Proofpoint Inc (PFPT) Q4 2018 Earnings Conference Call Transcript

Proofpoint Inc  (PFPT)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the Proofpoint Fourth Quarter 2018 Earnings Results Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Jason Starr, Vice President of Investor Relations. Please go ahead.

Jason Starr -- Vice President, Investor Relations

Thank you. Good afternoon and welcome to Proofpoint's fourth quarter 2018 earnings call. We'll be discussing our results for not only the fourth quarter, but also the full year 2018. Joining me on the call today are Gary Steele, Proofpoint's Chief Executive Officer and Chairman of the Board; and Paul Auvil, Proofpoint's Chief Financial Officer.

Today we'll be discussing the results announced in our press release that was issued after the market closed this afternoon, a copy of which is available on the Investor Relations section of our website. During the course of this call, we will make forward-looking statements regarding future events and future financial performance of the company, which are subject to material risks and uncertainties that could cause actual results to differ materially. We caution you to consider the important risk factors contained in the press release and on this conference call. These risk factors are also more fully detailed under the caption Risk Factors in Proofpoint's filings with the SEC, including our most recent Form 10-Q.

These forward-looking statements are based on assumptions that we believe to be reasonable as of today's date, January 31st, 2019. We undertake no obligation to update these statements as a result of new information or future events. Of note, it is Proofpoint's policy to neither reiterate nor adjust the financial guidance provided on today's call, unless it is also done through a public disclosure, such as a press release or through the filing of a Form 8-K. Additionally, we will present both GAAP and non-GAAP financial measures on today's call. These non-GAAP measures exclude a number of items as set forth in our release. These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing Proofpoint's performance.

A reconciliation of GAAP to non-GAAP measures and a list of the reasons why the company uses these non-GAAP measures are included in today's press release. Also, I would like to remind everyone we have adopted ASC 606 as of January 1, 2018 under the full retrospective method. And as such, all of the comparisons to prior financial periods, discussed on today's earnings call and outlined in today's press release are made in reference to our retrospective financials as revised in accordance with the 606 accounting standard. Please refer to our comments during our first quarter 2018 earnings call on April 26, 2018, as well as our filings with the SEC for greater detail regarding some of the impacts and differences in our reporting under this new accounting standard.

So that said I'll turn the call over to Gary.

Gary Steele -- Chief Executive Officer

Thanks, Jason. I'd like to thank everyone for joining us on the call today. We are very pleased with our fourth quarter results, which closed out yet another strong -- year of strong execution for Proofpoint, both financially and strategically. Our overall business momentum remained strong driven by the continuing demand for our next generation cloud security and compliance platform, the ongoing migration to the cloud and our unique visibility into the rapidly evolving threat landscape.

For the full-year 2018, we beat our guidance on all metrics delivering billings growth of 37%, revenue growth of 38% and an ongoing expansion of our free cash flow margins, which finished the year just shy of 22%, all of which highlight our disciplined execution and steady progress toward achieving the targets for 2020 that we outlined during our Analyst Days in prior years. Beyond these strong operating results throughout the year we continue to invest in expanding our product offerings, while scaling our organizations and infrastructure around the world with an eye toward capturing the significant growth opportunity that lies ahead as the need for a people-centric approach to cybersecurity comes of age.

More specifically to this point as organizations accelerate their migration of applications and workloads to the cloud, we are finding that our people-centric approach to security is clearly resonating with both customers and prospects. While operating in the cloud has many well-known benefits, the move to the cloud also creates an entirely new set of attack factors that threat actors are readily exploiting in their relentless efforts to compromise organizations leaving companies with significant security blind spots, given that traditional on premise security infrastructure by definition cannot meet the challenges posed by this new generation of Cloud systems and infrastructure.

And in this new world of cloud applications and workloads, threat actors are keenly aware that is far easier to target and compromise people as oppose to infrastructure in their efforts to infiltrate a company for financial gain. In fact over 99% of all targeted attacks are designed to drive human interaction in order to achieve their objective, whether it is stealing login credentials, running malicious code, wiring money or exfiltrating sensitive and valuable data.

While the persistent efforts to compromise employees due to delivery of malicious email continues unabated, these efforts are now being bolstered by newly emerging vectors such as cloud account takeovers, internal poster account control, social compromise and weaponized documents delivered to cloud applications and file shares. To deal with these evolving set of challenges, companies need a comprehensive solution to safeguard their employees whenever they interact with content beyond the firewall.

Proofpoint is uniquely positioned to thwart this broad spectrum of emerging threats by combining our excellence in email security and threat intelligence with our broad product suite beyond email, including our browser isolation, our Cloud Access Security Broker solution also referred to as CASB. Our data loss prevention solution also referred to as DOP, our threat remediation solution and our security awareness training which together provide a comprehensive set of defenses to protect employees whenever they interact with content beyond the firewall. Since over 90% of attacks begin with malicious email, this vector remains the most important entry point for an enterprise to secure and given the rapidly changing threat landscape existing legacy solutions are unable to provide enterprises with a sufficiently capable defense due to their lack of focus and innovation.

Defending against this email attack vector has always been Proofpoint's core capability and the insights gained by filtering billions of emails daily provide extraordinary visibility into both the sources and destinations of these targeted attacks, as well as the specific intent of each malicious campaign. This unique vantage point not only serves as the foundation of our exceptional ability to protect customers from email threats, but also enables us to provide each customer with actionable data regarding their most attacked employees and how best to protect them. And since the same attacks that the threat actors attempt to deliver through email are simply repurpose and delivered through these new cloud attack vectors all of the intelligence that we glean from our email filtering system is immediately applied to our broader set of people-centric defenses.

A great example of these capabilities and action is our newly released Proofpoint Attack Index. This new capability is available for customers via our TAP dashboard and help security teams to quickly identify, which of their employees are their very attacked people and as such represent the greatest risk to their organization. This composite view is based on a threat score based on sophistication of threat actor, the type and volume of attacks and the spread and focus of the attack across email and the broader spectrum of cloud venues.

This aggregate set of information can thereby enable security teams to quickly prioritize and take additional steps to ensure that these very attacked people and the assets that they have, the rights to access are fully protected through additional adaptive security controls such as Proofpoints CASB, browser isolation and DOP solutions as well as capabilities delivered through our comprehensive technical integrations with ecosystem partners such as Okta and their identity access management or CyberArk and their privileged access management solutions.

We're also finding that as we share more of this data with our customer security teams we're becoming a more critical partner in their efforts to protect their users from threat actors around the globe and the visibility and insight that our newly released attack index dashboards provide are quite helpful in terms of outlining security risk in a format that a Company's CEO and board of Directors can readily understand. As one Fortune 500 CSO recently noted in a discussion with our team, Email is more than just a defense point. It is a key source of intelligence.

In 2018, we launched a number of new products including Cloud Accounts Defense or CAD, Proofpoint CASB and Internal Mail Defense or IMD, all of which were showing encouraging signs of early interest with our customer base. These solutions were all built using combination of acquired technologies, paired with the existing Proofpoint solutions enabling us to create unique offerings that leverage these combined capabilities. We believe that these solutions are unmatched in the marketplace and are increasingly critical to protecting enterprises from the rapidly changing threat landscape. As we shared on previous calls, we have seen a significant increase in the number of compromised accounts in Office 365 and other cloud applications. These compromises enable threat actors in masquerade as legitimate employees and conduct phishing attacks, spread ransomware and exfiltrate sensitive information by co-opting these legitimate corporate accounts.

As a result of this new method of attack, we developed and launched our CAD solution, which is a subset of our CASB offering, designed to specifically detect and remediate compromised Office 365 accounts. We have seen strong customer interest in both CAD, as well as for CASB offering, which extends this protection to additional cloud venues such as G Suite, Box, Dropbox, salesforce.com and Slack while uniquely applying both our advanced threat and compliance technologies to these new venues providing a set of capabilities that are uniquely differentiated in the marketplace.

