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Proofpoint Inc (PFPT)
Q1 2019 Earnings Call
April 25, 2019, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the Proofpoint First Quarter 2019 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
Thanks, Keith. Good afternoon, and welcome to Proofpoint's First Quarter 2019 Earnings Call. Joining me on the call are Gary Steele, Proofpoint's Chief Executive Officer and Chairman of the Board; and Paul Auvil, Proofpoint's Chief Financial Officer.
Today, we will 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'll 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-K. These forward-looking statements are based on assumptions that we believe to be reasonable as of today's date, April 25, 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.
Finally, in addition to reading our press release and SEC filings, we encourage investors to also monitor the Investors section of our website at investors.proofpoint.com, as we routinely post investor-oriented information such as News and Events, Financial Filings, Webcasts, Presentations and other relevant materials to it.
So with that said, I'll turn the call over to Gary.
Gary Steele -- Chief Executive Officer and Chairman
Thanks, Jason. I'd like to thank, everyone, for joining us on the call today. We are very pleased by the strong start to the year, with our team delivering yet another quarter of exceptional top line and bottom line financial results.
Q1 revenues were $202.9 million, nicely ahead of expectations and representing 25% annual growth. And our free cash flow for the quarter was $48.6 million, well ahead of plan, reflecting a free cash flow margin equal to 24% of revenue.
Under the rule of 40 framework that we've shared on prior calls, which combines revenue growth with free cash flow margin, our Q1 results translates to a sum of 49, further highlighting our success in driving attractive revenue growth, paired with expanding free cash flow, delivered through a consistent execution and solid operating discipline.
Our overall business momentum remains strong, driven by the demand for next-generation cloud security and compliance platform, the ongoing migration to the cloud and our unique visibility into the rapidly evolving threat landscape. The competitive environment remains favorable, and our people-centric approach to cybersecurity is resonating with our customers and prospects alike, as evidenced by our continued high win rates, robust demand for our emerging products and our world-class renewal rate, which remains nicely above 90%.
As organizations around the world accelerate their migration of applications, workloads, communications and data into the cloud, the traditional enterprise parameter becomes permeable and as such, creates a gap in terms of defending end-users from the threat landscape.
Threat actors are keenly aware of this gap, which provides them an attractive opportunity to target and exploit unwilling (ph) employees in these new and often unprotected venues through socially engineered attacks, account takeovers and credential stuff, thereby exposing enterprises to significant data loss, financial harm and brand damage.
And while most companies know, there are very important people or VIPs, there are few who realized who their very attacked people or VIPs are. And in fact, the VIPs aren't always an organization's VIPs, but the latter can be far more important to protect and monitor because of the sensitive content that they can access.
As a result, adopting a people-based approach to cybersecurity has become an imperative for security teams around the world, and Proofpoint is uniquely positioned to deliver it by combining our excellence in email security and threat intelligence with our broadening product suite across email, cloud and web properties.
Beyond the world-class threat protection that Proofpoint delivers to our customers, we provide our customers with unique and deep insights into who in the organization is being targeted by which threat actor, through which method of attack and how all of this compares to their industry peers. This exceptional visibility has increased our relevance to security teams globally, as this information can better arm security teams with actionable data and enablement to implement adaptive controls to construct a more mature security posture.
These controls might include conducting additional security awareness training and phishing stimulation for their most targeted employees. Our customers try and implement browser isolation to provide advanced threat and DOP capabilities to better secure against web threats or as a final step, engage with one of our technology partners to deploy multifactor identification.
Now, turning to some of our key operating results during the first quarter. The rapidly changing threat landscape and the ongoing transition to the cloud, particularly the ongoing shift to Microsoft Office 365, continue to be dual long-term catalyst that are helping to drive demand for Proofpoint's full suite of security and compliance solutions, as existing on-premise infrastructure by definition cannot meet the challenge of this new generation of cloud systems and infrastructure.
Example of deals we won this quarter, where we displaced legacy on-premise security appliances as part of a migration to Office 365, included a multinational utility company based in Europe that purchased Protection TAP, Threat Response and Email Fraud Defense or EFD for 140,000 users.
A Fortune 100 media and communications company that added Protection, TAP, Threat Response and threat intelligence for 110000 users, a Fortune 500 investment and wealth management bank that purchased Protection TAP, Threat Response, Privacy, EFD, Proofpoint's security awareness training or PSAT, Continuity and threat intelligence for 30,000 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 first quarter included a large hospital system that added Protection, TAP, Threat Response, Privacy, EFD, PSAT and threat intelligence for 40,000 users; a Fortune 500 healthcare manufacturing company that purchased Protection, TAP and Threat Response for 30,000 users; and a Fortune 500 retailer that purchased Protection, TAP, EFD and PSAT for 7,000 users.
We are also pleased with the ongoing success of our add-on sales into our customer base, which contributed nicely to our growth this quarter. In particular, we are very encouraged by the ongoing strength in demand for our emerging products, led by strong demand for E-mail Fraud Defense, Threat Response and a security awareness and phishing simulation capabilities. Note that our add-on sales represent an opportunity of well over $1 billion in annual recurring revenue that we hope to cultivate in the years ahead.
It has now been over a year since we completed the acquisition of Wombat, which we have rebranded as Proofpoint's Security Awareness Training or PSAT. We are increasing our traction in this area and believe that this represents yet another attractive opportunity for Proofpoint to drive meaningful growth in an exciting new segment of the cybersecurity market.
Chief Security Officers increasingly realized that despite their many security investments, their people remain the weakest link in the overall security posture. And as a result are taking steps by conducting comprehensive training for their users and reinforcing this by running regular simulated phishing attacks.
Our research shows that organizations that have deployed this capability can decrease the click rate on phishing attacks by up to 90%, and these actions are proving to be increasingly important as the vast majority of all cyber attacks require human involvement to be successful.
By coupling PSAT with our core threat protection, our customers can raise the awareness of their users by exposing them to real-world simulated attacks based on what we're seeing across the actual threat landscape. This integration, which is unique in the industry is crucial to organizations as they work to better defend their users from the latest attack vendors targeting them.
We've seen strong interest in security awareness training over the past few quarters and are encouraged with our progress. As expected, the synergies of integrating Wombat's capabilities into the broader Proofpoint platform have resulted in several innovative features that are driving additional customer interest given their differentiation.
A great example of this is our Closed-Loop Email Analysis and Response or CLEAR integration between Wombat and Threat Response. This features enables end-users to report suspicious email with a PhishAlarm Analyzer plug-in from Wombat, which are then further evaluated by threat response.
