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Proofpoint Inc (PFPT)
Q3Â 2019 Earnings Call
Oct 24, 2019, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Proofpoint Third Quarter 2019 Earnings Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Jason Starr, Vice President, Investor Relations. Please begin, sir.
Jason Starr -- Vice President, Investor Relations
Thanks, Aaron. Good afternoon, and welcome to Proofpoint's third 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'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, October 24, 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 to 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 releases 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 of the Board
Thanks, Jason. I'd like to thank everyone for joining us on the call today. We are very pleased with our Q3 results, with our team delivering yet another quarter of solid top line and bottom-line financial results. Q3 revenues were $227.4 million, ahead of expectations and representing 23% annual growth. Our results also demonstrate the strong operating leverage embedded in our business model with our guided profitability metrics such as gross margin, operating income and free cash flow, all coming in ahead of our targets.
In addition, we are also pleased to have completed a $920 million convertible note offering providing significant longer-term strategic operating flexibility, which Paul will discuss shortly. Our overall business momentum remains strong, driven by a number of key factors, including the demand for our next generation cloud security and compliance platform, the ongoing migration to the cloud, our effectiveness identifying and blocking the most complex and malicious threats 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 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%.
The ongoing migration of enterprise applications and workloads to the cloud provides organizations with many well-known benefits, but also provides attackers with an entirely new and often unprotected vectors that they can exploit to compromise individuals for financial gain. To deal with these evolving challenges, companies need a comprehensive set of people-centric cybersecurity and compliance capabilities to better safeguard their employees whenever and wherever they interact with content beyond the firewall. This is a fundamental shift from the previous paradigm. Security leaders increasingly need the visibility to understand not only who in their organization is being targeted, but also how likely they are to be tricked into coming to an attack and the sensitivity of company information and resources that they have access to.
Additional information such as the sophistication of the attackers, for instance, are they a hacker or a state sponsored threat actor or whether the attack is targeted are part of a broader campaign can all help security teams take appropriate steps to prioritize their security to their highest risk, most privileged or most vulnerable users. Proofpoint is uniquely positioned to solve all of these challenges by combining our excellence in email security and threat intelligence with our broadening reach across a wide array of critical cloud applications.
The threat intelligence and visibility delivered through Proofpoint's targeted attack protection dashboard provides security teams with unique and actionable data down to the department and employee level, enabling them to implement additional adaptive controls to improve their overall security posture such as deploying browser isolation or conducting advanced security awareness training and phishing simulation in order to further protect users who are the most frequently targeted by threat actors. This intelligence is a tremendous competitive differentiator for Proofpoint and has elevated our discussions with security teams from customers and prospects alike making us an even more strategic partner for enterprises around the globe.
Over the past several years, we've witnessed a profound shift in the threat landscape moving away from infrastructure-based attacks toward socially engineered attacks that are curated to target specific individuals. These targeted attacks now represent the number one threat factor. Our many investments in R&D and M&A over the years have delivered a span of innovation that has kept our solutions well ahead of the ever evolving threat landscape, enabling us to protect our customers from these rapidly evolving angles of attack, the latest generation of which include business email compromise and account takeover attacks.
Our Email Fraud Defense or EFD offering has proven to be an effective way for security teams to protect against increasing BEC attacks over the past few years. And more recently, our innovative CASB offering can provide additional visibility into account takeovers and important DLP or Data Loss Protection capabilities, include leading cloud venues like Office 365, Salesforce.com, Box and Dropbox. For example, in one recent sales engagement at a Fortune 500 retailer, our CASB service detected over 1,600 compromised Office 365 accounts, putting them at significant risk either from X filtration of sensitive data within the accounts or through internal attacks being launched by threat actors from within their own corporate domain.
Across our customer base and prospects alike, we have seen a steady increase in the number of compromised account attacks in 2019. And as a result, we have seen an increasing traction with our CASB offering over the course of the year. This increased interest in CASB naturally draws along with it interest in both our advanced threat protection and DLP capabilities. In fact, in its most recent Magic Quadrant for Cloud Access Security Brokers, Gartner scored [Phonetic] highly in these two categories and also recognized our improved ability to execute in this particular market. And to note, DLP in particular is increasingly important to protect against not only hidden written data leakage from well intended employees, but more importantly the escalating challenges posed by insider threats where either a rogue employee or a threat actor are operating inside the company infrastructure, accessing and eventually exfiltrating sensitive company data.
These types of attacks and compromise had have become more prevalent and damaging over the past several years. In fact, the FBI recently issued an updated estimate that business email compromise and account compromise attacks have resulted in over $26 billion in cumulative losses since June of 2015 with over half of that amount occurring since May of 2018. These forms of attack are widespread and have been reported in all 50 US states and 177 countries and have now overtaken ransomware, a number one threat for cyber insurance.
Our innovations in the areas of EFD and CASB are proving critical in preventing these new forms of attack and compromise and another great example of Proofpoint's innovation and unique ability to stay ahead of the constantly changing threat landscape. With that as a backdrop, let's turn to some of our key operating results for the third quarter.
The rapidly changing threat landscape and the ongoing transition to the cloud and the migration to Microsoft Office 365 in particular continue to be dual long-term catalysts 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 challenges of this new generation of cloud systems and infrastructure.
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 third quarter included: a Fortune 500 retailer that purchased our P0 bundle, which includes Protection, TAP and Threat Response along with Internal Mail Defense, CASB and isolation for 60,000 users. A Fortune 500 mining company that purchased P0 and also Privacy for 20,000 users. A Fortune 500 semiconductor manufacturing company that purchased Protection and TAP for 17,000 users and a large municipality that purchased our P2 bundle for 15,000 users.
We are also pleased with the 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, which yet again represented over one-third of the total new and add-on business closed during the quarter led by strong demand for Email Fraud Defense or EFD, Threat Response and notably Proofpoint Security Awareness Training or PSAT.
Overall, we're seeing strong customer interest in PSAT with success selling into our existing base, as well as driving new account wins. And this is becoming a key driver in our ongoing traction with our bundling strategy. In Q3, we delivered exciting new enhancement to PSAT, including new video-based awareness content. We believe that our product road map for PSAT is compelling and represents yet another attractive opportunity for Proofpoint to drive meaningful growth in an exciting new segment of the cybersecurity market. We were also pleased to announce that for the sixth consecutive year, PSAT was named a leader in Gartner's Magic Quadrant for Security Awareness computer-based training.
Another recent innovation in our emerging services portfolio is TAP isolation, which we launched in Q3 and seamlessly integrates our browser isolation technology into our TAP advanced threat detection system in order to further enhance the protection of end users. This new capability provides security teams with the ability to establish policies and customize how and when the isolation system is involved, particularly for their very attacked people and further protects users from malicious URL links. In the quarter, we saw good early traction for TAP isolation with a number of customer wins in the third quarter and we believe this further extends our competitive lead in the advanced threat market.
In terms of segment reporting, our compliance segment recorded yet another quarter of solid growth driven by strength in our archiving business paired with the accelerating momentum of our PSAT products as well as continued interest in our Digital Risk solutions. Over the past several quarters, we have seen increased interest in many of the new archiving features that we've introduced, including supervision, eDiscovery and analytics visualization, particularly from firms and regulated industries such as healthcare and financial services, and the features are starting to drive demand.