Now turning to some of our key operating results during the fourth quarter and for the year. Our suite of advanced threat solutions, including our targeted attack protection are TAP offering, continues to be an important contributor to the growth of the business. And we had a number of noteworthy TAP and Protection wins during the quarter, including a Fortune 100 airline that added Protection, TAP, Threat Response, Internal Mail Defense and Wombat for 80,000 users, a large nonprofit healthcare provider, who purchased Protection and TAP, Threat Response, and Email Fraud Defense or EFD for 70,000 users. At a Fortune 500 financial services firm who purchased Protection & TAP, Threat Response, Privacy and EFD for 22,000 users.

Beyond the broader threat landscape, the ongoing transition to the cloud and the shift in Microsoft Office 365, in particular continues to be a long term catalyst that is helping to drive demand for Proofpoint's full suite of security and compliance solutions, as existing on premise infrastructure by definition cannot meet the challenges of this new generation of cloud systems and infrastructure. Examples of deals won this quarter where we displace legacy on premise security appliances as part of the migration to Office 365, included a large insurance company that purchased Protection & TAP, Threat Response and Privacy for 40,000 users.

A Global 2,000 airline, that purchased Protection & TAP for nearly 30,000 users and the Fortune 500 powered energy company that added Protection & TAP, Threat Response, Privacy and Wombat for 20,000 users. We also continue to effectively demonstrate the strength of Proofpoint's products when compared to the baseline security solutions provided by Microsoft, as part of their Office 365 bundles. Examples of customers who had moved to Office 365 and subsequently decided to upgrade their security capabilities with Proofpoint during the fourth quarter included a Fortune 500 Global food and beverage company, that purchased Protection & TAP, Threat Response, EFD, Cloud Account Defense, Internal Mail Defense and Wombat for 65,000 users. And an International food company based in Europe that purchased Protection & TAP for 5,000 users and a regional cable company that purchased Protection & TAP, Threat Response, Privacy and Wombat for 4,500 users.

Overall, the competitive environment remains favorable and we continue to experience high win rates, coupled with a world class renewal rate that remains above 90%. We are also pleased with the ongoing success of our add-on sales, which contributed nicely to our growth this quarter representing approximately half of all new and add-on annual recurring revenue booked in 2018. Specifically, we were very encouraged by the ongoing strength and demand for our emerging products, which continue to meaningfully outpace the rest of our product portfolio and again contributed to over 30% of the total new and add-on business closed during the quarter led by strong demand for EFD, Threat Response and Wombat.

As we mentioned in the past, these new offerings have expanded our TAM by over $5 billion and are proving to be an excellent source of growth. In fact as a year in 2018, this cohort of products now represents over 20% of our annual recurring revenue under contracts, an important milestone as we extend into new markets. These new products also provide an important competitive advantage as they enable us to holistically depend the enterprise for people based methods of attack across email, cloud and social vectors in a way that is unique in the marketplace. When coupled with the other product innovations, we've introduced since 2012, we have effectively increased our total addressable market from $2 billion to over $12 billion and expanding into new segments of the security market, such as advanced threat, security orchestration automation and response, browser isolation, CASB and security awareness training.

A few to key emerging product wins in Q4 included a non-profit healthcare system, that added Proofpoint CASB for over 130,000 users; a Fortune 500 technical services firm that added Cloud Account Defense for 55,000 users; a Fortune 500 food company that added Proofpoint CASB and Internal Mail Defense for 22,000 users; a global toy production company located in Europe that purchased EFD and Wombat for 20,000 users; and a Fortune 1000 insurance company added Threat Response, Cloud Account Defense and Wombat for over 5,000 users. Our compliance segment recorded another quarter of solid growth driven by three factors, including continued traction with our archiving solution, accelerating momentum for our Wombat, Security, training and Threat simulation products and lastly a nice uptick in demand for our social offerings.

Our pipeline continues to strengthen with several deals converting in the fourth quarter, including a Fortune 100 airline that added archiving for 110,000 users; a Fortune 1000 insurance company that added archiving 5,500 users and a Global 2000 insurance company that added Digital Risk for security and brand protection; and a Fortune 500 investment firm and a Global 2000 investment bank both of which added Digital Risk to enable their respective wealth advisors to meet security compliance requirements in their social selling efforts.

We also remain very excited about our technology partnerships with Palo Alto Networks, CyberArk, Imperva and Splunk and most recently most, Okta. These partnerships continue to help drive our pipeline, expand our market reach and increase overall value to customers. As an update, we have completed our technology integration with Okta, which was released in the third quarter and is another great example of our open approach incorporating best in class solutions to help reinforce our customers' security postures. With this relationship, Proofpoint can identify users that have clicked on a known malicious link through TAPS visibility and then automatically notify Okta to take additional -- to take steps, to increase authentication for the user in question.

We also continue to make progress toward further expansion abroad and are pleased with the quarterly results in our international business, which grew 45% year-over-year and represented 19% of total revenue. Also as we noted last quarter, our growth and sales capacity in Europe has been somewhat slower than anticipated. And while work remains, I am pleased with our progress here. We still have significant hiring ahead as we plan to open new geographies in this region throughout 2019. Notable international deals closed during the quarter included a government entity that purchased protection for 180,000 users; a Global 2000 airline located in Japan that purchased Protection & TAP for nearly 30,000 users; and a Global 2000 conglomerate that purchase Protection & TAP for 20,000 users.

Finally, as we continue to invest our growth opportunity, we're very pleased to have added nearly 600 people to our team around the world over the course of the past year with their total headcount ending at just over 2,600 as of the end of 2018. We plan to continue to invest in scaling our team in 2019 particularly in our market overseas, as we look to capitalize on the emerging demand for people-centric security around the world.

So in summary, we are very pleased with our Q4 results and our strong momentum as we enter 2019. Our unique people-centric approach to cybersecurity and compliance is clearly resonating with customers and prospects alike. And we believe we're well-positioned to further capitalize on our opportunity to gain share in the over $12 billion total addressable market in the coming years.

With that let me turn it over to Paul.

Paul Auvil -- Chief Financial Officer

Thanks, Gary. We were quite pleased with our operating results this quarter, with many thanks to the hard work of our teams all around the world. Revenue totaled $198.5 million, up 35% year-over-year and well above our guidance range of $191 million to $193 million. Note that this outperformance was driven by a number of factors including several million dollars in revenues that were accelerated into the quarter under the ASC 606 accounting methodology that we'd otherwise expected to recognize in 2019, under the guidance that we provided back in October.

As we continue to see some of our largest customers prefer to deploy our solutions as a private cloud in their own data centers rather than in the Proofpoint cloud. Absent this ASC 606 effect, we still would have exceeded the high end of our guidance range by roughly $2.5 million, driven by better than expected linearity in the quarter and an uptick in hardware and services revenue. Note that adjusting for the impacts of our recent acquisitions in conjunction with the impacts of the ASC 606 accounting standard, we estimate that the underlying organic growth rate was approximately 27% for the quarter.

Billings from the fourth quarter were $269.9 million, an increase of 43% year-over-year and above the high end of our guidance range, up $266.5 million to $268.5 million. Note that as expected, our fourth quarter billings represented over 30% of total billings for the year, reflecting a quarter-to-quarter sequential increase of nearly 22% from the preceding quarter. These results not only demonstrate the increasing seasonality we're seeing in this metric as we scale the business, but also the excellent execution by our sales and administrative teams throughout the world during the quarter.

As part of these results, I would also like to note that we did see an improvement in the performance of the ramping members of our sales team in the Americas. But of course, the fourth quarter is always a cyclically strong quarter and hence we feel it is a premature to declare that this issue has been fully resolved. Thus, we will continue to monitor the performance of the newer members of our sales team and continue to invest in the availment of our new hires as we scale the business.