If a message is determined to be malicious, it is automatically attracted for not only that user's mailbox but anyone else in the organization that received it, all within minutes. This automation is highly valuable to overburden security teams, as it eliminates the need for manual investigation, thereby freeing them to focus on other pressing matters.
Finally, our team has done an effective job at selling core Proofpoint services into the Wombat customer base, which has already resulted in several meaningful wins. This acquisition is another great example of our well-proven ability over the years to acquire and integrate point solutions into our broad product set, effectively accelerating the pace of innovation that we delivered to our customers and affording them the opportunity to consolidate the buying activity onto Proofpoint's cloud security and compliance platform with its world-class family of products.
Over the past several years, these transactions have also significantly expanded our total market opportunity. In fact, Gartner now estimates that the market for computer-based security awareness alone will exceed $2 billion in revenue in 2022. And when coupled with our other emerging products, we have expanded our total available market by over $6 billion, resulting in a total available market in excess of $13 billion.
Our emerging products continue to be an excellent source of growth, meaningfully outpacing the rest of our product portfolio, contributing over one-third of total new and add-on business closed during the quarter. A few of the key emerging product wins in Q1 included a Fortune 100 hospital chain that added EFD for 265,000 users; a Fortune 100 computer technology company that added Threat Response for 160,000 users; and a Fortune 100 retailer that added EFD and PSAT for 130,000 users.
Our compliance segment recorded yet another quarter of solid growth, driven by continued traction with our archiving solution, accelerating momentum with our security awareness training and threat simulation products and a nice increase in demand for a Digital Risk or social offerings. In fact, we're quite encouraged with the momentum we've seen with our Digital Risk products over the past several quarters, which are now contributing meaningfully to the segment's growth.
Our pipeline in this segment continues to strengthen with several deals converting in the first quarter, including two Fortune 500 investment and wealth management banks that added social and Digital Risk for 15,000 and 9,000 users, respectively; a multinational conglomerate that added PSAT for 140,000 users; a large European bank that added PSAT for 20,000 users; a Japanese financial holding company that added Threat Response and PSAT for 15,000 users; and a state hospital system that purchased archiving for 13,000 (ph) users.
As we shared last quarter, our product portfolio has steadily grown to include 17 unique services and a key initiative for our go-to market this year was the launch of our solution bundles or our P1, P2 and P3 offerings. We believe that these bundles make it easier for our customers to consume these broad capabilities, eliminating the need for multiple sales cycles and greatly simplifying the sales process for our team and importantly. for the channel. While this effort is still early, bundled products contributed nicely to our Q1 results, reflecting solid customer interest in this approach, particularly with the entry-level P1 bundle.
We remain very excited about the technology partnerships with CyberArk, Okta, Palo Alto Networks and Splunk. These partnerships continued to drive our pipeline, expand our market reach and increase overall value to customers. In fact, our largest transaction this quarter was influenced by one of these technology partners. We also continued to make progress toward further expansion abroad, and are pleased with the quarter results in our international business, which grew 37% year-over-year and represented 19% of total revenue.
Overall, we believe that the organization is executing well, as punctuated by some notable international deals closed during the quarter, such as a multi-national beverages company that purchased Protection, TAP, Threat Response and EFD for 30, 000 users; and a web-based search -- travel search company that purchased Protection, TAP, and Threat Response for 20,000 users.
We plan to continue to invest in our international opportunity and open additional geographies in order to capitalize on the burgeoning demand for people-centric security around the world. So in summary, we continue to execute well as demonstrated by our strong Q1 results and our market momentum.
Our unique people-centric approach to cybersecurity and compliance is clearly resonating with customers and prospects alike, and we believe we are well positioned to further capitalize on our opportunity to gain share in the over $13 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 $202.9 million, up 25% year-over-year, and above our guidance range of $198 million to $200 million. Billings for the first quarter were $215 million, an increase of 15% year-over-year and above the high-end of our guidance range of $211.5 million to $213.5 million. We're pleased with these results, particularly when considering that Q1 represented a difficult compare given the strong results recorded in Q1 of 2018.
As noted on prior calls, under ASC 606, the derivation of our billings metric requires adjustments to reflect unbilled accounts receivable activity during the quarter, as well as any right of refund liability. For Q1, the adjustment related to these two items was immaterial.
Our duration for the quarter was in the middle of our targeted range of 14 months to 20 months, consistent with the past few quarters 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 $610 million, up $12 million sequentially with short-term growing by $8.7 million and long term increasing by $3.4 million. In terms of a bit more detail on revenue during Q1, revenues from our advanced threat segment grew 22% year-over-year and represented 75% of total revenue, and our compliance segment grew 33% year-over-year and represented 25% of revenue.
Please note that when analyzing our revenue sequentially from Q4 of 2018 to Q1 of 2019, it is important to keep in mind two factors that we highlighted on our call in January. First, revenue in Q4 were benefited by $3 million due to the acceleration of revenue under ASC 606, which did not recur again here in Q1. And second, note that our daily revenue recognition methodology resulted in a sequential decline in revenues of $4 million from Q4 to Q1, given that Q1 is two days shorter than Q4.
Turning to expenses and profitability for the first quarter. On a non-GAAP basis, our total gross margin was 78.5%, above our expectations, primarily driven by our strong revenue performance. During the first quarter, total non-GAAP operating expenses increased 26% over the prior year period to $136.2 (ph) million, representing 67% of total revenue. Our non-GAAP operating income for the first quarter was $22.9 million, reflecting an operating margin of over 11%.
Now moving on to net income. First, I'm very pleased to note that this quarter represents our 12th consecutive quarter of positive net income on a non-GAAP basis. In light of this milestone and in conjunction with what we believe to be a very promising outlook in the years to come, beginning January 1st of 2019, we are now calculating non-GAAP net income in accordance with a directive issued by the SEC under their Non-GAAP Financial Measures Compliance and Disclosure Interpretations, Section 102.11.
Note that other successful businesses such as Palo Alto Networks, Splunk and Workday, have all moved to follow the same reporting standard, as they became consistently profitable on a non-GAAP basis over the past few years. Under this directive, companies generally apply a tax rate to their non-GAAP pre-tax income based on an estimated effective tax rate that is derived, as if these earnings were actually GAAP pre-tax income. As such, we've calculated an effective non-GAAP tax expense, commensurate with our level of non-GAAP profitability, using an estimated tax rate applied to our non-GAAP pre-tax earnings.
