During his visit to the Proofpoint HQ in Silicon Valley, SC Magazine editor Paul Fisher met up with Paul Auvil, chief financial officer. Auvil has more than 20 years experience in finance and technology including four years as CFO at VMware. He joined Proofpoint in July 2007.
Paul Fisher: What was the attraction of joining Proofpoint and how is the business doing?
Paul Auvil: When I was looking at businesses a couple of years ago, the most important thing was finding a company that really had a platform for a sustainable business, one you could build a long term public company around.
In Silicon Valley we have hundreds of start-ups, but very few meet that test. I vetted literally dozens of companies before I settled on Proofpoint, because to me, much like VMware, it has this extremely solid foundation entry point into the enterprise.
But with that as a starting point there are all these other very interesting areas where you can add technology and products to broaden your revenue per user footprint.
Equally important, the product line that we have represents a very large, multi-billion dollar opportunity, so even if we never invented another thing, even if we never acquired another company you can easily see Proofpoint becoming a billion dollar company.
Having been here a couple of years, I am pleased to see that that has absolutely been the case. It's a tremendous platform.
It's also important to have a platform where you're solving a constantly evolving and complex problem, so that it won't be commoditised. There are lots of interesting platforms out there but they quickly get commoditised - companies come and go. But in our case the inbound email security threat in particular is just constantly evolving, so it requires constant engineering and development on the part of the supplier in order to maintain a quality filter and if you keep doing that it allows you to keep a high price on the product.
But back to your point about how we are doing. I was wondering as we came into the Fall of last year, how things would play out with the recession. We have a very high renewal rate - a 98 per cent renewal rate.
I was worried that maybe the renewal rate would drop as people faced with tight budgets would just go to some low end, inexpensive solution and figure out that they'd somehow make do with it. What we found is that the renewal rates continued at the same high level, because people intuitively understand that if you go to the cheap product you get what you pay for.
There are costs on the other side over and above the human cost of having to go through all this email that you'd prefer not to oversee, there is also the literally physical costs of having to put more email servers in place, and more storage in place to deal with all this inbound email that you don't want that the filter is no longer screening. It's huge.
Not only is the renewal rate high, but our ability to go out and win and convert customers from their first generation platforms over to ours continues to be equally compelling, and as a result we're looking at a business that, in an extremely tough economy, will grow somewhere between 35 and 50 per cent year on year.
PF: Is that typical of you and your competitors?
PA: It's not, because in all candour, we're growing at the expense of our competitors. The only other company that shows up consistently as an alternative is Cisco IronPort, Postini occasionally on the hosted side and also MessageLabs.
They'll be there to defend to the extent that they're the current incumbent. Symantec will try to defend their position as will McAfee, Microsoft etc. But they don't have the sales team actively engaged in trying to broaden the footprint. Why, I'm not sure. Maybe it's because they inherently understand that their solutions aren't that competitive, and so, trying to retain their current customers is one thing, but spending sales resources to try to expand the footprint knowing that they will have a very low win rate is just not worth the trouble.
Sales people are smart. They won't go and try to sell things they won't win. Since Symantec, McAfee and Microsoft have tremendously long lists of other things to go and sell, the sales guys get the fact that there's no point in selling against Proofpoint on email security. They say: 'We're just going to lose, let's go to the same customers but sell them stuff where we know we can win'.
PF: You said you have had a lot of renewals, what about new business?
PA: Absolutely, yes. In any given quarter about half the business is renewals from the prior year, and half the business is new customers that we're closing. Both in and around email security as well as our newest business, archiving, that we added through our acquisition of Fortiva last year.
PF: Gary Steele, Proofpoint CEO, said that one of the reasons why he's fairly confident is that you've got a strong cash position. Would you want to start an information security company right now though?
PA: No. I wouldn't want to be in a small start-up right now. There are some companies that are series A, series B companies with some very good technology, but it is hopeless to try to get anyone to buy your products right now if you don't have strong reference accounts for prospective customers, if you don't have someone that they can call and can confirm and corroborate that the technology is good. Combine this with the fact that people are increasingly concerned that these small companies aren't going to make it and it's not a good outlook.