As I explained in detail on our Q1 call, under ASC 606 the derivation of our billings metric now requires adjustments to reflect unbilled accounts receivable activity during the quarter, as well as any right of refund liability. And for Q4 the adjustment related to these two items was an impact negative $1.4 million in aggregate. Our duration remained in the lower half of our target range of 14 to 20 months down modestly from Q3 and continues to underscore the high quality of our free cash flow generation. This trend in terms of duration is further reflected in our deferred revenue balances, which ended the quarter at $598 million, up $73 million sequentially with short-term growing by $49 million and long term increasing by $24 million.

Note that the growth in long term deferred revenues in particular contributed 33% of the overall increase in deferred revenues for this quarter, down from 47% in Q3. During the fourth quarter, our advanced threat segment grew 34% year-over-year and represented 74% revenue. Our compliance segment grew 38% year-over-year and represented 26% of revenue.

Turning to expenses and profitability for the fourth quarter. On a non-GAAP basis, our total gross margin was 79% above our expectations driven primarily by our strong revenue performance. During the fourth quarter, total non-GAAP operating expenses increased 36% over the prior year period to $127.3 million representing 64% of total revenue. In terms of profitability for the quarter, we reported non-GAAP net income of $29.1 million well above our guidance range of $18.5 million to 20.5 million driven by both the revenue outperformance as well as lower than expected spending in both sales and R&D. I would like to highlight that even if we exclude the unexpected contribution to revenues driven by ASC 606 as discussed earlier, we still delivered an upside to net income above the high end of our guidance range by over $5 million. As the revenue growth outpaced the rate at which we could productively invest in the business.

Moving on to EPS, non-GAAP earnings per share for the quarter was $0.51 per fully diluted share above our guidance range of $0.33 to $0.36 based on 56.8 million shares. On a GAAP basis, we recorded a net loss for the fourth quarter of $21.2 million or $0.39 per share based on 54.8 million shares outstanding. As a reminder, in August we called our 2020 convertible bonds, which were settled for 2.9 million shares of common stock in September and hence that share count is included in our total share count for both the fourth quarter as well as the full year. In terms of cash flow, we generated $55.1 million in operating cash flow and invested $6.4 million in capital expenditures resulting in free cash flow for the quarter of $48.6 million above our guidance range of $43 million to $45 million.

Turning to a quick summary of the results for the full year 2018. Total revenue was $717 million, an increase of 38% compared to 2017. When taking into account the contributions of our recent acquisitions for the full year in conjunction with the impact of the ASC 606 accounting standard, we estimate that the underlying organic growth rate was roughly 28%. Billings for the full year were $875 million, up 37% year-over-year and above the high end of our final guidance for the year.

Non-GAAP net income for the year was $82 million or $1.47 per share based on $57 million weighted average diluted shares outstanding well above our guidance of $71.9 million, $73.9 million or $1.29 to a $1.32 per share. We generated $185 million in operating cash flow and invested $30 million in capital expenditures resulting in free cash flow generation of $155 million for the year or 22% of revenue, up from 21% recorded in 2017. Highlighting the company's ability to generate strong free cash flow growth while at the same time, delivering compelling top line results.

I'd like to take a moment to provide everyone with an update on our annual customer statistics, which underscore the significant progress we've made in both expanding our customer base while also driving the sale of additional services into our installed base over the past 12 months. In terms of the customer accounts, we ended the year with nearly 6,100 enterprise customers, including approximately 550 customers that came to us through the acquisition of wombat on March 1. Note that we've updated the derivation of this metric as compared to our reporting in the past and as such this reporting now excludes any customer that contributes less than $10,000 in annual recurring revenue. We believe that this approach provides a better reflection of our ongoing progress in growing our footprint in our target markets serving large and midsize enterprises around the world.

As in the past years, this metric continues to exclude the tens of thousands of customers that are primarily sourced from our Essentials and MSSP partners. For comparative purposes, applying the same methodology to last year's data, our enterprise customer account was approximately 4,400 at the end of 2017. Hence, our enterprise customer base has grown organically by over 25% during the past 12 months.

Another important factor driving our growth is our success in driving additional sales to our existing customers by leveraging our broadening product line, which now stands at 17 unique services and represents an incremental opportunity of well over $1 billion in annual recurring revenue by selling these solutions into our install base. This expanding product portfolio is also important as many of these solutions, particularly Wombat, EFD and Digital Risk create additional opportunities to engage with prospects and to land new customers beyond our traditional approach where we've used our security email gateway as the initial entry point in engagement with a new prospects.

Overall, we continue to make great progress with add-on sales, as exemplified by the fact that the number of customers with three or more products has increased from roughly 2,000 to 2,900 in the past 12 months, an increase of 45%. Yet, this also highlights that just over half of our customers still only have one or two products providing substantial headroom to drive revenue growth through add-on sales into our customer base. Targeted Attack Protection in particular continues to represent an important driver in this on activity and as of the end of 2018, our TAP enterprise customer count was approximately 3,900, an increase of 900 over the past 12 months, reflecting 64% penetration into our enterprise customer base. We ended the year with 530 enterprise customers from the Fortune 1000 or just over half of the index. Each of whom has at least one significant enterprise scale deployment with Proofpoint.

It's important to note, however that even with this ongoing success, we still have a substantial opportunity to further grow our revenues across the Fortune 1000 to the add-on sale of additional Proofpoint capabilities to that installed base, while also winning new customers in this category through our best in class security and compliance solutions. And as a point of reference, at these Fortune 1000 customers approximately three quarters of them are current protection customers and hence many of them join Proofpoint through an initial purchase outside of our core email security product line demonstrating another benefit of our broad product suite. Internationally, we ended the year with 24% of the Global 2,000 as customers, which is up from 18% at the end of 2017. Further, highlighting that the addressable market outside of United States in both Europe and Asia Pacific represents a compelling future growth opportunity for Proofpoint.

Looking ahead, let's move on to guidance for 2019. As we start the new year, we remain well positioned with a broad product line, a loyal customer base and at favorable competitive environment. With that said, note that our fourth quarter results marked a strong finish to the year and when coupled with the significant contribution from our acquisitions across the arc of our 2018 financial results, creates a challenging set up in terms of our year-over-year comparisons for 2019, particularly when also considering the wind down of the Cloudmark OEM business.

In terms of revenues, despite the $3 million in revenue that was accelerated into 2018 under ASC 606, as previously noted, we are maintaining our original guidance of $870 million to $874 million, hence reflecting a modest increase. This represents approximately 22% growth year-over-year at the midpoint or nearly 23% when adjusting for the 2018 AS6 606 revenue acceleration that I noted earlier.

Consistent with what I had indicated during our October call, we continue to expect our reported revenue, year-over-year growth to be in the range of 21.5% to 22.5% for each of the first three quarters of the year. In terms of the fourth quarter, the very strong performance that we just recorded in the fourth quarter of 2018 driven by the ASC 606 revenue acceleration, creates a challenging base lines for the coming year and absent as similar effect in 2019. We expect a growth rate of just over 20% in the fourth quarter of 2019.

In terms of billings, our expectations continue to be in the range of $1.058 billion to $1.062 billion, representing 21% growth at the midpoint. In terms of the timing over the course of the year, we expect a pattern similar to the past year with approximately 20% of the total billings for the year to be recorded in Q1, 21.5% of the total in Q2, 26% in Q3 and 32.5% of the total in Q4. We expect full year 2019 non-GAAP gross margins to be just over 78%, modestly improved when compared to 2018 and above the midpoint of our long term range of 77% to 79%.

We are increasing our expectations for full year 2019 non-GAAP net income to now be in the range of $94 million to $98 million or a $1.60 to a $1.67 per share using $58.8 million fully diluted shares outstanding. In terms of cash flow, we are raising our 2019 free cash flow guidance to a range of $196 million to $200 million or nearly 23% of revenue with the midpoint up from our previous guidance of approximately $195 million.