Our archiving pipeline continues to strengthen, given our cloud-based delivery model and the many investments in innovation we're making as compared to legacy on-premise competitors. And while we're clearly optimistic in terms of our prospects and positioning in this market, it is important to note that given the size and complexity of these larger opportunities, it can take many quarters for them to mature and meaningfully contribute to our results.
Examples of archiving deals converting in the third quarter included: a large North American bank that purchased a three-year prepaid subscription to our archiving service for a high seven figure amount for 18,000 users. A large Canadian bank that purchased a three-year prepaid subscription for archiving service for a high seven figure amount for 55,000 users. And a leading technology company that expanded their archive deployment for their 50,000 users.
As we users. As we shared on prior calls, our product portfolio has steadily grown and now represents 18 unique services. A key initiative for our go-to-market this year was the launch of our solutions bundles, P0, P1, P2 and P3. We believe that these bundles make it easier for customers consume our broad set of capabilities, eliminating the need for multiple sales cycles and greatly simplifying the selling process for our sales team and importantly, for the channel. While this effort is still early, bundled products, again, contributed nicely to our Q3 results, reflecting solid customer interest in this approach. In fact, we closed over 100 deals with the entry level P0 and P1 bundles this quarter and also made further progress with our higher end P2 and P3 bundles.
Additional examples of customers that purchased bundles during the third quarter included: a Fortune 100 investment bank that upgraded to the P2 bundle along with the EFD for 45,000 users. A subsidiary of a Global 2000 communication company that purchased P1 for 50,000 users. And lastly, I was particularly pleased to see one of our long time Fortune 100 healthcare customers with 80,000 users choose to upgrade to the P3 bundle with a three-year prepaid service commitment for a low eight figure amount.
Now, turning to our federal opportunity. As we shared last quarter, we received our Authority to Operate or ATO under FedRAMP for our Protection TAP and DLP offerings. This was quickly followed by our first FedRAMP win, a large agency with over 200,000 users that booked early in the quarter and was discussed in our call back in July. Beyond this leading transaction, as we expected, we had a solid but not overly significant contribution from this vertical in Q3 and we continue to believe we have a very large opportunity to expand our presence in the government vertical over the next several years.
We also continue to make progress toward further expansion abroad and are pleased with the quarterly results in our international business, which grew 28% year-over-year and represented 20% of total revenue. Overall, we believe the operations outside of the United States are executing well, as highlighted by notable international deals closed during the quarter, such as a Global 2000 financial services firm that purchased Protection for 160,000 users. A Global 2000 financial services firm that purchased Protection and TAP for 18,000 users. A leading transportation services company that purchased our P3 bundle for 5,000 users and a large privately owned distributor of electrical products that purchased Protection, TAP, Threat Response and Internal Mail Defense for 16,000 users. We plan to continue to invest in our international opportunities, including opening additional geographies to capitalize on the burgeoning demand for people-centric security and compliance around the world.
Finally, turning to our ecosystem partnerships. We recently announced a new technology partnership with CrowdStrike, a leader in cloud delivered endpoint protection. This technical integration protects our customers from advanced threats across email and endpoints through cloud to cloud APIs established between TAP and CrowdStrike Falcon. This provides customers with automated context and visibility to ensure all endpoints are protected from malicious attachments and receive automatic notification if related malicious content tries to execute on a device.
We also announced an expansion of our technology partnership with Okta, a leading independent provider of identity access management for the enterprise to enhance how our joint customers protect their most out risk users from sophisticated cyber attacks. Through this integration, customers can leverage TAP's attack index, which identifies an organization's very attacked people and scores the threats they face on their criticality and in turn provide actionable data to apply stronger access control through Okta's identity cloud to better protect those users.
So in summary, we continue to execute well as demonstrated by our strong Q3 results in 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, which exceeded our guidance across the board. Many thanks to the hard work of our teams around the world who delivered these results.
Before reviewing the numbers, I would like to provide a quick overview and some additional modeling points regarding our recent $920 million convertible bond offering, which we were pleased to have completed in August. In terms of some background, given the compelling pricing in the convertible bond market, both our leadership team and our Board of Directors felt that it was a good time to access this funding resource primarily to support future M&A projects.
We close the funding on August 23rd, structured as a five-year note. These notes are due in August of 2024 and carry annual cash interest expense of 0.25% or $2.3 million per year payable in equal by annual installments in February and August. It's also carry a three-year provisional call that can be exercised anytime after August 2022, assuming certain conditions are met. The conversion price associated with these notes is $153.99, which represented a 37.5% premium at the time of issue and the convertible into approximately 6 million shares.
Importantly, we took approximately $85 million of the net proceeds entered -- and entered into a cap call transaction with certain financial institutions. This enables the company to participate in any upside beyond the conversion price up to $223.98, which in turn reduces dilution by up to 1.9 million shares. Taking into account the cap call, the net proceeds from the financing were approximately $816 million.
I would like to point out that just as we did with our previous two series in convertible notes that we retired in 2017 and 2018 respectively. The shares associated with these new 2024 notes will now be included in our EPS calculations when they are dilutive. We have included a brief summary in today's press release outlining the associated accounting treatment for EPS under the if-converted methodology to be applied going forward. The same methodology that we used for our previous series of convertible notes.
Now turning to our financial results. Revenue for the third quarter totaled $227.4 million, up 23% year-over-year and above our guidance range of $223 million to $225 million. Billings for the third quarter were $277.8 million, an increase of 26% year-over-year and above the high-end of our guidance range of $274 million to $276 million. 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 Q3, the adjustment related to these two items was $4.3 million.
Recall that from our many acquisitions, we have assumed certain legacy customer contracts, which include terms and conditions that require different accounting treatment than our typical Proofpoint customer agreements. And this quarter, we had one fairly large transaction in particular that fell into this category. We saw a rebound in contract duration of roughly 10% this quarter, a modest reversal from our relative low point recorded earlier in the year. This increase in duration was primarily driven by the two large archiving deals and also the significant P3 transaction, all three of which Gary mentioned earlier. Where all three of these organizations chose to execute multi-year prepaid contracts as part of locking in their commitment to deploy and leverage our technology across their global operations.
This trend in terms of duration is further reflected in our deferred revenue balances, which ended the quarter at $674.6 million, up $46.1 million sequentially with short-term growing by $27.4 million and long-term increasing by $18.7 million. Note that on a year-over-year basis, short-term deferred revenue grew by 22% from $440 million to $542 million. It is also worth noting that on a year-to-date basis, our total increase in long-term deferred revenue equals a modest 3.4% of total billings, up nominally as compared to the 3% and 3.2% recorded over the same periods during the past two years.
In terms of a bit more detail on revenue during Q3, revenues from our Advanced Threat segment grew 19% year-over-year and represented 72% of total revenue and our Compliance segment grew 37% year-over-year and represented 28% of revenue.