This additional non-GAAP tax expense is then included in the calculation of our non-GAAP net income, thereby reducing non-GAAP net income by a corresponding amount. It is, of course, important to note that this is a derivation solely for the purpose of applying a notional tax rate to non-GAAP pre-tax income. And as such, these figures have no impact on our GAAP income statement, our balance sheet or our statement of cash flows.
On a GAAP basis, we continue to expect that we will not incur any material tax expense for the foreseeable future, excluding any potential discrete items, given our large balance of US net operating loss carryforwards and our US valuation allowance.
We currently estimate for all of 2019 that our tax rate under this disclosure requirement will be approximately 17%. And looking beyond 2019, we estimate that this tax rate should range from 17% to 20% over the next several years. So with that as a backdrop, in terms of our net income results for the quarter, we are quite pleased with our performance.
Under our historical methodology and consistent with our guidance from last quarter, net income for the first quarter was $23.1 million or $0.40 per share, significantly higher than our guidance range of $18 million to $20 million, driven by both the revenue outperformance as well as lower-than-expected spending in both sales marketing and R&D.
That said, comporting with the SEC's C&DI 102.11 standard, our estimated tax rate of 17% results in an additional non-cash tax expense of $3.4 million for the quarter, resulting in a non-GAAP net income of $19.6 million under this calculation method. We have included a table in today's press release, which further highlights the differences under the standard, as it relates to both our Q1 results as well as our guidance.
Moving on to EPS. Under our historical reporting methodology, non-GAAP earnings per share for the quarter was $0.40 per fully diluted share, nicely above the high-end of our guidance range of $0.31 to $0.35, based on 57.6 million shares. Under 102.11, our non-GAAP earnings per share for the quarter was $0.34. On a GAAP basis, we recorded a net loss for the first quarter, totaling $28.3 million, or $0.51 per share, based on 55.3 million shares outstanding.
Moving to the balance sheet. We ended the quarter with $257 million in cash, cash equivalents and short-term investments. I'd like to take a moment to point out that beginning January 1st of this year, we have also implemented the new accounting standard known as ASC 842, which changed the recording of long-term operating leases in the financials.
The most significant change with this new standard is that most leases, including most operating leases will now be capitalized on the balance sheet. Accordingly, we recorded assets of $60 million against liabilities, reflecting the value of these leases.
Note that this new accounting standard has no impact on our income statement or our statement of cash flows. In terms of free cash flow, we generated $54.1 million in operating cash flow and invested $5.5 million in capital expenditures, resulting in free cash flow for the quarter of $48.6 million, well above our guidance range of $38 million to $40 million and notably delivering 25% of our full-year guidance during the first 90 days of the year.
This strong result was partially driven by better-than-expected billings and collection in the quarter, which was then further bolstered by capital spending that was somewhat lower than expected, as we shifted some projects originally planned for Q1 to later in the year and also chose to deploy some workflows with cloud service providers rather than deploying in our own data center infrastructure, particularly with regards to some of our newer product lines such as security training and phishing stimulation.
Now turning to our outlook. Starting with billings guidance. We expect Q2 billings to be $228 million to $230 million, resulting in year-over-year growth of 16% at the midpoint. This represents an increase from our previous guide on our January call, where we indicated that key (ph) billings in Q2 would be approximately 21.5% of total billings guidance for the year, hence roughly $228 million at the midpoint.
As a reminder, here in 2019, we are shouldering the full impact of the wind down of Cloudmark's OEM business. For the full year, we are increasing the midpoint of our billings guidance by $4 million, and now expect a range of $1.062 billion to $1.066 billion, representing nearly 22% growth at the midpoint.
For modeling purposes, over the second half of the year, we continue to expect a pattern similar to past few years, with roughly 26% of total billings occurring in Q3 or roughly $275 million, and roughly 32.5% of total year billings occurring in Q4, or $345 million.
Turning to revenue guidance. For the second quarter, we are increasing our range to $210 million to $212 million, or nearly 23% growth at the midpoint, above the guidance that we provided back in January where we expected a year-over-year growth rate in the second quarter of 21.5% to 22.5%.
For the full year, we are increasing our revenue guidance by $4 million, which takes our range to $874 million and $878 million and represents 22% growth year-over-year at the midpoint or nearly 23%, when adjusting for the ASC 606 revenue acceleration in Q4 '18 that I noted on our January call.
In terms of modeling, the second half of the year, we continue to expect our reported year-over-year growth for the third quarter to be in the range of 21.5% to 22.5%. And for the fourth quarter, as I just mentioned, recall that the very strong performance in the fourth quarter of 2018 was driven by, in part, roughly $3 million in revenue acceleration under ASC 606 as we've discussed in January, which creates a challenging baseline for the coming year.
And absent a similar effect here in 2019, we continue to expect a growth rate of just over 20% in the fourth quarter of 2019 or roughly $238 million. In terms of gross margin guidance, we expect second quarter and annual non-GAAP gross margin to be just over 78%.
Moving on to net income guidance. Under our historical methodology, in January, we guided the full-year net income to be in the range of $94 million to $98 million. Today, we are effectively raising that guidance by $4 million to a range of $97.9 million to $101.9 million. That said, in adopting 102.11, we will now apply a 17% non-cash tax expense to our reporting of non-GAAP net income, which equates to an additional non-cash expense of approximately $14.7 million at the midpoint of the range.
As such and adjusting for this reporting methodology, our updated guidance for the year is $83.5 million to $87 million, or $1.43 to a $1.49 earnings per share, based on 58.5 million fully diluted shares outstanding. Note that this guidance for the year 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 $17.5 million, which includes $2.8 million of income tax computed under our historical method and as noted, $14.7 million of additional non-cash income tax expense attributable to the 102.11 calculation.
For the second quarter, under our historical approach to reporting, we are guiding net income to a range of $23 million to $25 million. That said, in adopting 102.11, we will apply a 17% non-cash tax expense to our reporting of non-GAAP net income, which equates to an additional non-cash expense of $3.5 million. As such and adjusting for this reporting methodology, our guidance for the second quarter is $19.5 million to $21.5 million, or $0.34 to $0.37 earnings per share, based on 57.7 million fully diluted shares outstanding.
Note that this Q2 guidance assumes capital expenditures of $9 million, depreciation of approximately $8 million and an income tax provision, exclusive of potential discrete items of approximately $4.2 million, which includes approximately $0.7 million of income tax computed under our historical method and approximately $3.5 million of additional non-cash income tax expense attributable to 102.11.
