Rocket Powered Unicorn
Transcript of Rocket Powered Unicorn
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About Our Unicorn Industry: SaaS (Security) LTM Revenue: $246.7 million Market Cap: $2.9 billion 3.3% from All-Time High Float: $2.8 billion ADV: $36.4 million Short Interest / Float: 13.6% Borrow Availability: GC
The More it Sells, The More it Loses
38.2 48.5 64.8
81.8 106.3
137.9
195.6
246.7
(25.9) (19.7) (20.9) (20.1) (20.4) (27.5)
(64.2) (92.5)
PFPT Revenue and Net Losses 2008 - LTM
Revenue Net Income
But its Multiple Expands
4.78x
3.15x
6.58x
8.92x 8.58x
9.80x
11.77x
3.79x
2.69x
5.51x
7.23x 6.86x 7.75x
9.25x
2H2012 1H2013 2H2013 1H2014 2H2014 1H2015 2H2015
PFPT multiple expansion 2013 - Present TEV/LTM Total Revenue TEV/NTM Total Revenues
What Powers PFPT’s Rocket?
• Mischaracterization as “cyber” security • Management misleading re TAM and organic
growth • Analysts Gone Wild • Failure to acknowledge competitive pressures
that have already led to discounting • Last gasp effort to grab market share before
MSFT, GOOG, AMZN, and CSCO move in
Highlights of Our Research Process
• Nine former employees interviewed – Focus on sales and marketing
• Four large accounts interviewed – Three customers, one went with other vendor
• Got up close real-time look at SME going through PFPT sales process
But it’s Almost Entirely Email Security and Archiving
-‐
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15
Email Security Archiving and Governance
Email CAGR: 45.6% Archiving CAGR: 17.6%
PFPT Email Security Offerings
• “Protection” – anti-spam and anti-malware • “Privacy” – email encryption • “TAP” – Targeted Advanced Protection
Secure Email Gateway revenue (2014) Worldwide Information Security spending (2014)
Why PFPT Doesn’t Like Admitting it’s Just Email
Source: Gartner
$71.1 billion
$1.3 billion
PFPT Loves to Tout Gartner’s “Magic Quadrant” Gartner Magic Quadrant for Secure Email Gateways, June 2015
At first blush it looks good for PFPT
But Here is What Gartner Says • “The SEG market is mature.” • “The SEG revenue from the Magic
Quadrant vendors in 2014 was $1.3 billion…”
• “We anticipate continued, low single-digit growth (2% to 4%) for the overall market.”
Businesses Email Might be Shrinking
Source: Technavio 2015
Estimated Worldwide Average Daily Emails per Business
What is TAP?
• PFPT’s solution for “Targeted Attack Protection” (a subset of “Advance Persistent Threats”) – Criminals often send emails with malicious
attachments or URLs that when opened, allow them to access the network
• TAP goes beyond signature analysis; sandboxes emails and opens and analyzes attachments and links
Q: How Big is the TAP Market?
A: “I think there’s lots of estimates that are, frankly, bullshit.”
- Gary Steel, CEO; Sep 3, 2013
Q: How Big is the APT Security TAM?
“…pull away all the hype of the Advanced Persistent Threat market and the big stupid TAM numbers that are being thrown around today…” (emphasis added)
- Gary Steel, CEO; December 3, 2013
IDC Report
“Boundary covers all types of traffic (e.g., HTML, SMTP, TCP/IP). Most of the boundary solutions consist of security appliances, but some functions will be handled in the cloud.”
Remember Gartner? • “Ancillary services, such as targeted attack
prevention, data loss prevention and encryption, are the main drivers of growth, while traditional spam and virus-filtering subscription costs are flat to slightly down. “ (emphasis added)
• In other words, Gartner factored TAP into its 2% - 4% growth forecasts (off a $1.3 billion SEG revenue base).
