What's In Store For Proofpoint (PFPT) This Earnings Season?

Proofpoint, Inc. (NASDAQ:PFPT) is slated to release fourth-quarter 2017 results on Feb 6. The question lingering in investors’ minds is whether this cybersecurity firm will be able to post a positive earnings surprise in the to-be-reported quarter. Notably, the company has surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive surprise of 35.4%. So, let’s see how things are shaping up prior to this announcement.

What to Expect?

The current Zacks Consensus Estimate for the quarter under review is pegged at 21 cents, representing year-over-year growth of 16.7%. We note that the Zacks Consensus Estimate remained unchanged over the past 60 days. Additionally, analysts polled by Zacks project revenues of roughly $139.8 million, up 30.9% from the year-ago quarter.

Let’s take a look at the driving factors this quarter.

Increased Migration to Office 365 Driving Security Demand

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 solid demand for its cyber-security suites from enterprises which are transitioning to cloud, particularly to Microsoft's (NASDAQ:MSFT) Office 365.

Per the company, customers are looking for additional security capabilities that “complement and enhance the baseline solutions provided by Microsoft.” During the third 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 this 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 $105 million, which signifies a year-over-year increase of 3.6.4%.

Proofpoint, Inc. Price and EPS Surprise

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 that hit the globe last year. It should be noted that in 2017, the world witnessed two back-to-back ransomware attacks, WannaCrypt or WannaCry in May, Petya in June, followed by the massive data breach at Equifax (NYSE:EFX) which was reported in September last year.

All these have increased the demand for security-related products among enterprises and governments. Per a latest research report from Gartner (NYSE:IT) , worldwide cybersecurity spending is likely to witness year-over-year growth of 8% this year and reach $96.3 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.

Rising Costs to Dent Profitability

Proofpoint has recorded remarkable top-line growth in the past quarters on the back of healthy product demand, continued focus on launching products and acquisitions. However, the company’s escalating operating expenses remain an overhang on its bottom-line results.

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 has affected Proofpoint’s bottom-line performance.

We expect increasing operating expense to partly mitigate the benefit of higher revenue growth in the to-be-reported quarter.

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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