Turning to expenses and profitability for the third quarter, on a non-GAAP basis, our total gross margin was 80% above our expectations, primarily driven by strong revenue performance. Note that this result was above our 2020 target range of 77% to 79%, though the performance this quarter was also benefiting nominally from a slower-than-expected ramp in our data center investments during the quarter.
Total non-GAAP operating expenses during the quarter increased 21% over the prior year period to $147 million, representing 65% of total revenue. Our non-GAAP operating income for the third quarter was $33.9 million, reflecting an operating margin of 15% bringing us into the high end of our 2020 targeted range of 13% to 15%, a full year ahead of schedule. Non-GAAP net income was $29.8 million, nicely above our guidance range of $21.5 million to $23.5 million, driven by both the revenue outperformance as well as our lower-than-expected spending in sales, marketing, R&D and the aforementioned slower ramp in data center investments.
Also it is important to note that $1 million of upside net income during the quarter was directly attributable to the convertible notes issued in late August, with $1.4 million of additional interest expense or income rather earned on the cash balances from the funds raised netted against $0.2 million of accrued interest expense payable to the note holders and then adjusted for the 17% C&DI tax rate.
As we discussed on our past two calls, beginning in January 1 of 2019, we are now calculating non-GAAP net income in accordance with the SEC's Non-GAAP Financial Measures Compliance and Disclosure Interpretations section 102.11. This quarter's calculation includes $6.1 million in tax expense under C&DI at an implied tax rate consistent with last quarter of 17%. Non-GAAP earnings per share for the quarter was $0.49 per fully diluted share. As I noted, the EPS calculation applies the if-converted method to our newly issued convertible notes and as such adds back the $0.2 million in cash interest associated with the convertible debt. For Q3 specifically, as the notes were issued on August 23rd, only 2.5 million of these shares were included in the calculation as we use the weighted average outstanding calculation, which represented a fully diluted share count of 61.2 million shares. Adjusting to eliminate the impacts from the convert transaction, which of course wasn't contemplated in our guidance back in July. The results for the quarter still otherwise would have been $0.49 per share. So still above the high end of our guidance range of $0.37 to $0.40.
On a GAAP basis, we recorded a net loss for the third quarter totaling $44.3 million or $0.79 per share based on 56 million shares outstanding. But note, we expected Q3 tax payment for the repatriation of intellectual property from Israel to the United States associated with our acquisition of Meta Networks was in fact deferred until October. So as a result, while the repatriation did in fact impact Q3 current and deferred GAAP tax expense by $17.6 million, its impact on cash flow was delayed until the fourth quarter, as I will discuss in more detail later in my prepared remarks.
Moving to the balance sheet, we ended the quarter with $1.1 billion in cash, cash equivalents and short-term investments compared to $183 million in Q2. This significant increase was primarily driven by the convertible notes offering that we closed in August. In terms of cash flow for the quarter, we generated $68.6 million in operating cash flow and invested $10 million in capital expenditures resulting in free cash flow of $58.6 million, well ahead of our guidance of $40 million to $42 million, while we had a very strong collection cycle within the quarter that helped to deliver this result. It is also important to note that our original guidance for the quarter assumed a onetime payment to repatriate the intellectual property associated with our acquisition of Meta Networks of roughly $10 million. So per my earlier comment, this did not get completed in the quarter and hence the equivalent guidance for the third quarter would have been $50 million to $52 million when adjusted for this effect. Viewed in this context, our $58.6 million in free cash flow recorded during the quarter was still a very good result and nicely ahead of our guidance reflecting a free cash flow margin of nearly 26%.
Moving on to guidance for the rest of the year. For the full year, we are maintaining our billings guidance range of $1.064 billion to $1.068 billion, representing nearly 22% growth at the midpoint. This guidance implies Q4 billings range of approximately $339 million to $343 million and also reflects a year-over-year growth rate of 26% for the fourth quarter at the midpoint.
We are increasing our 2019 revenue guidance to $882.3 million to $884.3 million, increasing the midpoint by $3.8 million, reflecting 23% growth year-over-year at the midpoint. This infers a range for the fourth quarter of $237.5 million to $239.5 million, representing 20% growth year-over-year for Q4. There was a reminder, the very strong revenue performance in the fourth quarter of 2018 was driven in part by roughly $3 million in revenue acceleration under ASC 606, as we discussed back in our January call. And this creates a challenging baseline in Q4 absent a similar acceleration this year. And so adjusting for this effect, guidance implies 22% growth for the fourth quarter.
In terms of gross margin guidance, we expect annual and fourth quarter non-GAAP gross margin to be approximately 79%. In terms of guidance for net income, for the fourth quarter, we expect non-GAAP net income of $30 million to $32 million or $0.47 to $0.50 in earnings per share based on $64.9 million fully diluted shares outstanding, as spending catches up to revenue and some expenses that were originally expected to be incurred in Q3 will now fall into Q4. Also, it is important to note that this fourth quarter guidance includes $2 million of upside directly attributable to the convertible notes issued in late August, with $3 million of additional interest income earned on the cash balances from the funds raised netted against $0.6 million in accrued interest expense payable to the noteholders and then adjusted for the 17% C&DI tax rate. Note that this Q4 guidance assumes capital expenditures of $14 million, depreciation of approximately $9 million and an income tax provision of approximately $6.3 million, calculated in accordance with C&DI 102.11 at an effective rate of 17%.
For the full year, we are increasing our net income guidance by $9.5 million at the midpoint from our prior range of $94 million to $96 million to an updated range of $103.5 million to $105.5 million, which equates to $1.72 to $1.75 earnings per share based on 60.6 million fully diluted shares outstanding.
As I just noted, this updated full year guidance includes a favorable impact from the issuance of the convertible notes of approximately $3 million across the third and fourth quarter. As such of the $9.5 million increase in guidance just noted, $3 million is attributable to convertible notes and $6.5 million is attributable to our improved operational outlook. 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 of approximately $21.4 million, calculated in accordance with C&DI 102.11.
In terms of free cash flow, given the strong linearity during the third quarter, the cash collections that otherwise would have been expected in Q4 were actually accelerated into Q3. And with that in mind, in terms of free cash flow for the fourth quarter, we are now expecting this to range between $58.2 million and $60.2 million. Note that this now includes the one-time tax payment associated with the repatriation of intellectual property for Meta Networks, which we now expect to be $8.4 million, a bit lower than the original estimate of $10 million that we had provided last quarter.
For the full year, we are increasing the range by $4.5 million with a new outlook for free cash flow of $200.5 million to $202.5 million. This represents a free cash flow margin of 23% or approximately 24% when excluding the $8.4 million IP transfer tax payment. Note that this updated range includes approximately $2 million in incremental interest income receipts from our increased cash balances resulting from our recent capital raise from the issuance of convertible notes. We believe that this outlook is particularly compelling given our commitment to innovation as well as our ongoing investments to pursue the key opportunities in the market.
While we're still in the early stages of our planning process, I would now like to share a preliminary view regarding our 2020 financial outlook. I would like to highlight that this is a baseline target for modeling purposes with similar assumptions being made at this stage of our planning process as in prior years. As we complete our 2020 plan, we will provide a more detailed outline of our operating assumptions on our next earnings call.