In terms of free cash flow, as discussed during our call in January, we had expected approximately 30% of our annual free cash flow to be delivered in the first half of the year or roughly $60 million. Given the strong start in Q1, we now expect to end the first half with approximately $75 million and hence, a contribution of $25 million to $27 million during the second quarter.
For the full year, we are also raising our free cash flow guidance to a range of $200 million to $204 million, or 23% of revenue at the midpoint. For modeling free cash flow for the second half of the year, we expect approximately $50 million to be delivered in the third quarter.
We believe that this outlook is particularly compelling, given our commitment to innovation and ongoing investments to pursue the key opportunities in the market and demonstrates continued progress toward our 2020 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.
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 as discussed last quarter.
When considering our outlook for 2019 of 22% revenue growth and 23% free cash flow margins, it results in a figure of 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 opportunity over the next several years, given our significant opportunity to add new customers throughout the world while selling add-on into our ever-expanding installed base, combined with strong secular trends regarding the ongoing migration of workloads and content to the cloud and the ongoing severity of the threat landscape, we believe that we can maintain a rule of 40 metric in the mid-40s by 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 and bottom line operating results in the first quarter, and believe the 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 very much for taking the 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 Melissa Franchi with Morgan Stanley.
Melissa Franchi -- Morgan Stanley -- Analyst
Great. Thanks for taking my question. A question to start with Paul. Paul, if you look at the sequential growth in billings this quarter, it was the sharpest Q1 quarter-on-quarter decline that we've seen in the business historically. And I know that you've talked about the businesses becoming more back-end loaded and then you had Cloudmark and starting to roll off. But were there any other factors in Q1 that drove that sequential growth or just sequential decline? And then what are the factors that are driving the more back-end loaded business?
Paul Auvil -- Chief Financial Officer
Yeah. No, that's a great question. And what I'm pleased with is, we beat the guidance that we provided for the first quarter as we always do. And I would say that as we look at the overall framework and I think we discussed this in the past, in a couple of other calls, as we scale, there are couple of things that are fundamentally true. First of all, like most businesses in and around both SaaS and enterprise software, we do tend to close a majority of our new and add-on business in the second half of the year and particularly in the fourth quarter.
No that's a great question. And what I'm pleased is we beat the guidance that we provided for the first quarter as we always do. And I would say that as we look at the overall framework and I think we discussed this in the past in a couple of other calls as we scale there are couple of things fundamentally true. . First of all like most businesses in and around both SaaS and enterprise software we do tend to close a majority of our new and add- on business in the second half of the year and particularly in the fourth quarter.
And so as you can imagine, as that compounds year after year, after year, the renewals base gets more and more concentrated in the second half of the year in the fourth quarter in particular. So, when you compare a fourth quarter billings performance with our first quarter billings performance, what you see is this big sequential change in the amount of renewal business is actually being booked by the business. And so it has nothing to do with the actual overall health of the business. As Gary mentioned during his prepared remarks, our renewal rate continues to be well over 90%.
It just has to do with the timing of the renewals. And of course, Q1, we do tend to close a lot less new in add-on business in that first quarter as compared to the fourth quarter. And so it's a combination of those two factors that cause this sequential decline in billings between the fourth quarter one year and the first quarter the next year.
Melissa Franchi -- Morgan Stanley -- Analyst
Very helpful. Thank you so much.
Paul Auvil -- Chief Financial Officer
Thanks.
Operator
We'll take our next question from Andrew Nowinski with Piper Jaffray.
Andrew Nowinski -- Piper Jaffray -- Analyst
Great. Thank you, and congrats on a great quarter. I want to ask a question on the bundles. You mentioned that there were solid interests, specifically in our entry-level P1 bundle and it looks like that actually contains a number of your products including Wombat. So, I was wondering, did you see an increase in the average spend per user this quarter relative to prior quarters.
Gary Steele -- Chief Executive Officer and Chairman
Yeah. There was a small modest increase in spend. And to your point, that P1 bundle includes our basic advanced threat protection capabilities, as well as we can have a good, better and best version of bundling that we offer with Wombat. And so the good version is included in the P1 bundle. So, it did certainly helped lift the ASPs just ever so modestly. Just to be clear, while we did see a nice uptick in the interest, in bundles and the sale of the P1 bundle in Q1, it still represents a fairly small amount of our overall business booked in terms of new add-on during the quarter.
So, we feel like this initial starting point indicates that bundles are of interest to customers and we're seeing traction with our sales team channel and customers. And so it will be an interesting event to see how that evolves. There is percentage to the overall new and add-on business that we close over the arc of the rest of the year.
Andrew Nowinski -- Piper Jaffray -- Analyst
Great. Thank you.
Gary Steele -- Chief Executive Officer and Chairman
Thanks.
Operator
We'll take our next question from Phil Winslow with Wells Fargo.
Philip Winslow -- Wells Fargo Securities -- Analyst
Hey, guys. Thanks for taking my question. Congrats on the strong start to the year. I just want to focus on sales productivity and also the international business. Wondering if you can provide just an update on how you're feeling about the trends in sales productivity and then (inaudible) in particularly international? Thanks.
Gary Steele -- Chief Executive Officer and Chairman
Yeah. We feel good about the results that we posted from an international perspective. The overall growth rate was quite healthy. The deals that we closed we felt good about. We've continued on our path of expansion within the EMEA region specifically. We continued to open new territories, and we will continue to do that.
What we've seen is we've seen sales productivity very much come in aligned -- in alignment with what we're seeing in North America. And so we feel like we've got a great path and great opportunity there.
Paul Auvil -- Chief Financial Officer
And I think, overall hiring, we had another good quarter of hiring new talent into the team. You are always looking to drive that growth curve as best you can. But we are pleased with where that hiring activity came in both in Europe and as well as the rest of the international operations. And so, as we think about where we're driving for the later part of the year, for now, we feel good about where we stand with the team globally.
Philip Winslow -- Wells Fargo Securities -- Analyst
Great. Thanks, guys.
Operator
We'll take our next question from Matt Hedberg with RBC Capital Markets.
Matt Hedberg -- RBC Capital Markets. -- Analyst
Hey, guys. Thanks for taking my question. Gary, you've been bullish on Office 365 for quite some time and you called it out in your prepared remarks again. I'm wondering, can you help us with what percentage of new business comes from customers running Office 365? And so I'm sort of curious as to how big of a funnel or a pipeline that is relative to sort of Non-Office 365 customers.
