Proofpoint CEO: Cloud-Based Security Software Is Meeting Threats To Major Enterprises

Although shares of security software specialist Proofpoint Inc. (Nasdaq: PFPT) have been essentially flat since its April 19 initial public offering, CEO Gary Steele said Monday the company is confident about its long-term strategy.

"We're one of the younger companies in the security business," he said in a visit to International Business Times in New York. "We are more innovative and able to compete."

The 10-year-old Sunnyvale, Calif.-based company sells its software as a service over the cloud to big enterprises such as Bank of America (NYSE: BAC), as well as agencies including the U.S. Department of Agriculture and the Pentagon. Its top competitors remain the security giants Symantec Corp. (Nasdaq: SYMC), owner of the Norton anti-virus products well-known to consumers, and McAfee, now a unit of Intel (Nasdaq: INTC), the No. 1 chipmaker.

After raising about $82 million in its IPO, Proofpoint most recently reported a second-quarter net loss that widened to $5.5 million, or 21 cents a share, from the year earlier's $4.3 million, or $1.10 a share, as revenue rose 30 percent to $25.9 million and subscription revenue jumped 40 percent to $24.7 million.

Unlike many software companies, including its partner Microsoft (Nasdaq: MSFT), the world's biggest software company, Proofpoint customers pay for their entire package upfront. "Customers sign a one-, two- or three-year contract and pay the whole thing up front," Steele said.

So a key barometer for the company is to watch subscription growth as well as cash flow, which is generating a very large sum that can be spent to develop new security software to meet evolving threats, said Steele, 49. He is the former CEO of Portera Software, acquired by Gores Technology Group in 2002, as well as a former executive with the old Sun Microsystems and Sybase.

Sun is now a part of Oracle (Nasdaq: ORCL), the No. 1 database developer, while Sybase is part of Germany's SAP (NYSE: SAP), Europe's top software developer.

Proofpoint has been designated a member of the security software "magic quadrant" by market researchers Gartner Inc. (NYSE: IT), and Steele acknowledged that could make Proofpoint an attractive target to them, or to its other principal marketing partners, International Business Machines Corp. (NYSE: IBM) and VMware (NYSE: VMW), the virtualization specialist controlled by storage leader EMC Corp. (NYSE: EMC).

"Our total cost of ownership is cheaper" by about 30 to 40 percent, Steele said, one reason why new enterprise customers look at Proofpoint first. He estimated that companies pay between $4 and $15 per user annually for protecting their servers, PCs and, increasingly, handheld devices that transmit or transact corporate data.

Others, headed by IBM, but also including Citrix Systems Inc. (Nasdaq: CTXS) and private LANDesk Software, have also entered the sector and are targeting the so-called BYOD (bring-your-own-device) market.

Because Proofpoint taps the cloud to sell all its services, it can sell its solutions more cheaply, Steele said. Over time, "the cloud has become more accepted as a deployment model."

Besides IBM, Microsoft and VMware, resellers account for about 55 percent of overall sales, the CEO said. About 85 percent of revenue comes from U.S. clients now, so the company plans to open offices in Europe to target multinationals and other enterprises, using some of the IPO cash.

With a payroll around 400, Steele said Proofpoint does most of its research and development at its headquarters in Toronto and in Salt Lake City, where it acquired private NextPage, a specialist in tracking documents, last year.

Research spending will keep rising, Steele said, because cyberthreats are gaining sophistication. To be sure, not a single Proofpoint customer has been successfully cyberattacked or infiltrated, the CEO said.

Steele, meanwhile, declined to predict when Proofpoint will report its first net profit.

Analysts polled by Thomson Reuters expect the company's cash flow to turn positive in the first half of 2013, so that by the second quarter, the net loss will dwindle to only 5.5 cents a share, as revenue rises about 14 percent to $29.5 million. Cash flow by then will be positive, though.

Proofpoint will be watching the threat scenario closely, Steele said. "As threats change, as cyberconditions change, you can be sure we will be fresh with whatever new conditions emerge," he added.

Proofpoint shares fell 2 cents to $13.66 in late Monday trading. They were priced at $13 in the IPO led by Credit Suisse (NYSE: CS) and Deutsche Bank Securities (NYSE: DB).