Overall, our business remains well positioned, the competitive environment favorable and the strong secular drivers of the move to the cloud and an active threat landscape are firmly in place. So with that as a backdrop, our preliminary view on 2020 as follows: we are providing an initial revenue range of $1.05 billion to $1.0625 billion or baseline revenue growth rate of approximately 20% when measured against the midpoint of our updated 2019 guidance.
In terms of billings guidance, after seven years of beating our guidance on this metric as a public company, as we look to the cadence of how we intend to operate the business now that our billing scale has exceeded $1 billion annually. We've decided that going forward, we will end our practice of guiding on this particular metric. In terms of some background here, we've concluded that it is the combination of revenue growth and the delivery of cash flow that drives how investors value our business and as such, the actual timing of billings per se is not an important metric and how we run the business, particularly as the vast majority of our billings activity our renewals that are increasingly accumulating toward the end of each of our quarterly periods based on our customer's buying patterns.
With all that in mind, the timing of whether these renewals or bills on the last few days of one quarter as opposed to the first few days of the next has no relevant impact on either the recording of revenue or the timing of cash flows, particularly when viewed in the context of our operating model where over 95% of our revenues are derived from recurring subscription contracts. So with that said, for those investors who still choose to model this metric, let me provide a few pointers. First, we'd expect billings growth to be equal to or slightly less than revenue growth in 2020, depending on duration of build contracts, which we would continue to expect to remain somewhere in our stronger range of 14 to 20 months. Given the seasonal timing of sales and customer renewal cycles, we would remind investors to expect a pattern similar to prior years were approximately 35% to 40% of our businesses booked in the first half of the year.
Drilling down as we intend to focus our efforts more on the timing of cash flow rather than billings, we would reasonably expect that a portion of Q1 renewal billings activity, it would have traditionally closed at the end of Q1 will move into Q2 under our new protocol. This of course has no impact on revenue or cash flow that will be recorded in 2020 and simply reflects an easing of how we handle quarter end activity with some deals moving by handful of days from the end of March to early April. We would still expect approximately one-third of billings to occur in Q4, as we've seen over the past several years.
For 2020 operating income modeling, we are expecting the low end at the target range that we have shared on prior calls of 13% to 15%. In terms of considerations for net income, keep in mind that with our recent convertible note offering, our interest expense will be $2.3 million and offset by interest income on our cash balances, which are held in highly liquid assets, where we hope to hold an interest rate of approximately 1% over the course of the year.
Also note as well that future M&A activity over the course of next year would serve to lower these cash balances and as such, would have a nominal adverse impact on our net income and EPS accordingly. In terms of tax rate under C&DI, we expect our tax rate for 2019 and for 2020 to both be consistently at 17%.
Now turning to free cash flow. As we shared on our Q3 call in 2018, we have outgrown our current Sunnyvale campus, where we've operated for over 12 years now and is noted on that call, we signed an 11-year lease for a new headquarters location, just a few blocks away to accommodate our planned growth over the next decade. This project remains on schedule with the targeted opening in the fourth quarter of 2020. As part of this build out, we indicated that we plan to make modest investments in order to bring the building into compliance with our office standards and we currently expect an approximate investment of $25 million in one-time net tenant improvements at the lower end of our prior estimate of $25 million to $30 million.
For modeling purposes, the capital expenditures in total that will be incurred for the project will be $43.5 million, so this will be offset by approximately $18.5 million in the form of a tenant allowance that we've negotiated with the landlord. Note that this offset will run through the operating cash line of the cash flow statement as opposed to netting directly against capital expense. With this in mind, when excluding the onetime costs for our headquarters, we currently expect our free cash flow to grow by 24% year-over-year to approximately $250 million or roughly 24% of revenue, demonstrating the strong free cash flow characteristics of our financial model.
On a reported basis, hence, including the investments in our new headquarters, we expect free cash flow to be approximately $225 million or 21% of revenue. We believe that this outlook -- this initial outlook is particularly compelling given our commitment to innovation as well as the ongoing investments we're making to pursue the key opportunities in the market. As in prior years, we expect the majority of this cash flow to be delivered in the second half of the year with just under 30% generated in the first half. This 2020 guidance assumes total capital expenditures of approximately $93.5 million, including the just noted headquarters capital investment of $43.5 million, which again will be partially offset by the $18.5 million TI Allowance that will run through operating cash flow. Similar to past years, we plan to further refine our 2020 forecast as we complete our planning process and gain additional insights from our extended network of partners and channel sales, but we believe that this is a thoughtful and solid starting point.
As a final comment, I would like to highlight that this guidance for 2020 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 initial 2020 outlook of 20% revenue growth and 24% free cash flow margins, when adjusted for the onetime headquarters investment, these metrics would suggest a figure of 44 under the rule of 40 construct reflecting a very attractive financial model, which continues to place us prominently in the top quartile of all publicly traded SaaS companies.
In conclusion, we continue to execute well, delivering strong top and bottom line operating results here in the third quarter. And 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 again 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
[Operator Instructions] We'll go first to Jonathan Ho with William Blair.
Jonathan Ho -- William Blair -- Analyst
Hi, can you just hear me OK?
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yes we can.
Jonathan Ho -- William Blair -- Analyst
Perfect. I just wanted to start out with a question around your billings guidance and particularly for the fourth quarter, just given the outperformance this quarter, and maybe what you're seeing in terms of puts and takes around that guidance?
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah. Thanks, Jonathan. That's a good question. As we look at the overall business and again with the billings number for the full year being over $1 billion. Our focus is on essentially as I talked about and the reason why we're suspending the billings guidance going forward, our focus really is on how do we deliver the revenue metric and how do we deliver the cash flow metric. And so we were excited about raising both the revenue and the cash flow metrics for the year and we're excited about the guidance that we provided as a starting point for 2020.
As we think about third quarter performance and where we see fourth quarter coming together, overall, we feel like that range that we provided last quarter was the right range for us to be operating to. Keep in mind that it's delivering a 26% year-over-year growth rate in both the third and fourth quarter. So we think those numbers are compelling. So as we just looked at the outlook for the remainder of the year and how the pieces come together going into 2020, we felt that holding the overall billings guide for the full year was the right strategy at this stage.
Jonathan Ho -- William Blair -- Analyst
Got it. Thank you.
Gary Steele -- Chief Executive Officer and Chairman of the Board
And we'll go to the next question.
Operator
Yes, sir. We're going to next to Melissa Franchi with Morgan Stanley.
Melissa Franchi -- Morgan Stanley -- Analyst
Great. Thanks for taking my question. Gary, I'd like to start with, just maybe a high-level macro question. Just given, one of the first security companies to report this season. So there is obviously some concern about softening IT spending, I'm just wondering, it doesn't seem like you're seeing any of that. But just wondering if any of the customer conversations have changed. And then, Paul, as you're thinking about Q4 billings, was there any incremental conservatism embedded just given macro uncertainty?