Similar to past years, we expect the majority of this cash flow to be delivered in the second half of the year with roughly $60 million or 30% of the total contributed in the first half. We believe that this outlook is particularly compelling given our commitment to innovation and ongoing investments to pursue the key opportunities in the market around the world and demonstrates continued progress toward our target of 24% to 26% free cash flow margins.

Also I would like to note that we are producing this cash flow with an average build contract duration in the mid-teens, which highlights the high quality of the recurring cash flow that our business can generate as it scales. This 2019 guidance assumes capital expenditures of $38 million, depreciation of roughly $32 million to $34 million and an income tax provision exclusive of potential discrete items of approximately $2.7 million to $29 million.

Now, let's discuss our financial outlook for the first quarter. We currently expect billings to be $211.5 million to $213.5 million, a slight increase from our initial guide back in October, resulting in year-over-year growth of 14% at the midpoint, which we think marks a strong start to the year given the challenging 2018 compares that I noted earlier. Regarding our revenue outlook, we expect a range of $198 million to $200 million, which places us at the high end of the range of the 21.5% to 22.5% growth that we provided on our last call. We expect first quarter non-GAAP gross margin to be roughly 78%.

We expect first quarter non-GAAP net income to be $18 million to $20 million or $031 to $0.35 per share, an increase of 14% year-over-year compared to our prior expectations where we've suggested a potential modest decline from the prior year. This also assumes an income tax provision, exclusive discrete items from approximately $0.7 million during the quarter, depreciation of approximately $8.5 million and a share count of $57.2 million fully diluted shares outstanding. We expect first quarter free cash flow to be $38 million to $40 million, representing 48% year-over-year growth and also ahead of our earlier expectations. This includes capital expenditures of roughly $9 million.

Now before wrapping up, I'd like to share a few reminders about seasonal trends that occur within our financial model. First, revenue growth tends to be a bit lower sequentially from the fourth quarter to the first quarter, given that we employ a daily revenue recognition methodology with respect to releasing subscription revenues from our deferred revenue accounts. More specifically given the Q1 has only 90 days of revenue to recognize, as compared to 92 in Q4. The result is a sequential decline in subscription revenue from our existing base of business of approximately 2% which equates to roughly $4 million in our current size and scale.

Also on the cost side, keep in mind, the first quarter is always a step backward in terms of profitability and cash flow for the company as our first quarter includes seasonal increases in cost associated with payroll taxes, sales kick off, initial sales and marketing investments for the year, as well as the timing of the payment of the company's annual bonus program. We believe that this is a good start to the year, particularly in light of the difficult comparisons we face against the financial performance that we delivered in 2018 as I discussed earlier.

As a final comment, I would like to highlight that this guidance for 2019 reflects our dual objectives of driving attractive growth in both revenue and free cash flow, which remains a hallmark of Proofpoint's disciplined operating strategy and is further corroborated under the rule of 40 metric discussed last quarter. When considering our outlook for 2019 of nearly 22% revenue growth and 23% free cash flow margins, it suggests a figure of roughly 45 under the rule of 40 construct, which places us prominently in the top quartile of all publicly traded SaaS companies.

We remain committed to our strategy of driving attractive growth in terms of revenue and free cash flow, so as we think about our business over the next several years given our significant opportunity to add new customers throughout the world, while selling add-on into our ever expanding install base, combined with the strong secular trends regarding the ongoing migration to the cloud and the ongoing severity of the threat landscape, we believe that we can maintain a rule of 40 metrics in the mid 40s via driving revenue growth in excess of 20%, while maintaining free cash flow margins in the mid-20s.

In conclusion, we continue to execute well delivering strong top line and bottom line operating results in the fourth quarter and we believe that Proofpoint remains well positioned to continue to drive disciplined growth with increasing free cash flow margins built on our proven capability to defend enterprises against today's advanced security and compliance threats.

Before turning it over to the operator for questions I would like to request that everyone limit themselves to just one question to help reduce the duration of our call and to ensure that everyone has a chance to be included in today's discussion.

Thank you for taking your time to join us on our call today. And with that we would be happy to take your questions now. Operator?

Questions and Answers:

Operator

Thank you. (Operator Instructions) We'll take our first question from Gur Talpaz with Stifel. Please go ahead.

Christopher Caleb Speros -- Stifel -- Analyst

Hi. This is actually Christopher here on for Gur. For Gary, it was nice to see that Wombat was included in couple of your larger wins during the quarter. Can you talk about the general level of demand for Wombat that you saw in Q4 and how we should think about Wombat is contributing to growth in 2019?

Gary Steele -- Chief Executive Officer

Sure. So we were really encouraged by what we saw and we did note in our prepared remarks Wombat being included in a number of deals. We're really seeing the opportunity come in kind of three forms. So one is, there's broad demand for security awareness training and phish simulation. And so there is -- just a pretty significant greenfield market and if you look at the market stats published by Gartner and others, that market is growing fast and it's quite compelling and is slated to be over a $1 billion by 2021. So we're encouraged by the Greenfield aspect, we saw great demand within our installed base, so lots of interest within our installed base for Wombat. And then we also saw the reverse, where within the Wombat install base we're seeing demand from the Wombat customers interested in the Proofpoint broader product. So we're very encouraged about the opportunity where -- we're basically three quarters into the selling process. I think we have our go-to-market model right. We've now got everyone trained, so we're pretty optimistic about the opportunity as we think about '19 and the role that Wombat can play in our growth.

Christopher Caleb Speros -- Stifel -- Analyst

Great. Thanks, guys.

Gary Steele -- Chief Executive Officer

You bet.

Operator

And we'll take our next question from Rob Owens with KeyBanc Capital Markets.

Robbie David Owens -- KeyBanc Capital Markets -- Analyst

Thanks for taking my question and also for Gary, sorry Paul. Gary on the competitive front, when you're sitting down with customers, is it as noisy as it is relative to Wall Street's concerns about Microsoft, the like? And I ask that from the standpoint that you talked about scale offers advantage within your solution the billions of emails each day. But obviously Microsoft is seeing those emails through Office 365. So give us a sense of kind of the competitive landscape. Have they caught up to the perception that's, I think some of the players on the street think and then how the platform offers advantages to Proofpoint? Thanks.

Gary Steele -- Chief Executive Officer

You bet. So as I mentioned in the prepared remarks, the competitive environment remain very favorable and we did not see Microsoft overall efficacy improve in the quarter, and we saw our win rates maintain a very high number over 90%. So while I think there's been noise in the market, I don't think there's that noise of customers. I think customers understand the efficacy we can deliver and frankly what's happening in the market is customers just test us. And when test us in a comparable head to head environment, we win those comparisons. So while there is -- I think there's a perception of noise, I don't think there's much noise actually in the customer world. I think they understand the value that we're delivering and we readily help those customers test. And so we haven't seen -- we haven't seen change for Microsoft and more broadly across the other competitors that we see -- we really see no fundamental change and so as we look at '19 we feel very optimistic about that competitive environment.

Paul Auvil -- Chief Financial Officer

Yeah. And I think just the one point I'd add to that is, you're sort of inferring this notion of the volume of email that obviously Microsoft sees to the Office 365 platform. To the point that Gary was referring to having the data is only a part of the problem. The other part is having world class algorithms and analytics that then enable you to sort through that and find the phishing attacks. And so we've been at this for 16 years now and have evolved multiple times over the course the history of the company different platforms, different capabilities including the next generation platform that we talked about over the course of last year that we recently implemented. All of these investments are a key part of what then when combined with massive amounts of email volume allow you to deliver this superior efficacy having the data alone doesn't really get you anything.

Matthew George Hedberg -- RBC Capital Markets -- Analyst

Thank you.

Operator

We'll take our next question from Phil Winslow with Wells Fargo.

