Three Components To Drive Proofpoint's (PFPT) Q3 Earnings

Proofpoint, Inc. (NASDAQ:PFPT) is scheduled to report third-quarter 2017 results on Oct 19.

We believe increased migration to Microsoft’s (NASDAQ:MSFT) Office 365, healthy cybersecurity market and high renewal rates will likely drive the company’s overall third-quarter results.

Let’s discuss them one by one.

Migration to Office 365

As more and more enterprises are migrating to cloud, demand for better cyber-security measures is on the rise. For the last few quarters, Proofpoint has been witnessing strong demand for its cyber-security suites by enterprises which are transitioning to cloud, particularly to Office 365.

Per the company, customers are looking for additional security capabilities that “complement and enhance the baseline solutions provided by Microsoft.” During the second quarter, a number of enterprises, which migrated to Office 365, bought the company’s security suits that also included a significant number of Fortune 500 enterprises.

We expect the momentum to continue in the to-be-reported quarter as well, thereby boosting its Protection and Advanced Threat segment’s top-line performance. The Zacks Consensus Estimate for revenues for the segment is pegged at $97 million.

Healthy Cybersecurity Market

We believe Proofpoint will continue to benefit from the increasing demand for cyber-security solutions, thanks to a number of cyber attacks across the globe in the last few months. It should be noted that the current year has witnessed massive cyber attacks, so far, including the two ransomware attacks — WannaCrypt or WannaCry in May, Petya in June, and one major data breach at Equifax (NYSE:EFX) which was reported last month.

All these have increased the demand for security-related products among enterprises and governments across the world. Per a latest research report from Gartner (NYSE:IT) , worldwide cybersecurity spending is likely to witness year-over-year growth of 7% this year and reach $86.4 billion.

We believe the upswing in the overall cyber-security market bodes well for Proofpoint as it will bring in new customers, thereby boosting its top-line performance.

High Renewal Rates

The company maintains a high renewal rate of more than 90% which signifies that it has a better product portfolio and stickier customers. A high renewal rate indicates more predictable revenues and a lesser selling cost.

Proofpoint, Inc. Price and EPS Surprise

Escalating Costs to Remain Overhang on Profitability

Although Proofpoint has witnessed remarkable top-line growth in the past quarters on the back of healthy product demand, sustained focus on launching products and acquisitions, the company has failed to deliver on the bottom line.

It should be noted that Proofpoint has invested heavily to enhance its sales and marketing capabilities, particularly by expanding the company’s sales force to survive in the highly competitive cyber security market. Notably, the company’s expenses escalated approximately three-fold to $461 million in 2016 from $124 million in 2012. This affected Proofpoint’s bottom-line performance.

Since Proofpoint continues to invest in sales and marketing, we anticipate this to remain a drag on the company’s third-quarter bottom-line results with Consensus Estimate of loss of 23 cents.

However, we expect a year-over-year improvement in the bottom-line results, mainly due to higher top-line expectation. In the year-ago quarter, Proofpoint had posted a loss of 27 cents. Furthermore, the third-quarter Consensus Estimate for revenues is pegged at $132 million, representing 32% year-over-year growth.

Currently, Proofpoint carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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