Gary Steele -- Chief Executive Officer and Chairman
Yeah, it's interesting. I think that when you look across every single enterprises today, they're building some former plan around Office 365 and every one is at a different point or a different state. I would say, probably 40% of our business or so is where they're actually in the process of migration, kind of in rough numbers.
But we do see even with the most conservative organization, they've got a plan in maybe a year or two out, but they're building plans to move. So, we fundamentally believe that this continues to be an important catalyst for us over the course of the next several years. This is -- we're still in. We're still not even halfway there. There's lots of opportunity left here.
Philip Winslow -- Wells Fargo Securities -- Analyst
Great. Thanks a lot.
Operator
We'll go next to Rob Owens of KeyBanc Capital Markets.
Rob Owens -- KeyBanc Capital Markets -- Analyst
Great. Thanks for taking my question, guys. It would appear that the quarter is off to a good start based on some of the the federal reporting sites. So, I think that begs the question. Number one, just highlight your federal opportunity and number two, what you guys are seeing in the archiving market here? Thanks.
Gary Steele -- Chief Executive Officer and Chairman
Sure. So, on the federal side, the one thing that continues to be encouraging to us is the broader move within federal agents to adopt cloud as a core platform. And while there has been discussion of this over the past several years, it's really becoming more of a here and now kind of thing for federal agencies and I think that creates opportunity for us.
And then with respect to the archiving business, we continue, as we noted in our prepared remarks, we continue to be really enthusiastic about that opportunity. The competitive landscape continues to move in a favorable way for us, and we're seeing great opportunity out there with respect to the archiving business.
Rob Owens -- KeyBanc Capital Markets -- Analyst
Great. Thanks. Hi, Paul.
Paul Auvil -- Chief Financial Officer
Hi.
Operator
Next is Jonathan Ho with William Blair.
Jonathan Ho -- Analyst -- Analyst
Hi. Good afternoon. I just wanted to understand a little bit better, what drove the outperformance in your cash flow and were you guys able to sort of invest at the levels that you're expecting to in Q1? Thanks.
Paul Auvil -- Chief Financial Officer
Yeah. There wasn't one particular effect. It was a combination of obviously collecting the large AR balance that we ended the year with, combined with some good productivity of collections within the quarter, business that we build and collected. And then somewhat lower spending in a variety of different areas across sales marketing, R&D. The first quarter is always kind of a -- everybody's kind of getting started and just starting to drive the engine for the year.
And so -- but we had deficits in spending areas that we think are an issue tactically or strategically to the business, just a little bit lower than what I built in, in my, as usual a fairly conservative planning. And then, of course, our CapEx numbers were a bit lower because there were a couple of projects we decided to defer to later in the year and then some of our newer capabilities, including compliance training and phishing simulation. We've decided to drive more of the build out in cloud service providers rather than build that out in our own data centers. And of course, that saves us some on CapEx, but it moves a little bit of that more into OpEx as part of that trade.
Gary Steele -- Chief Executive Officer and Chairman
We can go to our next question.
Operator
Next question is from Alex Henderson, Needham.
Alex Henderson -- Needham & Company -- Analyst
Great. Thank you very much. I was hoping you can talk a little bit about what you're seeing on the competitive front in terms of activities from Microsoft, Mime, (inaudible) Cisco or others. Could you give us some context around what their price action is looking like, or what the competitive win rates looks like or any other variable that would give us a sense of it. And if there's been any changes as a result of the change to packages in your go-to market, how does that impact in the selling timelines?
Paul Auvil -- Chief Financial Officer
Yeah. I mean, I'll let Gary provide some color on the competitors in general. But what I can tell you is that as we built out more and more value beyond Protection and TAP, as we added Email Fraud Defense in a variety of other capabilities, our TRAP solution, the Wombat compliance training and phish simulation. What we're seeing overall is that values and deal sizes are actually moving up. Further conversation a little bit early on the impact of the P1 bundles and so we're not seeing competition change those deal values.
In fact, I will say that our average value of a new deal that we're closing is probably moving up a bit as compared to where we were over the last couple of years. We generally don't comment overly specifically on competitors. But Gary, I don't know whether you want to provide any other color.
Gary Steele -- Chief Executive Officer and Chairman
No. The one thing that I would reiterate and we noted this in our prepared remarks that our win rates continued to be very high. When we look across the various folks that we run into in the market, we talk about Microsoft. We see Microsoft as a very important catalyst for growth for us because this broad moving to the cloud continues to be fundamentally good for our business.
And we're able to very clearly demonstrate the value that we can deliver over the core basic capabilities that Microsoft delivers. And we saw no change in the efficacy of their solutions. As you are probably aware, they offer two core security capabilities, one EOP, enterprise online protection that's fundamentally free with anything you buy with respect to Office 365.
And then their ATP solution, which was introduced four years ago, that'll be June of 2015 when they originally introduced that we see no change in the efficacy of that solution. And so our win rates remain extremely high. With respect to Mime, nothing really changed. We see them at the lower end of the market. Obviously, their aspirational -- we're trying to move up. We just haven't seen any fundamental shift there. And then smaller companies, I think you mentioned to Gary, we see them in a tiny, tiny, tiny percentage of our deals. And so, I would just say, on an overall basis, our win rates continue to be very high and the competitive environment has stayed very stable.
Rob Owens -- KeyBanc Capital Markets -- Analyst
Very helpful. Thank you very much.
Operator
Your next is Walter Pritchard with Citi.
Walter Pritchard -- Citigroup -- Analyst
Thanks. My question is on archiving. And it seems like in the past, you've had little bit of a fits and starts on getting that business really accelerating. It sounds like your commentary here is more bullish. I'm wondering what you attribute the increased traction there too and how sustainable do you view that to be?
Gary Steele -- Chief Executive Officer and Chairman
Yeah. I think our point of view on this is very positive because we have seen the continued diminished investment on behalf of the incumbent players there, whether it be Micro Focus or Veritas Enterprise Vault. And I think many of the customers that have been long-standing supporters of the solutions are just starting to giving up hope and they're looking for alternatives. And we're starting to see that market break. And I think we'll see some nice consistency in that market and growth opportunity for Proofpoint on a sustained basis over a long period of time. So to summarize, we feel very bullish about the opportunities around the archiving.
Operator
We'll take our next question from Gabriela Borges with Goldman Sachs.
Gabriela Borges -- Goldman Sachs -- Analyst
Good afternoon. Thank you. For Gary, how much do you think email security budgets are growing at the average Global 2000 customer or company? And the move toward a more people-centric approach on the messaging side, does that change how customers are thinking about budget or free-up different areas of budget for you guys to get access to? Thanks.