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah, great question, Melissa. So we -- so throughout Q3, we did not see any change in macro buying conditions. So we didn't see projects pushing out, we didn't see elongating sales cycles, and that's true really globally. And again, our footprint outside the US is roughly 20% of revenue. So that would have less impact on us. But we were pretty consistent around the globe. Things were quite healthy for us.
Paul Auvil -- Chief Financial Officer
Yeah. And to your question, specifically on Q4 and I probably should have touched on this with Jonathan's question from a minute ago. I mean, as we look at the fourth quarter, it's a very interesting timing in terms of the holiday calendars of when Christmas and New Year's come together. And we have already been made aware by a number of our customers that they are planning to have plant shutdowns that span a pretty meaningful period there at the end of December. And given the fact that we have lots and lots of renewal business that's due in those last couple of weeks, it does add a little bit of complexity and working with those customers and getting all those over the line, and that was another consideration as we were thinking about should we raise billings guidance for the fourth quarter. Yeah, our view is -- I can't control holiday schedules, I can't control when a CIO might be out on vacation, what have you. And given the fact, a lot of our contracts are quite large, they do even when they're just to renewal require a fairly complex sign off process in order to get them processed. And so just taking the holiday into account was part of how we thought about maintaining billings guide, because again, the timing of as the pieces come together at the end of Q4, early Q1 more effect how we record cash flow or revenue as a business.
Melissa Franchi -- Morgan Stanley -- Analyst
Helpful. Thank you.
Operator
The next to Matt Hedberg with RBC Capital Markets.
Matt Hedberg -- RBC Capital Markets -- Analyst
How are you guys? Thanks for taking my question, Gary, when you think of drivers for 2020, could you sort of summarize what you think the top three items could represent? Or they could represent upside to the initial 20% guide? And I guess, I'm wondering specifically to if competitive share shift from legacy vendors could be within one of those top three kind of given what's going on in the landscape?
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah, I think it's a combination of things. So I think that favorable competitive environment continues to play an interesting role for us. So that definitely factors in one of those top three. Second for us would be the early success we've experienced on bundles. So, as we noted in our prepared remarks, we saw good early traction in Q3 with both our P0 and P1 bundles and some nice early traction with the larger P2 and P3 bundles with some nice transactions noted in the prepared remarks. And then I think the third is we continue to invest in international a lot while today as we reported 20% of our revenues coming from international. I think we've got interesting opportunity there as well.
Matt Hedberg -- RBC Capital Markets -- Analyst
Great, thanks.
Gary Steele -- Chief Executive Officer and Chairman of the Board
The final one, I would -- and I would add, number four, which is our emerging product strength continues to be quite robust.
Matt Hedberg -- RBC Capital Markets -- Analyst
A bonus one. Thanks.
Gary Steele -- Chief Executive Officer and Chairman of the Board
You got it.
Operator
We'll go next to Jonathan Ruykhaver with Baird.
Jonathan Ruykhaver -- Baird -- Analyst
Yeah, good afternoon. So regarding the bundled packages, I'm just curious on your view of the potential uplift the ACV on renewal. Is it too early to identify any pattern? And then just in terms of both the large enterprise opportunity for bundling, when do you think that would start to get more traction?
Paul Auvil -- Chief Financial Officer
Yeah, it's a little hard to say. Obviously, customer pricing varies depending on vertical, depending on the size of the customer what have you. The moving people to the lower end bundles like our P0 and P1, now represent some modest improvement in overall revenue, but small. I think 5% to 15% typically. But the P2 and P3 bundles are very, very significant step-ups. And as Gary noted in his prepared remarks, and this large P3 transaction that we did with one of our long time customers in financial services was a low eight figure three-year transaction. So there is significant accretive value as we move people from kind of a standard email-oriented threat DLP framework to a full P2 or P3 deployment. So we're quite encouraged given the early success that we're seeing here this year with the P2 and P3 upgrades in particular in terms of the potential for them to help be a meaningful secular driver of growth for us, as we work our way into 2020 and beyond.
Jonathan Ruykhaver -- Baird -- Analyst
Helpful. Thank you.
Operator
We'll go next to Gray Powell with Deutsche Bank.
Gray Powell -- Deutsche Bank -- Analyst
Great. Thanks for taking the question. Maybe sort of a high level one. So how do you feel about the potential to gain share against Symantec given their sale to Broadcom. Is there an incremental opportunity there? And then when you look at it, do you have a sense as to how much of their email business is maintenance revenue on a previously purchased appliance versus pure subscription that sort of apples-to-apples with what you do? Thanks.
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah, on that second question, Gray, we don't have any specifics on the exact breakdown of subscription versus maintenance. I think the one thing that is encouraging is there is a regional amount of recurring revenue there across their on-prem maintenance plus their cloud subscription. And then in terms of their overall opportunity, we've had good success over a long period of time moving customers from Symantec over to Proofpoint. And so with the changes that are occurring in Symantec, we think that's a pretty interesting opportunity. We don't think those things happen overnight. We think that takes some time. But we're encouraged over the long haul about customers who are on Symantec and are looking for a next generation product, we think we're a great alternative, and we think that can play out over the course of the next three years.
Paul Auvil -- Chief Financial Officer
Yeah, I think the other thing that I'd add too is, for those of you who've been following Proofpoint for a number of years. One of the things that was very interesting when McAfee formally exited the business. We found that for many of the opportunities we could go in and sell our comparable offering to replace the existing McAfee capability, but in that sales engagement sell additional products and so might have been $1 that McAfee was receiving for every $1 they had been getting, we might get $1.50 or $2 or more. And so, given the breadth of our product line and our bundling strategy, in particular, even for the customers that might be operating on a current maintenance renewal base, there is a significant opportunity for us to monetize that in a way that's well above beyond what Symantec was ever able to accomplish with that installed base of customers.
Gray Powell -- Deutsche Bank -- Analyst
Got it. Okay. That's very helpful. Thank you.
Operator
We'll go next to Phil Winslow with Wells Fargo.
Phil Winslow -- Wells Fargo -- Analyst
Hey, guys, thanks guys for taking my question. I just wanted to focus in on the emerging products that again this quarter. Gary and Paul, when you look out into next year, how you sort of factoring those in to 2020? And what are you sort of most optimistic on?
Paul Auvil -- Chief Financial Officer
Yeah. So as we talked about over the last few quarters, they've been over a third of the new and add on recurring revenue that we booked. And we definitely see ongoing momentum actually across a pretty broad set of those products. So we think it does give us a nice setup going into 2020 whether customers want to buy those individual emerging products on their own or whether they end up getting included in a P2 or P3 bundle. So, again, the setup for us going into '20 with that broader product line and the emerging products in particular, we think is pretty compelling.
In terms of products that are kind of stand out, so I don't know, Gary, whether you want to provide some color there.
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah, I would go back to some of the comments we made in the prepared remarks. So we're seeing really high interest levels in our security awareness training to the Wombat business. I think we now have all of our sellers actively selling and prospecting on that and because that market is relatively nascent in fast growing. I think where we can actively participate in that growth. Second is EFD and Threat Response have been great staples and they represent opportunities as we think about bundling. And then finally, we referenced CASB and the opportunities there associated with data loss prevention. I think with the changes the broader structural changes happening within the industry, I think we're well positioned there to go see nice growth in 2020.
