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CLOUD-BASED PROVIDER OF ENTERPRISE
IPO BRIEF – MAY 10, 2012 SUMMARY
Proofpoint provides an information security suite centered around secure email firstname.lastname@example.org with additional functions for email management, compliance and governance. +1-617-934-1877 They deliver their solution in the cloud using a SaaS implementation and business model. The market is well established and filled with many competitors including Cisco, Symantec, Microsoft, Google and Intel/McAfee. Proofpoint has a strong offering in terms of the quality of their spam and malware protection, their management interface and SaaS-based deployment. Because the company is small relative to their customers and market opportunity they will have to “punch above their weight” consistently to win. The shares at current prices already reflect years of success and are slightly above our own intrinsic valuation of $12.50 for 2013. We like the product, strategy and management but current valuation doesn’t leave much room for reward. So far information security IPO names have done well and we expect Palo Alto Networks and AVAST to be coming soon as well. Palo Alto appears to be very well positioned in the enterprise space and more able to take on some of the existing giants there. Their IPO is also likely to be priced high so we will have to wait and see if it is an investment opportunity.
POSITIVES, NEUTRALS AND NEGATIVES
Good market: Corporations have been stung badly in the last year or two by inadequate data security and spending levels in the area have ratcheted up. All indications are that elevated spending is sustainable – due in no small part to the ongoing exertions of the global online crime world. Information security is a large and growing market of about $5B today and it’s growing 2x the general level of IT spending. Favorable structure: The cloud/SaaS model has numerous advantages for both Proofpoint and their clients. It gives management good visibility on revenue and clients get a better implementation that is easier to update and manage. These are critical in information security since risks, regulations and technology all change frequently. Large customers: By adding additional components to their product and having large customers Proofpoint may be able to grow more easily as existing customers contribute more to growth. This should also enable the company to lower their sales and marketing costs over time. Solid Position: Security is one area where it is difficult to compromise for the same of convenience, cost or for vendor consolidation. It doesn’t remove these risks from the Proofpoint business but it makes them manageable. Strong management: Proofpoint was founded by Eric Hahn. We had some overlap with when he was at Netscape running the enterprise software business. It was an impossible job but he did as well as anyone could have. Generally our impression is positive. Gary Steele was brought in to run the company though and his background includes Sybase, Sun Microsystems and HP so should know the way to scale. The CFO, Paul Auvil has a background in technical software from his prior roles at both VMWare and Vitria Software. IP Matters: Proofpoint has patents and IP but recently we have seen that long-standing innovation areas including security may be open to attack from any quarter. SaaS <> Magic: The SaaS business model has many benefits but investors tend to become complacent in terms of stock volatility. Revenue estimates may be fairly fixed but changes in the quarterly booking numbers can still have an outsized impact on share price. Mobile Lacking: Mobile is an area of opportunity that we have yet to see the company address. We think post-IPO the management team might consider expanding into, potentially via acquisition. There are many 1 May 10, 2012
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Proofpoint IPO Preview
Patience required: PFPT won’t be profitable for some time and the IPO proceeds may not be enough fund their growth through to consistently positive cash flow. In addition to our standard IV model we’ve included our infosec ecosystem and a few selected company descriptions that may help those less familiar with the sector. which is based on company results in 2017. As Proofpoint develops and demonstrates consistent increases in gross and operating margin their multiple may improve. For example we don’t have Proofpoint reaching quite reaching their target model in 2017. There is also a little “room” in terms of gross margin in later years depending on revenue mix and how international expansion impacts the model. We know through our work with StrikeForce Technology that mobile-based out-of-band authentication is one area that is going strong and another avenue to penetrate the enterprise. So far the company has done very well as a “pure” provider but will need to fend off the large players and new cloud-based entrants.candidates to chose from.” Competitive market: Information security is an intense and high stakes game. A mere glance at the ecosystem illustrates huge variations in margins and multiples. As long as things go well this shouldn’t be an issue for if the company runs into difficulty they don’t have much if any “cushion. EMC/RSA can recover but a smaller company would have a hard time. Valuation: As noted the shares are already trading above our 2013 IV. It’s not impossible but based on what is known now it’s improbable. Information security is a hard problem but cloud software lowers barriers to entry. Competition may spring up with short notice if an opportunity presents itself and create some havoc in the market. So we’d suggest that investors look for better entry points. 2012 . One sneeze away: We’ve noted that information security is the “problem that never sleeps” which acts as a strong incentive to buy solutions from firms like Proofpoint. At the same time a misstep as we saw with the hacking of RSA tokens can basically put a solution out to pasture. Proofpoint IPO Note 2 May 10. We expect sales and marketing costs to come down but at a slower rate than investors may be expecting.and mid-capitalization group. especially in the small. Valuation Our model is fair but differs in one important way from company guidance.