Gary Steele -- Chief Executive Officer and Chairman
Yeah. With respect to budget, I think one of the things that has changed is there's a broader awareness of the risks associated with the socially engineer targeted threats toward people. And so companies are not thinking about I'm putting more dollars toward email security. They're thinking about how do I better defend my people.
And so, we are seeing increases in spend because they're taking different approaches to bring together the capabilities that better defend their people. I don't have a hard and fast number of what that looks like, but they're prioritizing these projects. They're spending more money and it's making a difference.
On the people-centric side, what we're delivering today is helping organizations better understand who their targeted people are and then we're helping drive these adaptive controls that better secure those specific individuals. And I think the opportunity for Proofpoint is not only giving people that insight and visibility, but then also driving the maturity of their security posture by giving them more and more security controls. We noted that more training as an example of that. Well, that's working out exactly like we expected, but there's lots more that we can do in that area that will drive continued opportunity and demand for the company.
Gabriela Borges -- Goldman Sachs -- Analyst
That's helpful. Thank you.
Operator
We'll go next to Ken Talanian with Evercore ISI.
Ken Talanian -- Evercore ISI -- Analyst
Hi. Thanks for taking the question. I know you've talked about the renewal rate being above 90%, but I was wondering if you could comment on the trends you're seeing in your net retention rate and how that's compared -- how that's compared versus previous quarters?
Paul Auvil -- Chief Financial Officer
Yeah. We don't actually calculate that. So, I literally couldn't tell you what that is. The way we run the business is we look at our renewal rate on a no-nonsense basis of what's the recurring revenue that's up for renewal this quarter and what percentage of it did we lose and what percentage of it did we keep. And then separately, we run the sales team to this notion of new and add-on business that we signed out to them as quota and what we expect them to close.
Obviously, with the results we delivered this quarter, we delivered well on all of those metrics. So unfortunately, I can't give you a number there. I literally don't know what the number is. We don't view it as a metric that's useful as we are sort of evaluating the operational health of the business.
Ken Talanian -- Evercore ISI -- Analyst
Okay. Thank you.
Paul Auvil -- Chief Financial Officer
Yeah.
Operator
We'll go next to Sarah Hindlian with Macquarie.
Sarah Hindlian -- Macquarie -- Analyst
All right. Great. Thank you so much for taking my questions. Paul, I was really hoping you could help me drill down into magnitude of the impact of the wind down of Cloudmark. I don't think Q1 in on of the remainder of the year.
And how that weighs into the confidence you are expressing in the back half guidance? Actually, let me ask you that a little bit more clearly. What's the mix of acceleration in second half billings guidance? (inaudible) (Technical Difficulty) which I assume is the bulk of your better guide versus moving away from (inaudible).
Gary Steele -- Chief Executive Officer and Chairman
Yeah. So again, from a revenue perspective, the impact of Cloudmark OEM is we see that impacts more greatly in the first part of the year, where we had more significant revenues associated with the Cloudmark OEM business because that was then tapering, of course, over the ark of the year. So the impact was more greatly felt in Q1 and Q2 here.
Later in the year, while we did still have some Cloudmark OEM revenue, it was already starting to weigh in. The biggest issue with regards to revenue and year-over-year growth in the fourth quarter is this ASC 606 acceleration that we mentioned on the prepared remarks, both in January as well as again here on the call today, where you've got several million dollars of revenue that -- just because of the customers deployment methodology.
Even though it's a subscription business, we took the majority of the revenue in the period as prescribed under that accounting standard. From a billings perspective, really the Cloudmark OEM business is almost indiscernible in the scheme of the overall numbers. On the margin, it impacts a little bit in the first part of the year. But by the time you get to the second half of the year with a much larger secular renewal trends, driving through the Proofpoint installed base, it's really not a factor that affects that timing of billings by quarter as we've laid them out.
Operator
We'll go next to Gregg Moskowitz with Mizuho.
Michael Romanelli -- Mizuho Securities -- Analyst
Yeah. Hi, guys. This is Mike on for Greg. Thanks for taking the question. Can you just update us on how you're approaching M&A right now?
Gary Steele -- Chief Executive Officer and Chairman
Sure. This is Gary. So, we continue to look for opportunities where we think we can create more value under the people-centric framework. So, we think about opportunities that might extend our footprint and more adaptive controls, et cetera. We evaluate many, many opportunities. We're optimistic that at some point, we'll find something but we will remain active and be thoughtful about a disciplined approach to M&A.
Operator
We'll take our next question from Shaul Eyal with Oppenheimer.
Shaul Eyal -- Oppenheimer & Company -- Analyst
Thank you. Good afternoon, guys. Congrats on the solid set of results. Maybe big picture type of question. Historically, the Proofpoint's strategy has been and still is without a doubt, was driven by both displacement of legacy providers on the one hand. On the other hand, there are plenty of greenfield opportunities. Are you seeing any change in that respect nowadays? Is it more greenfield opportunities, or rather is it more displacement of those legacy providers? How should we be thinking about it?
Gary Steele -- Chief Executive Officer and Chairman
Yeah. No, I think that in the core email threat protection, we're doing very responsible (ph) displacement. We're either are displacing on-premise appliances, when organizations move to the cloud or we're taking out someone like Microsoft as they move to the cloud and have it, made the switch to a third-party provider.
And then in our emerging products, many of those are greenfield markets where, for example, there are many organizations, for example, that haven't bought security awareness and training yet and that might be just a thoughtful greenfield opportunity. So in the core, it's 99% of the time a displacement. And in emerging products, it's oftentimes just greenfield.
Paul Auvil -- Chief Financial Officer
Yeah. I think the other thing I'd add is we continue to see a good balance between new business and add-on business that drives the recurring revenue. So, I should have mentioned this one. Ken asked this question earlier. Well, again, we don't really have a net retention metric. It's a combination of the renewed value, plus the add-on value. We do see ongoing, really good productivity of the sales team going in and selling more products to the existing installed customer base. Again, about half of the new and add-on business comes from add-on, about how from new.
And one of the things just as Gary touched on that I think is particularly interesting is we've expanded into some of these new greenfield markets like or Email Fraud Defense product and the Wombat security learners training capabilities. It creates new entry points into customers, where for whatever reason maybe they weren't ready to reconsider their email security posture, we can sell them something else as part of that initial engagement and then come back around and sell the broader product line later. So, we really like these additional features in the product line in that regard.
