FireEye, Inc. and Proofpoint, Inc.: Initiation of Research Coverage

Thursday, January 16, 2014

William Blair & Company initiated research coverage of FireEye, Inc. (FEYE $58.87) and Proofpoint, Inc. (PFPT $35.74), leaders in data protection solutions, with Outperform ratings and Aggressive Growth company profiles.

Analyst Jonathan Ho estimated that FireEye would generate revenue of $160.3 million in fiscal 2013 and $405.4 million in fiscal 2014; he estimated Proofpoint would generate revenue of $132.7 million in fiscal 2013 and $165.0 million in fiscal 2014.

“We believe that FireEye’s advanced detection methods leveraging virtualization and use of the cloud are proving more effective in stopping zero-day threats and advanced persistent threats (APTs) than traditional, signature-based detection—the company has garnered significant attention by third-party industry analysts,” Ho said. “We believe that FireEye can deliver a five-year top-line CAGR of 40%-45%, based on our view that the company’s market opportunity is still in its early stages and that the company will capture significant market share of what we forecast to be a total addressable market approaching $20 billion, including the recently acquired Mandiant business.”

He added, “Trading at an enterprise value below 13 times the Street consensus 2015 calendar revenue, the stock is priced at a premium to our comparison group of network security and SaaS-based companies. Still, we believe the valuation is warranted, given the company’s significant top-line growth, expanding addressable market, strong technology, and what we view as inherent leverage in its operating model.”

Ho believes that Proofpoint can deliver consistent top-line growth of about 25% over the next several years, with the ability to gain significant market share from legacy providers that have lost focus on the space or struggled to maintain effective solutions. “We believe the growth opportunity will be driven by market share gains in its core market, cross-selling of adjacent archival and encryption products, distribution channel expansion, and new product offerings in the advanced threat detection space,” he said.

“Trading at 5.9 times the Street’s 2015 calendar revenue forecast on an enterprise-value-to-revenue basis, the stock is priced at a premium to most of the comparison group of network security companies,” he added. “However, we believe the valuation is warranted, based on the company’s very strong top-line growth, brand recognition in its legacy market, further opportunity for market share gains, and what we view as inherent leverage in its operating model that increases its profitability potential.”

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William Blair & Company, L.L.C. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making an investment decision.

William Blair & Company, L.L.C. is a market maker in the securities of of FireEye, Inc. and Proofpoint, Inc. and may have a long or short position.

William Blair intends to seek investment banking compensation in the next three months from of FireEye, Inc. and Proofpoint, Inc.

Additional information is available upon request.

Current Ratings Distribution (as of 12/31/13)

Coverage Universe
Outperform (Buy): 63%
Market Perform (Hold): 33%
Underperform (Sell): 1%

Inv. Banking Relationships*
Outperform (Buy): 16%
Market Perform (Hold): 3%
Underperform (Sell): 0%

* Percentage of companies in each rating category that are investment banking clients, defined as companies for which William Blair has received compensation for investment banking services within the past 12 months.

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