Philip Alan Winslow -- Wells Fargo Securities -- Analyst

Hi. Thanks for taking my question. Paul, you mentioned an improvement that you saw in productivity of new hires. When you think about about 2019 obviously, you've been wanting to take sort of one quarter's trend. Sort of what are you looking for there, what kind of processes you're putting in place to make sure that the Q4 momentum continues? And then just I have one follow up for Gary on that?

Paul Auvil -- Chief Financial Officer

Yeah. So I mean I think first and foremost in measuring it regularly, which we had been doing, but now I think with a more finer grained focus literally looking at it month-to-month and quarter-to-quarter is essential. But I think on top of that things and Gary will probably speak to this. Things like completely revamping our enablement process and how we bring people into the factory, when they first joined trained them on our core product line and the broader notions of among other things different vectors into an account. And I alluded to this in my part of the prepared remarks, which is historically the email security gateway was our way to get that first relationship and drive into the customer. But today with our digital risk products with Wombat and others, there are other ways to get that first toehold. And all these things have some art and science associated with them.

So doing a great job on training is important, but then beyond that you also have to have pretty good hands on mentoring programs. As you have your new hires on board, somebody is actually watching them not just managing and making sure they're building pipeline, but helping to make sure that in those first engagements that they have with customers, they have some real success there and I think, with our new sales leadership there's a completely reimagined and revamped focus on how that's happening. And I'm really optimistic about how I see that coming together right now.

Philip Alan Winslow -- Wells Fargo Securities -- Analyst

Got it. And then Gary, along those lines, in terms of improving productivity, how are you thinking about just the, call it, the pricing impacts of the products? Is there anything that you guys there can do there to sort of streamline and reduce friction in the sales process? Personally, you call it the a la carte menu?

Gary Steele -- Chief Executive Officer

Yeah. One of the things that we've rolled out for our sales team is basically solution bundles that make it easier for customers consuming the product, but also make it easier for sales reps to drive adoption of our technology. And so that's something that we rolled out at the beginning of this year, we held our sales kick off a week ago. I'd have actually never seen this sales team so excited in my 16 years here. And I think that was really an indicator of Blake and his sales leadership of the company that just got people fired up.

But I think this is easy to consume set of bundle that we've delivered to put in the hands of the other field. I think people are excited about that and frankly it's just easier to digest, easier to sell and easier for the customer to consume. So we're pretty excited about that. It's early, we want to see the results from that, but all indications look very positive at this point.

Philip Alan Winslow -- Wells Fargo Securities -- Analyst

Awesome. Thanks, guys.

Gary Steele -- Chief Executive Officer

You bet.

Operator

We'll take our next question from Gabriela Borges with Goldman Sachs. Please go ahead.

Daniel Peter Church -- Goldman Sachs Group -- Analyst

Good afternoon. This is Dan Church on for Gabriela Borges. Thanks for taking the question. I guess kind of piggybacking on the last question. How do you think about pricing power and what I mean is your ability to raise prices either when negotiating renewals or through up sell during their renewal process? Thank you.

Gary Steele -- Chief Executive Officer

Yeah. I think if there's enough competition in the market that I wouldn't describe us as having pricing power. But what I would describe is that through -- the power of our innovation we've created a broader and broader set of capabilities and I mentioned earlier in the prepared remarks that we now have 17 different solutions that where we look to drive more price or value at the account is by selling them more capabilities. So instead of being a company that goes and says, hey thanks for being with us for five years, here's another 5% or 10% price increase. We come in and say, hey, thanks for being with us for these number of years. By the way, we have some other capabilities, we think that would be very important for you to acquire that'll help and include -- improve your security posture and give you more value broadly as a company and particularly as the threat landscape evolves from just email security into these other venues whether it's in the social areas, whether it's in thousand shares like Box or Dropbox or new applications like Slack or Workday or other things running in the cloud, it's pretty easy for us to demonstrate to folks the need to more broadly protect the enterprise. And so we drive more value that way rather than just simply gouging the customer with the price increase.

Daniel Peter Church -- Goldman Sachs Group -- Analyst

Thank you.

Operator

We'll take our next question from Matt Hedberg with RBC Capital Markets. Please go ahead.

Matthew George Hedberg -- RBC Capital Markets -- Analyst

Hi, guys. Thanks for taking my question, and also appreciate the update on the international hires and the new rep productivity that was super helpful. Maybe I guess I'm thinking about kind of a follow-up to Phil's question. When you kick off a new calendar year, do you guys expect any changes to sales territories or account assignments, I guess I'm thinking with Blake in that role. And then maybe as a related question, as you think even longer term to 2020 and beyond, does the sales force in the territories need to evolve significantly from where we are today?

Gary Steele -- Chief Executive Officer

Great question. So Blake is off to a phenomenal start, as I indicated earlier, sales kickoff was just an incredible event. So I think people left really excited and I think what they see is that there aren't big broad changes being made and they feel enthusiastic about the capabilities that they have to sell in the coming year. So we do not anticipate broad territory changes, broad alignment changes, broad management changes we're not expecting any of that. And so I think given that level of stability I think that really helps the team focus on how to go out and kill their number for the year and I think that's what they're excited about, so I think we've got a good setup.

And I think to your point as you think beyond just '19 into '20 and beyond, for us the great news is that there's so much net new opportunity to go get with customers around the world that we don't need to make any meaningful changes to have a sales organization operates we'll continue to add predominately more resources in the international territories where we are significantly under represented today. And then because we have this very broad product line adding a handful of specialists here and there to help make sure that particularly the US where we already have a pretty large team. They have the support and the expertise they need to drive customers from having one product to two to three or more that with that extra help, they can drive those add-on sales. We think the combination of those two will help us to deliver that 20% or better growth rate for the next several years.

Matthew George Hedberg -- RBC Capital Markets -- Analyst

Super helpful. Thanks, guys.

Gary Steele -- Chief Executive Officer

You bet.

Operator

We'll take our next question from Steve Koenig with Wedbush Securities.

Steven Richard Koenig -- Wedbush Securities -- Analyst

Hi, gentlemen. Thanks a lot for taking my question. So maybe a little bit on the last question, you talked -- you've given us some great color on your initiatives for higher productivity. You talked a little bit about the bundles and how that can improve the productivity overall, maybe when it comes to productivity of your overall sales organizations. Can you talk about your approach to assigning incenting, enabling the reps? I mean, it sounds like your organization is relatively stable this year. Have you changed? Have you evolved your approach to how the quarters are being set and how the territories are being set or would you characterize it as being pretty much the same as last year?

Gary Steele -- Chief Executive Officer

Yeah. I think it's a pretty simple answer, Steve, I think that the structure of our compensation plans hasn't changed. We put that structure in place in 2011 and that structure has worked phenomenally well for us, so that stays in place. And you can think about the structure of our comp plan. We simply compensate people on annual recurring revenue. And so, we have everyone in the sales organization aligned to drive growth for the business.

And then as you think about the quota setting, we look at every territory and we determine whether what is the right thing to do relative to quotas. But it's just -- it was generally the same from '18 to '19 that's a simple way to think about it. There's changes here and there depending on territories and what's happening. But there really weren't significant changes as it relates to compensation going into the year, which again creates stability, it gets people excited and people really feel enthusiastic about their opportunity to really truly kill their number.

Paul Auvil -- Chief Financial Officer

Yeah. And I think what I'd add to that, is that with Blake and his leadership role historically, just given how he operates. He is closer to sort of day to day operations and kind of mixing it up on deals and working closely with the reps. He is very hands on as a sales leader and so as we went through the process of thinking about setting quotas that Gary just described earlier. I feel like we have better insights into what the actual dynamics were in the various territories and then being thoughtful about making sure we were assigning quotas that were fair to the sales rep, but also quite frankly fair to the company. And so I think people were generally quite pleased with the quotas we've rolled out, but I think it's a good trade between them being able to have a good shot at getting their number and earning the dollars they deserve for all their hard work traded off against managing the cost expectation for the business.

