Proofpoint Inc
Annual Report 2016

Plain-text annual report

PROOFPOINT INC FORM 10-K (Annual Report) Filed 02/23/17 for the Period Ending 12/31/16 Address Telephone 892 ROSS DRIVE SUNNYVALE, CA 94089 408-517-4710 CIK 0001212458 Symbol PFPT SIC Code Industry 7374 - Computer Processing and Data Preparation and Processing Services IT Services & Consulting Sector Technology Fiscal Year 12/31 http://www.edgar-online.com © Copyright 2017, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549__________________________________FORM 10-Kþ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2016ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the Transition Period from toCommission File Number 001-35506PROOFPOINT, INC.(Exact name of Registrant as specified in its charter)Delaware (State or other jurisdiction of incorporation or organization) 51-0414846 (I.R.S. employer identification no.)892 Ross DriveSunnyvale, California (Address of principal executive offices) 94089 (Zip Code)(408) 517-4710(Registrant’s telephone number, including area code)__________________________________S ecurities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of each exchange on which registeredCommon Stock , $0.0001 par value per share NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act: None __________________________________Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuantto Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filer þ Accelerated filer o Non-accelerated filer o(Do not check if a smaller reporting company) Smaller reporting company oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þThe aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on June30, 2016 as reported by the NASDAQ Global Select Market on that date, was approximately $2,571,000,000 . This calculation does not reflect a determination that certain persons are affiliatesof the registrant for any other purpose.The number of shares outstanding of the registrant’s common stock as of February 3, 2017 was 43,296,403 shares. __________________________________DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s Proxy Statement for its 2017 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed with the Securities and Exchange Commission, areincorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days ofthe registrant's fiscal year ended December 31, 2016 .Table of ContentsPROOFPOINT, INC.FORM 10-KFor the Fiscal Year Ended December 31, 2016TABLE OF CONTENTS PagePART I. Item 1.Business3Item 1A.Risk Factors15Item 1B.Unresolved Staff Comments31Item 2.Properties31Item 3.Legal Proceedings32Item 4.Mine Safety Disclosures32PART II. Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities33Item 6.Selected Financial Data34Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations36Item 7A.Quantitative and Qualitative Disclosures About Market Risk57Item 8.Financial Statements and Supplementary Data58Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure58Item 9A.Controls and Procedures58Item 9B.Other Information59PART III. Item 10.Directors, Executive Officers and Corporate Governance60Item 11.Executive Compensation60Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters60Item 13.Certain Relationships and Related Transactions, and Director Independence60Item 14.Principal Accountant Fees and Services60PART IV. Item 15.Exhibits and Financial Statement Schedules61 Index to Consolidated Financial Statements62Signatures 1021Table of ContentsCAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Allstatements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operationsand financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may,""will," "estimate," "continue," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. We have based theseforward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition,results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements aresubject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K.Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management topredict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results todiffer materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events andtrends discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied inthe forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except asrequired by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.Unless expressly indicated or the context requires otherwise, the terms “Proofpoint,” “Company,” “Registrant,” “we,” “us,” and “our” mean Proofpoint,Inc. and its subsidiaries unless the context indicates otherwise.2Table of ContentsPART IITEM 1. BUSINESSOverviewProofpoint is a leading security-as-a-service provider that enables large and mid-sized organizations worldwide to defend, protect, archive and governtheir most sensitive data. Our security-as-a-service platform is comprised of an integrated suite of on-demand data protection solutions, including threat protection,incident response, regulatory compliance, archiving, governance, eDiscovery, and secure communication. Our solutions are built on a flexible, cloud-basedplatform and leverage a number of proprietary technologies - including big data analytics, machine learning, deep content inspection, secure storage, advancedencryption, intelligent message routing, dynamic malware analysis, threat correlation, and virtual execution environments - to address today's rapidly changingthreat landscape.A fundamental shift in the sources of cyber crime, from hackers to organized crime and governments, combined with the emergence of international datatrafficking and sophisticated advanced persistent threats ("APTs"), polymorphic threats, zero-day exploits, and user-transplant "drive-by" downloads, is driving anunprecedented wave of both targeted and broad-based malicious attack campaigns designed to steal valuable information. At the same time, the growth ofbusiness-to-business collaboration and the use of social media for mass communication, as well as the consumerization of IT and the associated adoption of mobiledevices and unmanaged Internet-based applications, has increased organizations’ attack surface through the proliferation of sensitive data, reducing theeffectiveness of many existing security products. These factors have contributed to an increasing number of severe data breaches and expanding regulatorymandates, all of which have accelerated demand for effective data protection and governance solutions.Our platform addresses this growing challenge by not only protecting data as it flows into and out of the enterprise via on-premises and cloud-basedemail, social media and mobile apps, but also by keeping track of this information as it is modified and distributed throughout the enterprise for compliance anddata loss prevention, and securely archiving these communications for compliance and discovery. We address four important problems for the enterprise:•Protecting users from the advanced attacks that target them via email, social media, and mobile apps;•Preventing the theft or inadvertent loss of sensitive information and, in turn, ensuring compliance with regulatory data protection mandates;•Collecting, retaining, supervising and discovering sensitive data for compliance and litigation support; and•Enabling organizations to respond quickly to security issues, providing both the intelligence and the context to prioritize incidents and orchestrateremediation actions.Our platform and its associated solutions are sold to customers on a subscription basis and can be deployed through our unique cloud-based architecturethat leverages both our global data centers as well as optional points-of-presence behind our customers' firewalls. Our flexible deployment model enables us todeliver superior security and compliance while maintaining the favorable economics afforded by cloud computing, creating a competitive advantage for us overlegacy on-premises and cloud-only offerings.We were founded in 2002 to provide a unified solution to help enterprises address their growing data security requirements. Our first solution wascommercially released in 2003 to combat the burgeoning problem of spam and viruses and their impact on corporate email systems. To address the evolving threatlandscape and the adoption of communication and collaboration systems beyond corporate email and networks, we have broadened our solutions to defend againsta wide range of threats, including email, mobile apps and social media, to protect the information people create from both compromise and compliance risks, andto archive and govern corporate information. Today, our solutions are used worldwide to protect well over 100 million end-users. We market and sell our solutionsworldwide both directly through our sales teams and indirectly through a hybrid model where our sales organization actively assists our network of distributors andresellers. We also distribute our solutions through strategic partners.Proofpoint SolutionsOur integrated suite of on-demand security-as-a-service solutions enables large and mid-sized organizations to protect people throughout the enterprisefrom advanced attacks and compliance risks. Our comprehensive platform provides a secure3Table of Contentsemail gateway, advanced threat protection, threat intelligence, email encryption, data loss prevention, digital risk, archiving, eDiscovery, and threat responsecapabilities. These solutions are built on a cloud-based architecture, protecting enterprises and their customers from inbound threats via email, social media, andmobile apps, while identifying and protecting enterprise data not only where it is stored within the enterprise but also as it transits beyond the organization’sborders such as via email or social media. We have pioneered the use of innovative technologies to deliver better ease-of-use, greater protection against the latestadvanced threats, and lower total cost of ownership than traditional alternatives. The key elements of our solution include:•Superior protection against both advanced and targeted threats. We use a combination of proprietary technologies for big data analytics, machinelearning, deep content inspection, dynamic malware analysis, threat correlation, threat intelligence extraction, and virtual execution environments topredictively and actively detect and stop targeted "spear phishing" and other sophisticated advanced and next-generation threat attacks, includingAPTs, that employ malicious attachments, polymorphic threats, zero-day exploits, user-transparent “drive-by” downloads and other penetrationtactics. By processing, analyzing and correlating billions of data points on a daily basis, we can recognize anomalies in order to predictively detecttargeted attacks before users are exposed. Our deep content inspection technology enables us to identify malicious message attachments anddistinguish between valid messages and "phishing" messages designed to look authentic and trick the end-user into divulging sensitive data orclicking on a malicious web link. Our machine learning technology enables us to detect targeted "zero-hour" attacks in real-time, even if they havenot been seen previously at other locations, and quarantine them appropriately. Our dynamic malware analysis and virtual execution environmenttechnologies enable us to examine web site destinations and downloadable files to identify and block potentially hostile code that would otherwisecompromise end-user computers, even in cases where the web sites are considered reputable or the attachment’s malicious payload is obfuscated orotherwise disguised. Our threat correlation technologies enable us to rapidly confirm and contain threats, providing rapid, automated protection. Inaddition, our threat intelligence and response capabilities enable our customers to both prioritize threats that may have compromised them via ourEmerging Threat Intelligence and orchestrate or automate protective countermeasures via Proofpoint Threat Response.•Comprehensive, integrated email security, advanced threat, information protection and archiving, and digital risk protection product families. Weoffer a comprehensive solution for email security, composed of our Enterprise Protection, Email Fraud Defense, and Email Continuity offerings. Ouradvanced threat product family includes solutions to protect organizations across the predominant threat vectors, including email, social media,mobile apps, and SaaS applications. To protect enterprise data from security and compliance risks, our Information Protection product familyincludes a suite of security solutions (Data Loss Prevention, Encryption, and Data Discover for data at rest) and compliance (Enterprise Archive,eDiscovery Analytics, and Supervision). Finally, our digital risk protection suite enables organizations to look beyond their borders for threatstargeting their customers across email phishing, malicious web domains, fraudulent mobile apps, and fraudulent social media accounts.•Designed to empower end-users. Unlike legacy offerings that simply block communication or report audit violations, our solutions actively enablesecure business-to-business and business-to-consumer communications. Our easy-to-use policy-based email encryption service automaticallyencrypts sensitive emails and delivers them to any PC or mobile device. In addition, our secure file-transfer solution makes it easy for end-users tosecurely share various forms of documents and other content that are typically too large to send through traditional e-mail systems. All of oursolutions provide mobile-optimized capabilities to empower the growing number of people who use mobile devices as their primary computingplatform.•Security optimized cloud architecture. Our multi-tenant security-as-a-service solution leverages a distributed, scalable architecture deployed in ourglobal data centers for deep content inspection, global threat correlation and analytics, high-speed search, secure storage, encryption keymanagement, software updates, intelligent message routing, and other core functions. Our architecture also enables us to look across hundreds ofbillions of data points gathered from across our product portfolio and intelligence feeds to better correlate and analyze both targeted and broad-basedthreat campaigns. Customers can choose to deploy optional physical or virtual points-of-presence behind their firewalls for those who prefer todeploy certain functionality inside their security perimeter. This architecture enables us to leverage the benefits of the cloud to cost-effectivelydeliver superior security and compliance, while optimizing each deployment for the customer's unique threat environment.•Extensible security-as-a-service platform. The key components of our security-as-a-service platform, including services for secure storage, contentinspection, reputation, big data analytics, encryption, key management, and4Table of Contentsidentity and policy, can be exposed through application programming interfaces, or APIs, to integrate with internally developed applications as wellas with those developed by third-parties. In addition, these APIs provide a means to integrate with the other security and compliance componentsdeployed in our customers' infrastructures, including Proofpoint’s ecosystem partners.Our Security-as-a-Service PlatformWe provide a multi-tiered security-as-a-service platform consisting of solutions, platform technologies and infrastructure. Our platform currently includesproduct families and related bundles for the convenience of our customers, distributors and resellers. Each of these solutions is built as an aspect of our security-as-a-service platform, which includes both platform services and enabling technologies for both security and compliance. Our platform services provide the keyfunctionality to enable our various solutions while our enabling technologies work in conjunction with our platform services to enable the efficient construction,scaling and maintenance of our customer-facing solutions.Our suite is delivered by a cloud infrastructure and can be deployed as a secure cloud-only solution, or as a hybrid solution with optional physical orvirtual points-of-presence behind our customers' firewalls for those who prefer to deploy certain functionality inside their security perimeter. In all deploymentscenarios, our cloud-based architecture enables us to leverage the benefits of the cloud to cost-effectively deliver superior security and compliance whilemaintaining the flexibility to optimize deployments for customers' unique environm ents. The modularity of our solutions enables our existing customers toimplement additional modules in a simple and efficient manner.Product FamiliesEmail SecurityProofpoint’s Email Security Product family includes the Enterprise Protection secure email gateway, Email Fraud Defense, Email Continuity, andProofpoint Essentials. This suite of enterprise products is designed to protect customers' mission-critical messaging infrastructure from outside threats, enableenterprises to authenticate their email to reduce consumer phishing and fight business email compromise ("BEC") attacks, and keep email operational in the eventof a service provider outage. Proofpoint Essentials provides a version of these capabilities tailored to small- and medium-sized businesses. Key capabilities withinthe email security products include:•Enterprise Protection. Uses our Proofpoint MLX machine learning technology and reputation data to examine millions of possible attributes inevery message to block phishing and spear phishing attacks, spam, viruses, impostor email/business email compromise attacks, and other forms ofmalicious or objectionable content. This solution also includes sophisticated policy and routing controls designed to ensure security and the effective5Table of Contentshandling of all classifications of content, and includes the Smart Search tool to provide real-time visibility into message flows across anorganization's messaging infrastructure, using built-in logging and reporting capabilities with advanced message tracing, forensics and log analysiscapabilities.•Email Fraud Defense. Enables organizations to understand who is sending email from their domains, and create a policy to both authenticatelegitimate email and block fraudulent email.•Email Continuity. Allows organizations to maintain email communications if their on-premises or cloud-based email servers experience an outage.•Proofpoint Essentials. Our suite of security-as-a-service and compliance solutions specifically designed for distribution across managed serviceproviders and dedicated security resellers. Key capabilities include inbound email filtering to block spam and malware, outbound filtering forcompliance with company policies, email continuity to enable email service availability, targeted attack protection, and email archiving.Key benefits of the email security products include:•Superior protection from advanced threats, spam and viruses. Protects against advanced threats, spam and other malware such as viruses, wormsand spyware.•Comprehensive outbound threat protection. Analyzes all outbound email traffic to block spam, viruses and other malicious content from leaving thecorporate network, and pinpoint the responsible compromised systems.•Effective, flexible policy management and administration. Provides a user-friendly, web-based administration interface and robust reportingcapabilities that make it easy to define, enforce and manage an enterprise's messaging policies.•Easy-to-use end-user controls. Gives email users easy, self-service control over their individual email preferences within the parameters ofcorporate-defined messaging policies.•Superior protection from business email compromise . Combining a dynamic classifier on the email gateway with a proactive authentication solutiondelivers superior protection from these attacks.•Business continuity . Provides an always-on insurance policy for crucial business communications via email.Proofpoint Advanced Threat ProtectionProofpoint’s advanced threat protection products leverage a broad set of detection techniques that are constantly refined as the threat landscape evolves.The products are capable of detecting and preventing threats across email, social media, mobile apps, and SaaS applications, and deliver rich intelligence to enableenterprises to understand as much as possible about the attacks they are seeing and the adversaries behind them. Key capabilities of the advanced threat productsinclude:•Targeted attack protection. Enterprises are protected against both commodity and advanced threats such as phishing and other targeted email attacksby the use of big data analysis, predictive, virtual execution and dynamic malware analysis techniques to identify and apply additional securitycontrols against suspicious messages and any associated links to the web. The same detection techniques are extended to look for malicious contentin enterprise social media accounts, malicious links and file sent to users via SaaS applications, and malicious mobile apps that siphon off data orfunction as remote access Trojans.•Threat response. Provides threat information and indicators of compromise ("IoCs") correlation, aggregating across Proofpoint and other third-partysecurity products, to confirm and contain system compromises. By taking advantage of this automated incident response, enterprises can minimizeexfiltration windows and leverage staff for breach prevention and mitigation. In addition, it can be leveraged to automatically remove maliciousemails that have been delivered to users’ email boxes, reducing the potential risk exposure.Key benefits of Proofpoint Advanced Threat Protection include:6Table of Contents•Superior effectiveness. Proofpoint’s agility in deploying new detection measures and adjusting defenses in response to changes in the threat landscaperesults is highly effective in stopping threats before they reach enterprise users.•Curated threat intelligence. Proofpoint’s threat research team tracks campaigns and actors, providing detailed research in addition to curated IoCs.The high quality of this threat intelligence enables customers to better prioritize their responses to alerts generated by Proofpoint products, as well asleverage the intelligence to hunt for threats that may have compromised their enterprises via other channels.Proofpoint Information Protection and ArchivingA comprehensive data protection strategy must address both security and compliance risks. Our data loss prevention, encryption and compliance solutiondefends against leaks of confidential information, and helps ensure compliance with common U.S., international and industry-specific data protection regulations -including the Health Care Insurance Portability and Accountability Act of 1996 ("HIPAA"), the Gramm-Leach-Bliley Act, Canada's Personal InformationProtection and Electronic Documents Act, as well as acts such as CA SB 24, MA 201 CMR 17.00, ITAR, NERC-CIP, CFTC red flag rules, Basel II, EuroSOX(Directive 84/253/EEC), European Union Data Privacy Directive, and the Payment Card Industry Data Security Standard (PCI-DSS).Proofpoint Information Protection and Archiving is designed to ensure accurate enforcement of data governance, data retention and supervision policiesand mandates; cost-effective litigation support through efficient discovery; and active legal-hold management. It can store, govern and discover a wide range ofdata including email, instant message conversations, social media interactions, and other files throughout the enterprise.Key capabilities within Proofpoint Information Protection and Archiving include:•Advanced data loss prevention. Our advanced data loss prevention solution identifies regulated private content, valuable corporate assets andconfidential information before it leaves the organization via email, web-based applications, or our Secure Share solution. Pre-packaged smartidentifiers and dictionaries automatically and accurately detect a wide range of regulated content such as social security numbers, health records,credit card numbers, and driver's license numbers. In addition to regulated content, our machine learning technology can identify confidential,organization-specific content and assets. Once identified and classified, sensitive data can be blocked, encrypted and transmitted or re-routedinternally based on content and identity-aware policies.•Flexible remediation and supervision. Content, identity and destination-aware policies enable effective remediation of potential data breaches orregulatory violations. Remediation options include stopping the transfer completely, automatically forcing data-encryption, or routing to acompliance supervisor or the end-user for disposition. The solution also provides comprehensive reporting on potential violations and remediationusing our analytics capabilities.•Policy-based encryption. Automatically encrypts regulated and other sensitive data before it leaves an organization's security perimeter withoutrequiring cumbersome end-user key management. This enables authorized external recipients, whether or not they are our customers, to quickly andeasily decrypt and view content from most devices.•Secure share . Cloud-based security-focused solution designed to enable enterprise users to securely exchange large files with ease while stayingcompliant with enterprise data policies.•Data Discover . Automated discovery and remediation solution that identifies sensitive content across the enterprise and enables corrective action,while reducing risk of data breaches and compliance violations.•Secure cloud storage. With our proprietary double blind encryption technology and the associated data storage architecture, all email messages, filesand other content are encrypted with keys controlled by the customer before the data enters the Proofpoint Enterprise Archive. This ensures that evenour employees and law-enforcement agencies cannot access a readable form of the customer data without authorized access by the customer to theencryption keys stored behind the customer's firewall.7Table of Contents•Search performance. By employing parallel, big data search techniques, we are able to deliver search performance measured in seconds, even whensearching hundreds of terabytes of archived data. Traditional on-premises solutions can take hours or even days to return search results to a complexquery.•Flexible policy enforcement. Enables organizations to easily define and automatically enforce data retention and destruction policies necessary tocomply with regulatory mandates or internal policies that can vary by user, group, geography or domain.•Active legal-hold management. Enables administrators or legal professionals to easily designate specific individuals or content as subject to legal-hold. Proofpoint Enterprise Archive then provides active management of these holds by suspending normal deletion policies and automaticallyarchiving subsequent messages and files related to the designated matter.•End-user supervision. Leveraging our flexible workflow capabilities, Proofpoint Enterprise Archive analyzes all electronic communications,including email and communications from leading instant messaging and social networking sites, for potential violations of regulations, such as thoseimposed by Financial Industry Regulatory Authority ("FINRA") and the SEC in the financial services industry.Key benefits of Proofpoint Information Protection and Archiving include:•Regulatory compliance. Data Loss Prevention and Encryption enable outbound messages to comply with national and state government andindustry-specific privacy regulations, while Enterprise Archive helps organizations meet regulatory requirements by archiving all messages andcontent according to compliance retention policies and enabling staff to systematically review messages for compliance supervision.•Superior malicious and accidental data loss protection. Protects against the loss of sensitive data, whether from a cybercriminal attempting toexfiltrate valuable data from a compromised system, or from an employee accidentally distributing a file to the wrong party through email, webmail,social media, file sharing, or other Internet-based mechanisms for publishing content.•Easy-to-use secure communication. Allows corporate end-users to easily share sensitive data without compromising security and privacy, andenables authorized external recipients to transparently decrypt and read the communications from any device. Our mobile-optimized interfacesprovide an easy experience for the rapidly growing number of recipients on smartphones and tablets.•Reduction in “attack surface”. Enables the automated protection of sensitive data, reducing the amount of critical information potentially exposed toan attacker in a breach scenario.•Proactive data governance. Allows organizations to create, maintain and consistently enforce a clear corporate data retention policy, reducing therisk of data loss and the cost of eDiscovery.•Efficient litigation support. Provides advanced search features that reduce the cost of eDiscovery and allow organizations to more effectivelymanage the litigation hold process.•Reduced storage and management costs. Helps to simplify mailbox and file system management by automatically moving storage-intensiveattachments and files into cost-effective cloud storage.Proofpoint Digital Risk ProtectionProofpoint Digital Risk Protection looks beyond the enterprise perimeter to deliver real-time, omnichannel digital risk discovery and protection frombrand fraud, data loss, physical threats, and cyber threats. With this solution, enterprises can engage with their customers across web, email, mobile, and socialmedia with the confidence that their brands and customers are safe from all forms of digital risk.The key features of the Digital Risk product family include:8Table of Contents•Detecting Brand Fraud. Fraudsters imitate companies' brands across digital channels to target customers with phishing scams, malware, phishing,and counterfeit products. Using a native cloud-based platform, customers can quickly find fraudulent social media accounts, web domains, andmobile apps that are affiliated with their brands.•Detecting External Threats. External threat management tools enable organizations to quickly identify leaked intellectual property, credentials, andcustomer data on the web or dark web. Additionally, detection measures can identify cyber criminals using digital tools to plan and execute cyber-attacks that target company’s digital presence and/or physical attacks on its executives, employees, and physical locations.•Compliance Monitoring and Protection. Leveraging social media APIs, the platform can monitor and apply content policies to the brand’s ownedsocial media accounts for security, compliance and acceptable use. Using proprietary Deep Social Linguistic Analysis technology, social media andbrand managers can aggregate content from across their enterprise and review it for security, risk and compliance violations (including FINRA,Federal Financial Institutions Examination Council, Food and Drug Administration, SEC, Financial Conduct Authority violations), allowing them tosafely syndicate content distribution across their social media marketing platforms.Key benefits of Proofpoint Digital Risk Protection include:•Reduction of fraud. Enterprises can reduce both the direct and indirect costs relating to fraud by rapidly and proactively identifying fraudulent webdomains, mobile apps, and social media accounts leveraged by cyber criminals in phishing and other forms of attacks.•Visibility into external threats. Organizations benefit from early warnings of potentially harmful threats to physical sites, digital presences, and keyexecutives, as well as well as unauthorized posting or resale of their private data.•Enhanced compliance. Reduces potential liability from inadvertent posting of sensitive data and demonstrates compliance with more than 35standards and industry regulations. Automates compliance review processes and social advocate programs through seamless integration with leadingsocial media management suites.Platform ServicesOur platform services provide the key functionality to implement our various solutions, using our enabling technologies. Our platform services primarilyconsist of:•Threat detection. Proofpoint deploys an ensemble approach to detect both malware and malware-free attacks. The approach combines multiple formsof detection, including composite reputation correlation, sandboxing for malicious attachments, URLs, and credential phishing, code analysis,network detection, and classifiers for phishing and impostor/BEC attacks.•Threat intel extraction. Proofpoint leverages a dedicated environment to learn as much as possible about threats that are detected by any part of theensemble approach. The extraction environment leverages virtual sandboxes, physical hardware, and human analysts to induce malware to detonateand gather as much forensic detail about it as possible.•Nexus threat graph. Proofpoint synthesizes threat intelligence gathered from the vectors and threat feeds in a graph database known as ProofpointNexus, which is leveraged by threat researchers to correlate threats into campaigns, analyze new threats for links to known actors, and lend context(e.g. what vertical industries are seeing a given campaign) to all detected threats.•Real-time detection . Proofpoint leverages platform services to be in the flow of the movement of potentially sensitive data, including our emailgateways, API-based social media integrations, mobile applications store scanning tools, and SaaS application API/proxy connectivity.•Information classification. For regulated or otherwise sensitive data, Proofpoint leverages smart identifiers to accurately recognize data types that arerelevant from either a security or compliance perspective.9Table of Contents•Intelligent policy. Proofpoint’s information protection and archive products leverage an intelligent policy framework that spans retention, legal hold,smart identifiers, and compliance frameworks, regardless of where the data may be stored or by which channel it is being sent.Enabling TechnologiesOur enabling technologies are a proprietary set of building blocks that work in conjunction with our application services to enable the efficientconstruction, scaling and maintenance of our customer-facing solutions. These technologies primarily consist of:•Big data analytics. Indexes and analyzes petabytes of information in real-time to discover threats, detect data leaks and enable end-users toquickly and efficiently access information distributed across their organizations.•Machine learning. Builds predictive data models using our proprietary Proofpoint MLX machine learning techniques to rapidly identify andclassify threats and sensitive content in real-time.•Identity and policy. Enables the definition and enforcement of sophisticated data protection policies based on a wide set of variables, includingtype of content, sender, recipient, pending legal matters, time and date, regulatory status and more.•Secure storage. Stores petabytes of data in the cloud cost-effectively using proprietary encryption methods, keeping sensitive data tamper-proofand private, yet fully searchable in real-time.•Virtual execution environments. Exposes suspected malware to a permuted set of instrumented virtual system environments, to assessmaliciousness, exploit activity and compromise processes.•Intelligent message routing. Policies can be established by administrators to automatically direct email communications differently through theemail network, based on aspects of the messages, for security, compliance, supervisory, system performance, or other reasons.•Threat intelligence correlation. Utilizes inputs from Proofpoint, cloud, and other third-party products to assess IoCs and confirm successfulsystem compromises by malicious actors in near-real-time, then administers network controls to effectively contain the compromised systems.InfrastructureWe deliver our security-as-a-service solutions through our cloud architecture and international data center infrastructure. We operate thousands ofphysical and virtual servers across eleven data centers located in the United States, Canada, the Netherlands and Germany.Our cloud architecture is optimized to meet the unique demands of delivering real-time security-as-a-service to global enterprises. Key design elementsinclude:•Security. Security is central to our cloud architecture and is designed into all levels of the system, including physical security, network security,application security, and security at our third-party data centers. Our security measures have met the rigorous standards of SSAE 16 certification.In addition to this commercial certification program, we have also successfully completed the FISMA certification for our cloud-basedinformation protection and archiving solution, enabling us to serve the rigorous security requirements of U.S. federal agencies.•Scalability and performance. By leveraging a distributed, scalable architecture we process billions of requests against our reputation systemsand hundreds of millions of messages per day, all in near real-time. Massively-parallel query processing technology is designed to ensure rapidsearch results over this vast data volume. In addition to this aggregate scalability across all customers, our architecture also scales to effectivelymeet the needs of several of our largest individual customers, each of which has millions of users and processes tens of millions of messages perday.10Table of Contents•Hybrid Deployment. Our cloud architecture enables individual customers to deploy entirely in Proofpoint's global data centers or in hybridconfigurations with optional points of presence located behind the customer's firewall. This deployment flexibility enables us to deliver security,compliance and performance tailored to the unique threat profile and operating environment of each customer.•High availability. Our services employ a wide range of technologies including redundancy, geographic distribution, real-time data replicationand end-to-end service monitoring to provide 24x7 system availability.•Network operations control. We employ a team of skilled professionals who monitor, manage and maintain our global data center infrastructureand its interoperability with the distributed points of presence located behind our customers' firewalls to ensure 24x7 operations.CustomersAs of December 31, 2016 , we had customers of all sizes across a wide variety of industries. A number of our largest customers use our platform toprotect more than a million users and handle over a billion messages per day. We have a highly diversified customer base, with one customer, a strategic partnerserving a number of end customers with our platform, who accounted for 12% of total revenue in 2014. There were no single partners or customers that accountedfor more than 10% of our total revenue in 2016 and 2015. In each year since the launch of our first solution in 2003, we have maintained a renewal rate with ourexisting customers of over 90%.We target large and mid-sized organizations across all major verticals including aerospace and defense, education, financial services, government,healthcare, manufacturing and retail. We have been particularly successful selling to the largest enterprises in the United States as ranked by Fortune Magazine areour customers. We have also had success penetrating the market leaders in a number of significant verticals including:•4 of the 5 largest U.S. retailers•3 of the 5 largest U.S. aerospace and defense contractors•5 of the 5 largest U.S. banks•3 of the 5 largest global pharmaceutical companies•3 of the 5 largest U.S. petroleum refining companies Sales and MarketingSalesWe primarily target large and mid-sized organizations across all industries. Our sales and marketing programs are organized by geographic regions,including Asia-Pacific, EMEA, Japan, North America, and South America, and we further segment and organize our sales force into teams that focus on largeenterprises (4,000 employees and above), mid-sized organizations (1,000 - 4,000 employees) and existing customers. In addition, we create integrated sales andmarketing programs targeting specific vertical-markets. This vertical-market approach enables us to provide a higher level of service and understanding of ourcustomers' unique needs, including the industry-specific business and regulatory requirements in industries such as healthcare, financial services, retail andeducation.We sell through both direct and indirect channels, including technology and channel partners:•Direct sales and reseller channel. We market and sell our solutions to large and mid-sized customers directly through our field and inside salesteams as well as indirectly through a hybrid model, where our sales organization actively assists our network of distributors and resellers. Oursales personnel are primarily located in North America, with additional personnel located in Asia-Pacific, EMEA, Japan and South America. Ourreseller partners maintain relationships with their customers throughout the territories in which they operate, providing them with services andthird-party solutions to help meet their evolving security requirements. As such, these partners act as a direct conduit through which we canconnect with these prospective customers to offer our solutions. Our channel partners include security centric resellers such as11Table of ContentsAdaptive Solutions, CDW, Forsythe Technology, Optiv, and SHI International, as well as distributors such as Ingram Micro and ExclusiveNetworks.