8 8.9 62.7 93.7 35.6% 57.0% $27.47 -4% Intrinsic Value Up/Downside $61 $0 35% 40 15% Cash Debt Tax Rate P/E Multiple Discount Rate 1% $390 Avg.6% $181.73 29 -$18 -$108 $7 -$102 -$3.1 78.2% $19.0 53.4 35% -$34 -32.ProofPoint PFPT 9-May-12 Dec YE Subscription Hardware YoY Change $ Total Revenue YoY Growth COGS % COGS $ Gross Profit Gross Margin S&M% S&M$ R&D% R&D$ G&A% G&A$ Operating Expenses % Operating Expenses $ Operating Margin Operating Income Taxes Tax Rate Net Income Net Margin Market Value Using P/E Cash Position Shares (M) Period Share Price PV of MV 4 Years Out PV of Cash 4 Years Out PV MV + Cash PV Value Per Share 29 -$17 -$234 $10 -$224 -$7.0 17.7 -24.0% $30.8% $157.0% $136.3% $11.2 11.7 $52.0% $11.8 $110. Dilution Cap (M) PFPT Nasdaq 23% $13.0% $83.7% 52.2 68.9 71.0% 51.4% $22.6 0.4% $24 $8.5% -$1.0% 47.0% $0 $0.2% $31.0% 42.2% $17.0% -$20 -$6.4% 44.2 87.6 35% -$5 -2.0% $68.8% 34.0% $51.2% 31.0% $35.5% $45.2% $28.0% $110.2 55.57 21.6 $36.1 $205.5% -$7 -$2.7% $71.50 46.2 -12.9 24.3 -50.5 $86.6 11.6% $7.00 30 Ticker Exchange Rev Growth Current Price Shares Out Proofpoint IPO Note 3 May 10.5 66.6 9.3% $29.47 2014 $150 $12 $31 $162 23.4 72.5 35% -$10 -7.6% -$510 $61 30 -$17 $0 $7 $7 $0.0% 44.5 10.0% $72.23 2012 $96 $9 $23 $105 28.55 23.0% $56.0% $17.1% -$20 -$7.0% -$16 -$5.8 35% -$13 -25.0% $84.0% $96.3 19.0% $61.3% 36.5% $117.7% 32.0% -$53 -$18.8 9.5% $633 $34 32 $20 $12.6% $24.9 4.4% 36.2 16.5 35% $7 2.5% $15.0% $40.8% 48. 2012 .0 $168.2 27.2% 30.9 35% -$13 -15.4 -39.9% -$19 -$6.2 18.7 24.5 87.8% 29.0% $102.4 $136.8% $21.9% -$190 $12 31 -$6 2015 $185 $13 $36 $198 22.6 69.0 70.5 35% $16 5.2% $10 $3.0 35% $0 0.3 -31.1 65.29 2013 $120 $11 $26 $131 24.0% $61.8 11.0% 38.5 $26.0% $53.8 11.5 8.1 63.0% $24.7% $5.366 $27 30 -$45 $150 $11 $160 $5.9% -$503 $49 2009 $42 $6 2010 $58 $7 $16 $65 33.5 -4.0% $71.3 $36.7% $262 $18 32 $8 2017 $275 $15 $50 $290 20.0% 40.0% $0 $12 31 $0 2016 $226 $14 $42 $240 21.2% $42.8 69.8% -$409 $17 31 -$13 $362 $20 $382 $12.6 85.2% $9.4 8.0% $89.5% $27.1 35% -$13 -20.0% $44.0% $46.0% $13.2% -$524 2011 $74 $8 $17 $82 26.
