Proofpoint's Business Strategies; IPO 'Pre-Mortem' Continued

Posted: May 19, 2012 at 5:16 pm

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By Steve Van Tiem - May 19, 2012 | Tickers: CSCO, GOOG, HPQ, INTC, PFPT | 0 Comments

Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

I presented a synopsis of Proofpoint, Inc.'s (NASDAQ: PFPT) competitive advantages and position in the security-as-a-service industry in the previous installment of my "IPO pre-mortem" series. This installment will continue that topic by taking a look at the business strategies that Proofpoint will implement to maintain its competitive advantages and improve its position in the marketplace where it faces intense competition from much bigger rivals. Among these rivals are Intel, Corp. (NASDAQ: INTC), Symantec Corp., Cisco Systems Inc., (NASDAQ: CSCO), Google, Inc. (NASDAQ: GOOG), EMC Corporation, and Hewlett-Packard Co. (NYSE: HPQ).

Proofpoint has identified a set of objectives it seeks to achieve by making substantial commitments to marketing and research & development. Proofpoint's strategy for maintaining its competitive advantages and market position rests on successful achievement of the following objectives: grow the customer base by investing in direct inside and field sales organizations to increase market share; broaden adoption of the platform's functionality with existing customers, a majority of which have licensed only one solution; expand the international component of the business in Brazil, Canada, France, Germany, Japan, Mexico, Singapore, and the United Kingdom; enlarge the reseller and strategic partner channel network; extend the capabilities of the platform via competencies in big data analytics, machine learning, deep content inspection, secure storage, and advanced encryption; and protect against threats from competing communication and collaboration platforms such as instant messaging, web-based collaboration and file sharing applications, social networks, and blog posts.

The company's marketing is aimed at developing and maintaining its brand which is critical to gaining widespread acceptance of its offerings and will support its growth objectives. As a percentage of revenue, Proofpoint spent about 52% on its sales & marketing efforts in 2011 which far exceeds the percentage spent by any of its competitors. Symantec spent 42% followed by 23% for Cisco, 14% for Intel, and 12% for Google. EMC and HP do not break out marketing fromtheir SG&A line items on which they spent 32% and 11%, respectively, in 2011. Proofpoint's research and development is designed to enhance the platform's capabilities and provide a barrier against competing products. In 2011, the company spent 24% on R&D, which, like sales & marketing, far exceeds the percentage spent by its competitors. Intel spent 15% on R&D, followed by 14% for Symantec, Cisco, and Google, with EMC at 11% and HP at 3%. Proofpoint needs to devote such outsized percentages if it hopes to establish a strong brand and offer a competitive solution against its larger competition. Because Proofpoint's revenue base is so much smaller than any of these competitors, its spending on sales & marketing and R&D on a dollar basis is negligible even though it allocates such a high percentage to these efforts. Spending by Proofpoint in 2011 on R&D and sales & marketing together was $62.5 million compared to $3.5 billion for Symantec which spent the least of all the competitors on these items. Clearly, Proofpoint has a very steep path to becoming a significant force in the market place.

The marketing efforts are essential to maintaining Proofpoint's customer service and support advantage but I think that success in research and development will be the key determinant for the company. I also believe that an advantage in customer service and support is a weak position, especially for Proofpoint which competes against companies that are many times larger and can bring many more resources to bear in marketing. More important to the company's future success is its ability to continuously improve its existing platform and develop new ones as the competition in technology is ever evolving. And the company's managers are indispensible factors in how well research and development spending translates to actual technology enhancements and upgrades that support its competitive advantages. More will be said about management's ability and integrity in a future installment of this series.

At this stage in its business life cycle, Proofpoint is making significant commitments to marketing and R&D in an attempt to grow its customer base, broaden adoption of its platform, expand its international segment, enlarge its reseller and strategic partner channel network, extend the capabilities of its platform, and protect against threats from competing platforms. By developing and maintaining its brand and enhancing the platform's capabilities, Proofpoint should be able to maintain its competitive advantages and improve its position in the security-as-a-service marketplace. As the link between shareholders and the managers who will be implementing these strategies, the company's Board of Directors will be the topic of the next installment.

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Steve Van Tiem is a member of The Motley Fool Blog Network

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Proofpoint's Business Strategies; IPO 'Pre-Mortem' Continued

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May 19th, 2012 at 5:16 pm