•Strategic relationships. We also sell our solutions indirectly through key technology companies that offer our solutions in conjunction with oneor more of their own products or services. These companies each have their own base of customers, and they distribute our products to augmenttheir own branded products and solutions, sometimes under their own brand and sometimes under the Proofpoint brand.For sales involving a partner such as a distributor, reseller or strategic partner, the partner engages with the prospective customer directly and involves oursales team as needed to assist in developing and closing an order. At the conclusion of a successful sales cycle, we sell the associated subscription, hardware andservices to the partner who in turn resells these items to the customer, with the partner earning a margin based on the amount paid to Proofpoint as compared to theamount charged to the customer. With the order completed, we provide these customers with direct access to our security-as-a-service platform and otherassociated services, enabling us to establish a direct relationship and provide them with support as part of ensuring that the customer has a good experience withour platform. At the end of the contract term, the partner engages with the customer to execute a renewal order, with our team providing assistance as required.MarketingWe have a number of marketing initiatives to build awareness about our solutions and encourage customer adoption of our solutions. Our marketingprograms include a variety of digital marketing, advertising, conferences, events, white-papers, public relations activities and web-based seminar campaignstargeted at key decision makers within our prospective customers.We offer free trials, competitive evaluations and free security and compliance risk assessments to allow prospective customers to experience the quality ofour solutions, to learn in detail about the features and functionality of our suite, and to quantify the potential benefits of our solutions.Customer Service and SupportWe believe that our customer service and support provide a competitive advantage and are critical to retaining and expanding our customer base. Weconduct regular third-party surveys to measure customer loyalty and satisfaction with our solutions.Proofpoint Support Services We deliver 24x7x365 customer support from support centers located in EMEA, North America and Asia-Pacific regions. We offer a wide range ofsupport offerings with varying levels of access to our support resources.Proofpoint Professional Services and TrainingWith our security-as-a-service model, our solutions are designed to be implemented, configured, and operated without the need for any training orprofessional services. For those customers that would like to develop deeper expertise in the use of our solutions or would like some assistance with complexconfigurations or the importing of data, we offer various training and professional services. Many implementation services can be completed in one day and areprimarily provided remotely using web-based conferencing tools. If requested, our professional services organization also provides additional assistance with dataimporting, design, implementation, customization, or advanced reporting. We also offer a learning center for both in-person and online training and certification.Research and DevelopmentWe devote significant resources to improve and enhance our existing security solutions and maintain the effectiveness of our platform. We also workclosely with our customers to gain valuable insights into their threat environments and security management practices to assist us in designing new solutions andfeatures that extend the data protection, archiving and governance capabilities of our platform. Our technical staff monitors and tests our software on a regularbasis, and we maintain a regular release process to update and enhance our existing solutions. Leveraging our on-demand platform model, we can deploy real-timeupgrades with no downtime.Research and development expenses were $98.5 million , $74.5 million and $51.9 million for 2016, 2015 and 2014, respectively.12Table of ContentsCompetitionOur markets are highly competitive, fragmented and subject to rapid changes in technology. We compete primarily with companies that offer a broadarray of data protection and governance solutions. Providers of data protection solutions generally have product offerings that include threat protection, virusprotection, data loss prevention, flexible remediation, data encryption, and in some cases secure file transfer. Providers of archive solutions generally have productofferings that provide data storage, search, policy enforcement, legal-hold management, and in some cases supervision.Key competitors include:•Email and Advanced Threat Protection: Cisco Systems, Inc. (through its acquisitions of IronPort, SourceFire, and ThreatGRID), MicrosoftCorporation (through its acquisition of Frontbridge), FireEye, Inc., and Symantec Corporation (through its acquisitions of Brightmail andMessageLabs).•Archiving: Micro Focus International plc and Veritas Technologies LLC (through its acquisitions of KVS and LiveOffice while under theownership of Symantec Corporation).We believe we compete favorably based on the following factors:•effectiveness of our 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 platform.Certain of our competitors have greater sales, marketing and financial resources, more extensive geographic presence and greater name recognition thanwe do. We may face future competition in our markets from other large, established companies, as well as from emerging companies. In addition, we expect thatthere is likely to be continued consolidation in our industry that could lead to increased price competition and other forms of competition.Intellectual PropertyWe rely on a combination of trade secrets, patents, copyrights and trademarks, as well as contractual protections, to establish and protect our intellectualproperty rights and protect our proprietary technology. As of December 31, 2016 , we had 65 patents and 39 patent applications. We have a number of registeredand unregistered trademarks. We require our employees, consultants and other third parties to enter into confidentiality and proprietary rights agreements andcontrol access to software, documentation and other proprietary information. Although we rely on intellectual property rights, including trade secrets, patents,copyrights and trademarks, as well as contractual protections to establish and protect our proprietary rights, we believe that factors such as the technological andcreative skills of our personnel, creation of new modules, features and functionality, and frequent enhancements to our solutions are more essential to establishingand maintaining our technology leadership position.Despite our efforts to protect our proprietary technology and our intellectual property rights, unauthorized parties may attempt to copy or obtain and useour technology to develop products with the same functionality as our solution. Policing unauthorized use of our technology and intellectual property rights isdifficult.We expect that software and other solutions in our industry may be subject to third-party infringement claims as the number of competitors grows and thefunctionality of products in different industry segments overlaps. Any of these third parties might make a claim of infringement against us at any time.13Table of ContentsEmployeesAs of December 31, 2016 , we had 1,573 employees. We also engage a number of temporary employees and consultants. None of our employees isrepresented by a labor union with respect to his or her employment with us. We have not experienced any work stoppages and we consider our relations with ouremployees to be good. Our future success will depend upon our ability to attract and retain qualified personnel. Competition for qualified personnel remainsintense and we may not be successful in retaining our key employees or attracting skilled personnel.Corporate InformationWe were incorporated in Delaware in 2002. Our principal executive offices are located at 892 Ross Drive, Sunnyvale, California 94089, and ourtelephone number is +1 (408) 517-4710. Our website is www.proofpoint.com.Proofpoint, the Proofpoint logo, all of our product names and our other registered or common law trademarks, service marks, or trade names appearing inthis Annual Report on Form 10-K are our property. Other trademarks appearing in this prospectus are the property of their respective holders.Geographic Information For financial reporting purposes, net revenue and long-lived assets attributable to significant geographic areas are presented in Note 11, "SegmentReporting", to the consolidated financial statements, which is incorporated herein by reference.Available InformationWe file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments toreports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. The SEC also maintains a website athttp://www.sec.gov that contains reports, proxy and information statements and other information regarding Proofpoint and other companies that file materials withthe SEC electronically. The public may also obtain these filings at the Securities and Exchange Commission (“SEC”)'s Public Reference Room at 100 F Street, NE,Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. Copies of Proofpoint's reports on Form 10-K, definitive Proxy Statements, Forms 10-Q andForms 8-K, may be obtained, free of charge, electronically through our Internet website, http://investors.proofpoint.com/financials.cfm, or by sending an electronicmessage by visiting the Contact Us section within the investor relations portion of our website.14Table of ContentsITEM 1A. RISK FACTORSInvesting in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information inthis Annual Report on Form 10-K, before deciding whether to invest in shares of our common stock. The occurrence of any of the events described below couldharm our business, financial condition, results of operation and growth prospects. In such an event, the trading price of our common stock may decline and youmay lose all or part of your investment.Risks Related to Our Business and IndustryWe have a history of losses, and we are unable to predict the extent of any future losses or when, if ever, we will achieve profitability in the future.We have incurred net losses in every year since our inception, including net losses of $111.2 million , $98.7 million and $60.1 million in 2016, 2015 and2014, respectively. As a result, we had an accumulated deficit of $469.1 million as of December 31, 2016. Achieving profitability will require us to increaserevenue, manage our cost structure, and avoid unanticipated liabilities. We do not expect to be profitable in the near term. Revenue growth may slow or revenuemay decline for a number of possible reasons, including slowing demand for our solutions, increasing competition, a decrease in the growth of our overall market,or if we fail for any reason to continue to capitalize on growth opportunities. Any failure by us to obtain and sustain profitability, or to continue our revenuegrowth, could cause the price of our common stock to decline significantly.Our quarterly operating results are likely to vary significantly and be unpredictable, which could cause the trading price of our stock to decline.Our operating results have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors,many of which are outside of our control and may be difficult to predict, including:• the level of demand for our solutions, including our newly-introduced solutions, and the level of perceived urgency regarding security threats andcompliance requirements;• the timing of new subscriptions and renewals of existing subscriptions;• the mix of solutions sold;• the extent to which customers subscribe for additional solutions or increase the number of users;• customer budgeting cycles and seasonal buying patterns;• the extent to which we bring on new distributors;• any changes in the competitive landscape of our industry, including consolidation among our competitors, customers, partners or resellers;• timing of costs and expenses during a quarter;• deferral of orders in anticipation of new solutions or enhancements announced by us;• price competition;• changes in renewal rates and terms in any quarter;• the impact of acquisitions;• litigation costs;• any disruption in our sales channels or termination of our relationship with strategic channel partners;• general economic conditions, both domestically and in our foreign markets, and related changes to currency exchange rates;15Table of Contents• insolvency or credit difficulties confronting our customers, affecting their ability to purchase or pay for our solutions; or• future accounting pronouncements or changes in our accounting policies.Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our financial andother operating results, including fluctuations in our key metrics. This variability and unpredictability could result in our failing to meet the expectations ofsecurities analysts or investors for any period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could fallsubstantially and we could face costly lawsuits, including securities class action suits. In addition, a significant percentage of our operating expenses are fixed innature and based on forecasted revenue and cash flow trends. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negativeimpact on margins or other operating results in the short term.We may fail to meet or exceed the expectations of securities analysts and investors, and the market price for our common stock could decline. If one ormore of the securities analysts who cover us change their recommendation regarding our stock adversely, the market price for our common stock could decline.Additionally, our stock price may be based on expectations, estimates or forecasts of our future performance that may be unrealistic or may not be achieved.Further, our stock price may be affected by financial media, including press reports and blogs.If we are unable to maintain high subscription renewal rates, our future revenue and operating results will be harmed.Our customers have no obligation to renew their subscriptions for our solutions after the expiration of their initial subscription period, which typicallyranges from one to three years. In addition, our customers may renew for fewer subscription services or users, renew for shorter contract lengths or renew at lowerprices due to competitive or other pressures. We cannot accurately predict renewal rates and our renewal rates may decline or fluctuate as a result of a number offactors, including competition, customers’ IT budgeting and spending priorities, and deteriorating general economic conditions. If our customers do not renew theirsubscriptions for our solutions, our revenue would decline and our business would suffer.If we are unable to sell additional solutions to our customers, our future revenue and operating results will be harmed.Our future success depends on our ability to sell additional solutions to our customers. This may require increasingly sophisticated and costly sales effortsand may not result in additional sales. In addition, the rate at which our customers purchase additional solutions depends on a number of factors, including theperceived need for additional solutions, growth in the number of end-users, and general economic conditions. If our efforts to sell additional solutions to ourcustomers are not successful, our business may suffer.If our solutions fail to protect our customers from security breaches, our brand and reputation could be harmed, which could have a material adverse effect onour business and results of operations.The threats facing our customers are constantly evolving and the techniques used by attackers to access or sabotage data change frequently. As a result,we must constantly update our solutions to respond to these threats. If we fail to update our solutions in a timely or effective manner to respond to these threats, ourcustomers could experience security breaches. Many federal, state and foreign governments have enacted laws requiring companies to notify individuals of datasecurity breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, and anyassociation of us with such publicity may cause our customers to lose confidence in the effectiveness of our data security measures. Any security breach at one ofour customers or even an unproven allegation of a security breach at one of our customers, could harm our reputation as a secure and trusted company and couldcause the loss of customers. Similarly, if a well-publicized breach of data security at a customer of any other cloud‑based data protection or archiving serviceprovider or other major enterprise cloud services provider were to occur, there could be a loss of confidence in the cloud‑based storage of sensitive data andinformation generally.In addition, our solutions work in conjunction with a variety of other elements in customers’ IT and security infrastructure, and we may receive blame andnegative publicity for a security breach that may have been the result of the failure of one of the other elements not provided by us. The occurrence of a breach,whether or not caused by our solutions, or allegations of a breach, even if such allegations turn out to be untrue, could delay or reduce market acceptance of oursolutions and have an adverse effect on our business and financial performance. In addition, any revisions to our solutions that we believe may be necessary orappropriate in connection with any such breach may cause us to incur significant expenses. Any of16Table of Contentsthese events could have material adverse effects on our brand and reputation, which could harm our business, financial condition, and operating results.If our customers experience data losses, our brand, reputation and business could be harmed.Our customers rely on our archive solutions to store their corporate data, which may include financial records, credit card information, businessinformation, health information, other personally identifiable information or other sensitive personal information. A breach of our network security and systems orother events that cause the loss or public disclosure of, or access by third parties to, our customers’ stored files or data could have serious negative consequencesfor our business, including possible fines, penalties and damages, reduced demand for our solutions, an unwillingness of our customers to use our solutions, harmto our brand and reputation, and time-consuming and expensive litigation. The techniques used to obtain unauthorized access, disable or degrade service, orsabotage systems change frequently, often are not recognized until launched against a target, and may originate from less regulated or remote areas around theworld. As a result, we may be unable to proactively prevent these techniques, implement adequate preventative or reactionary measures, or enforce the laws andregulations that govern such activities. In addition, because of the large amount of data that we collect and manage, it is possible that hardware failures, humanerrors or errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that ourcustomers regard as significant. If our customers experience any data loss, or any data corruption or inaccuracies, whether caused by security breaches orotherwise, our brand, reputation and business would be harmed.Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may notcover any claim against us for loss of data or other indirect or consequential damages. Defending a suit based on any data loss or system disruption, regardless ofits merit, could be costly and divert management’s attention.Defects or vulnerabilities in our solutions could harm our reputation, reduce the sales of our solutions and expose us to liability for losses.Because our solutions are complex, undetected errors, failures or bugs may occur, especially when solutions are first introduced or when new versions orupdates are released, or when we introduce an acquired company’s products of services, despite our efforts to test those solutions and enhancements prior torelease. We may not be able to correct defects, errors, vulnerabilities or failures promptly, or at all.Any defects, errors, vulnerabilities or failures in our solutions could result in:•expenditure of significant financial and development resources in efforts to analyze, correct, eliminate or work around errors or defects or to addressand eliminate vulnerabilities;•loss of existing or potential partners or customers;•loss or disclosure of our customers’ confidential information, or the inability to access such information;•loss of our proprietary technology;•our solutions being susceptible to hacking or electronic break-ins or otherwise failing to secure data;•delayed or lost revenue;•delay or failure to attain market acceptance;•lost market share;•negative publicity, which could harm our reputation; or•litigation, regulatory inquiries or investigations that would be costly and harm our reputation.Limitation of liability provisions in our standard terms and conditions and our other agreements may not adequately or effectively protect us from anyclaims related to defects, errors, vulnerabilities or failures in our solutions, including as a result of federal, state or local laws or ordinances or unfavorable judicialdecisions in the United States or other countries.17Table of ContentsBecause we provide security solutions, our software, website and internal systems may be subject to intentional disruption that could adversely impact ourreputation and future sales. We could be a target of attacks specifically designed to impede the performance of our solutions and harm our reputation. Similarly, experiencedcomputer hackers may attempt to penetrate our network security or the security of our website and misappropriate proprietary information and/or causeinterruptions of our services. Because the techniques used by such computer hackers to access or sabotage networks change frequently and may not be recognizeduntil launched against a target, we may be unable to anticipate these techniques. If an actual or perceived breach of network security occurs, it could adverselyaffect the market perception of our solutions, and may expose us to the loss of information, litigation and possible liability. In addition, such a security breachcould impair our ability to operate our business, including our ability to provide support services to our customers.Our solutions collect, filter and archive customer data which may contain personal information, which raises privacy concerns and could result in us havingliability or inhibit sales of our solutions.Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection,use, and disclosure of personal information. Because many of the features of our solutions use, store, and report on customer data which may contain personalinformation from our customers, any inability to adequately address privacy concerns, or comply with applicable privacy laws, regulations and policies could, evenif unfounded, result in liability to us, damage to our reputation, loss of sales, and harm to our business. Furthermore, the costs of compliance with, and otherburdens imposed by, such laws, regulations and policies that are applicable to the businesses of our customers may limit the use and adoption of our solutions andreduce overall demand for them. Privacy concerns, whether or not valid, may inhibit market adoption of our solutions. For example, in the United Statesregulations such as the Gramm‑Leach‑Bliley Act, which protects and restricts the use of consumer credit and financial information, and the Health InsurancePortability and Accountability Act of 1996 (HIPAA), which regulates the use and disclosure of personal health information, impose significant security and dataprotection requirements and obligations on businesses that may affect the use and adoption of our solutions. The European Union’s Data Protection Directiverequires member states to impose restrictions on the collection and use of personal data that, in some respects, are more stringent, and impose more significantburdens on subject businesses, than current privacy standards in the United States.In the past we have relied on the U.S.-European Union Frameworks, as agreed to by the U.S. Department of Commerce and the European Union (“EU”)as one of the means to legally transfer European personal information from Europe to the United States. However, on October 6, 2015, the European Court ofJustice invalidated the U.S.-EU Safe Harbor framework. On February 2, 2016, the U.S. and E.U. announced agreement on a new framework for transatlantic dataflows entitled the EU-US Privacy Shield and Proofpoint self certified under the EU-US Privacy Shield framework on October 5, 2016. However, it is possible thatPrivacy Shield may be challenged in EU courts, so there is some uncertainty regarding its future validity and our ability to rely on it for EU to US data transfers.The uncertainty and changes in the requirements of these jurisdictions may increase the cost of compliance to provide services to EU based customers, reducedemand for our services from such customers, restrict our ability to offer services in certain locations, impact our customers’ ability to deploy our solutions inEurope, or subject us to sanctions, including fines and a prohibition on data transfers, by EU data protection regulators. Furthermore, future decisions may result indifferent European data protection regulators applying differing standards for the transfer of personal data, which could result in increased regulation, cost ofcompliance and limitations on data transfer for us and our customers. These developments could harm our business, financial condition and results of operations.The regulatory framework for privacy issues is evolving worldwide, and various government and consumer agencies and public advocacy groups havecalled for new regulation and changes in industry practices. It is possible that new laws and regulations will be adopted in the United States and internationally, orexisting laws and regulations may be interpreted in new ways, that would affect our business. Complying with any new regulatory requirements could force us toincur substantial costs or require us to change our business practices in a manner that could reduce our revenue or compromise our ability to effectively pursue ourgrowth strategy.Any failure or perceived failure to comply with laws and regulations may result in proceedings or actions against us by government entities or others, orcould cause us to lose users and customers, which could potentially have an adverse effect on our business.We operate in a highly competitive environment with large, established competitors, and our competitors may gain market share in the markets for oursolutions that could adversely affect our business and cause our revenue to decline.18Table of ContentsOur traditional competitors include security‑focused software vendors, such as Symantec Corporation and Cisco Systems, Inc. ("Cisco"), which offersoftware products that directly compete with our solutions. In addition to competing with these vendors directly for sales to customers, we compete with them forthe opportunity to have our solutions bundled with the product offerings of our strategic partners. Our competitors could gain market share from us if any of thesepartners replace our solutions with the products of our competitors or if these partners more actively promote our competitors’ products over our solutions. Inaddition, software vendors who have bundled our solutions with theirs may choose to bundle their software with their own or other vendors’ software, or may limitour access to standard product interfaces and inhibit our ability to develop solutions for their platform.We also face competition from large technology companies, such as Google Inc., Micro Focus International plc and Microsoft Corporation. Thesecompanies are increasingly developing and incorporating into their products data protection and storage software that compete on various levels with our solutions.Our competitive position could be adversely affected to the extent that our customers perceive that the functionality incorporated into these products would replacethe need for our solutions or that buying from one vendor would provide them with increased leverage and purchasing power and a better customer experience. Wealso face competition from independent security vendors such as FireEye, Inc. that offer network security products and many smaller companies that specialize inparticular segments of the markets in which we compete.Many of our competitors have greater financial, technical, sales, marketing or other resources than we do and consequently may have the ability toinfluence our customers to purchase their products instead of ours. Further consolidation within our industry or other changes in the competitive environment couldalso result in larger competitors that compete with us on several levels. In addition, acquisitions of smaller companies by large technology companies thatspecialize in particular segments of the markets in which we compete would result in increased competition from these large technology companies. If we areunsuccessful in responding to our competitors or to changing technological and customer demands, our competitive position and financial results could beadversely affected.If we do not effectively expand and train our sales force, we may be unable to add new customers or increase sales to our existing customers and our businesswill be harmed.We continue to be substantially dependent on our sales force to obtain new customers and to sell additional solutions to our existing customers. Webelieve that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenuegrowth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel. New hires require significant trainingand may take significant time before they achieve full productivity. Our recent hires and planned hires may not become as productive as we expect, and we may beunable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. If we are unable to hire and trainsufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new customers or increasing sales to our existing customerbase, our business will be harmed.Our sales cycle is long and unpredictable, and our sales efforts require considerable time and expense. As a result, our results are difficult to predict and mayvary substantially from quarter to quarter, which may cause our operating results to fluctuate.We sell our security and compliance offerings primarily to enterprise IT departments that are managing a growing set of user and compliance demands,which has increased the complexity of customer requirements to be met and confirmed in the sales cycle. Increasingly, we have found that increasingly security,legal and compliance departments are involved in testing, evaluating and finally approving purchases, which has also made the sales cycle longer and lesspredictable. We may not be able to accurately predict or forecast the timing of sales, which makes our future revenue difficult to predict and could cause our resultsto vary significantly. In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result we could lose other salesopportunities or incur expenses that are not offset by an increase in revenue, which could harm our business.Our cash flow is dependent in part upon our average contract durations, so significant shortening of our average contract durations may cause significantnegative impact to our operating results.With the majority of our business, we invoice our customers for the entire contract amount at the start of the term and these amounts are recorded asdeferred revenue on our balance sheet, with the dollar weighted average duration of these contracts for any given period over the past three years typically rangingfrom 14 to 20 months. As a result, while our practice of invoicing customers for the entire amount of the contract at the start of the term provides us with arelatively immediate19Table of Contentscontribution to cash flow, the revenue is recognized ratably over the term of the contract, and hence contributions toward operating income are realized over anextended period. If these average contract durations were to shorten significantly from their current range, it may cause us to experience less favorable cash flowsas compared to our current operating condition, requiring us to seek additional sources of capital to fund our operations.Because our long-term success depends, in part, on our ability to expand the sales of our platform to our customers located outside of the United States, ourbusiness will be increasingly susceptible to risks associated with international operations.One key element of our growth strategy is to develop a worldwide customer base and expand our operations worldwide. Our international revenue keepsgrowing as we add employees, offices and customers internationally, particularly in Europe and Asia.Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, political andcompetitive risks and competition that are different from those in the United States. Because of our limited experience with international operations, we cannotassure you that our international expansion efforts will be successful or that expected returns on such investments will be achieved in the future.In addition, our international operations may fail to succeed due to other risks inherent in operating businesses internationally, including:•fluctuations in currency exchange rates, which may cause our revenues and operating results to differ materially from expectations;•our lack of familiarity with commercial and social norms and customs in other countries which may adversely affect our ability to recruit, retain andmanage employees in these countries;•difficulties and costs associated with staffing and managing foreign operations;•the potential diversion of management’s attention to oversee and direct operations that are geographically distant from our U.S. headquarters;•compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection lawsand regulations;•legal systems in which our ability to enforce and protect our rights may be different or less effective than in the United States, including more limitedprotection for intellectual property rights in some countries;•immaturity of compliance regulations in other jurisdictions, which may lower demand for our solutions;•greater difficulty with payment collections and longer payment cycles;•higher employee costs and difficulty terminating non-performing employees;•differences in work place cultures;•the need to adapt our solutions for specific countries;•our ability to comply with differing technical and certification requirements outside the United States;•tariffs, export controls and other non-tariff barriers such as quotas and local content rules;•uncertainties related to the United Kingdom's withdrawal from the European Union;•adverse tax consequences;•restrictions on the transfer of funds;•anti-bribery compliance by us or our partners, including under the Foreign Corrupt Practices Act and similar laws of other jurisdictions; and•new and different sources of competition.20Table of ContentsOur failure to manage any of these risks successfully could harm our existing and future international operations and seriously impair our overallbusiness.If we are unable to enhance our existing solutions and develop new solutions, our growth will be harmed and we may not be able to achieve profitability.Our ability to attract new customers and increase revenue from existing customers will depend in large part on our ability to enhance and improve ourexisting solutions and to introduce new solutions. The success of any enhancement or new solution depends on several factors, including the timely completion,introduction and market acceptance of the enhancement or solution. Any new enhancement or solution we develop or acquire may not be introduced in a timely orcost-effective manner and may not achieve the broad market acceptance necessary to generate significant revenue. If we are unable to successfully develop oracquire new solutions or enhance our existing solutions to meet customer requirements, we may not grow as expected and we may not achieve profitability.We cannot be certain that our development activities will be successful or that we will not incur delays or cost overruns. Furthermore, we may not havesufficient financial resources to identify and develop new technologies and bring enhancements or new solutions to market in a timely and cost-effective manner.New technologies and enhancements could be delayed or cost more than we expect, and we cannot ensure that any of these solutions will be commerciallysuccessful if and when they are introduced.If we are unable to cost-effectively scale or adapt our existing architecture to accommodate increased traffic, technological advances or changing customerrequirements, our operating results could be harmed.As our customer base grows, the number of users accessing our solutions over the Internet will correspondingly increase. Increased traffic could result inslow access speeds and response times. Since our customer agreements often include service availability commitments, slow speeds or our failure to accommodateincreased traffic could result in breaches of our service level agreements or obligate us to issue service credits. In addition, the market for our solutions ischaracterized by rapid technological advances and changes in customer requirements. In order to accommodate increased traffic and respond to technologicaladvances and evolving customer requirements, we expect that we will be required to make future investments in our network architecture. If we do not implementfuture upgrades to our network architecture cost-effectively, or if we experience prolonged delays or unforeseen difficulties in connection with upgrading ournetwork architecture, our service quality may suffer and our operating results could be harmed.If we fail to manage our sales and distribution channels effectively or if our partners choose not to market and sell our solutions to their customers, ouroperating results could be adversely affected.We have derived and anticipate that in the future we will continue to derive a substantial portion of the sales of our solutions through channel partners. Inorder to scale our channel program to support growth in our business, it is important that we continue to help our partners enhance their ability to independentlysell and deploy our solutions. We may be unable to continue to successfully expand and improve the effectiveness of our channel sales program.Our agreements with our channel partners are generally non-exclusive and some of our channel partners have entered, and may continue to enter, intostrategic relationships with our competitors or are competitors themselves. Further, many of our channel partners have multiple strategic relationships and theymay not regard us as significant for their businesses. Our channel partners may terminate their respective relationships with us with limited or no notice and withlimited or no penalty, pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with our solutions. Our partnersalso may impair our ability to enter into other desirable strategic relationships. If our channel partners do not effectively market and sell our solutions, if theychoose to place greater emphasis on products of their own or those offered by our competitors, or if they fail to meet the needs of our customers, our ability to growour business and sell our solutions may be adversely affected. Similarly, the loss of a substantial number of our channel partners, and our possible inability toreplace them, the failure to recruit additional channel partners, any reduction or delay in their sales of our solutions, or any conflicts between channel sales and ourdirect sales and marketing activities could materially and adversely affect our results of operations.Because we recognize revenue from subscriptions over the term of the relevant service period, decreases or increases in sales are not immediately reflected infull in our operating results.21Table of ContentsWe recognize revenue from subscriptions over the term of the relevant service period, which typically range from one to three years, with some up to fiveyears. As a result, most of our quarterly revenue from subscriptions results from agreements entered into during previous quarters. Consequently, a shortfall indemand for our solutions in any quarter may not significantly reduce our subscription revenue for that quarter, but could negatively affect subscription revenue infuture quarters. We may be unable to adjust our cost structure to compensate for this potential shortfall in subscription revenue. Accordingly, the effect ofsignificant downturns in sales of subscriptions may not be