-$107 million (mid-point $103.5 million). The company intends to incur capital expenditure of approximately $48 million in 2017.

Coming to the fourth-quarter outlook, the company anticipates reporting revenues in the range of $138-140 million, and billings between $182 million and $182 million.

GAAP and non-GAAP gross margins are estimated to be 72% and 77.5%, respectively. Non-GAAP net income is projected to be in the range of $9.5-$10.5 million, or 19-21 cents per share.

Free cash flow is projected to be in the range of $25-$27 million, while capital expenditure will likely be approximately $13 million during the fourth quarter.

The company also initiated outlook for 2018. For the next year, it expects reporting revenues in the range of $644-$648 million (mid-point $646 million). Billings are projected to be in between $798 million and $802 million.

Non-GAAP earnings per share is anticipated to come in the range of 96 cents to $1.03 (mid-point 99.5 cents).

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter. While looking back an additional 30 days, we can see even more upward momentum. There have been three moves up in the last two months.

Proofpoint, Inc. Price and Consensus

VGM Scores

At this time, Proofpoint's stock has a great Growth Score of A, though it is lagging a bit on the momentum front with a B. The stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for growth investors than momentum investors.

Outlook

While estimates have been broadly trending upward for the stock, the magnitude of these revisions has been net zero. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.


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