Phil Winslow -- Wells Fargo -- Analyst
Great. Thanks guys.
Operator
We'll take our next question from Ken Talanian with Evercore ISI.
Ken Talanian -- Evercore ISI -- Analyst
Hi guys, thanks for taking the question. I was wondering if you could comment on your M&A pipeline and where you think asset prices are relative to history?
Paul Auvil -- Chief Financial Officer
Yeah, that's a good question. Yeah, I think overall the M&A landscape continues to be interesting to us. We continue to look at a reasonable number of opportunities as we always have. It's hard to say whether your overall pricing has meaningfully changed in the market, maybe on the margin. We're seeing a handful of people that are a little more rationale and their view of the valuation of the enterprises that they built. But I would say that we're still not quite -- quite there yet. But that doesn't keep us from looking and there's certainly some things that we're interested in, and we continue on our march to look for great intellectual property developed by others that we think fits into our framework that we can add to bolster, how we better defend and provide compliance for all of our customers in this people-centric security and compliance model.
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah. And I think our strategy has been one where we have to build a very big broad pipeline. And so we have to be looking at a lot of things because values vary across that broad range of company. So we just have a very active approach in how we evaluate and I think we will always maintain a very disciplined approach in what we are willing to pay for things.
Ken Talanian -- Evercore ISI -- Analyst
Great. Thank you.
Operator
We'll take our next question from Gur Talpaz with Stifel.
Gur Talpaz -- Stifel Nicolaus & Company -- Analyst
Great. Thanks for taking my question. Just following up on Ken's question, given the size of the capital raise you just conducted, would you consider bigger M&A or perhaps larger acquisitions relative to what you've done in the past. And then just one follow-up for Paul, given that you're point via the billings guidance, would you consider giving another metric something like ARR down the line as a way to gauge the business going forward? Thank you.
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah, I think in terms of looking at bigger things. I think our -- we continue to really operate within the framework of our people-centric model and what M&A fits within that broad framework where we're either enhancing our ability to identify threats or we're providing additional adaptive controls to better secure an enterprise. And with that, we're going to be extremely thoughtful about that size of deal that we can be successful with. We don't today anything that is transformational, but we would go after, that's not within our lens of things we're looking at. We just continue to operate within our broad framework of how do we extend people-centric, deliver more value to our customers, get great teams, and then operate with a high level of price discipline.
Paul Auvil -- Chief Financial Officer
And to your question on metrics. We're evaluating what we want to do going forward as we work our way into 2020. So to your point, having decided to suspend our practice of providing billings metric, which as we looked across kind of all the $1 billion plus SaaS companies, pretty much everyone moves away from that is they get to larger scale. Whether we would introduce ARR metric, RPO, something like that is something we are currently considering, but haven't made a decision on that yet.
Gur Talpaz -- Stifel Nicolaus & Company -- Analyst
Great. Thank you.
Operator
Our next question comes from Sarah Hindlian with Macquarie.
Sarah Hindlian -- Macquarie -- Analyst
Great. Thank you so much. Thanks for taking my question. Gary, I wanted to dig into you with the federal win that you noted in the quarter for 200,000 seats. And you talked about FedRAMP coming through across a number of areas. So I think this is really important. And I'd like to hear a little bit more from you about how you're thinking about the timing and potential opportunity around the federal segment. And when we could expect to start to see this business become more meaningful for you?
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah, so in 2019, we continue to make federal investments both from a certification point of view, to getting FedRamp obviously, as you noted, super important and super exciting to us and they became the catalyst for that large deal that we won in the quarter. We've also continued to build team and scale a team with respect to federal. So we think that we have a great opportunity in 2020 to see more results from federal and that I think will carry us through the next 36 months. So we feel very good about that opportunity, because we see this broader catalyst within the US government to drive transition to cloud and we think we can be an active participant as organizations move to cloud to be part of their new security infrastructure. So we're quite excited about that and I think we'll see this begin to play out in 2020.
Sarah Hindlian -- Macquarie -- Analyst
Terrific. Thank you so much. I appreciate that.
Operator
We'll go next to Alex Henderson with Needham.
Alex Henderson -- Needham & Company -- Analyst
Yeah, just a clarification on the last one. Are you FedRAMP low, medium or high and the question I wanted to ask is really on the sales side for 2020. To what extent you are talking about accelerating investments in sales hiring in order to penetrate international? How does the split between sales spend in the US versus international a lot? Thanks.
Paul Auvil -- Chief Financial Officer
Yeah. So maybe just starting on that second question first. We've been making good baseline investments in our international over the last, I'd call it 24 months now and I think that we are pleased with the traction and progress and you can see that, of course, reflected in the year-over-year growth rate of international versus domestic. So I think as we're contemplating the numbers for that 2020 guide, there will be a disproportionate amount of hiring that will likely go on a year-over-year growth basis in the international and likely Europe in particular where the team is definitely seeing some good momentum and some good success.
So we will be investing in Asia-Pac, we'll probably be doing some work in around Latin America as well, but I think Europe will be the biggest area of emphasis for us. Given the fact that it's a security market that rivals the US markets in terms of size and scale, it's kind of a natural place for us to focus. And of course, all of these large enterprises and midsize enterprises that operate in Europe have the exact same security and compliance problems. Compliance could be a little bit different by country compared to the US, but all of these enterprises have privacy issues they have to deal with in terms of mandates both from the EU, as well as often local country regulations that overlay on top of that. And so we think it's an opportunity that's quite compelling. So we will be adding resources in the US, we think it's a great market and we're still, I would say to some degree under distributed there, but there'll be more of a focus on growth in sales resources internationally with Europe really being kind of first among equals.
Gary Steele -- Chief Executive Officer and Chairman of the Board
And then with respect to your FedRAMP question, we're FedRAMP medium, that's what we focused on, not FedRAMP pie. We view that as the requirement across civilian and even DoD for most organizations.
Alex Henderson -- Needham & Company -- Analyst
Thank you very much.
Operator
We'll go next to Erik Suppiger with JMP.
Erik Suppiger -- JMP Securities -- Analyst
Yes. Quick question on the emerging services. It's been about a third of your new and add-on business for last three quarters. If you look out to fiscal '20, where do you think that could be as you exit fiscal ' 20?
Gary Steele -- Chief Executive Officer and Chairman of the Board
That's a good question. I would say that it's likely to expand. We don't specifically forecast emerging products as a segment, obviously, per se. But I think particularly as we see the P2 and P3 bundles take off, that will create further acceleration in the poll of how those products are deployed in the relative revenue allocation associated with them. So, I guess, I would say likely to increase, but do you think, I would like to remind people of us for our sales team. We pay them on recurring revenue, new or add-on recurring revenue and we have no bias in terms of what they sell. So we don't put any special splits [Phonetic] or accelerators or gates into the comp plan, because ultimately we want our salespeople to go out and sell whatever is easiest for them to go out and drive growth for the company for our shareholders with the idea that what get into the account, once you're in the account, sell the more of what they want. Let's not be overly prescriptively focused on product A versus product B versus product C. Growth is growth, cash flow is cash flow. And we do believe that the majority of our customers will want the breadth of our full product offering measured over time. But you never want to do anything where you're overly discounting a product just to try to hit a hurdle, and so we avoid putting that into any of the compensation plans for the sales team.