fully reflected in our results of operations until future periods. Our subscription model also makes itdifficult for us to rapidly increase our subscription revenue through additional sales in any period, as subscription revenue must be recognized over the term of thecontract.Interruptions or delays in services provided by third parties could impair the delivery of our service and harm our business.We currently serve our customers from third‑party data center facilities and resources located in the United States, Canada and Europe. We also rely onbandwidth providers, Internet service providers, and mobile networks to deliver our solutions. Any damage to, or failure of, the systems of our third‑partyproviders could result in interruptions to our service. If for any reason our arrangement with one or more of our data centers is terminated we could experienceadditional expense in arranging for new facilities and support. Our data center facilities providers have no obligations to renew their agreements with us oncommercially reasonable terms, or at all. If we are unable to renew our agreements with the facilities providers on commercially reasonable terms or if in the futurewe add additional data center facility providers, we may experience costs or downtime in connection with the transfer to, or the addition of, new data centerfacilities. In addition, the failure of our data centers to meet our capacity requirements could result in interruptions in the availability of our solutions, impair thefunctionality of our solutions or impede our ability to scale our operations. As we continue to add data centers, restructure our data management plans, and increasecapacity in existing and future data centers, we may move or transfer our data and our customers’ data. Despite precautions taken during such processes andprocedures, any unsuccessful data transfers may impair the delivery of our service, and we may experience costs or downtime in connection with the transfer ofdata to other facilities.We also depend on access to the Internet through third‑party bandwidth providers to operate our business. If we lose the services of one or more of ourbandwidth providers, or if these providers experience outages, for any reason, we could experience disruption in delivering our solutions or we could be required toretain the services of a replacement bandwidth provider. Our business also depends on our customers having high-speed access to the Internet. Any Internetoutages or delays could adversely affect our ability to provide our solutions to our customers.The occurrence of an extended interruption of our or third‑party services for any reason could result in lengthy interruptions in our services or in thedelivery of customers’ email and require us to provide service credits, refunds, indemnification payments or other payments to our customers, and could also resultin the loss of customers.Any failure to offer high-quality technical support services may adversely affect our relationships with our customers and harm our financial results.Once our solutions are deployed, our customers depend on our support organization to resolve any technical issues relating to our solutions. In addition,our sales process is highly dependent on our solutions and business reputation and on strong recommendations from our existing customers. Any failure tomaintain high-quality technical support, or a market perception that we do not maintain high-quality support, could harm our reputation, adversely affect our abilityto sell our solutions to existing and prospective customers, and harm our business, operating results and financial condition.We offer technical support services with many of our solutions. We may be unable to respond quickly enough to accommodate short-term increases incustomer demand for support services. We also may be unable to modify the format of our support services to compete with changes in support services providedby competitors. Increased customer demand for these services, without corresponding revenue, could increase costs and adversely affect our operating results.We have outsourced a substantial portion of our worldwide customer support functions to third‑party service providers. If these companies experiencefinancial difficulties, do not maintain sufficiently skilled workers and resources to satisfy our contracts, or otherwise fail to perform at a sufficient level, the levelof support services to our customers may be significantly disrupted, which could materially harm our reputation and our relationships with these customers.If we fail to develop or protect our brand, our business may be harmed.22Table of ContentsWe believe that developing and maintaining awareness and integrity of our company and our brand are important to achieving widespread acceptance ofour existing and future offerings and are important elements in attracting new customers. We believe that the importance of brand recognition will increase ascompetition in our market further intensifies. Successful promotion of our brand will depend on the effectiveness of our marketing efforts and on our ability toprovide reliable and useful solutions at competitive prices. We plan to continue investing substantial resources to promote our brand, both domestically andinternationally, but there is no guarantee that our brand development strategies will enhance the recognition of our brand. Some of our existing and potentialcompetitors have well-established brands with greater recognition than we have. If our efforts to promote and maintain our brand are not successful, our operatingresults and our ability to attract and retain customers may be adversely affected. In addition, even if our brand recognition and loyalty increases, this may not resultin increased use of our solutions or higher revenue.In addition, independent industry analysts often provide reviews of our solutions, as well as those of our competitors, and perception of our solutions inthe marketplace may be significantly influenced by these reviews. We have no control over what these industry analysts report, and because industry analysts mayinfluence current and potential customers, our brand could be harmed if they do not provide a positive review of our solutions or view us as a market leader.The steps we have taken to protect our intellectual property rights may not be adequate.We rely on a combination of contractual rights, trademarks, trade secrets, patents and copyrights to establish and protect our intellectual property rights.These offer only limited protection, however, and the steps we have taken to protect our proprietary technology may not deter its misuse, theft or misappropriation.Any of our patents, copyrights, trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process orlitigation. Competitors may independently develop technologies or products that are substantially equivalent or superior to our solutions or that inappropriatelyincorporate our proprietary technology into their products. Competitors may hire our former employees who may misappropriate our proprietary technology ormisuse our confidential information. Although we rely in part upon confidentiality agreements with our employees, consultants and other third parties to protectour trade secrets and other confidential information, those agreements may not effectively prevent disclosure of trade secrets and other confidential informationand may not provide an adequate remedy in the event of misappropriation of trade secrets or unauthorized disclosure of confidential information. In addition,others may independently discover our trade secrets and confidential information, and in such cases we could not assert any trade secret rights against such parties.We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation againstthird parties for infringement of our intellectual property rights or misappropriation of our trade secrets, or to establish the validity of our intellectual propertyrights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and managementpersonnel, which may adversely affect our business, operating results and financial condition. Certain jurisdictions may not provide adequate legal infrastructurefor effective protection of our intellectual property rights. Changing legal interpretations of liability for unauthorized use of our solutions or lessened sensitivity bycorporate, government or institutional users to refraining from intellectual property piracy or other infringements of intellectual property could also harm ourbusiness.Our issued patents may not provide us with any competitive advantages or may be challenged by third parties, and our patent applications may never begranted at all. It is possible that innovations for which we seek patent protection may not be protectable. Additionally, the process of obtaining patent protection isexpensive and time consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Giventhe cost, effort, risks and downside of obtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may not chooseto seek patent protection for certain innovations. However, such patent protection could later prove to be important to our business. Even if issued, there can be noassurance that any patents will have the coverage originally sought or adequately protect our intellectual property, as the legal standards relating to the validity,enforceability and scope of protection of patent and other intellectual property rights are uncertain. Any patents that are issued may be invalidated or otherwiselimited, or may lapse or may be abandoned, enabling other companies to better develop products that compete with our solutions, which could adversely affect ourcompetitive business position, business prospects and financial condition.We cannot assure you that the measures we have taken to protect our intellectual property will adequately protect us, and any failure to protect ourintellectual property could harm our business.Third parties claiming that we infringe their intellectual property rights could cause us to incur significant legal expenses and prevent us from selling oursolutions.23Table of ContentsCompanies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights,trademarks and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual propertyrights. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defendclaims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners who have no relevant productrevenue and against whom our potential patents may provide little or no deterrence. We have received, and may in the future receive, notices that claim we haveinfringed, misappropriated or otherwise violated other parties’ intellectual property rights. In the past we have been involved in litigation involving such allegationsof infringement. To the extent we gain greater visibility, we could face a higher risk of being the subject of intellectual property infringement claims, which is notuncommon with respect to software technologies in general and information security technology in particular. There may be third‑party intellectual property rights,including issued or pending patents that cover significant aspects of our technologies or business methods. Any intellectual property claims, with or without merit,could be very time consuming, could be expensive to settle or litigate and could divert our management’s attention and other resources. These claims could alsosubject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claimscould also result in our having to stop using technology found to be in violation of a third-party’s rights. We might be required to seek a license for the intellectualproperty, which may not be available on reasonable terms or at all. Even if a license were available, we could be required to pay significant royalties, which wouldincrease our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort andexpense. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of one or more of oursolutions or features of our solutions and may be unable to compete effectively. Any of these results would harm our business, operating results and financialcondition.In addition, most of our agreements with customers and channel partners include indemnification provisions under which we agree to indemnify them forlosses suffered or incurred as a result of claims of intellectual property infringement and, in some cases, for damages caused by us to property or persons. Largeindemnity payments could harm our business, operating results and financial condition.We rely on technology and intellectual property licensed from other parties, the failure or loss of which could increase our costs and delay or prevent thedelivery of our solutions.We utilize various types of software and other technology, as well as intellectual property rights, licensed from unaffiliated third parties in order toprovide certain elements of our solutions. Any errors or defects in any third‑party technology could result in errors in our solutions that could harm our business. Inaddition, licensed technology and intellectual property rights may not continue to be available on commercially reasonable terms, or at all. While we believe thatthere are currently adequate replacements for the third‑party technology we use, any loss of the right to use any of this technology on commercially reasonableterms, or at all, could result in delays in producing or delivering our solutions until equivalent technology is identified and integrated, which delays could harm ourbusiness. In this situation we would be required to either redesign our solutions to function with software available from other parties or to develop thesecomponents ourselves, which would result in increased costs. Furthermore, we might be forced to limit the features available in our current or future solutions. Ifwe fail to maintain or renegotiate any of these technology or intellectual property licenses, we could face significant delays and diversion of resources inattempting to develop similar or replacement technology, or to license and integrate a functional equivalent of the technology.Some of our solutions contain “open source” software, and any failure to comply with the terms of one or more of these open source licenses could negativelyaffect our business.Some of our solutions are distributed with software licensed by its authors or other third parties under so-called “open source” licenses, which mayinclude, by way of example, the GNU General Public License, or GPL, and the Apache License. Some of these licenses contain requirements that we makeavailable source code for modifications or derivative works we create based upon the open source software, and that we license such modifications or derivativeworks under the terms of a particular open source license or other license granting third parties certain rights of further use. By the terms of certain open sourcelicenses, we could be required to release the source code of our proprietary software, and to make our proprietary software available under open source licenses, ifwe combine our proprietary software with open source software in a certain manner. In the event that portions of our proprietary software are determined to besubject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies,or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our technologies and solutions. In addition torisks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensorsgenerally do not provide warranties or controls on the origin24Table of Contentsof the software. We have established processes to help alleviate these risks, including a review process for screening requests from our development organizationsfor the use of open source software, but we cannot be sure that all open source software is submitted for approval prior to use in our solutions, that ourprogrammers have not incorporated open source software into our proprietary solutions and technologies or that they will not do so in the future. In addition, manyof the risks associated with usage of open source software cannot be eliminated, and could, if not properly addressed, negatively affect our business.Governmental regulations affecting the export of certain of our solutions could negatively affect our business.Some of our products are subject to U.S. export controls, and we incorporate encryption technology into certain of our products. These encryptionproducts and the underlying technology may be exported outside the United States only with the required export authorizations, including by license, a licenseexception or other appropriate government authorizations, including the filing of an encryption registration. Governmental regulation of encryption technology andregulation of imports or exports, or our failure to obtain required import or export approval for our products, could harm our international sales and adversely affectour revenue.Failure to comply with such regulations, whether by us or companies that we have acquired, in the future could result in penalties, costs, and restrictionson export privileges, which could also harm our operating results.We have and may further expand through acquisitions of, or investments in, other companies, which may divert our management’s attention, dilute ourstockholders and consume corporate resources that otherwise would be necessary to sustain and grow our business.We have made multiple acquisitions in the past, and our business strategy may, from time to time, continue to include acquiring complementary products,technologies or businesses. We also may enter into relationships with other businesses in order to expand our solutions, which could involve preferred or exclusivelicenses, additional channels of distribution, or investments by or between the two parties. Negotiating these transactions can be time consuming, difficult andexpensive, and our ability to close these transactions may be subject to third‑party approvals, such as government regulation, which are beyond our control.Consequently, we can make no assurance that these transactions, once undertaken and announced, will close.These transactions may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integratingthe businesses, technologies, products, personnel or operations of acquired companies, particularly if the key personnel of the acquired business choose not to workfor us, and we may have difficulty retaining the customers of any acquired business. Acquisitions may also disrupt our ongoing business, divert our resources andrequire significant management attention that would otherwise be available for development of our business. Any acquisition or investment could expose us tounknown liabilities.In addition, as of December 31, 2016 , we had $229.0 million of goodwill and intangible assets, net of accumulated amortization, recorded on ourconsolidated balance sheet. We will incur expenses related to the amortization of intangible assets and we may in the future need to incur charges with respect tothe impairment of goodwill or intangible assets, which could adversely affect our operating results. Moreover, we cannot assure you that the anticipated benefits ofany acquisition or investment would be realized or that we would not be exposed to unknown liabilities. In connection with these types of transactions, we mayissue additional equity securities that would dilute our stockholders' ownership interests, use cash that we may need in the future to operate our business, incur debton terms unfavorable to us or that we are unable to repay, incur large charges or substantial liabilities, encounter difficulties integrating diverse business cultures,and become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. These challenges related to acquisitions orinvestments could adversely affect our business, operating results and financial condition.If we are unable to attract and retain qualified employees, lose key personnel, fail to integrate replacement personnel successfully, or fail to manage ouremployee base effectively, we may be unable to develop new and enhanced solutions, effectively manage or expand our business, or increase our revenue.Our future success depends upon our ability to recruit and retain key management, technical, sales, marketing, finance, and other critical personnel.Competition for qualified management, technical and other personnel is intense, and we may not be successful in attracting and retaining such personnel. If we failto attract and retain qualified employees, our ability to grow our business could be harmed. Our officers and other key personnel are employees-at-will, and wecannot assure you that we25Table of Contentswill be able to retain them. Competition for people with the specific skills that we require is significant. In order to attract and retain personnel in a competitivemarketplace, we believe that we must provide a competitive compensation package, including cash and equity‑based compensation. Volatility in our stock pricemay from time to time adversely affect our ability to recruit or retain employees. If we are unable to hire and retain qualified employees, or conversely, if we fail tomanage employee performance or reduce staffing levels when required by market conditions, our business and operating results could be adversely affected.In addition, hiring, training, and successfully integrating replacement personnel could be time consuming, may cause additional disruptions to ouroperations, and may be unsuccessful, which could negatively impact future revenue.Changes in laws and/or regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our solutions, andcould have a negative impact on our business.The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and businessapplications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting dataprivacy and the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our solutions in order to comply withthese changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or commerceconducted via the Internet. These laws or charges could limit the growth of Internet‑related commerce or communications generally, result in a decline in the useof the Internet and the viability of Internet‑based applications such as ours and reduce the demand for our solutions.The legal and regulatory framework also drives demand for our solutions. Our customers are subject to laws, regulations and internal policies thatmandate how they process, handle, store, use and transmit a variety of sensitive data and communications. These laws and regulations are subject to revision,change and interpretation at any time, and any such change could either help or hurt the demand for our solutions. We cannot be sure that the legal and regulatoryframework in any given jurisdiction will be favorable to our business or that we will be able to sustain or grow our business if there are any adverse changes tothese laws and regulations.If we are required to collect sales and use taxes on the solutions we sell, we may be subject to liability for past sales and our future sales may decrease.State and local taxing jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and regulations are subject tovarying interpretations that may change over time. In particular, the applicability of sales taxes to our subscription services in various jurisdictions is unclear. It ispossible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as state tax authorities could still assert that we areobligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits with respect tostate and international jurisdictions for which we have not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxeson our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales,discourage customers from purchasing our application or otherwise harm our business and operating results.Adverse conditions in the national and global economies and financial markets may adversely affect our business and financial results. Our financial performance depends, in part, on the state of the economy, which deteriorated in the recent broad recession, and which may deteriorate inthe future. Challenging economic conditions worldwide have from time to time contributed, and may continue to contribute, to slowdowns in the informationtechnology industry, resulting in reduced demand for our solutions as a result of continued constraints on IT-related capital spending by our customers andincreased price competition for our solutions. Moreover, we target some of our solutions to the financial services industry and therefore if there is consolidation inthat industry, or layoffs, or lack of funding for IT purchases, our business may suffer. If unfavorable economic conditions continue or worsen, our business,financial condition and operating results could be materially and adversely affected.Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by manmade problems such asterrorism.26Table of ContentsNatural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thuscould have a strong negative effect on us. We have significant operations in the Silicon Valley area of Northern California, a region known for seismic activity. Amajor earthquake or other natural disaster, fire, act of terrorism or other catastrophic event that results in the destruction or disruption of any of our critical businessoperations or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating resultscould be harmed. These negative events could make it difficult or impossible for us to deliver our services to our customers, and could decrease demand for ourservices. Because we do not carry earthquake insurance for direct quake‑related losses, and significant recovery time could be required to resume operations, ourfinancial condition and operating results could be materially adversely affected in the event of a major earthquake or catastrophic event.A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.Sales to U.S. and foreign federal, state and local governmental agency customers have accounted for a portion of our revenue in past periods, and we mayin the future increase sales to government entities. Sales into government entities are subject to a number of risks. Selling to government entities can be highlycompetitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that we will win a sale. We have investedin the creation of a cloud offering that has been certified under both the Federal Information Security Management Act and the Federal Risk and AuthorizationManagement Program for government usage but we cannot be sure that we will continue to sustain or renew this certification, that the government will continue tomandate such certification or that other government agencies or entities will use this cloud offering. Government demand and payment for our solutions may beimpacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for oursolutions. Government entities may have contractual or other legal rights to terminate contracts with our distributors and resellers for convenience or due to adefault, and any such termination may adversely impact our future results of operations. For example, if the distributor receives a significant portion of its revenuefrom sales to such governmental entity, the financial health of the distributor could be substantially harmed, which could negatively affect our future sales to suchdistributor. Governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in thegovernment refusing to continue buying our solutions, a reduction of revenue or fines or civil or criminal liability if the audit uncovers improper or illegalactivities. Any such penalties could adversely impact our results of operations in a material way.If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicableregulations could be impaired.As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes‑Oxley Act of 2002 (the "Sarbanes-Oxley Act"), andthe rules and regulations of the NASDAQ Global Market. We expect that the requirements of these rules and regulations will continue to increase our legal,accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systemsand resources.The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financialreporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to bedisclosed by us in the reports that we file with the SEC, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms,and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers.Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. In addition, becausewe have acquired companies in the past and may continue to do so in the future, we will also need to expend resources to integrate the controls of these acquiredentities with ours. Further, weaknesses in our internal controls may be discovered in the future. Any failure to develop or maintain effective controls, or anydifficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and mayresult in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal controls also could adversely affect theresults of periodic management evaluations and annual independent registered public accounting firm report regarding the effectiveness of our internal control overfinancial reporting that we are required to include in our Annual Report on Form 10-K under Section 404 of the Sarbanes‑Oxley Act. Ineffective disclosurecontrols and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information,which would likely have a negative effect on the trading price of our common stock.In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we haveexpended, and anticipate that we will continue to expend, significant resources, including27Table of Contentsaccounting‑related costs, and provide significant management oversight. Any failure to maintain the adequacy of our internal controls, or consequent inability toproduce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In theevent that we or our independent registered public accounting firm are not able to complete the work required under Section 404 of the Sarbanes-Oxley Act on atimely basis, or we are not able to demonstrate compliance with Section 404, we could be subject to late filings of our annual and quarterly reports, restatements ofconsolidated financial statements or other corrective disclosure, and, investors may lose confidence in our operating results and our stock price could decline. Inaddition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Global Market.We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards, which could adversely affect our profitability.As of December 31, 2016, we had federal and state net operating loss carryforwards due to prior period losses, which if not utilized will begin or continueto expire in 2018 and 2017 for federal and state purposes, respectively. We also have federal research tax credit carryforwards, which if not utilized will begin toexpire in 2022. These net operating loss and research tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities, whichcould adversely affect our profitability.In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, our ability to utilize net operating loss carryforwards or othertax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” An “ownership change” generally occurs ifone or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowestownership percentage within a rolling three-year period. Similar rules may apply under state tax laws.Future issuances of our stock could cause an “ownership change.” It is possible that any future ownership change could have a material effect on the useof our net operating loss carryforwards or other tax attributes, which could adversely affect our profitability.We have been incurring significantly increased costs and devoting substantial management time as a result of operating as a public company.As a public company, we incur significant legal, accounting and other expenses. For example, we are required to comply with certain of the requirementsof the Sarbanes‑Oxley Act and the Dodd Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented bythe SEC, and the NASDAQ Global Market, our stock exchange, including the establishment and maintenance of effective disclosure and financial controls andchanges in corporate governance practices. We expect that compliance with these requirements will continue to increase our legal and financial compliance costsand will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention fromoperational and other business matters to devote substantial time to these public company requirements.We have incurred and expect to continue to incur significant expenses and devote substantial management effort toward ensuring compliance with therequirements of Section 404 of the Sarbanes‑Oxley Act. We will need to hire additional accounting and financial staff with appropriate public company experienceand technical accounting knowledge. We cannot predict or estimate the amount of additional costs we may incur as a public company or the timing of such costs.Risks Related to the Ownership of Our Common StockOur stock price has been volatile in the past and may be subject to volatility in the future. The trading prices of our common stock has been volatile historically, and is likely to continue to be subject to wide fluctuations in response to variousfactors described below. These factors, as well as the volatility of our common stock, could also impact the price of our convertible notes. Factors affecting themarket price of our securities include:•variations in our revenue, billings, gross margin, operating results, free cash flow, loss per share and how these results compare to analystexpectations;28Table of Contents•forward looking guidance that we may provide regarding financial metrics such as billings, revenue, gross margin, operating results, free cash flow,and loss per share;•announcements of technological innovations, new products or services, strategic alliances, acquisitions or significant agreements by us or by ourcompetitors;•disruptions in our cloud-based operations or services or disruptions of other prominent cloud-based operations or services;•the economy as a whole, market conditions in our industry, and the industries of our customers;•trading activity by directors, executive officers and significant stockholders, or the perception in the market that the holders of a large number ofshares intend to sell their shares;•the size of our market float and significant option exercises;•any future issuances of securities;•sales and purchases of any common stock issued upon conversion of our convertible notes; and•any other factors discussed herein.In addition, the stock markets in general and the NASDAQ Global Market in particular, have experienced substantial price and volume volatility that isoften seemingly unrelated to the operating results of any particular companies. Moreover, if the market for technology stocks, especially security and cloudcomputing-related stocks, or the stock market in general experiences uneven investor confidence, the market price of our common stock could decline for reasonsunrelated to our business, operating results or financial condition. The market price for our stock might also decline in reaction to events that affect othercompanies within, or outside, our industry, even if these events do not directly affect us. Some companies that have experienced volatility in the trading price oftheir stock have been subject of securities litigation. If we are the subject of such litigation, it could result in substantial costs and a diversion of management’sattention and resources.We have indebtedness in the form of convertible senior notes.In December 2013, we completed an offering of $201.3 million aggregate principal amount of 1.25% convertible senior notes due 2018 and in June 2015,we completed an offering of $230.0 million aggregate principal amount of 0.75% convertible senior notes due 2020. As a result of these convertible notesofferings, we incurred $431.3 million principal amount of indebtedness, the principal amounts of which we may be required to pay at maturity in 2018 and 2020,or, upon the occurrence of a make-whole fundamental change (as defined in the indentures). There can be no assurance that we will be able to repay thisindebtedness when due, or that we will be able to refinance this indebtedness on acceptable terms or at all. In addition, this indebtedness could, among other things:•make it difficult for us to pay other obligations;•make it difficult to obtain favorable terms for any necessary future financing for working capital, capital expenditures, debt service requirements orother purposes;•require us to dedicate a substantial portion of our cash flow from operations to service the indebtedness, reducing the amount of cash flow availablefor other purposes; and•limit our flexibility in planning for and reacting to changes in our business.Conversion of our Notes may affect the price of our common stock and the value of the Notes.The conversion of some or all of our Notes may dilute the ownership interest of existing stockholders to the extent we deliver shares of common stockupon conversion. Holders of the Notes will be able to convert them only upon the satisfaction of certain conditions prior to June 15, 2018 and December 15, 2019,as applicable. The notes due June 15, 2018 are now convertible upon the election on holders. Upon conversion, holders of the Notes will receive cash, shares ofcommon stock or a combination of cash and shares of common stock, at our election. Any sales in the public market of shares of common stock issued uponconversion of such Notes could adversely affect the trading price of our common stock and the value of the Notes.29Table of ContentsAnti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.Our certificate of incorporation and bylaws contain provisions that could have the effect of rendering more difficult, delaying or preventing an acquisitionof our company deemed undesirable by our board of directors. These provisions could also reduce the price that investors might be willing to pay in the future forshares of our common stock and result in the market price of our common stock being lower than it would be without these provisions. Our corporate governancedocuments include provisions:•creating a classified board of directors whose members serve staggered three-year terms;•authorizing “blank check” preferred stock, which could be issued by our board without stockholder approval which may contain voting, liquidation,dividend and other rights which are superior to our common stock;•limiting the liability of, and providing indemnification to, our directors and officers;•limiting the ability of our stockholders to call and bring business before special meetings by providing that any stockholder action must be effected ata duly called meeting of the stockholders and not by a consent in writing, and providing that only our board of directors, the chairman of our board ofdirectors, our Chief Executive Officer or President may call a special meeting of the stockholders; and•requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates forelection to our board of directors.These provisions, alone or together, could frustrate, delay or prevent hostile takeovers and changes in control or changes in our management.In addition, the fundamental changes provisions of our Notes may delay or prevent a change in control of our company, because those provisions allownote holders to require us to repurchase such Notes upon the occurrence of a fundamental change (as defined in the indenture for the Notes). Furthermore, theindenture for the Notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations underthe Notes.As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, whichprevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations merging or combining withus without approval of the holders of a substantial majority of all of our outstanding common stock.Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new solutions could reduce ourability to compete and could harm our business.We may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raiseadditional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock coulddecline. If we issue equity securities in any additional financing, the new securities may have rights and preferences senior to our common stock. If we engage indebt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or otherratios. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:•develop or enhance our application and services;•continue to expand our product development, sales and marketing organizations;•acquire complementary technologies, products or businesses;•expand operations, in the United States or internationally;•hire, train and retain employees; or30Table of Contents•respond to competitive pressures or unanticipated working capital requirements.Future sales of our common stock in the public market could lower the market price for our common stock and adversely impact the trading price of the notes.In the future, we may sell additional shares of our common stock to raise capital. In addition, a substantial number of shares of our common stock isreserved for issuance upon the exercise of stock options, the vesting of restricted stock units and restricted stock pursuant to our employee benefit plans, forpurchase by employees under our employee stock purchase plan, and upon conversion of our outstanding convertible notes. We cannot predict the size of futureissuances or the effect, if any, that they may have on the market price for our common stock. The issuance and sale of substantial amounts of common stock, or theperception that such issuances and sales may occur, could adversely affect the trading price of the notes and the market price of our common stock and impair ourability to raise capital through the sale of additional equity securities.We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.We do not anticipate paying cash dividends on our common stock in the future. As a result, only appreciation of the price of our common stock willprovide a return to our stockholders. Investors seeking cash dividends should not invest in our common stock.