Operator
We'll go next to Imtiaz Koujalgi with Guggenheim Partners.
Imtiaz Koujalgi -- Guggenheim Securities -- Analyst
Hey, guys. Thanks for taking my question. I had a question on the linearity of the quarter. It looks like your DSOs went up quite a bit this quarter. Any comment on if the quarter was a bit more back-end loaded than usual?
Paul Auvil -- Chief Financial Officer
Actually, I think the DSOs between Q4 and Q1 are roughly flattish. So, linearity within the quarter was fine. Nothing different from other quarters that we've seen. Like most tech companies, we do find that there's a much stronger buying cycle in the last month of the quarter.
And to your point, when you close deals in the month of March, for example, you won't collect that in the month of March. And hence, that will drive your AR balance up accordingly. But I would say that the linearity in the first quarter was very similar to the linearity that we've seen in the past several quarters.
Imtiaz Koujalgi -- Guggenheim Securities -- Analyst
Thank you.
Operator
We'll go next to Steve Koenig, Wedbush Securities.
Steve Koenig -- Wedbush Securities -- Analyst
Hi, gentlemen. Thank for taking my questions. Congrats on the good start to the year. So, you guys are -- have great visibility and are pretty steady eddy while the market alternatively gets maniac and depressed (ph) on stock. Maybe just as you look at the short term and long term. Short term execution-wise, maybe just tell us about your confidence with some of the execution challenges you had in the middle of last year are behind you. And longer term, that guide for 20% revenue growth and mid 20% free cash flow margin, is M&A additive on the revenue side? Or is M&A kind of built into that guide? Maybe help us understand that a little bit.
Paul Auvil -- Chief Financial Officer
Yes. So, a couple of things. One, to your point about last year, the one thing I always like to point out for people is that we consistently beat the guidance over the course of all four quarters last year while delivering raises. And so, we executed right on top of everything that we put out for the Street. That said, we did talk about a little bit of an issue that we were running into with regards to productivity of our new hires in the Americas, which we feel like we're now, we've put that behind us.
And then we did get a bit of a slowdown in the hiring in the international teams, which we felt like we made good progress against, what exactly where you'd love to be on hiring, but we feel like we're mostly where we'd like to be there, so anyway. So, as we enter the year and as we look at where we stand here in April, I feel good about that set up.
And to your question about this notion in the longer term of 20% or better top line growth with mid-20s free cash flow, which I think is a great model for the company to operate under. Certainly, we'd expect that we'll probably do some smaller acquisitions to complement our R&D. That will be just part of driving additional value we can deliver to customers that make those numbers a reality. If we were to do a larger acquisition that was -- that had meaningfully inorganic contribution, then obviously that would likely be additive. I don't, in the near term foresee us doing any deals that would have in the context of our -- this year well over $800 million of revenue scale. I don't see us doing any deals that would be really material in the context of that from a revenue perspective. I'm not ruling it out. But it isn't kind of within the normal parameters of the sorts of businesses that we're looking at when we're considering M&A.
Gary Steele -- Chief Executive Officer and Chairman
And Steve, one other point. The one thing that I feel very good about is in the change that happened last year is with new sales leadership under Blake. I really feel like we've put in place the structure that will enable us to get to $1 billion to $2 billion and beyond. And I think that longer-term view of a scalable organization that can continue to drive growth over a very long period, I think we've set that up. So, feel really good about the organization.
Operator
We'll go next to Catharine Trebnick with Dougherty.
Catharine Trebnick -- Dougherty & Company -- Analyst
Thanks for taking my question. Back to archiving, you had mentioned the legacy players not investing as much. But are you also seeing a trend within Office 365 provide -- that are moving to Office 363 -- 365, looking to have a more online cloud-based archiving system and that you're getting some of those opportunities there? Thank you.
Gary Steele -- Chief Executive Officer and Chairman
Yeah. No, that's a great point, Catharine. The one thing that -- it maybe sound obvious, but as organizations move from an on-premise environment to Office 365, it really makes absolutely no sense to take all the data that's going to Office 365 and route it back to an on-premise archive.
And so the costs and the management associated with that really makes no sense. So the broad disruption of Office 365 not only supports us in the security world, but creates a unique opportunity on the archiving side as well. So yes, that's definitely part of the demand profile for what we're seeing on the archiving side.
Operator
We'll go next to Gur Talpaz with Stifel.
Gur Talpaz -- Stifel Nicolaus & Company Incorporated -- Analyst
Okay. Great. Thanks for taking my question. Hey, Gary, a lot of talk of threat response within the deal, as you noted earlier in your prepared remarks. Can you talk about that product in the space in general? And latest from the acquisition for the past (inaudible) missed about Palo Alto? Anything about relative differentiation for you and your approach versus what else is happening out there? Thank you.
Gary Steele -- Chief Executive Officer and Chairman
Yeah, no, great question. Where we have been focused and where we're winning business is we have taken the approach to automate very specific use cases and these are use cases that have extreme high value to security organizations. So in the prepared remarks, we talked about something called CLEAR. It's really -- just think of it as abuse mailbox.
So anytime if someone reports something, how do you automate all the noise associated with that reporting of an event. And so what security organizations, I think are really focused on right now and given that they lack resources and anything they can automate these specific use cases that creates value for them, they're willing to pursue.
So, our approach is not to be a broad-based platform to go whenever (inaudible). Our approach is how do we create value for security organizations by giving them some key tools for security, for automation other specific use cases that drive the love of automation that they haven't had in the past. So we're just -- that's why we're winning and it fits very naturally with everything else we're selling. And that's why you've heard it included in so many examples.
Operator
We'll go next to Daniel Bartus with Bank of America Merrill Lynch.
Daniel Bartus -- Bank of America Merrill Lynch -- Analyst
Hey, guys. Thanks for turning me in and taking the question. I just want to go back to -- is there any slow precedence you guys would ping too for (inaudible) and then growing the average value of deals? Or this is really the new approach? And then this still seems fully ramped under 92 and 93 bottles (ph) or would that be a source of upside as we move into second half?
Gary Steele -- Chief Executive Officer and Chairman
Yeah. So, I would say that as we look at bundles, one thing to keep in mind is we've actually been bundling as I've said before for quite some time. Protection and TAP for example was its own bundle for years. And then when we introduced our TRAP product line, we had another bundle that included those 3. So, it's not really new to the Proofpoint sales team, our channel or our customers. But what we decided to do is broaden the relevance of bundles by increasing the number of them to include products that really speak more to the broader people-centric vision as opposed to just things related to email security.