Steven Richard Koenig -- Wedbush Securities -- Analyst

Great. Fantastic. Thank you so much.

Operator

We'll take our next question from Walter Pritchard with Citi.

Walter H Pritchard -- Citigroup -- Analyst

Thanks a lot. Gary, on the M&A front, you did a lot of acquisitions kind of coming into last year. The year maybe turned out a little bit different, you didn't do a lot of M&A during the year. How are you feeling about your capacity and interest in doing M&A and what are the drivers of of either feeling better or different about that versus where you were in '18?

Gary Steele -- Chief Executive Officer

Yeah. No. Great question. So just refresh people's memories. We did one deal in 2018, which is Wombat that closed basically at the 1st of March. And so we'll basically lap that deal about a month. We are actively looking for interesting things, but we're very I think we apply a very disciplined approach and we think very carefully about what things would create value for our customers and create opportunity for long term growth for the company. So I think we're -- we continue to apply the same level of discipline and approach and we're pretty optimistic that there's interesting things out there it really comes down to finding things that we think are priced appropriately and can deliver value to our customers, so it's finding that balance that and continue to take that disciplined approach that we've had in the past.

Paul Auvil -- Chief Financial Officer

Yeah. And I think what I'd add there is that, what we're excited about is given the current set up in the $12 billion TAM that we have with the existing product line, really don't feel any pressure to go out and do any M&A to broaden the product suite that we have today. There are some interesting areas where we think making some additional investments through inorganic acquisition of technology could be compelling for our customer base, but we don't feel like there's any need to add those as we think about driving our objectives for the next several years in terms of revenue growth.

Walter H Pritchard -- Citigroup -- Analyst

Right. Thank you, both.

Operator

We'll take our next question from Patrick Colville with Arete Research.

Patrick Edwin Ronald Colville -- Arete Research Services -- Analyst

Hi, there. Thanks for taking the question, I don't want to flog a dead horse about the kind of sales reorg and the sales issues, can you just remind us, what the issues were there and just general volume on that and just kind of revisit that topic if possible?.

Gary Steele -- Chief Executive Officer

Yeah. There really -- just to clarify there wasn't no sales reorg. The one thing that we cited in our earlier prepared remarks were that we were slow in European hiring last quarter and we referenced in current remarks that we were pleased with the progress that we made over the course of the quarter. And then secondly, we refer to the fact that some of our new hires had a little longer to get fully up to speed, and we very much focused on that. So it's not like we had a big sales reorg. That's absolutely not the case and we're happy to flog this horse one more time. But we just to clarify, it's really about how do we ensure that we're meeting our hiring in EMEA which we are watching closely and we make a progress there. And then continuing the enablement as Paul described in earlier question.

Paul Auvil -- Chief Financial Officer

Yeah. And I think maybe the only other thing to add, but it's kind of a statement the obvious is, of course as everyone knows our leader Tracey Newell, who had run the sales organization through the middle of last year have stepped down. And so we did recently have Blake Salle who'd been with us for about 18 months when we promoted him into that role joined. But as I think we've alluded to in earlier parts of the prepared remarks as well as earlier questions. And one of the advantages that we saw in putting Blake in the role that we've now actually seen play out for another three months is, he's not the kind of person that's going to come in and make broad sweeping changes. He already knows the organization, he knows the people, he knows the playbook, he knows how we go out and win. And so he has made a lot of interesting fine tuning and adjustments that I think, as Gary alluded to regarding sales kick off. were huge favorably embraced by the sales organization. And so I think he's really doing a fine job in stepping into that bigger worldwide role and moving everything forward in a way that's incremental refinements, not any wholesale changes to our historical approach.

Patrick Edwin Ronald Colville -- Arete Research Services -- Analyst

Thank you so much.

Paul Auvil -- Chief Financial Officer

Yeah.

Operator

We'll take our next question from Melissa Franchi with Morgan Stanley.

Melissa A. Franchi -- Morgan Stanley -- Analyst

Hi. Thank you. Question for Paul on guidance. The Q4 billings came in better than expected and it sounds like you guys are pretty bullish across the board and particularly around the emerging solutions. So just thinking about filling this guidance for FY '19. Can you just maybe give us a little bit more color on what your assumptions are in terms of growth in the core email protection product versus some of the emerging solutions?

Paul Auvil -- Chief Financial Officer

Yeah. So as we look at the numbers for next year, we mostly break out plan internally as we think about planning based on quota capacity of the organization. So we don't have much of a biased toward one product versus the other. But as we've talk about the emerging products in particular had a really good run over the course of 2018 and as we look at the pipeline and the opportunity going into '19. They will play a formative role in driving growth in the 2019 numbers overall. So we feel like as we look at 2019, having the billings number now tip just over the $1 billion mark is an exciting next threshold for the company.

As we thought about the guidance that we provided in October and then we said looking at the numbers here going into the full year starting in January. We felt holding that guidance for now is the right thing to do, as we just develop the momentum of the execution across the first quarter here at January, February, March. And so we'll obviously revisit the guide when we get to April. But I think that if you look at this setup, emerging products particularly those that are both complements to the existing security email gateway, but also new capabilities that are well beyond email like -- CASB, like Digital Risk, like browser isolation. Those all have very nice momentum going into the year and so they will play a meaningful role on the margin in helping to deliver those results and hopefully things go well something a little bit better over the course of the year.

Melissa A. Franchi -- Morgan Stanley -- Analyst

Very helpful. Thank you.

Operator

We'll take our next question from Andrew Nowinski with Piper Jaffray.

Andrew James Nowinski -- Piper Jaffray Companies -- Analyst

All right. Thanks a lot and congrats on the strong finish to 2018.

Gary Steele -- Chief Executive Officer

Thanks.

Andrew James Nowinski -- Piper Jaffray Companies -- Analyst

In a number of the Microsoft displacements you highlighted, as well as a few of the other wins you had in the quarter. I think there were roughly about 5,000 users and although, there are still great wins and demonstrate their ability to continue being Microsoft, I'm wondering, if we should read anything into that regarding the Proofpoint moving perhaps more downstream into the lower end of the enterprise market, where vendors like Mimecast might compete.

Gary Steele -- Chief Executive Officer

No. You shouldn't read anything into that all. Those are just the examples that we chose to put in the script. We had wins with Microsoft across the board and a very high -- all the way down. So that was just -- those are just the specific examples that we referenced in the script. We feel like, as customers are moving to Office 365. We're seeing more hesitation from those larger customers to go there. And so I think over time you're going to see the larger customers when they make their initial dive to Office 365 that they will select a security provider outside of Microsoft.

Andrew James Nowinski -- Piper Jaffray Companies -- Analyst

That's great.

Paul Auvil -- Chief Financial Officer

Yeah. I think, couple of things I'd add, as we talked about when we were describing our enterprise customer account. We don't even count customers that are less than $10,000 of recurring revenue and something we don't value them. But when we think of enterprise accounts, it's got to be over $10,000 of recurring revenue to really be thought of an enterprise for our view. So back to your point, while we talked about the Fortune 1000 and the Global 2000 statistic because those are sort of benchmarks that are tracked by every company that reports as a public company that focuses on large and mid enterprise.

The reality is, there's a hugely lucrative market that operates below the Fortune 1000 well down into the 5,000 of users. And so a 5,000 seat account for us, even if they just buy a few products is still very compelling in terms of the long term value of that customer. And if they buy a broader product suite it's a very, very compelling engagement for us. So what we do talk about larger accounts because that tends to be a touchstone for enterprise businesses like ourselves. We are just as happy to close to 5,000 seat account, as a 50,000 seat account. They are equally important, equally strategic, equally lucrative in their own way.

Andrew James Nowinski -- Piper Jaffray Companies -- Analyst

Got it. That's great. Just real quick, did the government shutdown have any impact on your results this quarter your guidance for Q1.