Erik Suppiger -- JMP Securities -- Analyst
Would you be surprised if it hit 40% by the end of fiscal '20?
Gary Steele -- Chief Executive Officer and Chairman of the Board
No, I wouldn't be surprised if it got to that level.
Erik Suppiger -- JMP Securities -- Analyst
Very good. Thank you.
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah.
Operator
We'll take our next question from Gregg Moskowitz with Mizuho.
Gregg Moskowitz -- Mizuho -- Analyst
Okay, thank you very much and good afternoon, guys. Paul, I just wanted to follow-up in the Q4 billings commentary if I could. If I think back to Q4 of last year, you had spoken about an increasing amount of business that was coming up for renewal and you are right, and we saw acceleration in billings growth. And of course, every December, we have a significant holiday season, right? So, I haven't had the chance to look at. But what I'm wondering is the calendar this year is set up to be logistically more challenging in terms of holidays than it was last year or are you just factoring in more conservatism around this, so to speak?
Paul Auvil -- Chief Financial Officer
Yeah, I would say that, again, it's scale. So now we're at a whole at the level of scale as compared to last year. It adds logistical complexity. And then the holiday calendar just adds to that. So for example, last year we had a kind of a weekend to clean things up before we actually then ended up with the last day of the quarter, here there is no weekend. So we're ending on a week-day and we have until midnight of that week data process whatever comes in. And add to that the complexity of the timing of what we see is a lot of companies that are going to have extended vacation shutdown periods. It's just -- it's a couple of different dimensions that I just want to be thoughtful about is the Chief Financial Officer for the company and the expectations we set for Wall Street.
And again, as I shared in my prepared remarks. Honestly, the timing of billings really is, there's not much to do with anything in terms of how we deliver shareholder value because it doesn't affect the revenues are recorded in the quarter. And moving to billings a few days between the end of December and early January, it doesn't change the timing when that cash flow is going to be collected and delivered to the shareholders. And so it's from our perspective, delivering a 26% year-over-year growth rate, which is what the current guide is for the fourth quarter of billings is pretty substantial given our current scale and how we're operating. So we felt good about that and didn't see a need to move it.
Gregg Moskowitz -- Mizuho -- Analyst
Great. That's helpful. Thank you.
Operator
We'll go next to Walter Pritchard with Citi.
Walter Pritchard -- Citigroup -- Analyst
Hi, thanks. I'm wondering, Paul, in terms of the way that you're guiding, you've mentioned that your guidance, the initial guidance for 2020 is very similar to what you've done in the past. I'm wondering if you compared to last year, so I think last year you were coming out of some uncertainty in the third quarter. Is it fair to say that you're -- you took a more conservative attack last year or are we thinking about -- are you thinking about things similarly as how you guided that initial 2019 range, I guess a year ago compared to what you're doing now.
Paul Auvil -- Chief Financial Officer
Yeah, I would say similarly and the difference is that as you said, we were working through a few issues with how people were ramping in the US and some things with how we are scaling up international. In this case, well, I don't see those issues within the enterprise, we are just operating in this next level of scale and so we want to be thoughtful about how we're making assumptions about how all the pieces come together with the sales organization now operating at this next level over $1 billion etc. And so I would say that the relative mechanics that I've gone through of thinking about the guide here in October for 2020 is similar to how we were thinking about the mechanics of the guide for 2019 and it's still early obviously at this point. We got quite a ways between now and the end of 2020.
Walter Pritchard -- Citigroup -- Analyst
Okay. Thank you.
Operator
We'll take our next question from Patrick Colville with Arete Research.
Patrick Colville -- Arete Research -- Analyst
Hi, there. Thank you for taking my question. Can I switch slightly to a more strategic question around Meta Networks. And what the plan is for that company and the acquisition? And then also, are you going to be competing against in that market? Thank you.
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah, sure. So again, just to refresh everybody's memory. Meta was a acquisition that we did a very small Israel-based company in May of this year, it falls in the zero trust network access category. Our interest in Meta was to provide additional adaptive controls in our broader people-centric framework. We're very, very excited about the technology. It is early in early in its life. And what we're focused on right now is early customer adoption. So while we're seeing very good interest in the market with that particular product, we're really just working through the process of maturing the capabilities and better understanding how we can continue to drive interest in adoption of this new capability.
It's a little early to call out who the competitors will be because we're one of the few companies that are focused on as people-centric view. We have seen the use cases that we're focused on of high interest with customers. So for example, contractor access to network giving, again, there are contracts represent a very risky group of individuals that if one of them were, in fact, that they could impact the whole corporate network. And so by providing access through Meta, organizations could put policies and controls around what systems and application those individuals can see. And so that seems to be resonating quite well as an early use case, but I would say it's early and we're going to operate in this very early stage for the foreseeable future, probably through the first half of 2020.
Patrick Colville -- Arete Research -- Analyst
Great. Thank you so much.
Operator
We'll go next to Taz Koujalgi with Guggenheim Partners.
Taz Koujalgi -- Guggenheim Partners -- Analyst
Hey guys, thanks for taking my question. I had a question on the pricing of bundles versus buying the products individually. Can you comment on what the per-seat [Phonetic] pricing is to buy a bundle of supplying those products, separately is it lower than the per seat price would be if you buy the bundle --
Gary Steele -- Chief Executive Officer and Chairman of the Board
If you buy -- yeah, if you buy a bundle especially P2, P3 you're realizing a modest discount probably somewhere in the 10% to 15% range versus buying them individually. And for us, the bundles are delivering some additional value at a reasonable discount to customers. But more importantly, it's a way of really helping to frame for the customers kind of this good-better-best concept of "hey I see this price list of 18 products, how do they fit together and what do I need to buy to deal with my broader people-centric security compliance problem". And so the bundles are really about helping to frame that for our salespeople, for our channel partners and ultimately for the customer.
Taz Koujalgi -- Guggenheim Partners -- Analyst
Got it. Thank you.
Operator
We'll take our next question from Rob Owens with Piper Jaffray.
Rob Owens -- Piper Jaffray -- Analyst
Good afternoon, guys.
Gary Steele -- Chief Executive Officer and Chairman of the Board
Good afternoon.
Rob Owens -- Piper Jaffray -- Analyst
Gary, if you look at the success you've seen in archiving over the last couple of quarters, and I think, if we look back at the story for the last five years, this is always potentially been on the comment, it really feels like it's happening now. So maybe some of the puts and takes you're seeing around the market dynamics, what's happening, how pipelines are setting up. As you look at 2020 and this being a potential catalyst for the next couple of years. Just some of the puts and takes around how this market is evolving. Thanks.