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur corporate headquarters, which includes our operations and research and development facilities, is located in Sunnyvale, California, and currentlyconsists of 95,557 square feet of space under a lease that expires in 2020, with a five-year extension option. In 2016, we leased additional 43,925 square feetbuilding in Sunnyvale, California, which is currently under renovation, and upon completion, will serve as expansion of our corporate headquarters. The 2016leases expires in 2024, with a five-year extension option.We lease additional U.S. offices in Utah, Texas, Indiana and Colorado. We also lease offices in Toronto, Canada; Paris, France; Tokyo, Japan; Nurnberg,Germany; London and Reading, United Kingdom; Belfast, Ireland, Sydney, Australia; Taipei, Taiwan and Herzliya, Israel. We believe our facilities are adequatefor our current needs and for the foreseeable future.The following is a list of our locations and the primary functions.LocationPrimary functionSunnyvale, California, U.S.Research and development, sales, marketing and administrationMinuteman, Utah, U.S.Research and development, sales, marketing and administrationAustin, Texas, U.S.Research and development, marketingIndianapolis, Indiana, U.S.Research and developmentDenver and Broomfield, ColoradoResearch and development, sales and marketingHerzliya, IsraelResearch and developmentToronto, CanadaResearch and development, sales, marketing and administrationUnited KingdomResearch and development, sales and marketingParis, FranceSalesTokyo, JapanSalesNurnberg, GermanySalesBelfast, IrelandResearch and development, sales and marketingTaipei, TaiwanResearch and development, sales, marketing and administrationSydney, AustraliaSales and marketing31Table of ContentsWe operate eleven data centers at third-party facilities throughout the world: six in the United States, two in Canada, one in the Netherlands and two inGermany.ITEM 3. LEGAL PROCEEDINGSFrom time to time, we may be involved in legal proceedings and subject to claims in the ordinary course of business.Although the results of these proceedings and claims cannot be predicted with certainty, we do not believe the ultimate cost to resolve these matters wouldindividually, or taken together, have a material adverse effect on our business, operating results, cash flows or financial condition. Regardless of the outcome, suchproceedings can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances thatfavorable outcomes will be obtained.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.32Table of ContentsPART II.ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESMarket Price of Our Common StockOur common stock is traded on the NASDAQ Global Market, under the symbol PFPT. The following table set forth, for the periods, indicated, the highestand lowest intraday sales price of our common shares as reported by the NASDAQ Global Market. High LowYear Ended December 31, 2016 First Quarter$65.28 $35.56Second Quarter$65.19 $46.58Third Quarter$80.68 $63.01Fourth Quarter$88.00 $68.04Year Ended December 31, 2015 First Quarter$60.72 $45.37Second Quarter$67.87 $50.53Third Quarter$72.70 $50.82Fourth Quarter$75.46 $54.87Holders of our Common SharesAs of February 3, 2017 , there were 45 stockholders of record, although we believe that there are a larger number of beneficial owners as many of ourshares of our common stock are held by brokers and other institutions on behalf of stockholders.Dividend PolicyWe have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay anycash dividends on our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directorsand will be dependent on a number of factors, including our earnings, capital requirements and overall financial conditions.Unregistered Sales of Equity SecuritiesOn October 24, 2016, the Company issued 110,782 shares of its common stock to certain stockholders of FireLayers, Ltd. as partial consideration paid bythe Company in connection with the consummation of the Company's acquisition of FireLayers, Ltd. The shares were not registered under the Securities Act of1933, as amended ("Securities Act") in reliance upon the exemption from registration pursuant to Section 4(a)(2) of the Securities Act.Use of Proceeds from Public Offering of Common StockThere has been no material change in the use of proceeds from our initial public offering in April 2012.Stock Performance GraphThe following graph shows a comparison from April 20, 2012 through December 31, 2016 , of the cumulative total return for our common stock, theNASDAQ Composite Index, and the NASDAQ Computer Index. The graph assumes an investment of $100 on April 20, 2012 and reinvestment of any dividends.The comparisons in the graph below are required by the Securities and Exchange Commission and are not intended to forecast or be indicative of possible futureperformance of our common shares.33Table of Contents April 20, 2012 December 31, 2012 December 31, 2013 December 31, 2014 December 31, 2015 December 31, 2016Proofpoint, Inc.100.00 87.43 235.58 342.54 461.72 501.78NASDAQ Composite - Total Returns100.00 101.92 142.87 163.50 174.88 190.39NASDAQ Computer Index100.00 95.61 128.24 156.01 167.97 188.58The above stock Performance Graph and related information shall not be deemed "filed" with the SEC and is not to be incorporated by reference into anyfiling of Proofpoint, Inc. made under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAThe following tables present selected historical financial data for our business. You should read this information together with "Management's Discussionand Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, related notes and other financial information includedelsewhere in this Annual Report on Form 10-K. The selected consolidated financial data in this section are not intended to replace the consolidated financialstatements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.We derived the consolidated statements of operations data for the years ended December 31, 2016, 2015 and 2014, and the consolidated balance sheetdata as of December 31, 2016 and 2015 from our audited consolidated financial statements included elsewhere in this report. We derived the consolidatedstatements of operations data for the years ended December 31, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2014, 2013 and 2012from our consolidated financial statements not included in this report. Effective January 1, 2016, we changed our accounting policy for sales commissions that areincremental and directly related to customer sales contracts in which revenue is deferred. The adoption of this accounting policy change has been appliedretrospectively for all periods presented. See Note 1 of the Notes to Consolidated Financial Statements in this annual report for information regarding the change inaccounting policy for sales commissions. Our historical results are not necessarily indicative of the results to be expected in the future.34Table of Contents Years Ended December 31, 2016 2015 2014 2013 2012 (in thousands, except per share data)Consolidated Statements of Operations Data: Revenue: Subscription$365,960 $257,329 $187,527 $132,062 $101,470Hardware and services9,536 8,068 8,080 5,869 4,825Total revenue375,496 265,397 195,607 137,931 106,295Cost of revenue: (1) Subscription94,716 71,746 53,136 35,468 28,246Hardware and services13,877 12,312 12,543 6,124 4,867Total cost of revenue108,593 84,058 65,679 41,592 33,113Gross profit266,903 181,339 129,928 96,339 73,182Operating expense: (1) Research and development98,506 74,459 51,903 34,449 24,827Sales and marketing201,204 148,414 98,333 69,123 53,445General and administrative52,774 36,616 26,679 19,622 12,693Total operating expense352,484 259,489 176,915 123,194 90,965Operating loss(85,581) (78,150) (46,987) (26,855) (17,783)Interest expense(23,538) (18,000) (11,213) (641) (108)Other expense, net(1,103) (1,927) (2,230) (215) (154)Loss before (provision for) benefit from income taxes(110,222) (98,077) (60,430) (27,711) (18,045)(Provision for) benefit from income taxes(986) (635) 313 2,808 (521)Net loss$(111,208) $(98,712) $(60,117) $(24,903) $(18,566)Net loss per share, basic and diluted$(2.66) $(2.48) $(1.61) $(0.71) $(0.77)Weighted average shares outstanding, basic and diluted41,859 39,787 37,381 34,874 24,056_______________________________________________________________________________(1)Includes stock-based compensation and amortization of intangible assets as follows: Years Ended December 31, 2016 2015 2014 2013 2012 (in thousands)Stock-based compensation: Cost of subscription revenue$7,427 $5,028 $2,404 $1,007 $657Cost of hardware and services revenue$1,494 $1,098 $604 $196 $70Research and development$24,342 $20,672 $10,204 $3,608 $1,869Sales and marketing$28,607 $21,511 $10,795 $4,270 $3,103General and administrative$16,826 $11,785 $6,997 $3,002 $1,622Amortization of intangible assets: Cost of subscription revenue$9,423 $7,079 $4,157 $2,220 $2,785Research and development$60 $91 $93 $47 $30Sales and marketing$4,938 $5,074 $4,494 $1,743 $461General and administrative$— $12 $46 $34 $—35Table of Contents As of December 31, 2016 2015 2014 2013 2012 (in thousands)Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments$396,751 $406,237 $214,986 $251,801 $86,517Deferred commissions, current and long-term$25,664 $22,802 $15,060 $10,938 $8,280Property and equipment, net$52,523 $34,501 $18,718 $11,221 $8,560Total assets$801,660 $705,616 $439,076 $401,211 $148,721Convertible senior notes$366,541 $345,699 $161,396 $152,642 $—Debt, current and long-term$123 $155 $695 $2,350 $4,012Deferred revenue, current and long-term$312,181 $223,726 $162,675 $123,983 $86,859Total stockholders' equity$44,923 $83,185 $71,533 $88,098 $42,088ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with our "Selected ConsolidatedFinancial Data" and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion containsforward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those forward-looking statements below. Factorsthat could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section entitled "Risk Factors"included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “may,” “will,”“expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements aresubject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed orimplied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, andthose discussed in the section titled “Risk Factors”, set forth in Part I, Item 1A of this Form 10-K. Except as required by law, we disclaim any obligation to updateany forward-looking statements to reflect events or circumstances after the date of such statements.OverviewProofpoint is a leading security-as-a-service ("SaaS") provider that enables large and mid-sized organizations worldwide to defend, protect, archive andgovern their most sensitive data. Our SaaS platform is comprised of an integrated suite of on-demand data protection solutions, including threat protection andincident response, regulatory compliance, archiving, data governance and eDiscovery, and secure communication. Our solutions are built on a flexible, cloud-basedplatform and leverage a number of proprietary technologies, including big data analytics, machine learning, deep content inspection, secure storage, advancedencryption, intelligent message routing, dynamic malware analysis, threat correlation, and virtual execution environments, to address today’s rapidly changingthreat landscape.Our platform addresses this growing challenge by not only protecting data as it flows into and out of the enterprise via on-premises and cloud-basedemail, instant messaging, social media and other web-based applications, but also by keeping track of this information as it is modified and distributed throughoutthe enterprise for compliance and data loss prevention, and securely archiving these communications for compliance and discovery. We address four importantproblems for the enterprise:•protecting users from the advanced attacks that target them via email, social media and mobile applications;•preventing the theft or inadvertent loss of sensitive information and, in turn, ensuring compliance with regulatory data protection mandates;•collecting, retaining, governing and discovering sensitive data for compliance and litigation support; and•enabling organizations to respond quickly to security issues, providing both the intelligence and the context to prioritize incidents and orchestrateremediation actions.Our platform and its associated solutions are sold to customers on a subscription basis and can be deployed through our unique cloud-based architecturethat leverages both our global data centers as well as optional points-of-presence behind36Table of Contentsour customers’ firewalls. Our flexible deployment model enables us to deliver superior security and compliance while maintaining the favorable economicsafforded by cloud computing, creating a competitive advantage for us over legacy on-premises and cloud-only offerings.We were founded in 2002 to provide a unified solution to help enterprises address their growing data security requirements. Our first solution wascommercially released in 2003 to combat the burgeoning problem of spam and viruses and their impact on corporate email systems. To address the evolving threatlandscape and the adoption of communication and collaboration systems beyond corporate email and networks, we have broadened our solutions to defend againsta wide range of threats, protect against outbound security risks, and archive and govern corporate information. As the threat environment has continued to evolve,we have dedicated significant resources to meet the ongoing challenges that this highly dynamic environment creates for our customers such as investingsignificantly to expand the breadth of our data protection platform as these expenditures are primarily in connection with the replacement and upgrade ofequipment to lower the cost of deployment as well as to improve the efficiency for our cloud-based architecture. Our business is based on a recurring revenue model. Our customers pay a subscription fee to license the various components of our SaaS platform for acontract term that is typically one to three years. At the end of the license term, customers may renew their subscription and in each year since the launch of ourfirst solution in 2003, we have maintained a renewal rate with our existing customers of over 90% . We derive this retention rate by calculating the total annuallyrecurring subscription revenue from customers currently using our SaaS platform and dividing it by the total annually recurring subscription revenue from boththese current customers as well as all business lost through non-renewal. A growing number of our customers increase their annual subscription fees after theirinitial purchase by broadening their use of our platform or by adding more users, and these sales have consistently represented greater than 15% of our billingseach year since 2008.We market and sell our solutions worldwide both directly through our sales teams and indirectly through a hybrid model where our sales organizationactively assists our network of distributors and resellers. We also derive a lesser portion of our total revenue from the license of our solutions to strategic partnerswho offer our solutions in conjunction with one or more of their own products or services. Our solutions are designed to be implemented, configured and operated without the need for any training or professional services. We offer varioustrainings and professional services for those customers that seek to develop deeper expertise in the use of our solutions or would like assistance with complexconfigurations or the importing of data. In some cases, we provide a hardware appliance to those customers that elect to host elements of our solution behind theirfirewall. Increasing adoption of virtualization in the data center has led to a decline in the sales of our hardware appliances and a shift towards our software-basedvirtual appliances, which are delivered as a download via the Internet. Our hardware and services offerings carry lower margins and are provided as a courtesy toour customers. We expect the overall proportion of revenue derived from the hardware and services offerings to generally remain below 5% of our total revenue.Historically, the majority of our revenue is derived from our customers in the United States. We believe the markets outside of the United States offer anopportunity for growth and we intend to make additional investments in sales and marketing to expand in these markets. Revenue from customers outside of theUnited States grew 34% for the year ended December 31, 2016 as compared to prior year. In terms of customer concentration, there were no individual customersor partners that accounted for more than 10% of our total revenue for the years ended December 31, 2016 and 2015.We have not been profitable to date and will need to grow revenue at a rate faster than our investments in cost of revenue and operating expenses in orderto achieve profitability, as discussed in more detail below.Key Opportunities and ChallengesThe total costs associated with the teams tasked with closing business with new customers and additional business with our existing customers haverepresented more than 90% of our total sales and marketing costs since 2008. Although we expect customers to be profitable over the duration of the customerrelationship, the upfront costs typically exceed related revenue during the earlier periods of a contract. As a result, while our practice of invoicing our customers forthe entire amount of the contract at the start of the term provides us with a relatively immediate contribution to cash flow, the revenue is recognized ratably overthe term of the contract, and hence contributions toward operating income are limited in the period where the sales and marketing costs are incurred. Accordingly,an increase in the mix of new customers as a percentage of total customers would likely negatively impact our near-term operating results. On the other hand, weexpect that an increase in the mix of existing customers as a percentage of total customers would positively impact our operating results over time. As weaccumulate customers that continue to renew their contracts, we anticipate that our mix of existing customers will increase,37Table of Contentscontributing to a decrease in our sales and marketing costs as a percentage of total revenue and a commensurate improvement in our operating income.As part of maintaining our SaaS platform, we provide ongoing updates and enhancements to the platform services both in terms of the software as well asthe underlying hardware and data center infrastructure. These updates and enhancements are provided to our customers at no additional charge as part of thesubscription fees paid for the use of our platform. While more traditional products eventually become obsolete and require replacement, we are constantly updatingand maintaining our cloud-based services and as such they operate with a continuous product life cycle. Much of this work is designed to both maintain andenhance the customers' experience over time while also lowering our costs to deliver the service. Our SaaS platform is a shared infrastructure that is used by all ofour customers. Accordingly, the costs of the platform are spread in a relatively uniform manner across the entire customer base and no specific infrastructureelements are directly attached to any particular customer. As such, in the event that a customer chooses to not renew its subscription, the underlying resources arereallocated either to new customers or to accommodate the expanding needs of our existing customers and, as a result, we do not believe that the loss of anyparticular customer has a meaningful impact on our gross profit as long as we continue to grow our customer base.To date, our customers have primarily used our solutions in conjunction with email messaging content. We have developed solutions to address new andevolving messaging solutions such as social media and file sharing applications, but these solutions are relatively nascent. If customers increase their use of thesenew messaging solutions in the future, we anticipate that our growth in revenue associated with older email messaging solutions may slow over time. Althoughrevenue associated with our social media and file sharing applications has not been material to date, we believe that our ability to provide security, archiving,governance and discovery for these new solutions will be viewed as valuable by our existing customers, enabling us to derive revenue from these new forms ofmessaging and communication.While the majority of our current and prospective customers run their email systems on premise, we believe that there is a trend for large and mid-sizedenterprises to migrate these systems to the cloud. While our current revenue derived from customers using cloud-based email systems continues to grow as apercentage of our total revenue, many of these cloud-based email solutions offer some form of threat protection and governance services, potentially mitigating theneed for customers to buy these capabilities from third parties such as ourselves. We believe that we can continue to provide security, archiving, governance, anddiscovery solutions that are differentiated from the services offered by cloud-based email providers, and as such our platform will continue to be viewed asvaluable to enterprises once they have migrated their email services to the cloud, enabling us to continue to derive revenue from this new trend toward cloud-basedemail deployment models.With the majority of our business, we invoice our customers for the entire contract amount at the start of the term and these amounts are recorded asdeferred revenue on our balance sheet, with the dollar weighted average duration of these contracts for any given period over the past three years typically rangingfrom 14 to 20 months. As a result, while our practice of invoicing customers for the entire amount of the contract at the start of the term provides us with arelatively immediate contribution to cash flow, the revenue is recognized ratably over the term of the contract, and hence contributions toward operating incomeare realized over an extended period. As such, our efforts to improve our profitability require us to invest far less in operating expenses than the cash flowgenerated by our business might otherwise allow. As we strive to invest in an effort to continue to increase the size and scale of our business, we expect that thelevel of investment afforded by our growth in revenue should be sufficient to fund the investments needed to drive revenue growth and broaden our product line. Considering all of these factors, we do not expect to be profitable on a GAAP basis in the near term and in order to achieve profitability we will need togrow revenue at a rate faster than our investments in operating expenses and cost of revenue.We intend to grow our revenue through acquiring new customers by investing in our sales and marketing activities. We believe that an increase in newcustomers in the near term will result in a larger base of renewal customers, which, over time, we expect to be more profitable for us.Sales and marketing is our largest expense and hence a significant contributing factor to our operating losses. We believe that our opportunity to improveour return on investment on sales and marketing costs relies primarily on our ongoing ability to cost-effectively renew our business with existing customers,thereby lowering our overall sales and marketing costs as a percentage of revenue as the mix of revenue derived from this more profitable renewal activityincreases over time. Therefore, we anticipate that our initial significant investments in sales and marketing activities will, over time, generate a larger base of moreprofitable customers. Cost of subscription revenue is also a significant expense for us, and we expect to continue to build on the improvements over the past years,such as in replacing third-party technology with our proprietary technology and improving the utilization of our fixed investments in equipment and infrastructure,in order to provide the38Table of Contentsopportunity for improved subscription gross margins over time. Although we plan to continue enhancing our solutions, we intend to lower our rate of investment inresearch and development as a percentage of revenue over time by deriving additional revenue from our existing platform of solutions rather than by addingentirely new categories of solutions. In addition, as personnel costs are one of the primary drivers of the increases in our operating expenses, we plan to reduce ourhistorical rate of headcount growth over time.Key MetricsWe regularly review a number of metrics, including the following key metrics presented in the table below, to evaluate our business, measure ourperformance, identify trends in our business, prepare financial projections and make strategic decisions. Many of these key metrics, such as non-GAAP grossmargin, billings, adjusted EBITDA and free cash flows, are non-GAAP measures. This non-GAAP information is not necessarily comparable to non-GAAPinformation of other companies. Users of this financial information should consider the types of events and transactions for which adjustments have been made. Year Ended December 31, 2016 2015 2014 (in thousands)Total revenue$375,496 $265,397 $195,607 Growth41% 36% 42%Gross margin percentage71% 68% 66%Non-GAAP gross margin76% 73% 70%Billings (non-GAAP)$462,751 $324,348 $233,699 Growth43% 39% 46%Adjusted EBITDA (non-GAAP)$38,697 $12,332 $3,627Free cash flows (non-GAAP)$59,828 $20,677 $7,625Non-GAAP gross marginWe define non-GAAP gross margin as non-GAAP gross profit divided by GAAP revenue. We define non-GAAP gross profit as GAAP gross profit,adjusted to exclude stock-based compensation expense and the amortization of intangible assets associated with acquisitions. We consider this non-GAAP financialmeasure to be a useful metric for management and investors because it excludes the effect of stock-based compensation expense and the amortization of intangibleassets associated with acquisitions so that our management and investors can compare our business operating results over multiple periods, and compare theCompany's financial results with other companies in its industry, many of which present similar non-GAAP financial measure. However, there are a number oflimitations related to the use of non-GAAP gross margin versus gross margin calculated in accordance with GAAP. For example, stock-based compensation hasbeen and will continue to be for the foreseeable future a significant recurring expense in our business. Stock-based compensation is an important part of ouremployees’ compensation and impacts their performance. In addition, the components of the costs that we exclude in our calculation of non-GAAP gross marginmay differ from the components that our peer companies exclude when they report their non-GAAP results. Management compensates for these limitations byproviding specific information regarding the GAAP amounts excluded from non-GAAP gross margin and evaluating non-GAAP gross margin together with grossmargin calculated in accordance with GAAP.The following table presents the reconciliation of gross margin to Non-GAAP gross margin for the years ended December 31, 2016, 2015 and 2014:39Table of Contents Year Ended December 31, 2016 2015 2014 (in thousands)GAAP gross profit$266,903 $181,339 $129,928GAAP gross margin71% 68% 66%Plus: Stock-based compensation expense8,921 6,126 3,008Amortization of intangible assets9,423 7,079 4,157Non-GAAP gross profit$285,247 $194,544 $137,093Non-GAAP gross margin76% 73% 70%BillingsWe have included billings, a non-GAAP financial measure, in this report because it is a key measure used by our management and board of directors tomanage our business and monitor our near term cash flows. We define billings as total revenue plus change in deferred revenue during a period, less deferredrevenue from acquisitions. We have provided reconciliation between total revenue, the most directly comparable GAAP financial measure, and billings.Accordingly, we believe that billings provides useful information to investors and others in understanding and evaluating our operating results in the same manneras our management and board of directors.Our use of billings as a non-GAAP measure has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for revenueor an analysis of our results as reported under GAAP. Some of these limitations are: •Billings is not a substitute for revenue, as trends in billings are not directly correlated to trends in revenue;•Billings is affected by a combination of factors including the timing of renewals, the sales of our solutions to both new and existing customers, therelative duration of contracts sold, and the relative amount of business derived from strategic partners. As each of these elements has uniquecharacteristics in the relationship between billings and revenue, our billings activity is not closely correlated to revenue except over longer periods oftime; and•Other companies, including companies in our industry, may not use billings, may calculate billings differently, or may use other financial measuresto evaluate their performance ‑ all of which reduce the usefulness of billings as a comparative measure.The following table presents the reconciliation of total revenue to billings for the years ended December 31, 2016, 2015 and 2014: Year Ended December 31, 2016 2015 2014 (in thousands)Total revenue$375,496 $265,397 $195,607Deferred revenue Ending312,181 223,726 162,675Beginning223,726 162,675 123,983Net change88,455 61,051 38,692Less: deferred revenue contributed by acquisitions(1,200) (2,100) (600)Billings$462,751 $324,348 $233,699 Adjusted EBITDA40Table of ContentsWe define adjusted EBITDA as net loss, adjusted to exclude: depreciation, amortization of intangible assets, interest (income) expense, net, provision for(benefit from) income taxes, stock-based compensation, acquisition- and litigation-related (income) expenses, net, and other (income) expense, net. Acquisitionrelated expense, net, include legal, accounting, and other professional fees, as well as changes in the fair value of contingent consideration obligations. We believethat adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with anadditional tool to compare business performance across companies and across periods. We believe that:•Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance,facilitates period-to-period comparisons of operations and facilitates comparisons with our peer companies, many of which use similar non-GAAPfinancial measures to supplement their GAAP results; and•It is useful to exclude certain non-cash charges, such as depreciation, amortization of intangible assets and stock-based compensation, andacquisition- and litigation-related (income) expenses from adjusted EBITDA because the amount of such expenses in any specific period may not bedirectly correlated to the underlying performance of our business operations and these expenses can vary significantly between periods as a result ofnew acquisitions, full depreciation of previously acquired tangible and amortization of intangible assets, the timing of new stock‑based awards orlitigation-related (income) expenses, as the case may be.We use adjusted EBITDA in conjunction with traditional GAAP operating performance measures as part of our overall assessment of our performance,for planning purposes, including the preparation of our annual operating budget, to evaluate the effectiveness of our business strategies and to communicate withour board of directors concerning our financial performance.We do not place undue reliance on adjusted EBITDA as our only measure of operating performance. Adjusted EBITDA should not be considered as asubstitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, includingthat other companies may calculate these measures differently than we do, that they do not reflect our capital expenditures or future requirements for capitalexpenditures and that they do not reflect changes in, or cash requirements for, our working capital.The following table presents the reconciliation of net loss to adjusted EBITDA for the years ended December 31, 2016, 2015 and 2014: Year Ended December 31, 2016 2015 2014 (in thousands)Net loss$(111,208) $(98,712) $(60,117)Depreciation17,131 12,644 9,033Amortization of intangible assets14,421 12,256 8,790Interest expense23,538 18,000 11,213Provision for (benefit from) income taxes986 635 (313)EBITDA(55,132) (55,177) (31,394)Stock-based compensation expense78,696 60,094 31,004Acquisition-related expense1,080 911 612Litigation-related expense12,950 4,577 1,175Other expense, net1,103 1,927 2,230Adjusted EBITDA$38,697 $12,332 $3,627Free cash flowsWe define free cash flow as net cash provided by operating activities minus capital expenditures. We consider free cash flow to be a liquidity measurethat provides useful information to management and investors about the amount of cash generated by the business that, after the acquisition of property andequipment, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet. Analysisof free cash41Table of Contentsflow facilitates management’s comparisons of our operating results to competitors’ operating results. A limitation of using free cash flow versus the GAAPmeasure of net cash provided by operating activities as a means for evaluating our company is that free cash flow does not represent the total increase or decreasein the cash balance from operations for the period because it excludes cash used for capital expenditures during the period. Management compensates for thislimitation by providing information about our capital expenditures on the face of the cash flow statement and in the "Liquidity and Capital Resources" sectionbelow. Year Ended December 31, 2016 2015 2014 (in thousands)GAAP cash flows provided by operating activities:$94,235 $46,504 $22,613Less: Purchase of property and equipment(34,407) (25,827) (14,988)Non-GAAP free cash flows$59,828 $20,677 $7,625Components of Our Results of OperationsRevenueWe derive our revenue primarily through the license of various solutions and services on our security-as-a-service platform on a subscription basis,supplemented by the sales of training, professional services and hardware depending upon our customers' requirements. Subscription. We license our platform and its associated solutions and services on a subscription basis. The fees are charged on a per user, per year basis.Subscriptions are typically one to three years in duration. We invoice our customers upon signing for the entire term of the contract. The invoiced amounts billed inadvance are treated as deferred revenue on the balance sheet and are recognized ratably, in accordance with the appropriate revenue recognition guidelines, overthe term of the contract. We also derive a portion of our subscription revenue from the license of our solutions to strategic partners. We bill these strategic partnersmonthly. We expect our subscription revenue will continue to grow and remain above 95% of our total revenue.Hardware and services. We provide hardware appliances as a convenience to our customers and as such it represents a small part of our business. Oursolutions are designed to be implemented, configured and operated without the need for any training or professional services. For those customers that seek todevelop deeper expertise in the use of our solutions or would like assistance with complex configurations or the importing of data, we offer various training andprofessional services. We typically invoice the customer for hardware at the time of shipment. We typically invoice customers for services at the time the order isplaced and recognize this revenue ratably over the term of the contract. On occasion, customers may retain us for special projects such as archiving import andexport services; these types of services are recognized upon completion of the project. We expect the overall proportion of revenue derived from hardware andservice offerings to generally remain below 5% of our total revenue.Cost of RevenueOur cost of revenues consists of cost of subscription revenue and cost of hardware and services revenue. Personnel costs, data center costs and hardwarecosts are the most significant components of our cost of revenues. We expect personnel costs to continue to increase in absolute dollars as we hire new employeesto continue to grow our business.Cost of Subscription Revenue. Cost of subscription revenue primarily includes personnel costs, consisting of salaries, benefits, bonuses, and stock-basedcompensation, for employees who provide support services to our customers and operate our data centers. Other costs include fees paid to contractors whosupplement our support and data center personnel; expenses related to the use of third-party data centers in both the United States and internationally; depreciationof data center equipment; amortization of licensing fees and royalties paid for the use of third-party technology; amortization of internally developed intangibleassets; and the amortization of intangible assets acquired through business combinations. Growth in subscription revenue generally consumes production resources,requiring us to gradually increase our cost of subscription revenue in absolute dollars as we expand our investment in data center equipment, the third-party datacenter space required to house this equipment, and the personnel needed to manage this higher level of activity.42Table of ContentsCost of Hardware and Services Revenue. Cost of hardware and services revenue includes personnel costs for employees who provide training andprofessional services to our customers as well as the cost of server hardware shipped to our customers that we procure from third parties and configure with oursoftware solutions.Operating ExpensesOur operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs, whichconsist of salaries, benefits, bonuses, and stock-based compensation, are the most significant component of our operating expenses. We expect personnel costs tocontinue to increase in absolute dollars as we hire new employees to continue to grow our business. Our headcount has increased from 449 employees as ofDecember 31, 2012 to 1,573 employees as of December 31, 2016 . As a result of this growth in headcount, operating expenses have increased significantly overthese periods. We expect personnel costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business.Research and Development. Research and development expenses include personnel costs, consulting services and depreciation. We believe that theseinvestments have played an important role in broadening the capabilities of our platform over the course of our operating history, enhancing the relevance of oursolutions in the market in general and helping us to retain our customers over time. We expect to continue to devote substantial resources to research anddevelopment in an effort to continuously improve our existing solutions as well as to develop new offerings. We believe that these investments are necessary tomaintain and improve our competitive position. However, over the longer term, we intend to monitor these costs so as to decrease this spending as a percentage oftotal revenue. Our research efforts include both software developed for our internal use on behalf of our customers as well as software elements to be used by ourcustomers in their own facilities. To date, our capitalized costs on software developed for internal use on behalf of our customers have not been material. For thesoftware developed for use on our customers’ premises, the costs associated with the development work between technological feasibility and the generalavailability has not been material and as such we have not capitalized any of these development costs to date.Sales and Marketing. Sales and marketing expenses include personnel costs, sales commissions, and other costs including travel and entertainment,marketing and promotional events, public relations and marketing activities. These costs also include amortization of intangible assets as a result of our pastacquisitions. Due to our continued investment in growing our sales and marketing operations, both domestically and internationally, headcount increases werereflected in higher compensation expense consistent with our revenue growth. Our sales personnel are typically not immediately productive, and therefore theincrease in sales and marketing expenses we incur when we add new sales representatives is not immediately offset by increased revenue and may not result inincreased revenue over the long-term if these new sales people fail to become productive. The timing of our hiring of new sales personnel and the rate at whichthey generate incremental revenue will affect our future financial performance. We expect that sales and marketing expenses will continue to increase in absolutedollars and be among the most significant components of our operating expenses.General and Administrative. General and administrative expenses consist of personnel costs, consulting services, audit fees, tax services, legal expensesand other general corporate items. As a result of our operational growth, we expect our general and administrative expenses to increase in absolute dollars in futureperiods as we continue to expand our operations and hire additional personnel. Interest ExpenseInterest expense consists of interest income earned on our cash, cash equivalents and short-term investments, the interest expense related to ourconvertible senior notes and our capital lease payments.Other Income (Expense), NetOther income (expense), net, consists primarily of the net effect of foreign currency transaction gains and losses.