Paul Auvil -- Chief Financial Officer

Sadly, no. Our federal business continues to be a relatively small part of our business. So we haven't seen any impact. We do have federal business that renews in the first quarter and I will just specifically say that we're assuming that it will renew in Q1. So if we had another shutdown then extended all the way through the end of March, it could on the margin have a small impact on our business but it's, up 5% of our overall business for the quarter. So it's not a material impact, but it could glitch a little bit in terms of what we record for billings in Q1 versus Q2. We wouldn't lose the customer but it might just move the timing when we're actually able to invoice them, so we'll see.

Andrew James Nowinski -- Piper Jaffray Companies -- Analyst

Great, (inaudible).

Paul Auvil -- Chief Financial Officer

Thanks.

Gary Steele -- Chief Executive Officer

Thank you.

Operator

We'll take our next question from Ken Talanian with Evercore ISI.

Kenneth Talanian -- Evercore ISI -- Analyst

Hi. Thanks for taking the question. So, Paul I was wondering if you could give us a sense for what assumptions you've made around growth internationally in your 2000 outlook? And whether any upside might manifest in the first half or the second half of 2019?

Paul Auvil -- Chief Financial Officer

Yeah, so in the baseline plan and we've alluded to this both in the call back in October, as well as the call here, we do expect to see the growth rate to decelerate a bit internationally compared to what you see in the last few quarters, part of it is just lapping a tough year-over-year compare as we did have a nice international contribution from the Cloudmark acquisition, which now has played through and we have another acquisition with international revenues that are contributing inorganically, so that will be a little bit of a headwind.

But as well, you know as we look at it, we talked again back in October, we got little bit behind on our hiring internationally and while we did make some nice progress in Q4, there's still work to be done there. But at the end of the day, the overall baseline plan assumes that Europe contributes and international overall contributes at a growth rate that's roughly on par with the US. So to your point exactly, I think if we can get a little bit more of a catch up on hiring, there's potential for an upside for us to deliver over the course of the year, driven by better execution in Europe and internationally in other geographies.

And you know the local line leadership we have in the countries is really, really quite good and the people they've hired are quite good. So we've got all the baseline capabilities in place to potentially deliver on that sort of results, little bit of upside, but you know let's see how things play out in Q1 and then we'll go from there.

Kenneth Talanian -- Evercore ISI -- Analyst

Great. Thanks very much.

Operator

We'll take our next question from Tim Klasell with Northland Securities.

Tim Klasell -- Northland Securities -- Analyst

Hey, guys. Congrats on the quarter. My question has to do with the emerging products, you listed off Wombat an internal email and some others that you were pretty happy with over the last year, which ones are you most excited about -- which one maybe just pick out one who you think will be Rookie of the year, when we have this call this time next year? Thank you.

Paul Auvil -- Chief Financial Officer

I think -- I would say it will likely be Wombat because what I noted earlier, we just see demand coming from really three different points one greenfield market, two, our install base; and three, we're just getting this cross-selling opportunity into the Wombat base. So I suspect it will be wombat and it plays broadly across the globe, so not only do we see domestic opportunity, we see international opportunity and those deals tend to have higher velocity, they just it's an easier decision for customer to make. So it's a nice entry point, whereas a bigger decision if you're talking about -- taking out your core email security.

I think the other thing that I would note though is we've had very good performers across the emerging cohort, so we noted in the prepared remarks, the performance in Email Fraud Defense or EFD and the performance of Threat response, so this would probably be the next couple to think about, but they're all doing quite well and I think there'll be nice contributors to growth in '19.

Tim Klasell -- Northland Securities -- Analyst

Okay. Very helpful. Thank you.

Paul Auvil -- Chief Financial Officer

You bet.

Operator

We'll take our next question from Sarah Hindlian with Macquarie Capital.

Sarah Hindlian -- Macquarie Capital -- Analyst

All right, great. Thank you so much for taking my question. I'd like to dig in a little bit more on the sales side given the new Sales Head. I know Tracey had a very particular focus on the channel and your mix of channel has gone up pretty considerably over the years. So how is the new Head of Sales thinking about the business? Does she have a different strategic approach? Obviously, you're happy with productivity ramps of new hires, but a little bit more color in terms of how he views the landscape would be really appreciated guys. Thank you.

Gary Steele -- Chief Executive Officer

You bet, I'll start and I think Paul has a comment here too Sarah. So one is -- I think his view is one where we're really extending the reach of the channel. So under Tracey's leadership, she is very focused on some of the big national resellers that operated at very large scale. I think with Blake and the way he's thinking about is extending that reach down to critical regional partners, where those individuals have really important regional relationships and can drive incremental business for us into tough to crack accounts. And so, we've already seen in a very short period of time some very good engagement not only with the broader national partners, but also with critical regional partners. So it's a very -- I think It's a perspective that really extends beyond where we've been and we've already seen impact and productivity improvements from that.

Paul Auvil -- Chief Financial Officer

Yeah and I think what I'd add to that is, so at the sales kickoff we had a couple of weeks ago, I actually gave sort of the introductory remarks for the portion that was related to our channel strategy. And part of it was just to emphasize that in case anybody was wondering, the CFO was 100% committed to the channel. And then we brought up a handful of panelists, who were some of the top performers for the year, people who are going to sales club, where they told their stories about how working with the channel helped them deliver some quite frankly pretty extraordinary results with some of these people deliver.

And I have to say that at the end of the session and the sessions go 45 minutes after I have given my kickoff remarks, I went kind of wandered in the back of the room just to kind of observe the overall session from the other end. And honestly, there wasn't a single person on their phone, everybody was just captivated by the session. So I would say going into this year there is as much or more momentum in terms of channel and how we engage to go drive our business than I've seen in past years of the business with the company.

Sarah Hindlian -- Macquarie Capital -- Analyst

Great, thank you and congratulations on this important quarter. Great job. Appreciate it.

Gary Steele -- Chief Executive Officer

Thank you.

Operator

We'll take our next question from Alex Henderson with Needham and Company.

Alex Henderson -- Needham and Company -- Analyst

Thanks. I was hoping you could talk a little bit about the quarterly progression in the hiring both in the US and internationally, it sounds like you had a fair amount of sales people come in, but it sounded like they came in more toward the back end of the quarter. So I would think that you would see some increase in the cost sequentially as result. And how is that progressing as we go through the first quarter or are we again likely to be more back-end weighted in the hiring process? Thanks.

Paul Auvil -- Chief Financial Officer

Yes. So as typical you often add a reasonable number of salespeople who join either right at the end of Q4 and early Q1 as they're finishing up whatever they have left to do with their current employer. And so this year was no different than past years in that regard. I think as we talked about this very high out performance in terms of our net income for the fourth quarter, we were little less linear than I planned on some of the hiring there. Not a problem obviously in the way we delivered overall results in a nice upside and profitability for shareholders.

But I feel like as we stand here at the end of January, the quarter capacity that we had in place at sales kickoff yes that sets up quite nicely for the year and I don't expect nonlinear hiring for sale sign over the course of the year, we expect anything maybe a little front end loaded as they go out and we basically give them hiring objectives for the year and tell them to just go work on filling those roles if they get a little too far ahead of themselves against our profitability metrics, we might put a pause on it. But generally people go out and execute quite well and it all kind of fits within our overall financial model and we track all that quite closely. So again as you can see in terms of the sequential profitability from Q4 to Q1, we are picking up a bit of a load in terms of that step function in additional sales folks joining here in the first quarter, but I think within the overall profitability model that we have planned for the year and the guidance that we just provided, it all fits together quite nicely.

So again, I think we stand here at the end of January with a very strong cohort of salespeople going out engaging in the market and I think a good hiring plan both internationally as well as domestically to build core capacity for the year.

Alex Henderson -- Needham and Company -- Analyst

Great. Thanks.

Operator

We'll take our next question from Gray Powell with Deutsche Bank.

