What's in the Offing for Proofpoint (PFPT) Q1 Earnings?

Proofpoint, Inc. PFPT is slated to release first-quarter 2018 results on Apr 26. The company has witnessed a remarkable streak of beating earnings estimates. In fact, in each of the trailing four quarters, Proofpoint surpassed the Zacks Consensus Estimate, coming up with an average positive earnings surprise of 35.3%.

What the Zacks Model Unveils?

Our proven model does not conclusively show that Proofpoint is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

You can see the complete list of today’s Zacks #1 Rank stocks here.

It should be noted that stocks with a Zacks Rank #4 or 5 (Sell rated) are best avoided, especially when the company is seeing negative estimate revisions.

Proofpoint carries a Zacks Rank #4 (Sell) and has an Earnings ESP of -9.87%, which makes surprise prediction difficult. Furthermore, we noted that the Zacks Consensus Estimate for first-quarter earnings has been revised downward over the past 60 days.

However, the company is likely to continue reporting top and bottom line growth on a year over year basis. Analysts polled by Zacks project revenues of roughly $152 million, up 34.3% from the year-ago quarter.

Nonetheless, the earnings growth rate is likely to slow down in the to-be-reported quarter. The current Zacks Consensus Estimate for the quarter under review is pegged at 16 cents, representing year-over-year growth of 33.3%. Notably, in the fourth quarter of 2017, Proofpoint had registered non-GAAP earnings growth of 61%.

We believe, although increased migration to Microsoft’s MSFT Office 365 and a healthy cybersecurity market will drive the company’s top-line results, escalating expenses might dent profitability.

Proofpoint, Inc. Price and EPS Surprise

Proofpoint, Inc. Price and EPS Surprise | Proofpoint, Inc. Quote

Escalating Costs to Impede Profitability

Proofpoint recorded remarkable top-line growth in the past quarters, driven by healthy product demand, continued focus on product launches and acquisitions. However, the company’s escalating operating expenses continue to impact 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 sales and marketing expenses have recorded more than five-fold jump to $258.8 million in 2017 from $42.7 million in 2011. Also, operating expenses escalated more than six-fold to $441.4 million in 2017 from $71.7 million in 2011. This has impacted Proofpoint’s bottom-line performance.

We expect soaring operating expense to partly mitigate the benefit of stellar revenue growth in the soon-to-be-reported quarter.

Increased Migration to Office 365 to Drive Revenues

As 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 Office 365.

Per the company, customers are looking for additional security capabilities that “complement and enhance the baseline solutions provided by Microsoft.” Throughout last year, 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 anticipate this momentum to have continued into the first quarter as well, the favourable impact of which will likely reflect in the Protection and Advanced Threat segment’s top-line performance. The Zacks Consensus Estimate for revenues for the segment is pegged at $115 million, which reflects a year-over-year jump of 36.9%.

Healthy Cybersecurity Market

We believe Proofpoint will continue to benefit from the increasing demand for cyber-security solutions, thanks to the slew 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 EFX which was reported in September last year.

All these have increased the demand for security-related products among enterprises and governments. Per the latest research report from Gartner 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.

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