(Provision For) Benefit From Income TaxesFor 2013 and prior years, the (provision for) benefit from income taxes was related to state and foreign income taxes. As we have incurred operatinglosses in all periods to date and recorded a full valuation allowance against our deferred tax assets, we have not historically recorded a provision for federal incometaxes. However, in the years ended December 31, 2016 and 2015, we recognized $0.4 million and $0.1 million, respectively, of deferred tax expense in the U.S.related to amortization43Table of Contentsof tax goodwill on business acquisitions. We also recognized a $0.8 million deferred tax benefit in 2014 related to the release of U.S. valuation allowances as aresult of business acquisitions. Realization of any of our deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. Utilization of our net operating losses and research and development credits may be subject to substantial annual limitation due to the ownership changelimitations provided by the Internal Revenue Code and similar state provisions. Analyses have been conducted to determine whether an ownership change hadoccurred since inception. The analyses have indicated that although ownership changes have occurred in prior years, the net operating losses and research anddevelopment credits would not expire before utilization as a result of the ownership change. In the event we have subsequent changes in ownership, net operatinglosses and research and development credit carryovers could be limited and may expire unutilized as a result of the subsequent ownership change.Results of OperationsThe following table is a summary of our consolidated statements of operations. Year Ended December 31, 2016 2015 2014 (in thousands)Revenue: Subscription$365,960 $257,329 $187,527Hardware and services9,536 8,068 8,080Total revenue375,496 265,397 195,607Cost of revenue: (1) Subscription94,716 71,746 53,136Hardware and services13,877 12,312 12,543Total cost of revenue108,593 84,058 65,679Gross profit266,903 181,339 129,928Operating expense: (1) Research and development98,506 74,459 51,903Sales and marketing201,204 148,414 98,333General and administrative52,774 36,616 26,679Total operating expense352,484 259,489 176,915Operating loss(85,581) (78,150) (46,987)Interest expense(23,538) (18,000) (11,213)Other expense, net(1,103) (1,927) (2,230)Loss before (provision for) benefit from income taxes(110,222) (98,077) (60,430)(Provision for) benefit from income taxes(986) (635) 313Net loss$(111,208) $(98,712) $(60,117)The following table sets forth our consolidated results of operations for the specified periods as a percentage of our total revenue for those periods.44Table of Contents Year Ended December 31, 2016 2015 2014Revenue: Subscription97 % 97 % 96 %Hardware and services3 3 4Total revenue100 100 100Cost of revenue: (1) Subscription25 27 27Hardware and services4 5 7Total cost of revenue29 32 34Gross profit71 68 66Operating expense: (1) Research and development26 28 26Sales and marketing54 56 50General and administrative14 14 14Total operating expense94 98 90Operating loss(23) (30) (24)Interest expense(6) (7) (6)Other expense, net(1) — (1)Loss before (provision for) benefit from income taxes(30) (37) (31)(Provision for) benefit from income taxes— — —Net loss(30)% (37)% (31)%_______________________________________________________________________________(1)Includes stock-based compensation and amortization of intangible assets as follows: Year Ended December 31, 2016 2015 2014 (in thousands)Stock-based compensation: Cost of subscription revenue$7,427 $5,028 $2,404Cost of hardware and services revenue1,494 1,098 604Research and development24,342 20,672 10,204Sales and marketing28,607 21,511 10,795General and administrative16,826 11,785 6,997Amortization of intangible assets: Cost of subscription revenue$9,423 $7,079 $4,157Research and development60 91 93Sales and marketing4,938 5,074 4,494General and administrative— 12 46Revenue Year EndedDecember 31,Change Year EndedDecember 31, Change 2016 2015 $ % 2015 2014 $ % (in thousands) (in thousands) Subscription$365,960 $257,329 $108,631 42% $257,329 $187,527 $69,802 37 %Hardware and services9,536 8,068 1,468 18% 8,068 8,080 (12) — %Total revenue$375,496 $265,397 $110,099 41% $265,397 $195,607 $69,790 36 %45Table of ContentsSubscription revenue increased $108.6 million and $69.8 million , or 42% and 37% , respectively, for 2016 and 2015. These increases were primarily dueto a $92.9 million and $60.6 million increase in revenue from the United States and, to a lesser extent, a $15.7 million and $9.2 million from internationalcustomers for 2016 and 2015, respectively.The increase in subscription revenue for 2016 and 2015 was due to the ongoing robust demand for our advanced threat solutions, increase in add-onactivity and renewal rate being higher than 90%. Additionally, the revenue recognized from acquired deferred revenue related to the acquisitions made was $2.7million, $4.7 million and $7.1 million in 2016, 2015 and 2014, respectively. The change in subscription revenue due to pricing was not significant for either period.Hardware and services revenue for 2016 increased $1.5 million or 18% , as compared to 2015, primarily due to higher revenue from professional servicesrelated to the archiving solutions. The change in hardware and services revenue was not material in 2015 as compared to 2014. Cost of Revenue Year EndedDecember 31, Change Year EndedDecember 31, Change 2016 2015 $ % 2015 2014 $ % (in thousands) (in thousands) Subscription$94,716 $71,746 $22,970 32% $71,746 $53,136 $18,610 35 %Hardware and services13,877 12,312 1,565 13% 12,312 12,543 (231) (2)%Total cost of revenue$108,593 $84,058 $24,535 29% $84,058 $65,679 $18,379 28 %Cost of subscription revenue increased $23.0 million , or 32% , in 2016 as compared to 2015, and $18.6 million, or 35%, in 2015 as compared to 2014.The increases were primarily due to increases in operations-related expense of $13.6 million and $12.4 million, respectively, due to increased headcount,depreciation expense as a result of higher capital expenditures to support our growth, and amortization of intangible assets expense of developed technology fromthe acquisitions. Additionally, support-related expenses increased $6.5 million and $4.8 million, respectively, primarily due to higher headcount and consultingcosts. Data center costs increased $2.9 million and $1.6 million, respectively, primarily due to subscription revenue growth in our cloud-based solutions.Cost of hardware and services revenue for 2016 increased $1.6 million , or 13% , as compared to 2015, primarily due to an increase in professionalservice costs as our headcount increased. The change in hardware and services cost was not material in 2015 as compared to 2014.Operating Expenses Year EndedDecember 31, Change Year EndedDecember 31, Change 2016 2015 $ % 2015 2014 $ % (in thousands) (in thousands) Research and development$98,506 $74,459 $24,047 32% $74,459 $51,903 $22,556 43%Percent of total revenue26% 28% 28% 26% Research and development expenses increased $24.0 million and $22.6 million , or 32% and 43% , for 2016 and 2015, respectively. The increases wereprimarily due to personnel-related costs of $18.7 million and $19.9 million for 2016 and 2015, respectively, from higher headcount, including those from theintegration of the acquisitions in 2016 and 2015. Additionally, corporate expense increased $2.7 million and $0.9 million, respectively, primarily due to highercosts from expanded operations, higher allocated costs from facilities, human resources and IT-related expense as we grew year-over-year, and increasedconsulting costs of $2.8 million and $1.6 million in 2016 and 2015, respectively, as we grew rapidly in both years.46Table of Contents Year EndedDecember 31, Change Year EndedDecember 31, Change 2016 2015 $ % 2015 2014 $ % (in thousands) (in thousands) Sales and marketing$201,204 $148,414 $52,790 36% $148,414 $98,333 $50,081 51%Percent of total revenue54% 56% 56% 50% Sales and marketing expenses increased $52.8 million and $50.1 million , or 36% and 51% , for 2016 and 2015, respectively. The increase in headcounton a worldwide basis and increase in revenue resulted in increased personnel-related and commissions costs of $45.8 million and $40.3 million, respectively.Travel expenses increased $1.1 million in 2016 and $1.6 million in 2015. Corporate and facilities expenses increased $3.3 million in 2016 and $4.1 million in 2015due to costs related to our acquisitions and higher allocated costs as the company expanded. Marketing expenses related to lead generation, trade shows,advertising and other initiatives increased $2.3 million in 2016 and $3.9 million in 2015 due to increased marketing activities. Year EndedDecember 31, Change Year EndedDecember 31, Change 2016 2015 $ % 2015 2014 $ % (in thousands) (in thousands) General and administrative$52,774 $36,616 $16,158 44% $36,616 $26,679 $9,937 37%Percent of total revenue14% 14% 14% 14% General and administrative expenses increased $16.2 million and $9.9 million , or 44% and 37% , for 2016 and 2015, respectively, primarily due toincreases in personnel-related costs of $7.5 million and $6.3 million for 2016 and 2015, respectively, to support our continued growth as a public company andbusiness acquisitions in 2016 and 2015. Legal expense increased $8.4 million in 2016 due to an increase in litigation and settlement costs related to the Finjanlawsuit and settlement (see Note 7 to the accompanying Consolidated Financial Statements), legal expense increased $3.4 million in 2015 as compared to 2014,due to litigation with Finjan. Interest Expense Year EndedDecember 31, Change Year EndedDecember 31, Change 2016 2015 $ % 2015 2014 $ % (in thousands) (in thousands) Total interest expense, net(23,538) (18,000) (5,538) (31)% (18,000) (11,213) (6,787) (61)%Total net interest expense increased $5.5 million in 2016 and $6.8 million in 2015, primarily due to higher interest expense related to the issuance of theconvertible senior notes in June 2015 and December 2013 and the associated interest expense, accretion of the debt discount and debt issuance costs.Other Expense, Net Year EndedDecember 31, Change Year EndedDecember 31, Change 2016 2015 $ % 2015 2014 $ % (in thousands) (in thousands) Total other expense, net$(1,103) $(1,927) $824 43% $(1,927) $(2,230) $303 (14)%Total net other expense decreased $0.8 million and $0.3 million for 2016 and 2015, respectively, primarily due to U.S. Dollar translation rate changesagainst other currencies, in particular the Euro, the Japanese Yen, the British Pound and the Canadian Dollar.(Provision For) Benefit From Income Taxes47Table of Contents Year EndedDecember 31, Change Year EndedDecember 31, Change 2016 2015 $ % 2015 2014 $$% (in thousands) (in thousands) (Provision for) benefit from income taxes$(986) $(635) $(351) 55% (635) 313 $(948) (303)% Total income tax expense increased $0.4 million in 2016 as compared to 2015. The increase is primarily due to an increase in U.S. deferred tax liabilitieson goodwill related to certain taxable business acquisitions. Total income tax expense increased $0.9 million in 2015 as compared to 2014. The increase is primarily due to tax benefit of $0.8 million recorded in2014 and related to the reversal of valuation allowance resulting from the Nexgate acquisition. Quarterly Results of OperationsThe following table sets forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters in the period endedDecember 31, 2016 . We have prepared the quarterly data on a basis consistent with our audited annual financial statements, including, in the opinion ofmanagement, all normal recurring adjustments necessary for the fair statement of the financial information contained in these statements. The historical results arenot necessarily indicative of future results and should be read in conjunction with our consolidated financial statements and the related notes included elsewhere inthis Annual Report on Form 10-K. Dec. 31,2016 Sept. 30,2016 June 30,2016 Mar. 31,2016 Dec. 31,2015 Sept. 30,2015 June 30,2015 Mar. 31,2015 (in thousands, except per share amounts)Consolidated Statements of Operations Data: Revenue: Subscription$104,082 $97,163 $87,318 $77,397 $72,472 $67,223 $61,778 $55,856Hardware and services2,723 2,621 2,586 1,606 2,467 1,926 1,768 1,907Total revenue106,805 99,784 89,904 79,003 74,939 69,149 63,546 57,763Cost of revenue:(1) Subscription25,849 23,987 23,198 21,682 20,374 18,209 16,829 16,334Hardware and services3,982 3,293 3,460 3,142 3,518 2,845 2,995 2,954Total cost of revenue29,831 27,280 26,658 24,824 23,892 21,054 19,824 19,288Gross profit76,974 72,504 63,246 54,179 51,047 48,095 43,722 38,475Operating expense:(1) Research and development27,772 24,493 23,588 22,653 20,092 20,000 18,659 15,708Sales and marketing54,550 51,467 48,664 46,523 41,174 38,651 35,638 32,951General and administrative10,778 8,393 22,999 10,604 10,827 9,961 8,495 7,333Total operating expense93,100 84,353 95,251 79,780 72,093 68,612 62,792 55,992Operating loss(16,126) (11,849) (32,005) (25,601) (21,046) (20,517) (19,070) (17,517)Interest expense(6,009) (5,920) (5,809) (5,800) (5,912) (5,903) (3,332) (2,853)Other (expense) income, net(575) (228) (302) 2 (292) (375) (80) (1,180)Loss before (provision for) benefitfrom income taxes(22,710) (17,997) (38,116) (31,399) (27,250) (26,795) (22,482) (21,550)Provision for income taxes(174) (370) (185) (257) (142) (219) (112) (162)Net loss$(22,884) $(18,367) $(38,301) $(31,656) $(27,392) $(27,014) $(22,594) $(21,712)Net loss per share, basic and diluted$(0.54) $(0.44) $(0.92) $(0.77) $(0.68) $(0.67) $(0.57) $(0.56)Weighted average sharesoutstanding, basic and diluted42,616 42,109 41,605 41,093 40,531 40,072 39,567 38,957_______________________________________________________________________________(1)Includes stock-based compensation expense and amortization of intangible assets as follows:48Table of Contents Three Months Ended Dec. 31,2016 Sept. 30,2016 June 30,2016 Mar. 31,2016 Dec. 31,2015 Sept. 30,2015 June 30,2015 Mar. 31,2015 (in thousands) Stock-based compensation: Cost of subscription revenue$1,988 $2,080 $1,721 $1,638 $1,408 $1,357 $1,148 $1,115Cost of hardware and servicesrevenue374 375 392 353 324 270 250 254Research and development6,844 6,019 5,877 5,602 5,110 5,862 5,762 3,938Sales and marketing7,897 7,174 6,718 6,818 6,016 5,469 5,157 4,869General and administrative4,439 4,315 4,000 4,072 3,379 3,238 2,918 2,250Total stock based compensationexpenses$21,542 $19,963 $18,708 $18,483 $16,237 $16,196 $15,235 $12,426 Amortization of intangible assets: Cost of subscription revenue$2,965 $2,223 $2,118 $2,117 $2,165 $1,945 $1,589 $1,380Research and development15 15 15 15 22 23 23 23Sales and marketing1,000 1,429 1,236 1,273 1,235 1,242 1,304 1,293General and administrative— — — — — — 1 11Total amortization of intangibleassets$3,980 $3,667 $3,369 $3,405 $3,422 $3,210 $2,917 $2,707The following unaudited table sets forth our consolidated results of operations data as a percentage of total revenue. Three Months Ended Dec. 31,2016 Sept. 30,2016 June 30,2016 Mar. 31,2016 Dec. 31,2015 Sept. 30,2015 June 30,2015 Mar. 31,2015Consolidated Statements of Operations Data: Revenue: Subscription97 % 97 % 97 % 98 % 97 % 97 % 97 % 97 %Hardware and services3 3 3 2 3 3 3 3Total revenue100 100 100 100 100 100 100 100Cost of revenue: Subscription24 24 26 27 27 26 26 28Hardware and services4 3 4 4 5 4 5 5Total cost of revenue28 27 30 31 32 30 31 33Gross profit72 73 70 69 68 70 69 67Operating expense: Research and development26 25 26 29 27 29 29 27Sales and marketing51 52 54 59 55 56 56 57General and administrative10 8 26 13 14 15 14 13Total operating expense87 85 106 101 96 100 99 97Operating loss(15) (12) (36) (32) (28) (30) (30) (30)Interest expense(6) (6) (7) (8) (8) (9) (6) (5)Other (expense) income, net— — — — — — — (2)Loss before (provision for)benefit from income taxes(21) (18) (43) (40) (36) (39) (36) (37)Provision for income taxes— — — — — — — —Net loss(21)% (18)% (43)% (40)% (36)% (39)% (36)% (37)%Liquidity and Capital ResourcesAs of December 31, 2016, we had $345.4 million in cash and cash equivalents and $51.3 million in short-term investments, for a total of $396.8 million. Also refer to Note 8 "Convertible Senior Notes" to the consolidated financial statements for discussion of the Notes. 49Table of ContentsWe plan to grow our customer base by continuing to emphasize investments in sales and marketing to add new customers, expand our customers’ use ofour platform, and maintain high renewal rates. We also expect to incur additional cost of subscription revenue in accordance with the resulting growth in ourcustomer base. We believe that the combination of our ongoing improvements in gross margins, the benefits of lower sales and marketing costs associated with ourrenewal activity, and the fact that our contracts are structured to bill our customers in advance should enable us to improve our cash flow from operations as wegrow. Based on our current level of operations and anticipated growth, both of which are expected to be consistent with recent quarters, we believe that ourexisting sources of liquidity will be sufficient to fund our operations for at least the next 12 months. Our future capital requirements will depend on many factors,including our rate of revenue growth, the expansion of our sales and marketing activities, and the timing and extent of spending to support product developmentefforts and expansion into new territories, and the timing of introductions of new features and enhancements to our solutions. To the extent that existing cash andcash equivalents and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity ordebt financing. We have invested, and plan to continue investing in acquiring complementary businesses, applications and technologies, and may continue to makesuch investments in the future, any of which could also require us to seek equity or debt financing in addition to our Notes. Additional funds may not be availableon terms favorable to us or at all.As of December 31, 2016 , the amount of cash and cash equivalents held by our foreign subsidiaries was $17.4 million , including intercompanyreceivable balances. If these funds were needed for our operations in the United States, we would be required to withhold foreign taxes on the funds repatriated ofapproximately $0.8 million . We have only provided $0.2 million for these taxes, as it is our intention that the majority of these funds are indefinitely reinvestedoutside the United States and our current plans do not demonstrate a need to repatriate these funds to our United States operations.Cash FlowsThe following table sets forth a summary of our consolidated cash flows for the periods indicated: Years EndedDecember 31, 2016 2015 2014 (in thousands)Net cash provided by operating activities$94,235 $46,504 $22,613Net cash used in investing activities$(89,231) $(102,861) $(95,120)Net cash (used in) provided by financing activities$(5,238) $223,188 $10,396Net Cash Flows Provided by Operating ActivitiesOur net loss and cash flows from operating activities are significantly influenced by our investments in headcount and data center operations to supportanticipated growth. Our cash flows are also influenced by cash payments from customers. We invoice customers for the entire contract amount at the start of theterm, and as such our cash flow from operations is also affected by the length of a customer contract.Net cash provided by operating activities was $94.2 million in 2016 as compared to $46.5 million in 2015. The increase of $47.7 million was primarilydue to:•An increase in amortization of intangible assets of $2.2 million due to the acquired businesses, and an increase in depreciation of fixed assets of $4.5million due to the increase in capital expenditure;•Stock-based compensation expense increased $18.6 million due to the increase in headcount and valuation of grants made;•Amortization of debt issuance costs and accretion of debt discount increased $5.9 million due to the issuance of our convertible notes in June 2015;•a decrease in deferred commissions change of $4.9 million due more deferrals in 2015 and higher deferred commission amortization in 2016 as comparedto 2015;•An increase in accounts payable change of $1.8 million due to the timing of the payments;50Table of Contents•An increase in deferred revenue change of $28.3 million due to higher billings;•An increase in accrued liabilities change of $2.0 million due to the timing of compensation and other payments;•The increase was offset by a net loss change of $12.5 million and an increase in accounts receivable change of $5.9 million .Net cash provided by operating activities was $46.5 million in 2015 as compared to $22.6 million in 2014. The increase of $23.9 million was primarilydue to:•An increase in amortization of intangible assets of $3.5 million due to the acquired businesses, and an increase in depreciation of fixed assets of $3.6million due to the increase in capital expenditure;•Stock-based compensation expense increased $29.1 million due to the increase in headcount and valuation of grants made;•Amortization of debt issuance costs and accretion of debt discount increased $6.2 million due to the issuance of our convertible notes in June 2015;•A decrease in accounts receivable change of $2.7 million due to collections;•An increase in accounts payable change of $2.3 million due to the timing of the payments;•An increase in deferred revenue change of $20.9 million due to higher billings;•An increase in accrued liabilities change of $0.5 million due to the timing of compensation and other payments;•The increase was offset by a net loss change of $38.6 million, an increase in deferred commissions change of $3.6 million primarily due to higherdeferrals, and a decrease in deferred rent change of $2.5 million as larger lease agreements, including tenant allowances received, were executed in priorperiods. Net Cash Flows Used in Investing ActivitiesOur primary investing activities consisted of acquisitions of businesses, capital expenditures in support of expanding our infrastructure and workforce andthe purchase and sale of short-term investments. As our business grows, we expect our capital expenditures and our investment activity to continue to increase. Wemay also target other companies for acquisition, however, there are none currently pending.Net cash used in investing activities was $89.2 million in 2016 as compared to $102.9 million in 2015. The decrease in cash used of $13.6 million wasdue to a $84.3 million increase in sales and maturities of short-term investments, offset by $50.1 million increase in payments for short-term investments, anincrease in capital expenditures of $8.6 million for infrastructure expansion and daily operations, an increase in payments to escrow account of $9.6 million due tothe Return Path acquisition, and an increase in business acquisition cost of $2.6 million .Net cash used in investing activities was $102.9 million in 2015 as compared to $95.1 million in 2014. The increase of $7.7 million was due to an increasein capital expenditures of $10.8 million for infrastructure expansion and daily operations offset by lower business acquisition cost by $2.1 million. Net Cash Flows (Used in) Provided by Financing ActivitiesNet cash used in financing activities was $5.2 million in 2016 as compared to cash provided of $223.2 million in 2015. The decrease of $228.4 millionwas primarily due to proceeds of $223.8 million from the issuance of the 0.75% Notes in June 2015 (see Note 8 to our Consolidated Financial Statements), a $7.5million increase in withholding taxes paid related to restricted stock unit net share settlement, $1.4 million paid in 2016 to release an indemnification holdbackliability incurred in connection with the Abaca Technology Corporation acquisition in July 2013, partially offset by $3.2 million increase in proceeds fromcommon stock issuance related to employee stock plans and $0.7 million decrease in payments for equipment loans and capital lease obligations.51Table of ContentsNet cash provided by financing activities was $223.2 million in 2015 as compared to $10.4 million in 2014. The increase of $212.8 million was primarilydue to proceeds of $223.8 million from the issuance of the 0.75% Notes in June 2015 (Note 8). The increase was partially offset by withholding taxes paid relatedto restricted stock net share settlement increase of $13.9 million.Contractual Obligations and CommitmentsThe following table summarizes our contractual obligations as of December 31, 2016 (in thousands): Payment Due By Period Total (5) Less Than1 Year 1-3 Years 3-5 Years More than 5yearsConvertible senior notes (1)$431,250 $— $201,250 $230,000 $—Interest payments (2)11,069 4,241 5,965 863 —Capital and operating lease obligations (3)51,329 13,945 24,500 7,268 5,616Purchase obligations (4)17,736 7,705 10,031 — —Total$511,384 $25,891 $241,746 $238,131 $5,616_______________________________________________________________________________(1)Represents the 0.75% and 1.25% convertible senior notes issued in June 2015 and December 2013, respectively. See Note 8, "Convertible Senior Notes" for further information.(2)Represents interest payments on the 0.75% and 1.25% senior convertible notes.(3)Consists of capital leases and contractual obligations under operating leases for office space and data centers.(4)Consists of minimum purchase commitment of products and services. Obligations under contracts that we can cancel without a significant penalty was not included in the table above.(5)As we are unable to reasonably predict the timing of settlement of liabilities related to unrecognized tax benefits, net, the table does not include $0.3 million of such non-current liabilitiesincluded in Other long-term liabilities recorded on our consolidated balance sheet as of December 31, 2016 .Off-Balance Sheet ArrangementsDuring the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes. We are therefore not exposed to any financing, liquidity, market or credit risk that could arise if wehad engaged in those types of relationships.Under the indemnification provisions of our standard customer agreements, we agree to indemnify, defend and hold harmless our customers against,among other things, infringement of any patents, trademarks or copyrights under any country's laws or the misappropriation of any trade secrets arising from thecustomer's legal use of our solutions. Certain indemnification provisions potentially expose us to losses in excess of the aggregate amount paid to us by thecustomer under the applicable customer agreement. No material claims have been made against us pursuant to these indemnification provisions to date.Critical Accounting Policies and EstimatesOur management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, whichhave been prepared in accordance with GAAP. GAAP requires us to make certain estimates and judgments that can affect the reported amounts of assets andliabilities, the disclosure of contingencies, and the reported amounts of revenue and expenses. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assetsand liabilities. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results ofoperations for future periods could be materially affected. See "Risk Factors" for certain matters that may affect our future financial condition or results ofoperations. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain atthe time the estimate is made, if different estimates reasonably could have been used, or if the changes in estimate that are reasonably likely to occur couldmaterially impact the financial statements.52Table of ContentsOur significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 1 "The Company and Summaryof Significant Accounting Policies” to the accompanying consolidated financial statements in this report. The following critical accounting policies reflectsignificant judgments and estimates used in the preparation of our consolidated financial statements:•Revenue recognition;•Deferred commissions;•Stock-based compensation expense;•Fair value of assets acquired and liabilities assumed in business combinations;•Impairment assessment of goodwill, intangible assets and other long-lived assets•Loss contingencies; and•Recognition and measurement of current and deferred income taxes.Revenue RecognitionWe derive our revenue primarily from two sources: (1) subscription revenue for rights related to the use of our software and security-as-a-service platformand (2) hardware, training, and professional services revenue provided to customers related to their use of our platform. Subscription revenue is derived from asubscription-based enterprise licensing model with contract terms typically ranging from one to three years, and consists of (i) subscription fees from the licensingof our software and security-as-a-service platform, (ii) subscription fees for access to the on-demand elements of our platform and (iii) subscription fees for theright to access our customer support services.Revenue is recognized when all of the following criteria have been met:•Persuasive evidence of an arrangement exists;•Delivery has occurred or services have been rendered;•Sales price is fixed or determinable; and•Collectability is reasonably assured.We generate sales directly through our sales team and, to a growing extent, through our channel partners. Sales to channel partners are made at a discountand revenues are recorded at this discounted price once all revenue recognition criteria are met. Channel partners generally receive an order from an end-customerprior to placing an order with us, and these partners do not carry any inventory of our products or solutions. Payment from channel partners is not contingent on thepartner’s success in sales to end-customers. In the event that we offer rebates, joint marketing funds, or other incentive programs to a partner, recorded revenuesare reduced by these amounts accordingly.We apply industry-specific software revenue recognition guidance to transactions involving the licensing of software, as well as related support, training,and other professional services. Software revenue recognition guidance requires revenue earned on software arrangements involving multiple elements such assoftware license, support, training, and other professional services to be allocated to each element based on the relative fair values of these elements. The fair valueof an element must be based on vendor-specific objective evidence ("VSOE") of fair value. VSOE of fair value of each element is based on the price charged whenthe element is sold separately.We have analyzed all of the elements included in our multiple element software arrangements and have determined that we do not have sufficient VSOEof fair value to allocate revenue to our software license agreements, support, training, and professional services. We defer all revenue under the arrangement untilthe commencement of the subscription services and any associated professional services. Once the subscription services and the associated professional serviceshave commenced, the entire fee from the arrangement is recognized ratably over the remaining period of the arrangement. If the professional services53Table of Contentsare essential to the functionality of the subscription, then the revenue recognition does not commence until such services are completed.Our arrangements typically include subscription services to our security-as-a-service platform. These hosted on demand service arrangements do notprovide customers with the right to take possession of the software supporting the hosted services. Certain arrangements also include the sale of hardwareappliances. Revenue from hardware appliances containing software components and hardware components that function together to deliver the hardwareappliance's essential functionality is excluded from the scope of the industry specific revenue recognition guidance. We recognize revenue from our hosted ondemand services in accordance with general revenue recognition accounting guidance. Only revenue derived from the licensing of the software is recognized inaccordance with the industry specific revenue guidance. When a sales arrangement contains multiple elements, such as hardware appliances, subscription services, customer support services, and/or professionalservices, we allocate revenue to each element based on a selling price hierarchy. In multiple element arrangements, revenue is allocated to each separate unit ofaccounting using the relative selling prices of each of the deliverables in the arrangement based on the selling price hierarchy. An element constitutes a separateunit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control. When applying therelative selling price method, we determine the selling price for each deliverable using VSOE of selling price. If VSOE does not exist, we use third-party evidence(“TPE”) of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use our best estimate of selling price ("BESP") for that deliverable.Revenue allocated to each element is then recognized when the basic revenue recognition criteria are met for each element. We determine BESP for an individualelement within a multiple element revenue arrangement using the same methods utilized to determine the selling price of an element sold on a standalone basis.We estimate the selling price for our subscription solutions by considering internal factors such as historical pricing practices and we estimate the selling price ofour hardware and other services using a combination of our historical costs paired with external measurements regarding the pricing of similar products andservices in similar industries.Hardware appliance revenue is recognized upon shipment. Subscription and support revenue are recognized over the contract period commencing on thestart date of the contract. Professional services and training, when sold with hardware appliances or subscription and support services, are accounted for separatelywhen those services have standalone value. In determining whether professional services and training services can be accounted for separately from subscriptionand support services, we consider the following factors: availability of the services from other vendors, the nature of the services, and the dependence of thesubscription services on the customer's decision to buy the professional services. If professional services and training do not qualify for separate accounting, werecognize the professional services and training ratably over the contract term of the subscription services.Delivery generally occurs when the hardware appliance is delivered to a common carrier freight on board shipping point by us or the hosted service hasbeen activated and communicated to the customer accordingly. Our fees are typically considered to be fixed or determinable at the inception of an arrangement andare negotiated at the outset of an arrangement, generally based on specific products and quantities to be delivered. In the event payment terms are provided thatdiffer significantly from our standard business practices, the fees are deemed to not be fixed or determinable and revenue is recognized as the fees become paid.We assess collectability based on a number of factors, including credit worthiness of the customer and past transaction history of the customer. ThroughDecember 31, 2016 , we have not experienced any material credit losses.Deferred CommissionsDeferred commissions are the direct and incremental selling costs that are associated with our customer contracts and consist of sales commissions paid toour direct sales force and referral fees paid to independent third-parties. The commissions are amortized to sales and marketing expense over the non-cancelableterms of the related contracts with our customers. The commissions payments, which are paid in full the month after the customer's service commences, are a directand incremental cost of the revenue arrangements. Direct sales commissions are deferred when earned and amortized over the same period that revenues arerecognized for the related non-cancelable contract. We believe this is the preferable method of accounting as the commission charges are so closely related to therevenue from the non-cancelable customer contracts that they should be recorded as an asset and charged to expense over the same period that the related revenueis recognized.Stock-Based Compensation Expense54Table of ContentsWe use the Black-Scholes option valuation model to estimate the fair value of stock options and ESPP shares. This valuation model requires the input ofhighly subjective assumptions, the most significant of which is our estimates of expected volatility and the expected term of the award.Starting January 1, 2016, the expected volatility of our common stock is based on the Company's historical volatility. Prior to January 1, 2016, thecommon stock price volatility was determined based on the historical average volatilities of the common stock of a group of publicly-traded peer companies thatoperated in a similar industry as the Company did not have sufficient trading history for its common stock.The expected life of options granted has been determined utilizing the "simplified" method as permitted by the SEC. The risk-free interest rate is based ona daily treasury yield curve rate whose term is consistent with the expected life of the stock options. We have not, historically, paid and, in the future, do notanticipate paying cash dividends on our shares of common stock and therefore, the expected dividend yield is assumed to be zero. We recognize stock-based compensation expense for only those shares expected to vest over the requisite service period of the award. We estimate ourforfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on historical forfeitureactivity and expected future employee turnover, if any. Changes in the estimated forfeiture rate can have a significant effect on reported share-based compensationexpense, as the cumulative effect of adjusting the rate for all expense is recognized in the period the forfeiture estimate is changed. Fair value of assets acquired and liabilities assumed in business combinationsIn each of our acquisitions, we used the purchase method of accounting which requires us to allocate the fair value of the total consideration transferred totangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of the acquisition, with the differencebetween the net assets acquired and the total consideration transferred recorded as goodwill. The fair values assigned, defined as the price that would be received tosell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on significant estimates and assumptionsdetermined by management. These estimates and assumptions are inherently uncertain and subject to refinement, as a result, during the adjustment period, whichmay be up to one year from the acquisition date, we may record adjustments to the assets acquired or liabilities assumed with any corresponding offset to goodwill.Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequentadjustments are recorded within our consolidated statements of operations.We used either the discounted cash flow method or the replacement cost method to assign fair values to acquired identifiable intangible assets. Thismethod requires significant management judgment to forecast future operating results and establish residual growth rates and discount factors. These models arebased on reasonable estimates and assumptions given available facts and circumstances, including industry estimates and averages, as of the acquisition dates andare consistent with the plans and estimates that we use to manage our business. If the subsequent actual results and updated projections of the underlying businessactivity change compared with the estimates and assumptions used to develop these values, we could experience impairment charges. In addition, we haveestimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economiclives change, depreciation or amortization expenses could be accelerated or slowed.Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition dateincluding our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration,where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part onhistorical experience and information obtained from the management of the acquired companies and are inherently uncertain.Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to:•future expected cash flows from our revenue streams;•cost to build the acquired technology;•the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in thecombined company’s product portfolio; and•discount rates.55Table of ContentsUnanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.For a given acquisition, we may identify certain pre-acquisition contingencies as of the acquisition date and may extend our review and evaluation ofthese pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we include these contingenciesas a part of the fair value estimates of assets acquired and liabilities assumed and, if so, to determine their estimated amounts.If we cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, whichis generally the case given the nature of such matters, we will recognize an asset or a liability for such pre-acquisition contingency if: (i) it is probable that an assetexisted or a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Subsequent to themeasurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our results of operations and financialposition.In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as ofthe acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to ourpreliminary estimates being recorded to goodwill if identified within the measurement period. Subsequent to the measurement period or our final determination ofthe tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax related valuation allowances willaffect our provision for income taxes in our consolidated statements of operations and could have a material impact on our results of operations and financialposition.Goodwill, Intangible Assets and Other Long-Lived Assets - Impairment AssessmentsWe review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable. For thepurposes of impairment testing, we have determined that we have one reporting unit. We perform the two-step impairment test, whereby we compare the fair valueof the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is notconsidered impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value ofthe reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If thecarrying value of a reporting unit’s goodwill exceeds its implied fair value, then we would record impairment loss equal to the difference. No impairment has beennoted to date.We periodically review the carrying amounts of intangible assets and other long-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying value of these assets may not be recoverable. We measure the recoverability of these assets by comparing the carrying amount of suchassets (or asset group) to the future undiscounted cash flow we expect the assets (or asset group) to generate. If we consider any of these assets to be impaired, theimpairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value. We make judgments about the recoverability ofpurchased intangible assets whenever events or changes in circumstances indicate that impairment may exist.Each period we evaluate the estimated remaining useful lives of intangible assets and other long-lived assets to assess whether a revision to the remainingperiods of amortization is required. Assumptions and estimates about remaining useful lives of our intangible and other long-lived assets are subjective. They canbe affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy.Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materiallyimpact our reported financial results. We did not recognize any intangible asset impairment charges to date.Loss contingenciesWe evaluate contingent liabilities including threatened or pending litigation in accordance with the authoritative guidance on contingencies. We assess thelikelihood of any adverse judgments or outcomes from potential claims or legal proceedings, as well as potential ranges of probable losses, when the outcomes ofthe claims or proceedings are probable and reasonably estimable. A determination of the amount of accrued liabilities required, if any, for these contingencies ismade after the analysis of each separate matter. Because of uncertainties related to these matters, we base our estimates on the information available at the time ofour assessment. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise ourestimates. Any revisions in the estimates of potential liabilities could have a material impact on our operating results and financial position.56Table of ContentsIncome TaxesWe determine our current and deferred tax provisions based on estimates and assumptions that could differ from the actual results reflected in our incometax returns filed during the subsequent year. We record adjustments based on filed returns when we have identified and finalized them, which is generally in thethird and fourth quarters of the subsequent year for U.S. federal and state provisions, respectively. We have placed a full valuation allowance on all net U.S.deferred tax assets because realization of these tax benefits through future taxable income cannot be reasonably assured. We intend to maintain the valuationallowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Any decision to reverse part or all of the valuation allowancewould be based on our estimate of future profitability. If our estimate were to be wrong, we could be required to charge potentially significant amounts to incometax expense to establish a new valuation allowance.Our effective tax rate includes the impact of certain undistributed foreign earnings for which we partially provided taxes because we plan to reinvestmajority of such earnings indefinitely outside the United States. We plan foreign earnings remittance amounts based on projected cash flow needs as well as theworking capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Material changes in our estimates of cash, workingcapital and long-term investment requirements in the various jurisdictions in which we do business could impact our effective tax rate. We are subject to incometaxes in the United States and certain foreign countries, and we are subject to corporate income tax audits in some of these jurisdictions. We believe that our taxreturn positions are fully supported, but tax authorities are likely to challenge certain positions, which may not be fully sustained. However, our income taxexpense includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax expense for these potentialassessments and recording the related assets and liabilities requires management judgments and estimates. We evaluate our uncertain tax positions in accordancewith the guidance for accounting for uncertainty in income taxes. We believe that our liability for uncertain tax positions is adequate. We review our liability foruncertain tax positions quarterly, and we may adjust such liability because of proposed assessments by tax authorities, changes in facts and circumstances, issuanceof new regulations or new case law, previously unavailable information obtained during the course of an examination, negotiations between tax authorities ofdifferent countries concerning our transfer prices, or the expiration of statutes of limitations.Recent Accounting PronouncementsRefer to Note 1 of the notes to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for a full description of recentaccounting pronouncements.Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKWe have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. Theserisks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countrieswhere we conduct business. To reduce certain of these risks, we monitor the financial condition of our large clients and limit credit exposure by collecting inadvance and setting credit limits as we deem appropriate. In addition, our investment strategy has been to invest in financial instruments that are highly liquid andreadily convertible into cash. To date, we have not used derivative instruments to mitigate the impact of our market risk exposures. We have also not used, nor dowe intend to use, derivatives for trading or speculative purposes.Interest Rate RiskWe are exposed to market risk related to changes in interest rates. Our investments primarily consist of money market funds, corporate debt securities,commercial papers, U.S. agency and Treasury securities, and certificates of deposit. As of December 31, 2016 , we had cash, cash equivalents, and short-terminvestments of $396.8 million . The carrying amount of our cash equivalents and short-term investments reasonably approximates fair value, due to the shortmaturities of these investments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and thefiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due toa fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investmentportfolio, we believe only dramatic fluctuations in interest rates would have a material effect on our investments. We do not believe that an immediate 10%increase in interest rates would have a material effect on the fair market value of our portfolio. As such we do not expect our operating results or cash flows to bematerially affected by a sudden change in market interest rates.As of December 31, 2016 , we had an outstanding balance of $431.3 million aggregate principal amount of the Notes (see Note 8 of our ConsolidatedFinancial Statements). We carry the Notes at face value, less relative fair value of conversion57Table of Contentsoptions allocated to equity and unamortized discounts, on our accompanying Consolidated Balance Sheets. Since these Notes bear interest at fixed rates, we haveno financial statement risk associated with changes in interest rates. However, the fair value of these Notes fluctuates as interest rate changes when the market priceof our common stock fluctuates.Foreign Currency RiskThe functional currency for our wholly owned foreign subsidiaries is the U.S. dollar. Accordingly, the subsidiaries remeasure monetary assets andliabilities at period-end exchange rates, while nonmonetary items are remeasured at historical rates. Income and expense accounts are remeasured at the averageexchange rates in effect during the year. Remeasurement adjustments are recognized in the consolidated statements of operations as foreign currency transactiongains or losses in the year of occurrence. Aggregate foreign currency transaction losses included in determining net loss were $0.9 million , $1.7 million and $2.2million for 2016, 2015 and 2014, respectively. Transaction gains and losses are included in other expense, net.As our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to reassess ourapproach to managing this risk. In addition, currency fluctuations or a weakening U.S. dollar can increase the costs of our international expansion. For ouroperating results and cash flows, we evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar. We have determined thatthere would not be a material effect on our results of operations from such a shift. To date, we have not entered into any foreign currency hedging contracts, sinceexchange rate fluctuations have not had a material impact on our operating results and cash flows. Based on our current international structure, we do not plan onengaging in hedging activities in the near future.Inflation RiskWe do not believe that inflation has had a material effect on our business, financial condition or results of operations. Nonetheless, if our costs were tobecome subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do socould harm our business, financial condition and results of operations.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe information in response to this item is included in our consolidated financial statements, together with the report thereon ofPricewaterhouseCoopers LLP, appearing in Item 15 of this Annual Report on Form 10-K, and in Item 7 under the heading Management's Discussion and Analysisof Financial Condition and Results of Operations.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresRegulations under the Securities Exchange Act of 1934, or the Exchange Act, require public companies, including us, to maintain “disclosure controls andprocedures,” which are defined in Rule 13a-15(e) and Rule 15d-15(e) to mean a company’s controls and other procedures that are designed to ensure thatinformation required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed in our reports that we file or submit under the Exchange Act is accumulated and communicated to management, including ourChief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as ofDecember 31, 2016 . Based on their evaluation, as of December 31, 2016 , our Chief Executive Officer and Chief Financial Officer have concluded that theCompany's disclosure controls and procedures were effective.Management's Annual Report on Internal Control over Financial Reporting58Table of ContentsOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in ExchangeAct Rule 13a-15(f) and Rule 15d-15(f). Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of theeffectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committeeof Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the framework in Internal Control - Integrated Framework (2013), ourmanagement concluded that our internal control over financial reporting was effective as of December 31, 2016 .The effectiveness of our internal control over financial reporting as of December 31, 2016 , has been audited by PricewaterhouseCoopers LLP, anindependent registered public accounting firm, as stated in their report which appears in Item 15(a) of this Annual Report on Form 10-K.Changes in Internal ControlThere have been no changes in our internal control over financial reporting during the quarter ended December 31, 2016 that materially affected, or arereasonably likely to materially affect, our internal control over financial reporting.Inherent Limitations on Effectiveness of ControlsManagement does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error andfraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurancethat its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that allcontrol issues and instances of fraud, if any, within the Company have been detected.ITEM 9B. OTHER INFORMATIONNone.59Table of ContentsPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item will be set forth in the definitive Proxy Statement for our 2017 Annual Meeting of Stockholders (the "ProxyStatement") and is incorporated into this report by reference.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item will be set forth in the Proxy Statement and is incorporated into this report by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this item will be set forth in the Proxy Statement and is incorporated into this report by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item will be set forth in the Proxy Statement and is incorporated into this report by reference.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item will be set forth in the Proxy Statement and is incorporated into this report by reference.60Table of ContentsPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES(a)(1) Financial StatementsThe list of consolidated financial statements set forth in the accompanying Index to the Consolidated Financial Statements at page 62 of this annual reportis incorporated herein by reference. Such consolidated financial statements are filed as part of this annual report.(2) Financial Statement SchedulesFinancial statement schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission ofthe schedule, or the required information is shown in the Consolidated Financial Statements or Notes thereto.(3) ExhibitsThe exhibits listed on the accompanying Index to Exhibits in Item 15(b) below are filed or incorporated by reference as part of this annual report on Form10-K. See Exhibit Index immediately following the Signature Pages.61Table of ContentsINDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm63Consolidated Balance Sheets64Consolidated Statements of Operations65Consolidated Statements of Comprehensive Loss66Consolidated Statements of Stockholders' Equity67Consolidated Statements of Cash Flows68Notes to Consolidated Financial Statements6962Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Proofpoint, Inc.In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive loss, ofstockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Proofpoint, Inc. and its subsidiaries at December 31, 2016and 2015 , and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accountingprinciples generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2016 , based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintainingeffective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sReport on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on theCompany's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whetherthe financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for sales commissions in 2016.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLPSan Jose, CaliforniaFebruary 23, 201763Table of ContentsProofpoint, Inc.Consolidated Balance Sheets(in thousands, except per share amounts) At December 31, 2016 2015 Assets Current assets: Cash and cash equivalents$345,426 $346,205Short-term investments51,325 60,032Accounts receivable, net of allowance for doubtful accounts of $216 and $199 at December 31, 2016 and 2015, respectively72,951 54,522Inventory598 485Deferred product costs1,829 2,228Deferred commissions21,168 19,314Prepaid expenses and other current assets17,498 5,695Total current assets510,795 488,481Property and equipment, net52,523 34,501Deferred product costs310 314Goodwill167,270 133,769Intangible assets, net61,708 41,330Long-term deferred commissions4,496 3,488Other assets4,558 3,733Total assets$801,660 $705,616Liabilities and Stockholders' Equity Current liabilities: Accounts payable$15,297 $14,081Accrued liabilities50,765 35,053Capital lease obligations32 32Deferred rent409 496Deferred revenue259,109 182,195Total current liabilities325,612 231,857Convertible senior notes366,541 345,699Long-term capital lease obligations91 123Long-term deferred rent2,413 2,033Other long-term liabilities9,008 1,188Long-term deferred revenue53,072 41,531Total liabilities756,737 622,431Commitments and contingencies (Note 7) Stockholders' equity: Convertible preferred stock, $0.0001 par value; 5,000 shares authorized; no shares issued and outstanding as of December 31, 2016 and 2015— —Common stock, $0.0001 par value; 200,000 shares authorized; 43,015 and 40,840 shares issued and outstanding at December 31, 2016 and 2015,respectively4 4Additional paid-in capital514,034 441,104Accumulated other comprehensive loss(7) (23)Accumulated deficit(469,108) (357,900)Total stockholders' equity44,923 83,185Total liabilities and stockholders' equity$801,660 $705,616The accompanying notes are an integral part of these consolidated financial statements.64Table of ContentsProofpoint, Inc.Consolidated Statements of Operations(in thousands, except per share amounts) Year Ended December 31, 2016 2015 2014Revenue: Subscription$365,960 $257,329 $187,527Hardware and services9,536 8,068 8,080Total revenue375,496 265,397 195,607Cost of revenue:(1)(2) Subscription94,716 71,746 53,136Hardware and services13,877 12,312 12,543Total cost of revenue108,593 84,058 65,679Gross profit266,903 181,339 129,928Operating expense:(1)(2) Research and development98,506 74,459 51,903Sales and marketing201,204 148,414 98,333General and administrative52,774 36,616 26,679Total operating expense352,484 259,489 176,915Operating loss(85,581) (78,150) (46,987)Interest expense(23,538) (18,000) (11,213)Other expense, net(1,103) (1,927) (2,230)Loss before (provision for) benefit from income taxes(110,222) (98,077) (60,430)(Provision for) benefit from income taxes(986) (635) 313Net loss$(111,208) $(98,712) $(60,117)Net loss per share, basic and diluted$(2.66) $(2.48) $(1.61)Weighted average shares outstanding, basic and diluted41,859 39,787 37,381 (1) Includes stock-based compensation expense as follows: Cost of subscription revenue$7,427 $5,028 $2,404Cost of hardware and services revenue$1,494 $1,098 $604Research and development$24,342 $20,672 $10,204Sales and marketing$28,607 $21,511 $10,795General and administrative$16,826 $11,785 $6,997(2) Includes intangible amortization expense as follows: Cost of subscription revenue$9,423 $7,079 $4,157Research and development$60 $91 $93Sales and marketing$4,938 $5,074 $4,494General and administrative$— $12 $46The accompanying notes are an integral part of these consolidated financial statements.65Table of ContentsProofpoint, Inc.Consolidated Statements of Comprehensive Loss(In thousands) Year Ended December 31, 2016 2015 2014Net loss$(111,208) $(98,712) $(60,117)Other comprehensive income (loss), net of tax: Unrealized gains (losses) on investments, net16 4 (27)Comprehensive loss$(111,192) $(98,708) $(60,144)The accompanying notes are an integral part of these consolidated financial statements.66Table of ContentsProofpoint, Inc.Consolidated Statements of Stockholders' Equity(in thousands) Common Stock AdditionalPaid-InCapital AccumulatedOtherComprehensiveIncome (Loss) AccumulatedDeficit TotalStockholders'Equity Shares Amount Balances at December 31, 201336,140 $4 $287,165 $— $(199,071) $88,098Net loss— — — — (60,117) (60,117)Unrealized loss on short-term investments— — — (27) — (27)Stock-based compensation expense— — 29,233 — — 29,233Common stock issued2,574 — 18,513 — — 18,513Tax withholding upon vesting of restricted stockawards(105) — (4,170) — — (4,170)Exercise of warrants2 — — — — —Issuance of restricted stock54 — — — — —Vesting of early exercise options— — 3 — — 3Balances at December 31, 201438,665 4 330,744 (27) (259,188) 71,533Net loss— — — — (98,712) (98,712)Unrealized gain on short-term investments— — — 4 — 4Embedded conversion feature on Convertible SeniorNotes— — 54,049 — — 54,049Stock-based compensation expense— — 54,418 — — 54,418Common stock issued2,486 — 20,292 — — 20,292Tax withholding upon vesting of restricted stockawards(311) — (18,400) — — (18,400)Vesting of early exercise options— — 1 — — 1Balances at December 31, 201540,840 4 441,104 (23) (357,900) 83,185Net loss— — — — (111,208) (111,208)Unrealized gain on short-term investments— — — 16 — 16Stock-based compensation expense— — 70,560 — — 70,560Acquisition of FireLayers, Ltd. (Note 2)111 — 176 — — 176Common stock issued2,474 — 27,799 — — 27,799Tax withholding upon vesting of restricted stockawards(410) — (25,605) — — (25,605)Balances at December 31, 201643,015 $4 $514,034 $(7) $(469,108) $44,923The accompanying notes are an integral part of these consolidated financial statements.67Table of ContentsProofpoint, Inc.Consolidated Statements of Cash Flows(in thousands) Year EndedDecember 31, 2016 2015 2014Cash flows from operating activities Net loss$(111,208) $(98,712) $(60,117)Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization31,552 24,900 17,823Loss on disposal of property and equipment434 162 2Amortization of investment premiums, net of accretion of purchase discounts4 103 312Foreign currency transaction loss852 1,657 2,182Provision for (recovery of) allowance for doubtful accounts17 (231) 175Stock-based compensation78,696 60,094 31,004Change in fair value of contingent consideration(669) — 5Amortization of debt issuance costs and accretion of debt discount20,842 14,933 8,753Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable(18,754) (12,811) (15,510)Inventory(113) 14 328Deferred product costs402 (388) (791)Deferred commissions(2,862) (7,742) (4,122)Prepaid expenses(2,660) (1,829) (945)Other current assets(1,472) 104 (351)Deferred income taxes(1) 509 (691)Long-term assets959 47 (23)Accounts payable4,271 2,460 189Accrued liabilities6,398 4,448 3,995Earn-out payment— — (13)Deferred rent292 (165) 2,315Deferred revenue87,255 58,951 38,093Net cash provided by operating activities94,235 46,504 22,613Cash flows from investing activities Proceeds from sales and maturities of short-term investments123,405 39,056 11,353Purchase of short-term investments(114,686) (64,537) (37,805)Purchase of property and equipment(34,407) (25,827) (14,988)Payments to escrow account(9,645) — —Receipts from escrow account260 — —Acquisitions of business, net of cash acquired(54,158) (51,553) (53,680)Net cash used in investing activities(89,231) (102,861) (95,120)Cash flows from financing activities Proceeds from issuance of common stock, net of repurchases21,779 18,583 17,640Withholding taxes related to restricted stock net share settlement(25,588) (18,108) (4,170)Proceeds from issuance of convertible senior notes, net of discount— 223,790 —Payments of debt issuance costs— (371) (191)Repayments of notes payable and loans(32) (706) (1,655)Holdback payments for prior acquisitions(1,397) — (741)Payment of contingent earn-outs— — (487)Net cash (used in) provided by financing activities(5,238) 223,188 10,396Effect of exchange rate changes on cash and cash equivalents(545) (963) (1,338)Net (decrease) increase in cash and cash equivalents(779) 165,868 (63,449)Cash and cash equivalents Beginning of period346,205 180,337 243,786End of period$345,426 $346,205 $180,337Supplemental disclosures of cash flow information Cash paid for interest$4,250 $3,381 $2,582Cash paid for taxes$893 $672 $491Supplemental disclosure of noncash investing and financing activities Unpaid purchases of property and equipment and asset retirement obligations$6,035 $4,906 $2,576Liability awards converted to equity$6,059 $1,745 $—The accompanying notes are an integral part of these consolidated financial statements.68Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements(dollars and share amounts in thousands, except per share amounts)1. The Company and Summary of Significant Accounting PoliciesThe CompanyProofpoint, Inc. (the "Company") was incorporated in Delaware in June 2002 and is headquartered in California.Proofpoint, Inc. is a leading security-as-a-service provider that enables large and mid-sized organizations worldwide to defend, protect, archive andgovern their most sensitive data. The Company's security-as-a-service platform is comprised of an integrated suite of on-demand data protection solutions,including threat protection, incident response, regulatory compliance, archiving, governance, eDiscovery, and secure communication. Basis of Presentation and ConsolidationThe accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP").The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances havebeen eliminated in consolidation.Starting January 1, 2016, the Company began separately presenting the effect of exchange rate changes on cash and cash equivalents in its consolidatedstatements of cash flows due to growing operations in foreign currency environments. Amounts in the comparable prior periods have been reclassified to conformto the current period presentation.Refer to "Sales Commissions" below regarding the Company's change in accounting policy for sales commissions effective January 1, 2016.During the reporting periods, the Company completed a number of acquisitions which are more fully described in Note 2, "Acquisitions". Theconsolidated financial statements include the results of operations from these business combinations from their date of acquisition.Use of EstimatesThe preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts ofexpenses during the reporting period. Actual results could differ materially from those estimates. Significant items subject to such estimates and assumptionsinclude those related to revenue recognition, deferred commissions, stock-based compensation expense, fair value of assets acquired and liabilities assumed inbusiness combinations, impairment assessments of goodwill, intangible assets and other long-lived assets, loss contingencies, and the recognition and measurementof current and deferred income taxes.Foreign Currency Remeasurement and TransactionsThe functional currency of the Company's wholly-owned foreign subsidiaries is the U.S. dollar. Accordingly, the subsidiaries remeasure monetary assetsand liabilities at period-end exchange rates, while nonmonetary items are remeasured at historical rates. Income and expense accounts are remeasured at theaverage exchange rates in effect during the year. Remeasurement adjustments are recognized in the consolidated statements of operations as transaction gains orlosses within other income (expense), net, in the period of occurrence. Aggregate transaction losses included in determining net loss were $852 , $1,657 and $2,182for the years ended December 31, 2016, 2015 and 2014, respectively.Cash and Cash EquivalentsThe Company considers currency on hand, demand deposits, time deposits, money market funds and all highly liquid investments with an originalmaturity of three months or less at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are held in various financial institutions in theUnited States and internationally.Investments69Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)The Company classifies all its investments as available-for-sale at the time of purchase since it is management's intent that these investments be availablefor current operations, and as such, includes these investments as short-term investments on its balance sheets. These investments consist of money market funds,corporate debt securities, commercial papers, U.S. agency and Treasury securities, and certificates of deposit with original maturities longer than three months.Short-term investments classified as available-for-sale are recorded at fair value with the related unrealized gains and losses included in accumulated othercomprehensive income (loss), a component of stockholders' equity. Realized gains and losses are recorded in the consolidated statements of operations andcomprehensive loss based on specific identification.InventoriesInventories are stated at lower of cost or market value, with costs computed on a first-in, first-out basis. The Company periodically reviews its inventoriesfor excess and obsolete items and adjusts carrying costs to estimated net realizable values when they are determined to be less than cost. Inventories held atDecember 31, 2016 and 2015 consist primarily of finished goods.Revenue RecognitionThe Company derives its revenue primarily from two sources: (1) subscription revenue for rights related to the use of the security-as-a-service platformand (2) hardware, training and professional services revenue provided to customers related to their use of the platform. The Company records its revenues net ofany value added or sales tax. Subscription revenue is derived from a subscription‑based enterprise licensing model with contract terms typically ranging from oneto three years, and consists of (i) subscription fees from the licensing of the security-as-a-service platform, (ii) subscription fees for access to the on-demandelements of the platform and (iii) subscription fees for the right to access the Company’s customer support services.Revenue is recognized when all of the following criteria have been met:•Persuasive evidence of an arrangement exists;•Delivery has occurred or services have been rendered;•Sales price is fixed or determinable; and•Collectability is reasonably assured.The Company generates sales directly through its sales team and, to a growing extent, through its channel partners. Sales to channel partners are made at adiscount and revenues are recorded at this discounted price once all revenue recognition criteria are met. Channel partners generally receive an order from an end-customer prior to placing an order with the Company, and these partners do not carry any inventory of the Company's products or solutions. Payment from channelpartners is not contingent on the partner’s success in sales to end-customers. In the event that the Company offers rebates, joint marketing funds, or other incentiveprograms to a partner, recorded revenues are reduced by these amounts accordingly.From time to time, certain third parties that the Company has an arrangement with provide the Company with referrals for which the Company pays areferral fee. The referral fee paid could vary depending on the level of effort. These fees are recorded in sales and marketing expense in proportion to the relatedrevenue streams consistent with the sales commissions accounting. The Company did not incur any material referral fee expenses during the years ended December31, 2016, 2015 and 2014.The Company applies industry-specific software revenue recognition guidance to transactions involving the licensing of software, as well as relatedsupport, training, and other professional services. The Company has analyzed all of the elements included in its multiple element software arrangements and hasdetermined that it does not have sufficient VSOE of fair value to allocate revenue to its subscription and software license agreements, support, training andprofessional services. The Company defers all revenue under the software arrangement until the commencement of the subscription services and any associatedprofessional services. Once the subscription services and the associated professional services have commenced, the entire fee from the arrangement is recognizedratably over the remaining period of the arrangement. If the professional services70Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)are essential to the functionality of the subscription, then the revenue recognition does not commence until such services are completed.The Company's revenue arrangements typically include subscription services to its security-as-a-service platform. These hosted on demand servicearrangements do not provide customers with the right to take possession of the software supporting the hosted services. Certain arrangements also include the saleof hardware appliances. Revenue from hardware appliances containing software components and hardware components that function together to deliver thehardware appliance's essential functionality is excluded from the scope of the industry specific revenue recognition guidance. The Company recognizes revenuefrom its hosted on demand services in accordance with general revenue recognition accounting guidance. Only revenue derived from the licensing of the softwareis recognized in accordance with the industry specific revenue guidance.When a sales arrangement contains multiple elements, such as hardware appliances, subscription services, customer support services, and/or professionalservices, the Company allocates revenue to each unit of accounting or element based on a selling price hierarchy. An element constitutes a separate unit ofaccounting when the delivered item has standalone value and delivery of the undelivered element is probable and within the Company's control. When applying therelative selling price method, the Company determines the selling price for each deliverable using vendor-specific objective evidence (“VSOE”) of selling price. IfVSOE does not exist, the Company uses third-party evidence (“TPE”) of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, theCompany uses its best estimate of selling price ("BESP") for that deliverable. Revenue allocated to each element is then recognized when the basic revenuerecognition criteria are met for each element. The Company determines BESP for an individual element within a multiple element revenue arrangement using thesame methods utilized to determine the selling price of an element sold on a standalone basis. The Company estimates the selling price for its subscriptionsolutions by considering internal factors such as historical pricing practices and it estimates the selling price of hardware and other services using a cost plusmodel.Hardware appliance revenue is recognized upon shipment. Subscription and support revenue are recognized over the contract period commencing on thestart date of the contract. Professional services and training, when sold with hardware appliances or subscription and support services, are accounted for separatelywhen those services have standalone value. In determining whether professional services and training services can be accounted for separately from subscriptionand support services, the Company considers the following factors: availability of the services from other vendors, the nature of the services, and the dependenceof the subscription services on the customer’s decision to buy the professional services. If professional services and training do not qualify for separate accounting,the Company recognizes the professional services and training ratably over the contract term of the subscription services. Delivery generally occurs when the hardware appliance is delivered to a common carrier freight on board shipping point by the Company or the hostedservice has been activated and communicated to the customer accordingly. The Company’s fees are typically considered to be fixed or determinable at theinception of an arrangement and are negotiated at the outset of an arrangement, generally based on specific products and quantities to be delivered. In the eventpayment terms are provided that differ significantly from the Company's standard business practices, the fees are deemed to not be fixed or determinable andrevenue is recognized as the fees become paid.The Company assesses collectability based on a number of factors, including credit worthiness of the customer and past transaction history of thecustomer. Through December 31, 2016 , the Company has not experienced material credit losses.Deferred RevenueDeferred revenue primarily consists of billings or payments received in advance of revenue recognition from the sale of the Company’s subscription fees,training and professional services. Once the revenue recognition criteria are met, this revenue is recognized ratably over the term of the associated contract.Deferred Product Costs Deferred product costs are the incremental costs that are directly associated with each noncancellable customer contract or hosting agreement andprimarily consist of cost of appliances and royalty payments made to third parties, from whom the Company has obtained licenses to integrate certain software intoits products. The costs are deferred and amortized71Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)over the noncancellable term of the related customer contract or hosting agreement, which typically range from 12 to 36 months.Property and EquipmentProperty and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful life of the related asset.Amortization of leasehold improvements is computed using the straight-line method over the shorter of the lease term or the estimated useful life of the asset orimprovement. Cost of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. When property andequipment are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss isincluded in other (expense) income, net.Impairment of Intangible Assets and Other Long-Lived AssetsThe Company evaluates long-lived assets, including property, equipment and definitive-lived intangible assets, for impairment whenever events orchanges in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of these assets is measured by comparison of thecarrying amount of such assets (or asset group) to the future undiscounted cash flows the assets (or asset group) is expected to generate. If the assets are consideredto be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired assets. The Company alsoevaluates the estimated remaining useful lives of intangible assets and other long-lived assets to assess whether a revision to the remaining periods of amortizationis required. No assets were determined to be impaired to date.Software Development CostsInternally developed software includes security software developed to meet the Company's internal needs to provide cloud-based subscription services toits end-customers and business software that the Company customizes to meet its operating needs. These capitalized costs consist of internal compensation relatedcosts and external direct costs incurred during the application development stage. The costs capitalized were not material in the years ended December 31, 2016and 2015.The costs to develop software that is marketed externally have not been capitalized as the current software development process is essentially completedconcurrently with the establishment of technological feasibility. As such, all related software development costs are expensed as incurred and included in researchand development expense in the consolidated statements of operations.Internally and externally developed software is amortized over the software’s estimated useful life of three to five years.Advertising and Promotion CostsExpenses related to advertising and promotion of solutions is charged to sales and marketing expense as incurred. The Company did not incur anymaterial advertising and promotion expenses during the years ended December 31, 2016, 2015 and 2014 .Goodwill and Intangible AssetsGoodwill represents the excess of the purchase price of the acquired enterprise over the fair value of identifiable assets acquired and liabilities assumed.The Company performs an annual goodwill impairment test during the fourth quarter of the calendar year and more frequently if an event or circumstancesindicates that impairment may have occurred. For the purposes of impairment testing, the Company has determined that it has one operating segment and onereporting unit. The Company performs a two-step impairment test of goodwill whereby the fair value of the reporting unit is compared to its carrying value. If thefair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and further testing is notrequired. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform thesecond step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwillexceeds its implied fair value, then impairment loss equal to the difference is recorded. The identification and measurement of goodwill impairment involves theestimation of the fair value of the Company. The estimate of fair value of the Company, based on the72Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)best information available as of the date of the assessment, is subjective and requires judgment, including management assumptions about expected future revenueforecasts and discount rates, changes in the overall economy, trends in the stock price and other factors. No impairment was identified by the Company as ofDecember 31, 2016 .Intangible assets consist of developed technology, customer relationships, non-compete arrangements, trademarks and patents, and order backlog. Thevalues assigned to intangibles are based on estimates and judgments regarding expectations for success and life cycle of solutions and technologies acquired.Intangible assets are amortized on a straight-line basis over their estimated lives, which approximate the pattern in which the economic benefits of theintangible assets are consumed, as follows (in years): Low HighPatents4 5Developed technology3 7Customer relationships2 7Non-compete agreements2 4Order backlog1 3Tradenames and trademarks1 5Warranty The Company provides limited warranties on all sales and provides for the estimated cost of the warranties at the date of sale, to the extent not alreadyprovided by its own vendors. The estimated cost of warranties not provided by vendors has not been material to date.Income TaxesThe Company accounts for income taxes in accordance with authoritative guidance, which requires use of the asset and liability method. Under thismethod, deferred income tax assets and liabilities are determined based on the difference between the consolidated financial statements carrying amounts and thetax basis of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the years in which the differences are expectedto be reversed.The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making suchdetermination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projectedfuture taxable income, tax planning strategies and recent financial operations.The Company has elected to use the "with and without" approach as described in ASC 740-20, "Intraperiod Tax Allocation" in determining the order inwhich tax attributes are utilized. As a result, the Company will only recognize a tax benefit from stock-based awards in additional paid-in capital if an incrementaltax benefit is realized after all other tax attributes currently available to the Company have been utilized. In addition, the Company has elected to account for theimpact of stock-based awards on other tax attributes, such as the research tax credit, within the consolidated statements of operations.The Company recognizes interest and penalties related to uncertain tax positions within the income tax expense line in the consolidated statements ofoperations. Accrued interest and penalties are included within the related tax liability line on the consolidated balance sheets.Employee Benefit PlansThe Company sponsors a 401(k) defined contribution plan covering all employees. The Company may make discretionary contributions to the 401(k). Todate, no contributions have been made by the Company.Stock-Based Compensation73Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)The Company issues stock-based compensation awards to employees and directors in the form of stock options, restricted stock units ("RSUs"),performance stock units ("PSUs"), employee stock purchase plan ("ESPP") and stock bonus and other liability awards (collectively, "awards").The Company measures and recognizes compensation expense for all stock-based awards based on the awards' fair value. Stock-based compensation forRSUs and PSUs is measured based on the value of the Company's common stock on the grant date. Stock-based compensation for employee stock options andESPP awards are measured on the date of grant using a Black-Scholes option pricing model.Stock bonus and other liability awards are accounted for as liability-classified awards, because the obligations are based predominantly on fixed monetaryamounts that are generally known at the inception of the obligation, to be settled with a variable number of shares of the Company's common stock. Awards vest either on a graded schedule or in a lump sum. The Company determines the fair value of each award as a single award and recognizes theexpense on a straight-line basis over the service period of the award, which is generally the vesting period. The exercise price of stock options granted is equal tothe fair value of the Company's common stock on the date of grant. Stock options expire ten years from the date of grant. Stock-based compensation expense is based on awards ultimately expected to vest, and the expense is recorded net of estimated forfeitures. Comprehensive Income (Loss)Comprehensive income (loss) includes all changes in equity that are not the result of transactions with stockholders. The Company’s comprehensiveincome (loss) consists of its net loss and changes in unrealized gains (losses) on its available-for-sale investments.Loss ContingenciesThe Company may be involved in various lawsuits, claims and proceedings that arise in the ordinary course of business. The Company records aprovision for a liability when it believes that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgmentis required to determine both probability and the estimated amount. The Company reviews these provisions at least quarterly and adjusts these provisions to reflectthe impact of negotiations, settlements, rulings, and updated information.Sales CommissionsEffective January 1, 2016, the Company changed its accounting policy for sales commissions that are incremental and directly related to its customersales contracts in which revenue is deferred. These commission costs are accrued and capitalized upon execution of a non-cancelable customer contract, andsubsequently expensed over the term of such contract in proportion to the related future revenue streams. For commission costs where revenue is recognized, therelated commission costs are recorded in the period of revenue recognition. Prior to this change in accounting policy, commission costs were expensed in theperiod in which they were incurred. The adoption of this accounting policy change has been applied retrospectively to all periods presented in this Annual Reporton Form 10-K, in which the cumulative effect of the change has been reflected as of the beginning of the first period presented. Deferred commissions as ofDecember 31, 2016 and December 31, 2015 were $25,664 and $22,802 , respectively. During the years ended December 31, 2016, 2015 and 2014, the Companydeferred $36,009 , $29,642 and $19,107 of commission costs and amortized $33,147 , $21,900 and $14,985 within sales and marketing expense, respectively.The Company believes this change in accounting policy is preferable as the direct and incremental commission costs are closely related to the revenue,and therefore they should be recorded as an asset and recognized as an expense over the same period that the related revenue is recognized.74Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)The cumulative effect of the change on accumulated deficit was $10,938 as of December 31, 2013. The following tables present the changes to thefinancial statement lines as a result of the accounting change for the periods presented in the accompanying Consolidated Financial Statements:Consolidated Balance Sheet As of December 31, 2015 As reported Adjustment As adjustedShort-term deferred commissions$— $19,314 $19,314Long-term deferred commissions$— $3,488 $3,488Accumulated deficit$(380,702) $22,802 $(357,900)Consolidated Statements of Operations Year ended December 31, 2015 Year ended December 31, 2014 As reported Adjustment As adjusted As reported Adjustment As adjustedOperating expenses: Sales and marketing$156,156 $(7,742) $148,414 $102,455 $(4,122) $98,333Net loss$(106,454) $7,742 $(98,712) $(64,239) $4,122 $(60,117)Net loss per share, basic and diluted$(2.68) $0.20 $(2.48) $(1.72) $0.11 $(1.61)Weighted average shares outstanding, basic anddiluted39,787 — 39,787 37,381 — 37,381Consolidated Statements of Comprehensive Loss Year ended December 31, 2015 Year ended December 31, 2014 As reported Adjustment As adjusted As reported Adjustment As adjustedNet loss$(106,454) $7,742 $(98,712) $(64,239) $4,122 $(60,117)Unrealized gains on short-term investments, net$4 $— $4 $(27) $— $(27)Comprehensive loss$(106,450) $7,742 $(98,708) $(64,266) $4,122 $(60,144)Recent Accounting PoliciesIn January 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2017-04, Intangibles - Goodwill andOther (Topic 350): Simplifying the Accounting for Goodwill Impairment (ASU 2017-04). ASU 2017-04 removes the requirement to perform a hypotheticalpurchase price allocation to measure goodwill impairment. A goodwill impairment will be the amount by which a reporting unit's carrying value exceeds its fairvalue, not to exceed the carrying amount of goodwill. The update to the standard is effective for interim and annual periods beginning after December 15, 2019,with early adoption permitted, and applied prospectively. The Company does not expect ASU 2017-04 to have a material impact on its financial statements. In January 2017, FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805) Clarifying the Definition of Business (ASU 2017-01). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactionsshould be accounted for as acquisitions (or disposals) of assets or businesses. The update to the standard is effective for interim and annual periods beginning afterDecember 15, 2017, and applied prospectively. The Company is currently evaluating the impact of the adoption of ASU 2017-01 on its consolidated financialstatements.75Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)In October 2016, FASB issued Accounting Standards Update No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (ASU2016-16). ASU 2016-16 eliminates the requirement to defer the recognition of current and deferred income taxes for intra-entity asset transfer until the asset hasbeen sold to an outside party. Therefore, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory whenthe transfer occurs. ASU 2016-16 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of thefirst interim period and the amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings asof the beginning of the period of adoption. The Company is currently evaluating the impact of the adoption of ASU 2016-16 on its consolidated financialstatements.In August 2016, FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receiptsand Cash Payments (ASU 2016-15). ASU 2016-15 makes eight targeted changes how cash receipts and cash payments are presented and classified in thestatement of cash flows. The update to the standard is effective for interim and annual periods beginning after December 15, 2017, and requires adoption on aretrospective transition method unless it is impracticable to apply. The Company is currently evaluating the impact of the adoption of ASU 2016-15 on itsconsolidated financial statements.In June 2016, FASB issued an Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of CreditLosses on Financial Instruments (ASU 2016-13). ASU 2016-13 changes the impairment model for most financial assets, and will require the use of an expectedloss model in place of the currently used incurred loss method. Under this model, entities will be required to estimate the lifetime expected credit loss on suchinstruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collectedon the financial asset. The update to the standard is effective for interim and annual periods beginning after December 15, 2019. The Company is currentlyevaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.In March 2016, FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to EmployeeShare-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of share-based payment awards toemployees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cashflows. The update to the standard is effective for interim and annual periods beginning after December 15, 2016. The Company does not expect ASU 2016-09 tohave a material impact on its financial statements. In February 2016, FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which requires lessees to put mostleases on their balance sheets but recognize the expenses on their statements of operations in a manner similar to current practice. ASU 2016-02 states that a lesseewould recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. Thenew standard is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted. While the Company is currentlyassessing the impact ASU 2016-02 will have on the Company's consolidated financial statements, the Company expects the primary impact to its consolidatedfinancial position upon adoption will be the recognition, on a discounted basis, of the Company's minimum commitments under noncancelable operating leases onour consolidated balance sheets resulting in the recording of right of use assets and lease obligations.In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), tosupersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goodsor services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenuerecognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variableconsideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Originally, ASU 2014-09 would beeffective for the Company starting January 1, 2017 using either of two methods: (i) retrospective to each prior reporting period presented with the option to electcertain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at thedate of initial application and providing certain additional disclosures as defined per ASU 2014-09. In July 2015, the FASB voted to amend ASU 2014-09 byapproving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. The FASB has issuedseveral updates to the standard which i)76Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)clarify the application of the principal versus agent guidance (ASU 2016-08); ii) clarify the guidance on inconsequential and perfunctory promises and licensing(ASU 2016-10) and iii) narrow-scope improvements and practical expedients (ASU 2016-12). The Company is currently evaluating the impact of the adoption ofASU 2014-09 on its consolidated financial statements.2. AcquisitionsAcquisitions are accounted for under the purchase method of accounting in which the tangible and identifiable intangible assets and liabilities of eachacquired company are recorded at their respective fair values as of each acquisition date, including an amount for goodwill representing the difference between therespective acquisition consideration and fair values of identifiable net assets. The Company believes that for each acquisition, the combined entities will achievesavings in corporate overhead costs and opportunities for growth through expanded geographic and customer segment diversity with the ability to leverageadditional products and capabilities. These factors, among others, contributed to a purchase price in excess of the estimated fair value of each acquired company'snet identifiable assets acquired and, as a result, goodwill was recorded in connection with each acquisition. Goodwill related to each acquisition, other thanFireLayers, Ltd., Return Path, Inc., Marble Security, Inc., Emerging Threats Pro, LLC and one of the acquisitions made in the fourth quarter of 2015, is notdeductible for tax purposes.While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilitiesassumed at the acquisition date, these estimates and assumptions are subject to refinement. When additional information becomes available, such as finalization ofnegotiations of working capital adjustments and tax related matters, the Company may revise its preliminary purchase price allocation. As a result, during thepreliminary purchase price allocation period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquiredand liabilities assumed, with the corresponding offset to goodwill. Subsequent to the purchase price allocation period, adjustments to assets acquired or liabilitiesassumed are recognized in the operating results.2016 AcquisitionsFireLayersOn October 24, 2016 (the "FireLayers Acquisition Date"), pursuant to the terms of share purchase agreement, the Company acquired all shares ofFireLayers, Ltd. ("FireLayers"), a provider of solutions for organizations to control and protect their cloud applications. With this acquisition, the Company willextend Targeted Attack Protection to SaaS applications, enabling customers to protect their employees using SaaS applications from advanced malware.The Company has provisionally estimated fair values of acquired tangible assets, intangible assets and liabilities at the FireLayers Acquisition Date. Theamounts reported are considered provisional as the Company is completing the valuation work to determine the fair value of certain assets and liabilities acquired,largely with respect to working capital adjustments. The results of operations and the provisional fair values of the acquired assets and liabilities assumed havebeen included in the accompanying consolidated financial statements since the FireLayers Acquisition Date. Revenue from FireLayers was not material forthe year ended December 31, 2016, and due to the continued integration of the combined businesses, it was impractical to determine the earnings.The total purchase price was $45,616 , net of cash acquired of $210 . Of the cash consideration paid, $7,740 was held in escrow to secure indemnificationobligations, which has not been released as of the filing date of this Annual Report on Form 10-K. The Company incurred $827 in acquisition-related costs whichwere recorded within operating expenses for the year ended December 31, 2016.Per the terms of the share purchase agreement, unvested stock options held by FireLayers employees were canceled and exchanged for unvested stockoptions to purchase shares of the Company's common stock. The fair value of $1,326 of these unvested options, which are subject to the recipient's continuedservice with the Company and thus excluded from the purchase price, will be recognized ratably as stock-based compensation expense over the required serviceperiod. Also, as part of the share purchase agreement, 111 shares of restricted stock were issued to certain key employees with the total fair value of $8,669 (seeNote 9), which was not included in the purchase price. The shares of restricted stock are subject to forfeiture if employment terminates prior to the lapse of therestrictions, and their fair value is expensed as stock-based compensation expense over the vesting period.77Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)Fair value of acquired assets and liabilities assumedThe following table summarizes the estimated fair values of acquired assets and liabilities: Estimated Fair ValueEstimated Useful Life (in years)Current assets acquired$432N/ADeveloped technology22,6005Fixed assets52N/ADeferred tax liability, net(3,530)N/AOther liabilities assumed(540)N/AAdditional-paid-in-capital(176)N/AGoodwill26,988Indefinite $45,826 Return PathOn August 24, 2016 (the "Return Path Acquisition Date"), pursuant to the terms of an asset purchase agreement, the Company acquired Return Path, Inc.'s("Return Path") Email Fraud Protection ("EFP") business unit. Return Path's EFP business, which provides standards-based DMARC authentication andproprietary sender-analysis capabilities, will be integrated into the Company's suite of email protection solutions to further enhance its business email compromisecapabilities.The Company has provisionally estimated fair values of acquired tangible assets, intangible assets and liabilities at the Return Path Acquisition Date. Theamounts reported are considered provisional as the Company is completing the valuation work to determine the fair value of certain assets and liabilities acquired,largely with respect to working capital adjustments. The results of operations and the provisional fair values of the acquired assets and liabilities assumed havebeen included in the accompanying consolidated financial statements since the Return Path Acquisition Date. The Company recorded $1,025 revenue from ReturnPath for the year ended December 31, 2016, and due to the continued integration of the combined businesses, it was impractical to determine the earnings. Proforma results of operations have not been presented because the acquisition was not material to the Company's results of operations.The total purchase price was $17,513 , of which $9,162 was classified and recorded as contingent consideration on the balance sheet as of the ReturnPath Acquisition Date. The Company expects to pay the contingent consideration within two years depending on the timing of contract assignments following theReturn Path acquisition date and the maximum potential payment amount could be up to $9,644 . The Company incurred $406 in acquisition related costs whichwere recorded within operating expenses for the year ended December 31, 2016.The fair value of the contingent consideration liability was determined as of the acquisition date using unobservable inputs. These inputs include theestimated amount and timing of future contract assignments, the probability of success and a risk-adjusted discount rate to adjust the probability-weighted cashflows to present value.Fair value of acquired assets and liabilities assumedThe following table summarizes the estimated fair values of acquired assets and liabilities:78Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts) Estimated Fair ValueEstimated Useful Life (in years)Customer relationships$7,6006Developed technology3,9004Order Backlog7001Deferred revenue assumed(1,200)N/AGoodwill6,513Indefinite $17,513 2015 AcquisitionsIn the fourth quarter of the year ended December 31, 2015, the Company made two acquisitions that were accounted for as business combinations. Theresults of operations and the fair values of the acquired assets and liabilities assumed have been included in the accompanying consolidated financial statementsfrom the respective date of each acquisition. Pro forma results of operations for these acquisitions have not been presented because the Company does not considerthese acquisitions to be material, individually or in the aggregate, to the Company's consolidated financial statements.The aggregate purchase price was $11,568 . The Company incurred $355 in acquisition related costs which were recorded within operating expenses forthe year ended December 31, 2015. The following table summarizes the fair values of acquired tangible and intangible assets, liabilities and goodwill: Fair ValueEstimated Useful Life (in years)Current assets acquired$414N/AFixed assets acquired73N/ALiabilities assumed(234)N/ADeferred revenue assumed(1,400)N/ADeferred tax liability, net(45)N/ACustomer relationships2,8007Order Backlog9003Developed technology3,0004Goodwill6,060Indefinite $11,568 Marble Security, Inc.On July 22, 2015 (the "Marble Acquisition Date"), pursuant to the terms of an asset purchase agreement, the Company acquired certain assets of MarbleSecurity, Inc. ("Marble"). The Marble mobile security technology proactively removes malicious mobile applications by leveraging its tight integration with theleading enterprise mobility management platforms, including MobileIron and AirWatch by VMware. The acquisition extends the Company’s threat intelligenceand advanced threat protection for email and social media security into the realm of mobile devices.The results of operations and the fair values of the acquired assets and liabilities assumed have been included in the accompanying consolidated financialstatements since the Marble Acquisition Date. Revenue from Marble was not material for the year ended December 31, 2015, and due to the continued integrationof the combined businesses, it was impractical to determine the earnings. Pro forma results of operations have not been presented because the acquisition was notmaterial to the Company's results of operations.The total purchase price was $8,500 . Of the cash consideration paid, $1,700 was held in escrow, to secure indemnification obligations, which has notbeen released as of the filing date of this Annual Report on Form 10-K. The Company incurred $277 in acquisition related costs which were recorded withinoperating expenses for the year ended79Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)December 31, 2015. Fair value of acquired assetsThe following table summarizes the fair values of acquired tangible, intangible assets and goodwill: Fair ValueEstimated Useful Life (in years)Fixed assets acquired$25N/ADeveloped technology7,3004Goodwill1,175Indefinite $8,500 Emerging Threats Pro, LLCOn March 6, 2015 (the "Emerging Threats Acquisition Date"), pursuant to the terms of a purchase agreement, the Company acquired 100% ofmembership interests in Emerging Threats Pro, LLC ("Emerging Threats"). Based in Indianapolis, Indiana, Emerging Threats provides threat intelligence solutionsto help protect networks from known or potentially malicious threats. With this acquisition, the Company integrated Emerging Threat's advanced threatintelligence solutions with its existing Targeted Attack Protection and Threat Response security solutions to advance threat detection and response across thecompleted attack chain. The combined technology provides customers with deeper insight into cyberthreats, enabling them to react faster to inbound cyberattacks,and to identify, block, and disable previously undetected malware already embedded in their organizations.The results of operations and the fair values of the acquired assets and liabilities assumed have been included in the accompanying consolidated financialstatements since the Emerging Threat Acquisition Date. Revenue from Emerging Threats was $2,477 for the year ended December 31, 2015, and due to thecontinued integration of the combined businesses, it was impractical to determine the earnings.The total purchase price was $31,803 , net of cash acquired of $52 , of which $3,662 was paid in the second quarter of 2015. Of the cash considerationpaid, $6,000 was held in escrow, to secure indemnification obligations, which has not been released as of the filing date of this Annual Report on Form 10-K. TheCompany incurred $277 in acquisition-related costs which were recorded within operating expenses for the year ended December 31, 2015.Fair value of acquired assets and liabilities assumedThe determination of the fair values of the assets acquired and liabilities assumed has been prepared on a provisional basis and changes to thatdetermination may occur as additional information becomes available. The following table summarizes the fair values of tangible and intangible assets acquired,liabilities assumed and goodwill:80Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts) Fair ValueEstimated Useful Life (in years)Current assets acquired$1,275N/AFixed assets acquired174N/ALiabilities assumed(448)N/ADeferred revenue assumed(700)N/AHoldback liability to the sellers(3,662)N/ATrade names2002Customer relationships4,2007Order Backlog2001Developed technology7,9007Goodwill19,054Indefinite $28,193 2014 AcquisitionsNexgate, Inc.On October 31, 2014 (the "Nexgate Acquisition Date"), pursuant to the terms of an agreement and plan of merger, a wholly-owned subsidiary of theCompany merged with and into Nexgate, Inc. ("Nexgate"), with Nexgate surviving as a wholly-owned subsidiary of the Company. Formerly based in Burlingame,California, Nexgate provides cloud-based brand protection and compliance for enterprise social media accounts. With this acquisition, the Company's customerscan effectively protect their online brand presence and social media communication infrastructure. Nexgate technology identifies and remediates fraudulent socialmedia accounts, account hacks, and content that contains malware, spam and abusive language. In addition, the Nexgate solution enforces policy on authorizedaccounts and posts for compliance with a wide-range of social media regulatory requirements.The results of operations and the fair values of the acquired assets and liabilities assumed have been included in the accompanying consolidated financialstatements since the Nexgate Acquisition Date. Revenue from Nexgate was not material for the year ended December 31, 2014.At the Nexgate Acquisition Date, the Company paid $31,771 in cash consideration, net of cash acquired of $1,032 . The Company incurred $231 inacquisition-related costs which were recorded within operating expenses for the year ended December 31, 2014.Fair value of acquired assets and liabilities assumed The following table summarizes the fair values of tangible assets acquired, liabilities assumed, intangible assets and goodwill:81Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts) Fair ValueEstimated Useful Life (in years)Current assets acquired$1,340N/AFixed assets acquired15N/ALiabilities assumed(64)N/ADeferred revenue assumed(600)N/ACustomer relationships3,0007Order backlog2002Core/developed technology3,2004In-process research and development900N/ADeferred tax liability, net(792)N/AGoodwill25,604Indefinite $32,803 NetCitadel, Inc.On May 13, 2014 (the "NetCitadel Acquisition Date"), pursuant to the terms of an agreement and plan of merger, a wholly-owned subsidiary of theCompany merged with and into NetCitadel, Inc. ("NetCitadel"), with NetCitadel surviving as a wholly-owned subsidiary of the Company. Formerly based inMountain View, California, NetCitadel is a pioneer in the field of automated security incident response. The acquisition extends the reach and capabilities of theCompany's existing advanced threat solutions, adding additional threat verification and containment capabilities via an open platform that unifies products from theCompany and other vendors.The results of operations and the fair values of the acquired assets and liabilities assumed have been included in the accompanying consolidated financialstatements since the NetCitadel Acquisition Date. Revenue from NetCitadel was not material for the year ended December 31, 2014.At the NetCitadel Acquisition Date, the Company paid $22,731 . The Company incurred $345 in acquisition-related costs which were recorded withinoperating expenses for the year ended December 31, 2014.Fair value of acquired assets and liabilities assumed The following table summarizes the fair values of tangible assets acquired, liabilities assumed, intangible assets and goodwill:Fair ValueEstimated Useful Life (in years)Tangible assets acquired$14N/ALiabilities assumed(1,267)N/ACustomer relationships1005Core/developed technology5,5005Goodwill18,384Indefinite$22,731 Pro Forma Financial Information (unaudited)The following unaudited pro forma financial information presents the combined results of operations for the years ended December 31, 2016, 2015 and2014 as though the acquisitions that occurred during the reporting periods had occurred as82Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)of the beginning of the comparable prior annual reporting periods, with adjustments to give effect to pro forma events that are directly attributable to theacquisitions such as amortization expense of acquired intangible assets, stock-based compensation directly attributable to the acquisitions and acquisition-relatedtransaction costs. The unaudited pro forma results do not include immaterial acquisitions made in the fourth quarter of 2015 and the acquisitions of Return Path andMarble, and do not reflect any operating efficiencies or potential cost savings which may result from the consolidation of the operations of the Company andacquisitions. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actualresults of operations of the combined company would have been if the acquisitions had occurred at the beginning of the period presented, nor are they indicative offuture results of operations: Year Ended December 31, 2016 2015 2014Total revenue$375,515 $264,904 $200,124Net loss$(119,531) $(111,440) $(75,066)Basic and diluted net loss per share$(2.86) $(2.80) $(2.01)The unaudited pro forma financial information includes acquisition-related transaction costs of $827 for the year ended December 31, 2016 .3. Concentration of RisksFinancial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents, short-term investments andaccounts receivable.The Company limits its concentration of risk in cash equivalents and short-term investments by diversifying its investments among a variety of industriesand issuers and by limiting the average maturity to one year or less. The Company's professional portfolio managers adhere to this investment policy as approvedby the Company's Board of Directors.The Company's investment policy is to invest only in fixed income investments denominated and payable in U.S. dollars. Investment in obligations of theU.S. government and its agencies, money market instruments, commercial paper, certificates of deposit, bankers' acceptances, corporate bonds of U.S. companies,municipal securities and asset backed securities are allowed. The Company does not invest in auction rate securities, futures contracts, or hedging instruments.The Company's accounts receivables are derived from revenue earned from customers primarily located in the United States of America. The Companyperforms periodic evaluations of its customers' financial condition and generally does not require its customers to provide collateral or other security to supportaccounts receivable, and maintains an allowance for doubtful accounts. Credit losses historically have not been material.During the years ended December 31, 2016 and 2015, no individual customers accounted for more than 10% of total revenue. One customer accountedfor 12% of total revenue in the year ended December 31, 2014.One customer accounted for 21% and 16% of total accounts receivable as of December 31, 2016 and 2015, respectively.4. Balance Sheet ComponentsAllowance for doubtful accounts activity and balances are presented below: Balance atBeginning ofPeriod Additions (Reversals)to Costs andExpenses WriteOffs Balance atEnd ofPeriodYear ended December 31, 2014$276 $158 $(5) $429Year ended December 31, 2015$429 $(169) $(61) $199Year ended December 31, 2016$199 $156 $(139) $21683Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)Property and equipment at December 31, 2016 and 2015 consist of the following: Useful Life(in years) December 31, 2016 2015Computer equipment2 to 4 $92,462 $63,867Software2 to 5 2,266 1,684Furniture5 1,532 1,074Office equipment2 to 5 467 347Leasehold improvements5 years, or lease term, ifshorter 6,198 4,728Other2 59 59Construction in progress 1,483 934 104,467 72,693Less: Accumulated depreciation (51,944) (38,192) $52,523 $34,501Property and equipment acquired under capital leases: December 31, 2016 2015Computer equipment$453 $453Less: Accumulated depreciation(341) (310) $112 $143Depreciation expense for the years ended December 31, 2016, 2015 and 2014 , was approximately $17,131 , $12,644 , and $9,033 , respectively. Thisincluded depreciation expense for assets under capital leases of $31 , $23 and $19 for the years ended December 31, 2016, 2015 and 2014 , respectively.Accrued liabilities at December 31, 2016 and 2015 consisted of the following: December 31, 2016 2015Accrued compensation$30,295 $21,994Customer deposits173 1,384Accrued royalties754 509Acquisition-related contingent consideration7,629 —Other11,914 11,166 $50,765 $35,0535. Goodwill and Intangible AssetsThe goodwill activity and balances are presented below:84Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts) December 31, 2016 2015Opening balance$133,769 $107,504Add: Goodwill from acquisitions33,501 26,289Less: Other adjustments to Goodwill— (24)Closing balance$167,270 $133,769The goodwill balance as of December 31, 2016 and 2015 was the result of the acquired businesses (see Note 2).Intangible AssetsIntangible assets consisted of the following: December 31, 2016 December 31, 2015 GrossCarryingAmount AccumulatedAmortization NetCarryingAmount GrossCarryingAmount AccumulatedAmortization NetCarryingAmountDeveloped technology$83,769 $(38,042) $45,727 $57,268 $(28,618) $28,650Customer relationships17,943 (3,228) 14,715 23,382 (12,291) 11,091Non-compete agreements— — — 804 (691) 113Trademark and patents930 (667) 263 1,006 (502) 504Order backlog1,600 (597) 1,003 1,300 (328) 972 $104,242$(42,534)$61,708 $83,760$(42,430)$41,330Amortization expense of intangibles totaled $14,421 , $12,256 and $8,790 during the years ended December 31, 2016, 2015 and 2014 , respectively.Future estimated amortization costs of intangible assets as of December 31, 2016 are presented below:Year Ended December 31, 2017$16,381201815,291201911,92620209,22120217,422Thereafter1,467 $61,7086. Fair Value Measurements and InvestmentsFair Value MeasurementsFair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transactionbetween market participants at the measurement date. A hierarchy for inputs used in measuring fair value has been defined to minimize the use of unobservableinputs by requiring the use of observable market data when available. Observable inputs are inputs that market participants would use in pricing the asset orliability based on active market data. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would usein pricing the asset or liability based on the best information available in the circumstances.The fair value hierarchy prioritizes the inputs into three broad levels:•Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities.85Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)The Company’s Level 1 assets generally consist of money market funds.•Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets;quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated byobservable market data for substantially the full term of the asset or liability.The Company’s Level 2 assets and liabilities consist of corporate debt securities, commercial papers, U.S. agency and Treasury securities andconvertible senior notes.•Level 3: Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to themeasurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determinedusing pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment orestimation.In connection with the acquisition of Return Path, a liability was recognized on Return Path Acquisition Date for the estimate of the fair value of theCompany's contingent payment. The Company determined the fair value of the Acquisition-related contingent liability based on the estimated amount and timingof future contract assignments, and the probability of success. This fair value measurement is based on significant inputs not observable in the market and thusrepresent Level 3 measurement.The following tables summarize, for each category of assets or liabilities carried at fair value, the respective fair value as of December 31, 2016 and 2015and the classification by level of input within the fair value hierarchy: Balance as of December 31, 2016 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3)Assets Cash equivalents: Money market funds$304,020 $304,020 $— $—Corporate debt securities2,139 — 2,139 —Commercial papers13,243 — 13,243 —Short-term investments: Corporate debt securities24,450 — 24,450 —Commercial papers22,979 — 22,979 —U.S. agency securities1,946 — 1,946 —U.S. Treasury securities1,950 — 1,950 —Total financial assets$370,727 $304,020 $66,707 $— Liabilities Acquisition-related contingent consideration$8,233 $— $— $8,23386Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts) Balance as of December 31, 2015 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Unobservable Inputs (Level 3)Assets Cash equivalents: Money market funds$306,983 $306,983 $— $—Corporate debt securities3,178 — 3,178 —Commercial papers8,996 — 8,996 —Short-term investments: Corporate debt securities36,527 — 36,527 —Commercial papers16,290 — 16,290 —U.S. agency securities5,414 — 5,414 —U.S. Treasury securities1,801 — 1,801 —Total financial assets$379,189 $306,983 $72,206 $—Based on quoted market prices as of December 31, 2016 , the fair value of the 0.75% and 1.25% Convertible Senior Notes (Note 8) were approximately$257,600 and $364,389 , respectively, determined using Level 2 inputs as they are not actively traded in markets.The following table represents a reconciliation of the Acquisition-related contingent consideration liability measured at fair value on a recurring basis,using significant unobservable inputs (Level 3): Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)Balance as of December 31, 2015$—Additions during the period9,162Payments during the period(260)Adjustments to fair value during the period recorded in General and Administrative expenses(669)Balance as of December 31, 2016$8,233The carrying amounts of the Company's cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values dueto their short maturities.InvestmentsThe cost and fair value of the Company’s cash and available-for-sale investments as of December 31, 2016 and 2015 were as follows:87Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts) December 31, 2016 Amortized Cost Unrealized Gains Unrealized Losses Fair ValueCash and cash equivalents: Cash$26,024 $— $— $26,024Money market funds304,020 — — 304,020Corporate debt securities2,140 — (1) 2,139Commercial papers13,243 — — 13,243Total$345,427 $— $(1) $345,426 Short-term investments: Corporate debt securities$24,458 $— $(8) $24,450Commercial papers22,979 — — 22,979U.S. agency securities1,945 1 — 1,946U.S. Treasury securities1,950 — — 1,950Total$51,332 $1 $(8) $51,325 December 31, 2015 Amortized Cost Unrealized Gains Unrealized Losses Fair ValueCash and cash equivalents: Cash$27,048 $— $— $27,048Money market funds306,983 — — 306,983Corporate debt securities3,178 — — 3,178Commercial papers8,996 — — 8,996Total$346,205 $— $— $346,205 Short-term investments: Corporate debt securities$36,549 $— $(22) $36,527Commercial papers16,290 — — 16,290U.S. agency securities5,415 — (1) 5,414U.S. Treasury securities1,801 — — 1,801Total$60,055 $— $(23) $60,032As of December 31, 2016 and 2015 , all investments mature in less than one year . Fair values for marketable securities are based on quoted market pricesfor the same or similar instruments.The Company reviews its investments on a quarterly basis to identify and evaluate investments that have an indication of possible impairment and hasdetermined that no other-than-temporary impairments were required to be recognized during the years ended December 31, 2016, 2015 and 2014. 