Proofpoint's Competitive Advantages; IPO 'Pre-Mortem' Continued
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the first installment of my "IPO pre-mortem" series, I broke down the IPO transaction of security-as-a-service company Proofpoint, Inc. (NASDAQ: PFPT). In that analysis, I examined the existing shareholders, prospective dilution, and control issues that potential investors need to understand when deciding if the company is starting out on the right foot. Now I will turn to Proofpoint's competitive advantages and business strategy which are crucial if the company is to move from its successful IPO to establish its position in a marketplace that includes household names like Intel Corp., Symantec Corp. (NASDAQ: SYMC), Cisco Systems Inc., Google, Inc., EMC Corporation, and Hewlett-Packard Co. (NYSE: HPQ). With reports like this from the Daily Ticker coming regularly, its little wonder that Proofpoint faces intense competition in cyber security. According to market research company International Data Corporation, the total worldwide market for data protection solutions is estimated to grow from $5.2 billion in 2011 to $8.0 billion by 2015, or 11% compounded annually.
Proofpoint's primary competitive advantage is its unique cloud based architecture that utilizes the favorable economics of cloud computing to deliver superior security & compliance via its global data centers and/or its customers' legacy systems. This flexibility to deliver its service either through its data centers or through its customers' legacy systems differentiates Proofpoint's offerings from cloud only and on-premise customer legacy solutions. This advantage allows Proofpoint to compete favorably based on the following factors: level of protection against advanced threats; comprehensiveness and integration of the solution; flexibility of delivery models; total cost of ownership; scalability and performance; customer support; and extensibility of the platform.
A combination of contractual rights, trademarks, trade secrets, patents, and copyrights are employed by Proofpoint to establish and protect the intellectual property rights to its unique cloud based architecture. But however strong these intellectual property rights are, the company still faces the risk that its competitors' offerings may incorporate functionality that customers perceive as better or equal substitutes, thereby eroding Proofpoint's competitive position and leading to price based competition. Competing offerings come from Intel's McAfee E-Mail Gateway, Symantec's MessageLabs products, Google's Postini Message Security, Cisco's IronPort E-Mail Security, EMC's SourceOne solutions, and HP's Business Protection solutions. Proofpoint competes with these offerings in threat protection, archiving, regulatory compliance & litigation support, and data storage. Each of these competitors is significantly larger than Proofpoint with revenue ranging from $6.7 billion for Symantec to $125 billion for HP and market capitalization ranging from $11.2 billion to $195 billion. Proofpoint had revenue of less than $82 million in 2011 and a market capitalization of about $400 million at the IPO price.
Proofpoint's cloud based architecture has several key elements that bolster its competitive sustainability beyond just the legal intellectual property rights. Physical, network, application, and third-party data center security are central to the design. To that end, the company has achieved next generation industry safety certification (SSAE16) and FISMA certification that allows it to serve existing and potential U.S. federal agency customers. Next, the architecture is designed to facilitate aggregate scalability across all customers and also scales to the needs of the largest individual customers. The third key element of Proofpoint's architecture is the flexibility that enables the company to deploy its security & compliance solutions tailored to the unique threat profile and operating environment of each customer. A wide range of technologies including redundancy, geographic distribution, real-time data replication, and end-to-end service monitoring are employed by a team of skilled Proofpoint professionals to provide 24x7 system availability. Finally, the company primarily uses internally developed and open source technology instead of commercially licensed technology which allows it to offer cost effective solutions to its customers.
Another source of competitive advantage that the company has identified in its IPO documents is customer service and support. While I agree that customer service and support are critical for the company to retain and expand it's customer base, I am dubious that a sustainable competitive advantage exists because there are no barriers to replication of their model. Competency in customer service and support most likely does supplement Proofpoint's ability to differentiate its services so that price is not the sole point of competition, but I do not believe a robust customer service and support function by itself leads to a competitive advantage.
As it begins its life as a public company, Proofpoint is at a tremendous disadvantage in terms of the resources it has available to establish and improve its position in the security-as-a-service marketplace. For this reason, it is critical that the company keep its unique architecture on the technological cutting edge to maintain a differentiated competitive advantage. Otherwise, the marketplace could switch to predominantly pricing based competition which would be untenable for Proofpoint given the much deeper pockets of its competitors. The business strategies that Proofpoint will use to maintain and grow its competitive advantages as it moves from its IPO will be the focus of the next installment of this continuing Proofpoint "pre-mortem" series.
56Steve has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.