And again, so far we're seeing that there's some good early indicators of interest. We do believe it will help ultimately over time drive larger deal sizes and generally make customers stickier as a result. But it's very early right now. So, data points in Q1, we felt were good early promising indicator. But I think it'll be interesting to see over the next several quarters how things play out from there.
Operator
We'll go next to Gray Powell with Deutsche Bank.
Gray Powell -- Deutsche Bank. -- Analyst
Great. Thanks for taking the question. So, I know there's some moving parts between Q4 and Q1 on the revenue side. If I look at the compliance piece, I guess, there just wasn't that much sequential growth in compliance revenue. So, how should we think about the organic growth in that business given that the year-over-year comparisons skewed by the Wombat acquisition? Thanks.
Gary Steele -- Chief Executive Officer and Chairman
Yes. So, there are a couple things to keep in mind that I mentioned in the prepared remarks. You got both the ASC 606 revenue acceleration, which was partially in that compliance segment. And then, of course, you've got the $4 million quarter-over-quarter deceleration associated with having two fewer days in the quarter. And since we have daily revenue recognition, you've got that as a headwind.
So overall, we feel good about the results and the way they come together. I think as we look at the guidance, we provided for the second quarter and the remainder of the year, we expect that you'll see ongoing healthy performance out of the compliance segment but also advanced threat.
So the net of it is, I'd like to always remind everybody from our perspective and I never bought the various development teams in the company to feel badly when I say this, but we really don't care what the sales team sells. They all have a recurring revenue target that we need them to hit. And whatever is resonating with customers is we want the sales team to go out and sell. So one quarter, Wombat might be a really important thing that is top of mind for customers. Another quarter it might be Email Fraud Defense. I suspect that CASB and browser isolation will increasingly come to the forefront of customers minds, of course, in addition to our ongoing Protection and TAP product line and the demand for those.
So the net of it is, while it's a result of us being a larger company, we're required to provide segment reporting and we always want to provide as much color around that as we can. The reality is that as we look at the relative growth between segments, it's not really that big a deal to us as long as we're meeting or exceeding our guidance and our own internal targets regarding delivering both billings, revenue growth, profitability and importantly, free cash flow margins as the business scales.
Operator
We'll go next to Patrick Colville with Arete Research.
Patrick Colville -- Arete Research -- Analyst
Thank you very much for squeezing me in. Can I just pick apart your revenue guidance? So in the quarter, if I'm right, you beat by about $3 million versus the midpoint of your guidance. And for the year, you've lifted your revenue guidance by $3 million. So, given that you had a nice beat this quarter, a very healthy start to the year, how come you are being more confident about the second half?
Paul Auvil -- Chief Financial Officer
Sure. We actually raised full year by $4 million. So, we raised a little bit more than what you described. And I think for us, we're sitting here in April, we're driving now the business at higher scale. And actually we feel good in the core baseline in terms of that combination of revenue growth and free cash flow. Delivering rule of 40 metric is quite compelling. And so we want to work our way through another three months here, get some execution under our belt and then reevaluate the second half of the year as we get there.
Operator
Our final question is from Erik Suppiger with JMP.
Erik Suppiger -- JMP Securities -- Analyst
Yeah. Thanks for putting me in. Just looking at the billings growth, you've given a few factors for being at the linearity through the year, but it looks here like your year-over-year billings growth in the first half of the year is in the mid-teens and the second half is, it gets you to the north of a 20% growth. Should we just think about that as the linearity of -- or the seasonality of orders is causing that bifurcation? Or can you prioritize kind of what is making the year so back-end loaded?
Gary Steele -- Chief Executive Officer and Chairman
Yes. So just as a reminder, if you look at the timing of the billings as delivered in Q1, Q2, Q3 and Q4 of last year, it's a relatively similar pattern here in 2019. And so, it is this notion of ongoing concentration of renewals in the back half of the year, combined with the natural fact that the new and add-on business that we close as a company in any given year tends to be higher as well.
So, there's nothing really out of the ordinary. Just as we get bigger and higher and higher scale, we have a more and more distorted effect in terms of the billings being delivered in the second half of the year. You've got larger companies like Salesforce, for example, they have a similar pattern in their overall billings activity. So, it's really quite frankly nothing more than that.
Operator
And ladies and gentlemen, this concludes today's question-and-answer session. For closing remarks, I'd like to turn the conference back over to Mr. Gary Steele. Please go ahead.
Gary Steele -- Chief Executive Officer and Chairman
Great. I want to take a moment to thank, everyone, for joining us on the call today. We're very pleased with our Q1 results and excited about the continued progress with our people-centric approach to cybersecurity. We believe we remain well positioned to drive attractive returns for our shareholders, and look forward to talking to you on our next call and seeing many of you on the conference circuit this quarter. Thanks so much for joining us today.
Operator
Ladies and gentlemen, this concludes today's conference. We appreciate your participation.
Duration: 65 minutes
Call participants:
Jason Starr -- Vice President, Investor Relations
Gary Steele -- Chief Executive Officer and Chairman
Paul Auvil -- Chief Financial Officer
Melissa Franchi -- Morgan Stanley -- Analyst
Andrew Nowinski -- Piper Jaffray -- Analyst
Philip Winslow -- Wells Fargo Securities -- Analyst
Matt Hedberg -- RBC Capital Markets. -- Analyst
Rob Owens -- KeyBanc Capital Markets -- Analyst
Jonathan Ho -- Analyst -- Analyst
Alex Henderson -- Needham & Company -- Analyst
Walter Pritchard -- Citigroup -- Analyst
Gabriela Borges -- Goldman Sachs -- Analyst
Ken Talanian -- Evercore ISI -- Analyst
Sarah Hindlian -- Macquarie -- Analyst
Michael Romanelli -- Mizuho Securities -- Analyst
Shaul Eyal -- Oppenheimer & Company -- Analyst
Imtiaz Koujalgi -- Guggenheim Securities -- Analyst
Steve Koenig -- Wedbush Securities -- Analyst
Catharine Trebnick -- Dougherty & Company -- Analyst
Gur Talpaz -- Stifel Nicolaus & Company Incorporated -- Analyst
Daniel Bartus -- Bank of America Merrill Lynch -- Analyst
Gray Powell -- Deutsche Bank. -- Analyst
Patrick Colville -- Arete Research -- Analyst
Erik Suppiger -- JMP Securities -- Analyst
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