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah -- Thanks. Great question. So we're super enthusiastic and excited about the opportunity around archiving and what we've seen is the larger incumbent players, whether it'd be the Micro Focus Autonomy solution or the Enterprise Vault solution under Veritas. There hasn't been a lot of innovation, and I think customers are beginning to look at what do they want to do next. And so we see great opportunity, specifically in financial services and other regulated industries like healthcare to help those customers move to a next-generation solution. We continue to see very steady pipeline build in terms of those organizations basically reaching out and working on what their plan is to do what they want to do next. And I think the only trade off here is as we've noted in our prepared remarks, it's very difficult to forecast win these deals is actually come to fruition. And so while, for example, we closed a very large deal that we noted in our Q2 remarks is actually a one of the most significant deals we've ever closed in the company's history. That was an archived deal. I think that they're just very difficult to forecast. So we feel like we've got a good setup for '20 and '21 and we're building pipeline nicely and we'll just -- we'll want to be conservative about when we think those deals ultimately come to fruition.
Rob Owens -- Piper Jaffray -- Analyst
Thanks.
Operator
We will go next to Daniel Bartus with Bank of America.
Daniel Bartus -- Bank of America Merrill Lynch -- Analyst
Thanks guys. I wanted to just hear one on the CASB opportunity, because it's supposed to be such a high growth market. So are you guys truly competing with in beating the leaders like a big glass [Phonetic] sky high or others? And is this a product that you can lead with in 2020? Or is it more of an add-on for existing customers? Thanks.
Gary Steele -- Chief Executive Officer and Chairman of the Board
Yeah. So we've made significant investments in this particular product area over the course of the last 18 months and we -- what we saw in Q3, for example, some good early wins against all of the CASB players. We had wins both in existing Proofpoint customers as well as leading with that in new accounts. And so we feel like we're really well positioned as we enter 2020 to go attack that market and we're optimistic and hopeful that we'll see that to be an interesting contributor in this overall emerging products cohort.
Daniel Bartus -- Bank of America Merrill Lynch -- Analyst
It sounds good. Thanks.
Operator
We'll take our next question from Andrew King with Dougherty & Company.
Andrew King -- Dougherty & Company -- Analyst
Hey guys, thanks for taking my question. I just wanted to focus on the bundles a little bit. So in the past, you guys might not have seen the best win rates that you guys have expected in the sub 15,000 mailbox space partially because of price competition. And it sounds like this, these bundles will sort of help you compete against those other competitors in that area. But how do you see that affecting the revenue contribution from this segment going forward?
Paul Auvil -- Chief Financial Officer
Yeah. So I would say that, just to clarify a couple of things. Sub 15,000, we haven't really -- if you think about that as a sort of a framework, we haven't seen any sort of unique price competition in that space. Now if you want to get down to sub 1,500, you get down sub 1,000, it's a different realm and it's one that we sort of have always historically gone are after more opportunistically. And so it's a different level of value that you deliver there when you have the likes of people like Barracuda and Mimecast operating there. It's a bit more of a commodity space, because a lot of people outside of financial services and healthcare can't really differentiate between good and bad email security. And so we really focus on the verticals where we can get the most value as we look at those lower end markets.
And then specifically, so the people who don't value differentiated security, we have our Essentials platform and we use that to serve the low end, mostly through managed service providers and some of our channel partners. So the net of it is back to your question about bundles, we're excited in that the bundles apply to all of the people that we have historically looked at as enterprise customers, whether it's 100% bank in Oklahoma or whether it's a 100,000 person financial institution located on the East Coast and everything in between. So the bundles are a great way for us to bring our differentiated technology and increased deal sizes and improve how we enable our customers, large and small to meaningfully change their security compliance posture for all this content that operates beyond the firewall. So hopefully that helps you see how the pieces fit together in terms of our model and how we think about serving the market.
Andrew King -- Dougherty & Company -- Analyst
Great. Thank you.
Operator
We'll take our final question from Carsten Sippel [Phonetic] with Cowen.
Carsten Sippel -- Cowen and Company -- Analyst
Hi, this is Carsten Sippel on for Nick Yako. I just wanted to circle back to the PSAT offering. Can you comment on from the point of differentiation relative to other offerings in the market, particularly as more more players entering the space. Thanks.
Paul Auvil -- Chief Financial Officer
Sure. A couple of things that we've focused on is, one, we're leveraging our threat intel everyday. Two, inform the kind of phish simulation that actually happen, because we fundamentally believe that you need to be training your users and raising the awareness of your users on the actual threats that are happening as opposed to just made up phishing lures, that's one. Two is for customers who choose to purchase our broader protections, we've done very deep integration where when a user reports a particular phish, we can actually automate the whole back-end process from grabbing the message, understanding whether based on our threat detection whether that is a malicious message we cannot do auto remediation if it ultimately gotten delivered and then we can inform the user. This is what is called CLEAR. This is the integration that we've talked about on previous calls.
And so -- and then the content that we've built, we've really focused on some key learning principles that have guided our pass through what kinds of content we want to deliver. And I think collectively those things differentiate us quite well in that market. And as I indicated in our prepared remarks, we continue to invest in a pretty robust product roadmap, we released a whole set of new video content last quarter and there is additional customization capabilities that we announced, I mean, in the quarter as well. So we've been on a very rapid path to take advantage of the growth in that market and we feel really good about our positioning.
Carsten Sippel -- Cowen and Company -- Analyst
Great. Thank you.
Paul Auvil -- Chief Financial Officer
You bet.
Operator
Ladies and gentlemen, this does conclude our question-and-answer session. I'll turn it back to Gary Steele for closing remarks.
Gary Steele -- Chief Executive Officer and Chairman of the Board
Great. Thanks. I want to just take a moment and thank everyone for joining us on the call today. We were very pleased with our Q3 results, our continued product innovation and excited about the continued progress with our people-centric approach to cybersecurity in our path beyond $1 billion in annual revenue. 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 this quarter. Thanks so much for joining us today.
Operator
[Operator Closing Remarks].
Duration: 73 minutes
Call participants:
Jason Starr -- Vice President, Investor Relations
Gary Steele -- Chief Executive Officer and Chairman of the Board
Paul Auvil -- Chief Financial Officer
Jonathan Ho -- William Blair -- Analyst
Melissa Franchi -- Morgan Stanley -- Analyst
Matt Hedberg -- RBC Capital Markets -- Analyst
Jonathan Ruykhaver -- Baird -- Analyst
Gray Powell -- Deutsche Bank -- Analyst
Phil Winslow -- Wells Fargo -- Analyst
Ken Talanian -- Evercore ISI -- Analyst
Gur Talpaz -- Stifel Nicolaus & Company -- Analyst
Sarah Hindlian -- Macquarie -- Analyst
Alex Henderson -- Needham & Company -- Analyst
Erik Suppiger -- JMP Securities -- Analyst
Gregg Moskowitz -- Mizuho -- Analyst
Walter Pritchard -- Citigroup -- Analyst
Patrick Colville -- Arete Research -- Analyst
Taz Koujalgi -- Guggenheim Partners -- Analyst
Rob Owens -- Piper Jaffray -- Analyst
Daniel Bartus -- Bank of America Merrill Lynch -- Analyst
Andrew King -- Dougherty & Company -- Analyst
Carsten Sippel -- Cowen and Company -- Analyst