3% 15.860 213.2% 19.8% 31. Splunk.458 3. Intersections Inc.87 $18.09 TEV 736 712 626 403 294 221 194 187 153 124 65 35 10 7 LTM Rev 83 365 125 82 205 107 373 164 39 36 102 22 0 4 EMERGING PUBLIC COMPANIES Avast Palo Alto Networks Segment Ticker TBD TBD Price 1 year change 3 month change TEV LTM Rev LTM Growth Gross Margin Oper Margin TEV / Revenue Proofpoint IPO Note 4 May 10.3 TEV / Revenue 1.2% 22.4 3.200 LTM Rev 106.0% na -15.4% 38.3% 76.1% Oper Margin -13.4% 2. Average Slug Network Security.705 5.6% 37.4% 73.86 $26.4% 33.3% 64.7% 6.1% 13.7% 17.9% 12.449 1.380 796 2.76 $43.5 1.1 0.305 4.2 2.8% 94.0 TEV / Revenue 8.279 LTM Growth 5.SoundView InfoSec Ecosystem 10-May-12 LARGER CAPITALIZATION IBM Microsoft Corporation Intel Corporation Oracle Corporation Cisco Systems.0% na 93.980 45.91 $0.V.9% 6. VirnetX Holding Corp INSIDE Secure Sourcefire.5 1.1% 3 month change 5% 0% 1% -6% -15% 1% 9% -2% -13% -5% -2.8% Oper Margin 15.44 $78.323 1.5% 3 month change -22% 10% 34% -7% 17% na -1% -8% 25% na 53% -4% 9. Inc.4% TEV 251. AVG Technologies N.2% Oper Margin 7.10 $26.011 2.3% -2.144 14. LogMeIn.05 $26.69 $7.740 2.08 $9.0% Gross Margin 79.1% 24.4% 44.6% 18.34 $1.3 2.9% 77. Management Anti Virus & Management Tools Network Security.5% na -54.2% 36.5% -0.36 $72.8 7.20 1 year change 19% 20% 16% -23% -5% -3% -5% 8% -20% -2% 0.0% 23.0% 32.1% 73.8% 57.4% 8.8% 12. Proofpoint. BIO-key International Inc. Inc.3% 83.5 2.565 123. Firewalls Internet Security Authentication Threat Management Network Management Logfile Analysis & Alerts Private Cloud Security Ticker JNPR VRSN GTO FTNT SWI SPLK NSR Price $17.23 $15.2% 89.3 1.8 2.8% 81.730 1. 2012 .7% 25. The KEYW Holding Corporation Guidance Software.0 3.82 $1.8 24.2 7.5% 88.3% 15.6% LTM Growth 37.0 4.635 5. Inc. Inc.7 7.68 $11.6% 0.1% -2.4 2.9 1. VASCO Zix Corporation Wave Systems Corp.1 4.6% -9.0 3.0% 1 year change na -25% -23% na -18% 15% -21% -34% -19% -53% 82% -23% -53% -35% -17.8% 10.7% -24. Inc.4 8.9% 91.6 14. Internet Security FIRE AVG SMALL CAPITALIZTION Imperva Inc.982 73. NeuStar.0% 1.3% 60.16 $14.7% 15.73 $12.1% Gross Margin 46.6 21.5% 76.5% 78.1 1.8% 4.8% 70.60 $32. GlobalSCAPE. VeriSign.7% 5.6 6.3% 81.4% 1 year change -54% 13% 64% 3% 83% na 32% -7% 27% na 117% na 31. Inc. Encryption Virtual Desktop Access Network Security.90 $7.1% 63.6% 91. Inc. Inc.9 2.8% 31.6 8.04 $8.6% -29.4% 77.9% 77.1% 5.84 $16.3% 25.4% 18. Firewalls Authentication.7% 8.4% 36.4% na 27. Websense.7% 86.51 $1.2% 3.66 TEV 7.7% 29. Trend Micro Inc.4% 17.0% 11.0 5.6% 24.2% 17. CA Technologies Symantec Corporation Check Point Software Average Slug Secure IT Solutions Security Software Anti Virus (McAfee) Identity Management Network Security.446 10.21 $52.8% 1.9% 85. SolarWinds.2% TEV / Revenue 2.479 217 1. StrikeForce Technologies.1% 18. Inc.9% 72.7% 12.7% 72. Average Slug Database Security (DLP) Web traffic monitoring Remote Desktop Access Email security & management Security Development & Services Investigation SW and Tools Consumer Security & Privacy Authentication Secure email Authentication (Hardware) Internet Security File Encryption Authentication (OOB) Authentication (Fingerprint) Ticker IMPV WBSN LOGM PFPT KEYW GUID INTX VDSI ZIXI WAVX TCX GSB SFOR BKYI Price $34.3% 13.612 458 215 121 674 1.3% 88.1% 68.494 2.9 4.5% 82.65 $32.183 3.2% 26. EMC Corporation Citrix Systems.8% 33.626 3.3% 6.058 36.031 54. Inc.7% 62.8% 3 month change 6% 7% -18% na 17% -19% -8% -19% -10% -38% 96% 12% -21% 13% 1. Inc. Inc.2% 26.1% 5.8% 94.82 $28.6 1.7% Gross Margin 64.42 $34.76 $40.1% 7.9 3.1% 10.55 $54.8% 61.0% 90.4% 61.4 2.2 2. Inc.9 na 1.43 $30.1% 95. Tucows Inc.210 0 151 181 272 Security Software TSE:4704 Information Security IP VHC Security Hardware (NFC) ENXTPA:INSD Network Security Anti Virus.49 $27.375 11.1% 13.38 $2.70 $23.4% 31.9% 17.01 $0.105 54.407 130.566 20.036 LTM Rev 4. Gemalto NV Fortinet Inc.5% 72.756 10. Inc.9% 7.1% 20.07 $30.754 6.636 69.4 0.2 MID CAPITALIZATION Juniper Networks.0% 13.3% 16.1 3.9% LTM Growth 2. Firewalls Ticker IBM MSFT INTC ORCL CSCO EMC CTXS CA SYMC CHKP Price $201.