It's tough going but it's proving to be an opportunity for us, in that there's a large list of very interesting series A companies with very good technology who are essentially trying to find an outlet, a buyer. So we're pondering that list at this point and trying to decide which of those really have great technology that would be a good addition to our product portfolio.
So, we'll probably do a few acquisitions this year around that. And it is very much a buyers market, because these smaller companies, really can't raise any more money, they have no sales traction, so, they are not bringing any cash in from customers, their only cash comes from the sources of additional financing as they do another round. And the product equity guys have all but stopped funding companies, except for really compelling, unique value propositions - and there aren't many of those.
PF: I heard that a lot of money is being deflected towards the biotech industry and green industries, because they feel that there's potential growth in that, much more than security?
PA: Exactly. VCs have dramatically pulled back the investments that they're making. But, the one's they are making are very much around theories of where government funds will be available and so green technology and biotech seem to be areas where people are playing the Obama thesis. Those are the areas where he's dramatically expanding the Federal budget so it seems like a safe play because there'll at least be some Federal money that will help support that company in its infancy.
The slowdown in funding availability outside of those two categories is not just limited to security companies; I think it is across the board. I don't think you could start a software company or a hardware company that does something to generically improve the performance or manageability of IT infrastructure. I don't think there are funds available right now.
PF: The CEO of nCircle told me that any infosec business with less than $15 million turnover probably won't survive the next few years. What's your take?
PA: That may be a little extreme because it depends on the nature of that company's business model, but I definitely think that companies that are under $10 million to $15 million of turnover definitely face a tough battle because, again, you don't have a big reference customer base. Everybody is pulling in their spending. I think the trickier thing in this environment right now is perhaps less sheer size - although I think if you are more than $50 million or $100 million you're over a certain barrier that gives you critical mass - as long as you're smart about how you manage your company you should be okay.
The bigger issue is for companies that live on a perpetual licence model as opposed to subscription. As we talked about earlier half of our business every quarter, sometimes more depending on the quarter and the renewal base, is essentially already done as long as I can maintain my 98 per cent renewal rate, and then the other half comes from closing new customers.
For companies on a classic perpetual model, 85 to 95 per cent of their business comes from new customers every quarter, because they only have a very small support revenue stream of renewals. Those companies are going to face a very, very difficult road, I think, over the next several quarters, because unless you have a very compelling must-have product line most of your new customer sales are going to dry up.
PF: How does this recession compare, say, with the dotcom bust of 2000?
PA: This is much tougher. And I went through the whole thing in 2000 and saw how that backslide played out and where things were going. But 2000 was very different, because you didn't have this broad weakness in the economy. It was really, mostly a weakness focussed in technology spending and so, while IT budgets contracted dramatically and we all had to adjust accordingly, we knew that the broader demand for products as purchased by end consumers hadn't changed dramatically.
So you could see that you just needed to resize to the new IT demand profile and then look for new markets to expand into, and then slowly grow again as IT budgets grew. Here, you have ongoing contraction of the GDP in every major nation on the planet, with the exception of China, and as a result those contractions continue.
By definition as the GDP continues to shrink, broader economic opportunity for every industry by definition is shrinking along with it. Until we see a plateau being reached or at least a slow down in that rate of decline it's hard to predict exactly when things will finally turn around and pick up. It may sound macabre but the worse things get the tougher it is on all these really interesting companies that I wouldn't mind acquiring.
The further this goes on the more they are on the ropes and the lower the price that I will pay to acquire some of those companies, and so it's a good thing for Proofpoint.
But for the broader overall industry and the economy at large, from all the reading that I do in the papers and trying to keep my own sense for this, the bottom line is there are no indicators that would show that we're near the bottom right now, but it does feel like, if you listen to the chairman of the US Federal Reserve, there's a chance for things to perhaps start to improve late this year, early next year.