Email Not as Much Mindshare as PFPT Says
• Financial services, healthcare, and government put the highest premium on securing email
• For many industries, email isn’t core to their business
TAP Bottom Line • 2013 estimate of $400 million was a
substantial overstatement • 2018 TAM of $2.9 billion is disingenuous. It is
just a slice – probably minority slice – of estimated $1.8 billion boundary
• Boundary is slowest growth segment of Advanced Threats market
• PFPT not even among vendors mentioned in IDC report
• PFPT management consistently represent acquisitions as contributing little revenue
• PFPT disclosed 2013 recognized revenue from acquisitions only $4.3 million
• Those companies generated $44.6 million in 2012, the year before the acquisitions
• PFPT’s annual rev growth from 2012-2014 was $89.3 million
Fudging PFPT’s Organic Growth
Less Can be More When Responding to the SEC
At IPO in 2012 SEC asked for detail on what products actually sell:
"We note that in your business section you list many products, but it is unclear whether they generate any significant amounts of revenue.” (emphasis added) - SEC correspondence, Jan. 10, 2012
PFPT was “unable to specifically attribute revenue”
“the Company’s subscription solution is comprised of many different elements. All customers who have purchased a valid subscription from the Company have the right to, and may at their own discretion, access its security-as-a-service platform and the various services it contains, including those solutions developed to address the new and evolving messaging solutions such as social media and file sharing applications. As a result, the Company is unable to specifically attribute revenue to the individual elements that comprise the Company’s subscription solution.” - SEC correspondence, Jan. 25, 2012
Less Can be More When Responding to the SEC
PFPT very recently found the ability to specifically attribute revenue to products:
“In the past when we first got into a customer we just had a one product sale, typically protection…” - Paul Auvil, CFO, Dec 1, 2015
But Seriously… Analysts seem to be caught in positive feedback loop (or spiral):
1. Recommend PFPT as a Buy 2. Stock goes up 3. Analyst gets praise 4. Analyst gets more bullish 5. Analyst gets more praise 6. Analyst gets Uber Bullish
Examples • “Proofpoint Hits 88mph with Strong 3Q15 Performance;
Raising Target Price to $80” • “Knocking it out the Park! Strong Guidance” • “…the primary concern of Proofpoint investors heading
into the quarter was 2016 guidance, which was answered with a resounding WOW.”
• One analyst’s approach: – 10-year DCF – PT raised to $82 (Nov 2015) from $72 (Sep 2015) – While lowering 2016E FCF by 32%!
Competitive Pressures Already Negatively Impacting Large
Accounts Migration to Cloud Email is not Good for PFPT’s
Market Share
Why Platforms are a Threat
• Platforms (esp. MSFT) have a long record of degrading and destroying businesses
• Because they’re ubiquitous, their cost to develop new features is trivial
• Existing players might have better products, but “Good Enough” often wins the day
• Eroding pricing power: PFPT has been premium priced, but now offering major discounts to large accounts seriously considering competitors – this includes TAP
• Signs of stress: Sales tactics have become very high pressure at times with large accounts
• Competition to continue to close the technology gap
Competition Already a Major Issue
• Offering is much lower cost than PFPT – Exchange Online Protection (EOP) is free with Exchange
• Major accounts stated MSFT offering already good enough for many large enterprises, particularly outside of finance and healthcare
• Major accounts largely felt that shift to Office 365 will give MSFT a big piece of the SEG market
MSFT
GOOG and AMZN PFPT GOOG $5/
month GOOG $10/
month AMZN
Business email addresses ([email protected]) X X X Video and voice calls X X
Integrated online calendars X X X Online text documents, spreadsheets and slides X X
Security and admin controls X X X X
24/7 phone and email support X X X X Unlimited Storage X Audit and reporting X X eDiscovery covering emails, chats, docs and files X X X Easily search and export to different formats X X X Email Archive X X X
Set message retention policies X X X Place and enforce litigation holds on inboxes X X X Anti malware, Antispam X X X X
CSCO
• IronPort just as significant a threat in large accounts as MSFT due to hardware foothold
• Seemingly not as smooth to integrate yet as PFPT
• Also a Top Right MQ SEG vendor
SME – PFPT Possibly Cannibalizing through Essentials
One former inside sales rep expressed frustration that Essentials (much lower priced product) was cannibalizing the primary offering for SMEs.
PFPT’s Ratio Should be MUCH Lower by Now
“And then sales and marketing is currently sitting at about 55%...so we look to drive sales and marketing down to mid-30s over time…we expect in the 3- to 5-year time frame to generate, call it, 20% to 22% on a non-GAAP-to-EBITDA basis and a similar number on free cash flow.” - Paul Auvil, CFO, Nov. 28, 2012
Where’s the Bang for the Buck?
PFPT billing and revenue YoY growth rates in 2015 are in line with those of 2014
Bottom Line
• PFPT’s growth rate is at real risk • Caveat is that next one or two quarters are
unlikely to see tapering, given recent customer adds
Cyber Security Fragile COMPANY 52-WEEK
HIGH OFF FROM HIGH EV/REVENUE
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Fortinet Inc. (NasdaqGS:FTNT) 50.31 -29% 5.6x
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FireEye, Inc. (NasdaqGS:FEYE) 55.33 -60% 5.3x
AVG Technologies N.V. (NYSE:AVG) 29.15 -31% 2.8x
CyberArk Software, Ltd. (NasdaqGS:CYBR) 76.35 -45% 7.4x
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