was founded in 2000 and is headquartered in Sunnyvale. (FTNT). which provide secure DNS caching. and mobile devices. and government entities worldwide. and harnesses machine data generated by physical. an application to inspect communications between 1 Descriptions from S&P CapitalIQ Proofpoint IPO Note 5 May 10. The company’s network security products include Sourcefire appliances for detecting. and Sourcefire Defense Center that provides application programming interfaces to interoperate third-party systems. In addition. VirnetX Holding Corporation (VHC) engages in developing and commercializing software and technology solutions for securing real-time communications over the Internet. The company focuses on commercializing its technology to original equipment manufacturers within the IP-telephony. and block malware outbreaks. and augmentation for administration and development. media. a secure wireless access points. intrusion prevention. smart phones. Sourcefire NGIPS to discover the characteristics and vulnerabilities of computing devices communicating on a network. California. Its software and technology solutions. eReaders. a security for Web-based applications. Splunk. providing a range of security and networking functions. a product that reduces cached internet content. energy and utilities. which enables end-customers to manage the system configuration and security functions of multiple FortiGate devices from a centralized console. California. it provides FortiAP. FortiScan. telecommunications. a software product that provides endpoint security for desktops. an appliances to ensure network availability. and Splunk Storm. and manufacturing. indexes. which decrypts SSL traffic for inspection by network security appliances. upgrade. security and compliance. Inc. retail. financial services and insurance. provides network security solutions to enterprises. and Sourcefire SSL Appliance. VirnetX Holding Corporation was founded in 2005 and is headquartered in Scotts Valley. application management. together with its subsidiaries. FortiClient. antivirus. cloud. California. Web filtering. an appliances. and enterprise applications. and unified communications markets. virtual or in the cloud IT infrastructure. a scalable secure authentication for enterprise networks. The company also offers a family of FortiManager product. virtual private network. and Ethernet switches. Sourcefire IPS to examine network packets for threats. blocking. fixed-mobile convergence. and other technologies. healthcare. 2012 . It also offers FireAMP. patch management systems. service providers. (SPLK) provides software solutions that provide real-time operational intelligence. education. a product that offers database-specific security. vulnerability management. understand. financial services. retail. It offers Splunk. the company provides Sourcefire Virtual Appliance. facilitate secure communications and create a secure environment for real-time communication applications. a product that optimizes the availability and performance of mobile. trouble ticketing. The company serves cloud and online services. Sourcefire NGIPS with Application Control to provide granular control of applications. a malware protection solution that uses data analytics to discover. FortiBridge. FortiDB. In addition. such as implementation. an engine that collects. Sourcefire NGFW that includes application control and firewall capabilities. In addition. including telecommunications. such as firewalls. and FortiAnalyzer product that enables collection. The company also provides services. education. and video conferencing. such as instant messaging. and Microsoft. and analyzing network traffic. routers. antispam. a cloud version of Splunk to analyze cloud based applications. deployment workshop. which include secure domain name registry and GABRIEL Connection Technology. The company offers its products and services directly to distributors. business analytics. a family of messaging security appliances. such as firewall. Inc. Inc. FortiBalancer. technology. FortiMail. and WAN acceleration. cloud. system health optimization and best practices review. analysis. Fortinet. FortiSwitch. and archiving of content and log data generated by its products. log management. FortiWeb.SELECTED RELATED COMPANY DESCRIPTIONS1 Fortinet. its solutions include operational intelligence. mobility. and FortiDNS. who sell to end-customers in various industries. was founded in 2005 and is based in San Francisco. government. Sourcefire. security information event management. laptops. application control. IT operations management. FortiCache. healthcare. government. Inc. FortiAuthenticator. Splunk. and travel and leisure industries. It primarily offers Unified Threat Management (UTM) solution that consists of FortiGate physical and virtual appliance products. manufacturing. voice over Internet protocol. technology. (FIRE) provides intelligent Cybersecurity technologies to commercial enterprises and government agencies worldwide. Inc. wireless controller.