Gray Powell -- Deutsche Bank -- Analyst

Okay, great. Nice work at the end. So looking into guidance, what's your confidence level on the potential for billings growth to reaccelerate from I think it's 14% in Q1 backing to something like the mid 20% range by Q4?

Gary Steele -- Chief Executive Officer

Well, that's basically what their current guidance suggests and obviously we have a reasonably good level of confidence in or we wouldn't guided to it. So again, we specifically laid out the goal for the year and then the percentage of that total goal that we deliver in Q1, Q2, Q3, Q4 and with the way that lays out to your point, it suggests billings growth rates that are in the mid 20s in the third and fourth quarter. So as we look at the combination of new and add-on business and our quarter capacity to drive that combined with the seasonality and the timing of renewals, as we stand today again we're talking about numbers that are quite away out at this point, but we feel generally quite good about that guide.

Gray Powell -- Deutsche Bank -- Analyst

Okay. That's really helpful. I mean just how much do the multi-year contract renewals helped you for a team, I just want to make sure I'm taking out the comps correctly as I look to Q4 '19?

Paul Auvil -- Chief Financial Officer

Yeah. I mean, you can just look forward and the -- we talked about short and long term for revenue growth. So long term for revenue growth was up about $24 million sequentially. So you can kind of parse that and think about what portion of the overall contracts that we renewed in Q4, we're more than one year in duration. But again the guidance that we provided kind of captures that. And again, notionally the duration of the business that we booked in aggregate across new add-on or renewals was actually down slightly from the third quarter.

Gray Powell -- Deutsche Bank -- Analyst

Okay, That's helpful. Thank you very much.

Paul Auvil -- Chief Financial Officer

Yep.

Operator

We'll take our next question from Imtiaz Koujalgi with Guggenheim Partners. Please go ahead.

Imtiaz Koujalgi -- Guggenheim Partners -- Analyst

Hey, guys. Thanks for taking my question. Paul, on Q3 you mentioned that the -- hey Paul, in Q3 you mentioned that the sales hire was slow down given the issue that you had in the productivity last quarter, so the sales and marketing expenses grew 39% percent in 2019, will that be like lower and I'm sorry 29% in 2018, would that be a lot lower in 2019?

Paul Auvil -- Chief Financial Officer

No, I think it will kind of grow just slightly below the overall pace of overall revenue growth. We just view the tremendous opportunity particularly outside the US to build quarter past and go after business not only in the core markets that we have already planted the flag like UK, France Germany, but also new GO's where we're just getting started like you know Italy, Spain, Benelux, Sweden and others. And of course Asia Pacific and Japan are big opportunities as well. So I think you'll see strong hiring in the sales organization in terms of quarter bearing headcounts across the entire year 2019.

Imtiaz Koujalgi -- Guggenheim Partners -- Analyst

Got it. And then for one you've guided $36 million of billings in 2018, can you comment how that actually came out versus your initial guidance of $36 million?

Paul Auvil -- Chief Financial Officer

We really haven't provided any specific updates around billings organic or inorganic. It's complicated to try to tease it apart. And so rather than give numbers that are just broad estimates we decided not to specifically speak to that over the course of the year.

Imtiaz Koujalgi -- Guggenheim Partners -- Analyst

Okay. Grow faster in the core business, can you please comment if the growth of Walmart is faster or lower than the core business?

Paul Auvil -- Chief Financial Officer

Well, I can tell you that the organic growth meaning once we own the thing March 1st, the engagement with our sales team and execution around our sales organization along with the Wombat team which we are then paying for their overall execution was quite good and in fourth quarter in particular we saw a very nice close rate of new business coming in to (inaudible) through those engagements.

Imtiaz Koujalgi -- Guggenheim Partners -- Analyst

That's very helpful. Thank you.

Operator

We'll take our next question from Erik Suppiger with JMP. Please go ahead.

Erik Suppiger -- JMP Securities -- Analyst

Yeah, thanks. Thanks for taking the question. I know we talked a little bit about Microsoft so far, but they have been apparently investing in their security. Can you comment as to how your competitive dynamics have changed relative to the breadth of services. My impression is that the average addition with the services and they've improved some of the efficacy of some of the traditional services. So when you're competing with them is it the breadth of services that your customers are quite preferring truthfully or is it still a significant competitive advantage in terms of the efficacy of the traditional products that you've got.

Gary Steele -- Chief Executive Officer

Yeah, we're winning on two fronts, we're winning on efficacy and so our ability to run in live production in a comparable way as Microsoft improve hands down and we're more effective that has been a key driver for us. And then secondly as you know our product line has grown, customers look to the broader set of capabilities that Proofpoint can offer. And so I think both of those play a role that efficacy has -- we've seen no change in Microsoft efficacy.

Erik Suppiger -- JMP Securities -- Analyst

Okay, thank you.

Gary Steele -- Chief Executive Officer

Thanks.

Operator

We'll take our final question from Shaul Eyal with Oppenheimer. Please go ahead.

Shaul Eyal -- Oppenheimer -- Analyst

Thank you. Hi, good afternoon, thank you for squeezing me in and congrats on the quarterly results. Just really quickly focusing back on Europe, so outside of your hiring plans and comments in Europe specifically, can you talk to us about the macro level demand trends, they are also conflicting views mixed signals probably market versus Wall Street. So what is that you guys have been seeing in Europe specifically. Thank you for that.

Gary Steele -- Chief Executive Officer

Sure. No we've seen broad based demand across our product line and so there -- we're very encouraged by the broad demand that we're seeing in terms of organizations having to deal with the kinds of targeted attacks that they have -- that are coming through email today. And so the play that we traditionally run in the US is the same play that we're running in Europe. And then second to that, we're encouraged by the broad demand for our emerging products in Europe. We saw very good demand early for Wombat, we saw very good demand for things like Email Fraud Defense or EFD. So we feel pretty optimistic broadly speaking about the European opportunity.

Operator

And ladies and gentlemen, this concludes today's question-and-answer session. At this time I'd like to turn the conference back to Gary Steele for any additional or closing remarks.

Gary Steele -- Chief Executive Officer

Great. I want to take a moment and thank everyone for joining us on the call today. We're very pleased with our Q4 results and excited about our continued progress with our people centric approach to cybersecurity. We believe we remain well-positioned to drive attractive returns for our shareholders and we look forward to talking to you on our next call and to see many of you on the conference circuit in the quarter. Thanks so much for joining us today.

Operator

Ladies and gentlemen, this concludes today's conference. We appreciate your participation.

Duration: 76 minutes

Call participants:

Jason Starr -- Vice President, Investor Relations

Gary Steele -- Chief Executive Officer

Paul Auvil -- Chief Financial Officer

Christopher Caleb Speros -- Stifel -- Analyst

Robbie David Owens -- KeyBanc Capital Markets -- Analyst

Matthew George Hedberg -- RBC Capital Markets -- Analyst

Philip Alan Winslow -- Wells Fargo Securities -- Analyst

Daniel Peter Church -- Goldman Sachs Group -- Analyst

Steven Richard Koenig -- Wedbush Securities -- Analyst

Walter H Pritchard -- Citigroup -- Analyst

Patrick Edwin Ronald Colville -- Arete Research Services -- Analyst

Melissa A. Franchi -- Morgan Stanley -- Analyst

Andrew James Nowinski -- Piper Jaffray Companies -- Analyst

Kenneth Talanian -- Evercore ISI -- Analyst

Tim Klasell -- Northland Securities -- Analyst

Sarah Hindlian -- Macquarie Capital -- Analyst

Alex Henderson -- Needham and Company -- Analyst

Gray Powell -- Deutsche Bank -- Analyst

Imtiaz Koujalgi -- Guggenheim Partners -- Analyst

Erik Suppiger -- JMP Securities -- Analyst

Shaul Eyal -- Oppenheimer -- Analyst

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