All of that said, we're making no plans in terms of how we're staffing and growing the company with any expectation of a turnaround any time soon. We're assuming that these conditions persist indefinitely and are staffing and executing accordingly with the idea that we have a number of plans on the table for how to take advantage of market opportunity when the markets turn around. We'll immediately put those plans into effect as soon as we see what we think are early signs of that recovery.
PF: That is as good an answer as I am going to get from anyone at the moment I think!
PA: Yes! My comment would be anybody who gives you a stronger, more affirmative statement, either in the positive, which is: 'oh, things are turning around next quarter, or at the end of the year', or in the negative, which is: 'oh, this economy is going to be a disaster for years to come', they are kidding themselves, because no one really has that data.
I do strongly believe that this is not going to be a repeat of the equivalent of the Great Depression. I don't think we're in for a four or five year recession. I don't think any of those things are true but whether the recovery is supposed to pick up late this year or we have to push our way well into 2010, that's the real formative question on the table.
PF: For me, the great revelation of this is that the theory that the world was no longer economically coupled to the United States economy has proven to be absolute rubbish.
PA: Indeed. We're completely coupled.
PF: Until the United States economy recovers the rest of the world is not going to recover, and in fact we are more coupled than ever before. I don't even know where this theory came from. It was because of China, I think, they thought that Europe wouldn't somehow suffer if America did. It has completely blown that theory apart.
PA: I agree. But the one thing that has been fascinating to me to watch is that the economy in China, at least for now, continues to grow, albeit at a much reduced pace.
It shows, in my mind, the marked contrast between China and the Japan of the 1980s, where Japan was completely coupled to the United States economy and to some degree, the European economy, and so, as went those economies so went Japan.
When things got even modestly turbulent in those two main markets, Japan cratered and they spent two decades in that crater, and have still really not got back on track, because they have no local demand. It's a country of prolific savers and they are not consumers.
With China, because they have this ongoing modernisation of the population, as people want a cell phone, a bicycle or a motorised bike, it seems like they've got enough indigenous demand for products that while its industries are reeling from a contraction in exports, they're still able to maintain a growth cycle within that economy. It will be interesting to see whether they can see that all the way through to the other side or whether eventually the export shut down even gets to them.
PF: They're big savers as well though, aren't they?
PA: Yeah, but I think they've got a better balance whereas Japan they're fixated on saving. I think China has got the kind of balance that the United States should seek to have, which is responsible saving, responsible spending and credit with intelligent limits. The other thing that is amusing though about this whole decoupling is to see the absolutely poor judgement in the way the United States deregulated its banking industry.
This was then blindly followed by other major economies throughout the world. It's one thing for us to have done to ourselves and for all of us to somehow think we knew better than the people who put the regulations in place decades ago, but it's interesting to see that so many other countries said: 'Oh, they did it, well, we need to do it to be globally competitive, right? Oh, we want London or Frankfurt to rival the rest of the world so we need to do the same deregulation so that our banks can freely lend and compete in the global market'. And so, we all did it to ourselves, and we are all uniformly paying the price accordingly.
PF: Let's end on a positive note. Are there any signs for optimism?
PA: There is some optimism, to see that all of the large world economies are all reacting independently to try to do things to repair the damage, and to each equally take on the burden of creating an affordable stimulus package in order to try to get each independent economy moving.
That gives me some cause for belief that maybe late this year things will finally get to the point of recovery. But I don't think we're suddenly going to see resurgence in growth. Historical recessions for the last several decades have been quick not particularly steep declines and then immediate bounce. The recession has historically lasted for less than a year with very modest negative growth. Half a per cent or one per cent correction of GDP and then you're immediately back in the United States to two or three per cent annual growth.
I think that if we can get it to the point where the growth rate gets to zero per cent and we can hold flat that would be a huge turnaround, which would then get consumers feeling more comfortable. Their spending will come back a little bit and then we'll get back to a more modest positive growth trajectory. I am hopeful that will happen in the next 12 months. We'll see.