automates enforcement of policies for datain-motion to authorized recipients. The company provides its products and services to a range of customers worldwide. employee error. It also provides Data Security Suite. the company offers TRITON Enterprise solutions. legal liability. defense contractors. 2012 . Further. The company’s SecureSphere is an integrated. technical and critical support. protect against hackers and malicious insiders. and local government agencies. and hospitals. email. California. modular suite. and audits and reports the distribution and use of confidential data. content delivery optimization. including spreadsheets. network attached storage. an integrated data security solution that discovers and identifies data stored on a networkconnected devices. health care providers. emails. and address and streamline regulatory compliance. and distributed denial of service-attack prevention that deliver on-demand Web application security. which provides central management. email. and education and certification services. and storage area network devices. In addition. Inc. Sourcefire. and cloud security solutions include security scanning and content classification. as well as national. state. was founded in 2001 and is headquartered in Columbia. engages in the development. The company serves financial institutions. offers its products and services to organizations. professional. California. formerly known as WebCohort Inc. such as file servers. malware attacks. and PDFs containing high-value business data stored by customers in unstructured repositories. Its Web security solution scans Web sites. and malfeasance and external threats comprise theft by undetected malicious code embedded in the network. monitors and prevents sensitive data from unauthorized distribution. IT companies. sales.. public. technology and telecommunication companies. Inc. an open-source project that addresses threat detection and protection. email security solution filters spam. event analysis.different virtual machines. telecommunication companies. Inc. insurers. The company. including Web. and original equipment manufacturers. an open source anti-malware product. and support of data security solutions that provide visibility and control over high value business data across critical systems within the data center. and local government agencies. and retailers. service. and Web application firewall product that protects Web applications from large scale cyber attacks and adapts to evolving threats to prevent data breaches. and productivity loss worldwide. and Razorback. including banks. Sourcefire Virtual Defense Center. and professional services. was founded in 2002 and is headquartered in Redwood Shores. government agencies. which offers database security products. it provides customer support. marketing. and combined security gateways with or without integrated data loss prevention with software-as-a-service solutions. data security solution protects against the loss of confidential information and data due to internal threats consist of inadequate business process controls. Imperva’s solutions secure business data across various systems in data centers. Proofpoint IPO Note 6 May 10. as well as private. word processing documents. and data security solutions to protect an organization’s data and users from cyber-threats. and other contents to identify new threats. Inc. It offers SecureSphere Data Security Suite. presentation slides. (IMPV). ClamAV. together with its subsidiaries. and hybrid cloud computing environments. which are designed to secure high-value business data in structured repositories in the data center. malicious links. and stand-alone enterprise data security solutions. a traffic inspection engine used in intrusion prevention system. as well as the United States and other national. and malware from inbound email. Websense. inappropriate images. (WBSN) provides Web. Snort. state. Websense-optimized appliances for mid-sized and enterprise-class organizations. and unauthorized copying of highly sensitive files to USB devices and other portable media. information leaks. Web filtering solutions. a solution designed to prioritize and mitigate risks to high-value business data. including traditional on-premise data centers. The company offers content security solutions. Imperva. Maryland. Its solutions also include cloud-based security services consisting of Web application firewall services. retailers. Websense. The company was founded in 1994 and is headquartered in San Diego. and reporting services. and educational institutions through a network of distributors. file security products that are designed to secure files. value-added resellers.
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