7. Commitments and ContingenciesOperating LeasesThe Company leases certain of its facilities under noncancellable operating leases with various expiration dates through 2024.Premises rent expense was $5,054 , $3,831 and $3,283 for the years ended December 31, 2016, 2015 and 2014 , respectively.88Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)Capital LeasesIn July 2012, the Company entered into two lease agreements to lease certain office equipment with expiration dates in July and October 2015. The leasesbear an annual interest rate of 4.50% and were secured by fixed assets used in the Company's office locations. Also, in July 2015, the Company entered into a newlease agreement (the "July 2015 Lease") to lease certain office equipment with expiration in August 2020. The July 2015 Lease bears an annual interest rate of6.5% . All leases are secured by fixed assets used in the Company's office locations.At December 31, 2016 , future annual minimum lease payments under noncancellable operating and capital leases were as follows: Capital Leases Operating Leases2017$41 $13,911201839 13,337201937 11,095202022 5,0272021— 2,220Thereafter— 5,616Total minimum lease payments139 $51,206Less: Amount representing interest(16) Present value of capital lease obligations123 Less: Current portion(32) Long-term portion of capital lease obligations$91 ContingenciesUnder the indemnification provisions of the Company's customer agreements, the Company agrees to indemnify and defend and hold harmless itscustomers against, among other things, infringement of any patent, trademark or copyright under any country's laws or the misappropriation of any trade secretarising from the customers' legal use of the Company's solutions. The exposure to the Company under these indemnification provisions is generally limited to thetotal amount paid by the customers under the applicable customer agreement. However, certain indemnification provisions potentially expose the Company tolosses in excess of the aggregate amount paid to the Company by the customer under the applicable customer agreement. To date, there have been no claimsagainst the Company or its customers pursuant to these indemnification provisions.Legal ContingenciesFrom time to time, the Company may be involved in legal proceedings and subject to claims in the ordinary course of business. On December 16, 2013,Finjan, Inc. sued the Company and its wholly-owned subsidiary, Armorize Technologies, Inc., in the United States District Court, Northern District of Californiafor alleged patent infringement of a variety of its patents, demanding preliminary and permanent injunctive relief, and unspecified damages. On June 3, 2016, the Company executed a Confidential Patent License, Settlement and Release Agreement with Finjan, Inc. The Company evaluated thetransaction as a multiple-element arrangement and allocated the payment of $10,900 to each identifiable element using its relative fair value. Based on estimatesof fair value, the Company determined that the primary benefit of the arrangement is avoided litigation cost and the release of any potential past claims, with nomaterial value attributable to future use or benefit. Accordingly, the Company recorded a $10,900 settlement charge within general and administrative expense inits consolidated statement of operations for the year ended December 31, 2016. The settlement charge was reduced by $1,938 received from escrow as part of theArmorize Technologies, Inc. Acquisition Agreement. The Company paid $4,300 to Finjan, Inc. in June 2016, $3,300 in December 2016, and will pay $3,300 onor before January 3, 2018. The remaining $3,300 payable was recorded in other-long term liabilities on the balance sheet as of December 31, 2016.89Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)8. Convertible Senior Notes0.75% Convertible Senior Notes due June 2020On June 17, 2015 , the Company issued $200,000 principal amount of 0.75% Convertible Senior Notes (the " 0.75% Notes") due 2020 in a privateoffering to qualified institutional buyers ("Holders") pursuant to Rule 144A under the Securities Act of 1934, as amended (the "Securities Act"). The initial Holdersof the 0.75% Notes also had an option to purchase an additional $30,000 in principal amount which was exercised in full. The net proceeds after the agent'sdiscount and issuance costs of $6,581 from the 0.75% Notes offering were approximately $223,419 . The Company uses the net proceeds for working capital andgeneral corporate purposes, which may include funding the Company's operations, capital expenditures, and potential acquisitions of businesses, products ortechnologies believed to be of strategic importance. The 0.75% Notes bear interest at 0.75% per year, payable semi-annually in arrears every June 15 andDecember 15, beginning on December 15, 2015.The 0.75% Notes are unsecured and rank senior in right of payment to any indebtedness expressly subordinated in right of payment to the 0.75% Notes.They rank equally with the Company's other existing and future unsecured indebtedness that is not subordinated and are structurally subordinated to any current orfuture secured indebtedness to the extent of the value of the assets securing the indebtedness and other liabilities of the Company's subsidiaries.The initial conversion rate is 12.3108 shares of the Company’s common stock per $1 principal amount of notes which equates to 2,831 shares ofcommon stock, or a conversion price equivalent of $81.23 per share of common stock. Throughout the term of the 0.75% Notes, the conversion rate may beadjusted upon the occurrence of certain events, such as the payment of cash dividends or issuance of stock warrants. The 0.75% Notes mature on June 15, 2020 ,unless repurchased, redeemed or converted in accordance with their terms prior to such date.At the Company's option, on or after June 20, 2018 , the Company will be able to redeem all or a portion of the 0.75% Notes at 100% of the principalamount, plus any accrued and unpaid interest, under certain conditions. The Company may redeem the 0.75% Notes in shares of the Company’s common stock,cash, or some combination of each.Prior to December 15, 2019 , the 0.75% Notes will be convertible at the option of the Holders only upon the satisfaction of certain conditions and duringcertain periods if any of the following events occur: •during the calendar quarter commencing after September 30, 2015, if the last reported sale price of the Company's common stock is greater than or equalto 130% of the applicable conversion price on each such trading day for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter;•during the 5 business day period after any 5 consecutive trading day period in which the trading price, as defined, per $1 principal amount of the 0.75%Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the Company's common stockand the applicable conversion rate on each such trading day;•upon a notice of redemption by the Company; or•upon the occurrence of specified corporate transactions.Subsequent to December 15, 2019 , Holders may convert their 0.75% Notes at the applicable conversion rate at any time prior to the close of business onthe second scheduled trading day immediately preceding the maturity date.Holders of the 0.75% Notes also have the right to require the Company to repurchase all or a portion of the 0.75% Notes at 100% of the principal amount,plus accrued and unpaid special interest, if any, upon the occurrence of certain fundamental changes to the Company.In accordance with the authoritative accounting guidance, the Company allocated the total amount of the 0.75% Notes into liability and equitycomponents. The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 6.50% basedon the a blended rate between the yield rate for a Moody's B1 rating and the average debt rate for comparable convertible transactions from similar companies. Thedifference between the 0.75% Notes principal and the carrying value of the liability component, representing the value of conversion premium assigned to theequity component, was recorded as an increase to additional paid in capital and as a debt discount on the90Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)issuance date. The equity component is being accreted using the effective interest rate method over the period from the issuance date through June 15, 2020 as anon-cash charge to interest expense. The amount recorded to additional paid in capital is not remeasured as long as it continues to meet the conditions for equityclassification. Upon issuance of the 0.75% Notes, the Company recorded $174,359 as debt and $55,641 as additional paid in capital within stockholders' equity.Additionally, the debt discount and issuance costs were allocated based on the total amount incurred to the liability and equity components using the sameproportions as the proceeds from the 0.75% Notes. The equity issuance costs of $1,592 were recorded as a decrease to additional paid-in capital at the issuancedate. 1.25% Convertible Senior Notes due December 2018 On December 11, 2013 , the Company issued $175,000 principal amount of 1.25% Convertible Senior Notes (the " 1.25% Notes," and together with the0.75% Notes, the “Notes”) due 2018 in a private offering to Holders pursuant to Rule 144A under the Exchange Act. The initial Holders of the 1.25% Notes alsohad an option to purchase an additional $26,250 in principal amount which was exercised in full. The net proceeds after the agent's discount and issuance costs of$5,803 from the 1.25% Notes offering were approximately $195,446 . The Company uses the net proceeds for working capital and general corporate purposes,which may include funding the Company's operations, capital expenditures, potential acquisitions of businesses, products or technologies believed to be ofstrategic importance. The 1.25% Notes bear interest at 1.25% per year, payable semi-annually in arrears every June 15 and December 15, beginning on June 15,2014.On July 5, 2016, the Company and the Trustee executed a supplemental indenture to address an administrative issue with the timing of a redemptionnotice. The amendment did not adversely affect the right of any holder and therefore did not require their consent. There were no other changes to terms of theNotes.The 1.25% Notes are unsecured and rank senior in right of payment to any indebtedness expressly subordinated in right of payment to the 1.25% Notes.They rank equally with the Company's other existing and future unsecured indebtedness that is not subordinated and are structurally subordinated to any current orfuture secured indebtedness to the extent of the value of the assets securing the indebtedness and other liabilities of the Company's subsidiaries.The initial conversion rate is 25.6271 shares of the Company’s common stock per $1 principal amount of the 1.25% Notes which equates to 5,158 sharesof common stock, or a conversion price equivalent of $39.02 per share of common stock. Throughout the term of the 1.25% Notes, the conversion rate may beadjusted upon the occurrence of certain events, such as the payment of cash dividends or issuance of stock warrants. The 1.25% Notes mature on December 15,2018 , unless repurchased, redeemed or converted in accordance with their terms prior to such date.At the Company's option, on or after December 20, 2016 , the Company will be able redeem all or a portion of the 1.25% Notes at 100% of the principalamount, plus any accrued and unpaid interest, under certain conditions. The Company may redeem the 1.25% Notes in shares of the Company’s common stock,cash, or some combination of each.Prior to June 15, 2018 , the 1.25% Notes will be convertible at the option of the Holders only upon the satisfaction of certain conditions and during certainperiods if any of the following events occur:•during the calendar quarter commencing after March 31, 2014, if the last reported sale price of the Company's common stock is greater than or equal to130% of the applicable conversion price on each such trading day for at least 20 trading days (whether or not consecutive) during the period of 30consecutive trading days ending on the last trading day of the preceding calendar quarter;•during the 5 business day period after any 5 consecutive trading day period in which the trading price, as defined, per $1 principal amount of the 1.25%Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of the Company's common stockand the applicable conversion rate on each such trading day;•upon a notice of redemption by the Company; or•upon the occurrence of specified corporate transactions.Subsequent to June 15, 2018 , Holders may convert their 1.25% Notes at the applicable conversion rate at any time prior to the close of business on thesecond scheduled trading day immediately preceding the maturity date.91Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)Holders of the 1.25% Notes also have the right to require the Company to repurchase all or a portion of the 1.25% Notes at 100% of the principal amount,plus accrued and unpaid special interest, if any, upon the occurrence of certain fundamental changes to the Company.In accordance with the authoritative accounting guidance, the Company allocated the total amount of the 1.25% Notes into liability and equitycomponents. The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 6.5% based onthe a blended rate between the yield rate for a Moody's B1-rating and the average debt rate for comparable convertible transactions from similar companies. Thedifference between the 1.25% Notes principal and the carrying value of the liability component, representing the value of conversion premium assigned to theequity component, was recorded as an increase to additional paid in capital and as a debt discount on the issuance date. The equity component is being accretedusing the effective interest rate method over the period from the issuance date through December 15, 2018 as a non-cash charge to interest expense. The amountrecorded to additional paid in capital is not remeasured as long as it continues to meet the conditions for equity classification. Upon issuance of the Notes, theCompany recorded $156,672 as debt and $44,578 as additional paid in capital within stockholders' equity. Additionally, the debt discount and issuance costs were allocated based on the total amount incurred to the liability and equity components using the sameproportions as the proceeds from the 1.25% Notes. The equity issuance costs of $1,285 were recorded as a decrease to additional paid-in capital at the issuancedate. The following tables represent the carrying values of all Notes as of December 31, 2016 and 2015 : December 31, 2016 0.75% Notes 1.25% Notes TOTALLiability component: Principal$230,000 $201,250 $431,250Less: debt discount and issuance costs, net of amortization(43,896) (20,813) (64,709)Net carrying amount$186,104 $180,437 $366,541 Equity component (1)$54,049 $43,293 $97,342 December 31, 2015 0.75% Notes 1.25% Notes TOTALLiability component: Principal$230,000 $201,250 $431,250Less: debt discount and issuance costs, net of amortization(54,952) (30,599) (85,551)Net carrying amount$175,048 $170,651 $345,699 Equity component (1)$54,049 $43,293 $97,342(1) Recorded on the consolidated balance sheets as additional paid-in capital, net of the $2,877 issuance costs in equityFor the years ended December 31, 2016, 2015 and 2014 , the Company incurred the following interest expense related to the Notes: 2016 2015 2014Interest expense related to contractual interest coupon$4,240 $3,441 $2,511Amortization of debt discount and issuance costs20,842 14,933 8,753Total$25,082 $18,374 $11,26492Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)9. Equity Award PlansStock-Based Compensation PlansOn March 30, 2012, the Board of Directors and the Company’s stockholders approved the 2012 Equity Incentive Plan (the "2012 Plan"), which becameeffective in April 2012. The Company has four equity incentive plans: the Company’s 2002 stock option plan (the “2002 Plan”), the 2012 Plan, and two FireLayersPlans assumed by the Company upon the acquisition of FireLayers in 2016. Upon the Company's initial public offering, all shares that were reserved under the2002 Plan but not issued, and shares issued but subsequently returned to the plan through forfeitures, cancellations and repurchases became part of the 2012 Planand no further shares will be granted pursuant to the 2002 Plan. No further shares will be granted pursuant to both FireLayers plans. All outstanding stock awardsunder the 2002 Plan, the two FireLayers plans and 2012 Plan will continue to be governed by their existing terms. Under the 2012 Plan, the Company has theability to issue incentive stock options (“ISOs”), nonstatutory stock options (“NSOs”), restricted stock awards, stock bonus awards, stock appreciation rights("SARs"), restricted stock units ("RSUs"), and performance stock units ("PSUs"). The 2012 Plan also allows direct issuance of common stock to employees,outside directors and consultants at prices equal to the fair market value at the date of grant of options or issuance of common stock. Additionally, the 2012 Planprovides for the grant of performance cash awards to employees, directors and consultants. The Company has the right to repurchase any unvested shares (at theoption exercise price) of common stock issued directly or under option exercises. The right of repurchase generally expires over the vesting period.Stock bonus and other liability awards are accounted for as liability-classified awards, because the obligations are based predominantly on fixed monetaryamounts that are generally known at the inception of the obligation, to be settled with a variable number of shares of the Company's common stock.Under the equity incentive plans, the term of an option grant shall not exceed ten years from the date of its grant and options generally vest over a three tofour -year period, with vesting on a monthly or annual interval. Under the 2012 Plan, 20,316 shares of common stock are reserved for issuance to eligibleparticipants. As of December 31, 2016 , 6,139 shares were available for future grant. Restricted stock awards generally vest over a four -year period.Stock OptionsThe fair value of options granted is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-basedcompensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the expected term(weighted-average period of time that the options granted are expected to be outstanding), the volatility of the common stock price and the assumed risk-freeinterest rate. The Company recognizes stock-based compensation expense for only those shares expected to vest over the requisite service period of the award. TheCompany determines its estimated forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the appropriateness of the forfeiture ratebased on recent forfeiture activity and expected future employee turnover, if any. Changes in the estimated forfeiture rate can have a significant effect on reportedstock-based compensation expense, as the cumulative effect of adjusting the rate for all expense is recognized in the period the forfeiture estimate is changed. Nocompensation cost is recorded for options that do not vest and the compensation cost from vested options, whether forfeited or not, is not reversed. The weighted average fair value of stock options granted to employees during the years ended December 31, 2016, 2015 and 2014 , was $24.04 , $28.20and $20.25 , respectively. The fair values were estimated on the grant dates using the Black-Scholes option-pricing model with the following weighted-averageassumptions:93Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts) Year Ended December 31, 2016 2015 2014Expected life (in years)5.31 - 6.08 5.31 - 6.08 5.31 - 6.08Volatility45% 50% - 52% 54% - 58%Risk-free interest rate1.3% - 1.4% 1.6% - 1.8% 1.8% - 1.9%Dividend yield—% —% —%The estimate for expected life of options granted reflects the midpoint of the vesting term and the contractual life computed utilizing the simplifiedmethod as allowed by the SEC staff. The Company does not have significant historical share option exercise experience and hence considers the expected termassumption calculated using the simplified method to be reasonable. Starting January 1, 2016, the expected volatility of the Company's common stock is based onthe Company's historical volatility. Prior to January 1, 2016, the common stock price volatility was determined based on the historical average volatilities of thecommon stock of a group of publicly-traded peer companies that operate in a similar industry as the Company did not have sufficient trading history for itscommon stock. The risk-free interest rate used was the Federal Reserve Bank's constant maturities interest rate commensurate with the expected life of the optionsin effect at the time of the grant. The expected dividend yield was zero , as the Company does not anticipate paying a dividend within the relevant time frame.The Company realized no income tax benefit from stock option exercises in each of the periods presented due to recurring losses and valuationallowances.Stock option activity under the Plan is as follows: Shares subject toOptions Outstanding Number ofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualTerm(in years) AggregateIntrinsicValueBalance at December 31, 20137,223 $8.17 6.82 $180,543Options granted563 36.91 Options exercised(1,984) 6.56 Options forfeited and canceled(514) 16.25 Balance at December 31, 20145,288 11.06 6.31 $196,608Options granted284 57.47 Options exercised(1,429) 8.31 Options forfeited and canceled(101) 19.11 Balance at December 31, 20154,042 15.10 5.77 $201,736Options assumed per FireLayers acquisition20 4.33 Options granted237 54.11 Options exercised(1,089) 11.59 Options forfeited and canceled(27) 43.15 Balance at December 31, 20163,183 $18.91 5.39 $164,842Exercisable, December 31, 20162,590 $12.68 4.73 $150,144Vested and expected to vest, December 31, 20163,124 $18.31 5.33 $163,622The total intrinsic value of options exercised was $58,061 , $72,993 and $64,455 , for the years ended December 31, 2016, 2015 and 2014 , respectively.Total cash proceeds from such option exercises were $12,620 , $11,868 and $13,007 for the years ended December 31, 2016, 2015 and 2014 , respectively.94Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)The grant date fair value of options that vested was $9,106 , $9,520 and $10,755 during the years ended December 31, 2016, 2015 and 2014 , respectively.As of December 31, 2016, the Company had unrecognized stock-based compensation expense of $11,800 related to stock options that will be recognized,net of forfeitures, over the average remaining vesting term of the options of 2.09 years. Restricted Stock UnitsA following table summarized the activity of RSUs, PSUs and stock-bonus awards: RSUs and PSUsOutstanding Number ofShares GrantedFairValuePerUnitAwarded and unvested at December 31, 20131,214 $29.57Awards granted2,362 39.77Awards vested(396) 30.79Awards forfeited(246) 31.59Awarded and unvested at December 31, 20142,934 37.45Awards granted1,541 61.48Awards vested(897) 38.70Awards forfeited(267) 41.89Awarded and unvested at December 31, 20153,311 47.94Awards granted1,605 64.08Awards vested(1,116) 44.73Awards forfeited(335) 51.40Awarded and unvested at December 31, 20163,465 $56.11As of December 31, 2016 , there was $118,420 of unamortized stock-based compensation expense related to unvested RSUs, which are expected to berecognized over a weighted average period of 2.97 years.The Company granted 146 and 189 PSUs in the years ended December 31, 2016 and 2015, respectively. The PSU vesting conditions were based onindividual performance targets. Unamortized expense was $9,660 as of December 31, 2016, net of estimated forfeitures.Stock Bonus Awards and Other Liability AwardsThe total accrued liability for the stock bonus awards and other liability awards was $7,855 and $5,676 as of December 31, 2016 and 2015, respectively.93 and 30 shares of common stock earned under the stock bonus program were issued during the years ended December 31, 2016 and 2015, respectively.Stock based compensation expense related to stock bonus program were $5,288 , $3,792 and $1,771 for the years ended December 31, 2016, 2015 and 2014.In March 2015, the Company issued liability awards with a fair value of $6,885 , which vest over three years period and are subject to continuous serviceand other conditions. The liability awards will be settled with a variable number of shares of the Company's common stock. During the year ended December 31,2016, 45 shares were vested and issued. The Company recognized $2,299 and $1,884 of stock-based compensation expense related to these liability awards in theyears ended December 31, 2016 and 2015.Employee Stock Purchase Plan95Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)On March 30, 2012, the Board of Directors and the Company’s stockholders approved the 2012 Employee Stock Purchase Plan (the "ESPP"), whichbecame effective in April 2012. A total of 745 shares of the Company's common stock was initially reserved for future issuance under the ESPP. The number ofshares reserved for issuance under the ESPP will increase automatically on January 1 of each of the first eight years commencing with 2013 by the number ofshares equal to 1% of the Company's shares outstanding on the immediately preceding December 31, but not to exceed 1,490 shares, unless the Board of Directors,in its discretion, determines to make a smaller increase. As of December 31, 2016 , there were 1,360 shares of the Company's common stock available for futureissuance under the ESPP.The fair value of the option component of the ESPP shares was estimated at the grant date using the Black-Scholes option pricing model with thefollowing weighted average assumptions: Year ended December 31, 2016 2015 2014Expected life (in years)0.5 0.5 0.5Volatility37% - 48% 42% - 47% 45% - 52%Risk-free interest rate0.38% - 0.45% 0.08% - 0.33% 0.05% - 0.07%Dividend yield—% —% —%The Company issued 200 shares and 161 shares under the ESPP in 2016 and 2015, respectively, at a weighted average exercise price per share of $45.65and $41.84 , respectively. As of December 31, 2016 , the Company expects to recognize $1,510 of the total unamortized compensation cost related to employeepurchases under the ESPP over a weighted average period of 0.37 years.Restricted StockThe Company granted 54 shares of restricted stock in the fourth quarter of 2014 to certain key employees with a total fair value of $2,357 and two -yearcliff vesting in 2016. The shares fully vested in 2016.The Company granted 111 shares of restricted stock in the fourth quarter of 2016 to certain key employees with a total fair value of $8,669 and three -yearannual vesting. As of December 31, 2016, there was $8,123 of unamortized stock-based compensation expense related to the unvested shares of restricted stock.The shares of restricted stock are subject to forfeiture if employment terminates prior to the lapse of the restrictions, and are expensed over the vesting period. Theyare considered issued and outstanding shares of the Company at the grant date and have the same rights as other shares of common stock.10. Net Loss per ShareBasic net loss per share of common stock is calculated by dividing the net loss by the weighted‑average number of shares of common stock outstandingfor the period. The weighted‑average number of shares of common stock used to calculate basic net loss per share of common stock excludes those shares subjectto repurchase related to stock options or restricted stock that were exercised or issued prior to vesting as these shares are not deemed to be issued for accountingpurposes until they vest. Diluted net loss per share of common stock is computed by dividing the net loss using the weighted‑average number of shares of commonstock, excluding common stock subject to repurchase, and, if dilutive, potential shares of common stock outstanding during the period. Basic and diluted net lossper common share was the same for all periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive.The following table presents the potentially dilutive common shares outstanding that were excluded from the computation of diluted net loss per share ofcommon stock for the periods presented because including them would have been anti-dilutive:96Table of Contents December 31, 2016 2015 2014Stock options to purchase common stock3,183 4,042 5,288Restricted stock units3,465 3,311 2,934Employee stock purchase plan92 81 90Common stock subject to repurchase135 54 54Bonus shares159 174 371.25% Convertible senior notes5,158 5,158 5,1580.75% Convertible senior notes2,831 2,831 —Total15,023 15,651 13,56111. Segment ReportingOperating segments are reported in a manner consistent with the internal reporting supported and defined by the components of an enterprise about whichseparate financial information is available, provided and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and inassessing performance. The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financialinformation presented on a consolidated basis. The Company has one business activity, and there are no segment managers who are held accountable foroperations, operating results and plans for levels or components below the consolidated unit level. Accordingly, the Company determined that it has one operatingand reportable segment.Starting January 1, 2016, the Company included privacy solutions into the "Archiving, Privacy and Governance" group. Amounts in the comparable priorperiod have been reclassified to conform to the current presentation. The following sets forth total revenue by solutions offered by the Company and by geographicarea. Revenue by geographic area is based upon the billing address of the customer: Year Ended December 31, 2016 2015 2014Total revenue by solution: Protection and Advanced Threat$272,621 $183,050 $126,812Archiving, Privacy and Governance102,875 82,347 68,795Total revenue$375,496 $265,397 $195,607 Year Ended December 31, 2016 2015 2014Total revenue by geographic area: United States$312,601 $218,424 $157,593Rest of world62,895 46,973 38,014Total revenue$375,496 $265,397 $195,607The following sets forth long-lived tangible assets by geographic area: December 31, 2016 2015Long-lived assets: United States$43,789 $29,514Rest of world8,734 4,987Total long-lived assets$52,523 $34,50197Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)12. Income Taxes The domestic and foreign components of loss before (provision for) benefit from income taxes were as follows for the years ended December 31, 2016,2015 and 2014 : Year Ended December 31, 2016 2015 2014Domestic$(112,904) $(101,453) $(65,433)Foreign2,682 3,376 5,003Loss before (provision for) benefit from income taxes$(110,222) $(98,077) $(60,430)The (provision for) benefit from income taxes is comprised of: Year EndedDecember 31, 2016 2015 2014Current tax expense: Federal$— $— $—State72 54 121Foreign795 514 530Total current867 568 651Deferred tax expense: Federal411 105 (792)State— (45) —Foreign(292) 7 (172)Total deferred119 67 (964)Provision for (benefit from) income taxes$986 $635 $(313)The reconciliation of income tax expense (benefit) at the statutory federal income tax rate of 34% to the income tax provision (benefit) included in theconsolidated statements of operations for the years ended December 31, 2016, 2015 and 2014 is as follows: Year Ended December 31, 2016 2015 2014Tax at federal statutory rate$(37,476) $(33,346) $(20,546)Foreign income tax rate differential(187) (270) (600)State, net of federal benefit(3,478) (2,952) (1,585)Stock compensation charges3,517 2,393 1,304SubPart F and other permanent items1,422 1,434 2,579Provision to return and other1,419 749 3,621Research and development credits(4,464) (2,920) (2,052)Uncertain tax positions749 561 391Valuation allowance39,484 34,986 16,575Provision (benefit from) for income taxes$986 $635 $(313)98Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)Deferred tax assets and liabilities reflect the net tax effects of net operating loss and tax credit carryovers and the temporary differences between thecarrying amount of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of the Company's deferredtax assets were as follows at December 31, 2016 and 2015: At December 31, 2016 2015Deferred tax assets: Net operating loss carryforwards$119,168 $98,882Tax credit carryforwards13,966 10,856Research expenditures2,401 2,301Deferred revenue13,698 12,165Stock compensation18,509 13,289Fixed assets207 1,426Accruals and other11,554 8,997Gross deferred tax assets179,503 147,916Valuation allowance(141,398) (101,909)Total deferred tax assets38,105 46,007Deferred tax liabilities: Intangible assets and other(8,793) (7,547)Deferred commissions(9,545) (8,438)Convertible senior notes(21,541) (28,267)Total deferred tax liabilities(39,879) (44,252)Total net deferred tax assets$(1,774) $1,755Non-current deferred income tax assets (included in other long-term assets)$2,121 $2,116Non-current deferred income tax liabilities (included in long-term liabilities)$3,895 $411The Company records net deferred tax assets to the extent that Company believes these assets will more likely than not be realized. In making suchdetermination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projectedfuture taxable income, tax planning strategies and recent financial operations.Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. The valuation allowanceincreased by approximately $39,489 and $10,980 during the years ended years ended December 31, 2016 and 2015 , respectively. Effective January 1, 2016, theCompany changed its accounting policy for sales commissions that are incremental and directly related to customer sales contracts in which revenue is deferred(see Note 1), as a result of the accounting policy change, the valuation allowance as of December 31, 2015 has been retrospectively reduced by $8,438 .As of December 31, 2016 and 2015 , the Company had net operating loss carry-forwards for federal income tax purposes of $533,825 and $425,640 ,respectively. The amount of federal net-operating loss carry-forwards at December 31, 2016 and 2015 for which a benefit will be recorded in APIC when realizedis approximately $214,229 and $158,246 , respectively. The federal net operating losses will begin to expire in 2018. As of December 31, 2016 and 2015 , theCompany had federal research credit carry-forwards of $9,231 and $6,642 respectively. The federal research and development credits will begin to expire in 2022.As of December 31, 2016 and 2015 , the Company had net operating loss carry-forwards for state income tax purposes of approximately $305,493 and$253,460 , respectively. The amount of state net-operating loss carry-forwards at December 31, 2016 and 2015 for which a benefit will be recorded in APIC whenrealized is approximately $125,497 and $90,849 , respectively. The state net operating losses expire between 2017 and 2036. As of December 31, 2016 and 2015 ,the Company99Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)had research and development credit carry-forwards for state income tax purpose of $11,195 and $8,734 , respectively. The state research and development creditshave no expiration period.The operating losses carry-forwards in non-U.S. locations were $7,045 as of December 31, 2016, there were no operating losses carry-forwards as ofDecember 31, 2015. The non-US operating losses carry-forwards have no expiration period. In addition, as of December 31, 2016 and 2015 , the Company hadresearch and development credit carry-forwards in its non-U.S. locations of approximately $2,010 and $2,058 , respectively. The non-U.S. research anddevelopment credits will begin to expire in 2031.Utilization of the federal and state net operating losses may be subject to substantial annual limitation due to the ownership change limitations providedby the Internal Revenue Code and similar state provisions. Analyses have been conducted to determine whether an ownership change had occurred since inception.The analyses have indicated that although ownership changes have occurred in prior years, the net operating losses and research and development credits would notexpire before utilization as a result of the ownership change. In the event the Company has subsequent changes in ownership, net operating losses and research anddevelopment credit carryovers could be limited and may expire unutilized as a result of the subsequent ownership change.The Company recognizes interest and penalties related to uncertain tax positions within the income tax expense line in the consolidated statements ofoperations. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets. During the year ended December 31,2016 , the Company reduced income tax expense by $45 from interest and penalties related to tax contingencies and has $182 of interest and penalties recorded asa long-term income tax liability as of December 31, 2016 . During the year ended December 31, 2015 , the Company reduced income tax expense by $15 frominterest and penalties related to tax contingencies and had $227 of interest and penalties recorded as a long-term income tax liability.As of December 31, 2016 , the Company had recorded unrecognized tax benefits of $922 that if recognized, would benefit the Company's effective taxrate. As of December 31, 2015 , the Company had recorded unrecognized tax benefits of $1,202 that if recognized, would benefit the Company's effective tax rate.The Company does not anticipate that the amount of unrecognized tax benefits relating to tax positions existing at December 31, 2016 will significantlyincrease or decrease within the next twelve months.Because of net operating loss and credit carry-forwards, all of the Company's tax years dating to inception in 2002 remain open to tax examination in U.S.and certain state tax jurisdictions. For other major non-U.S. jurisdictions, tax years from 2009 to present remain open to tax examination. The Company is notcurrently under audit in any material jurisdictions.The aggregate changes in the balance of gross unrecognized tax benefits were as follows:100Table of ContentsProofpoint, Inc.Notes to Consolidated Financial Statements (Continued)(dollars and share amounts in thousands, except per share amounts)Ending balance as of December 31, 2013$3,823Increase in balances related to tax positions taken during the current period524Increase in balances related to tax positions taken during the prior period—Decrease in balances related to tax positions taken during the prior period(87)Decrease in balances related to statute expirations during the current period(31)Ending balance as of December 31, 20144,229Increase in balances related to tax positions taken during the current period806Increase in balances related to tax positions taken during the prior period—Decrease in balances related to tax positions taken during the prior period(130)Decrease in balances related to statute expirations during the current period(85)Ending balance as of December 31, 20154,820Increase in balances related to tax positions taken during the current period1,262Increase in balances related to tax positions taken during the prior period20Decrease in balances related to tax positions taken during the prior period(17)Decrease in balances related to statute expirations during the current period(239)Ending balance as of December 31, 2016$5,846As of December 31, 2016 , $206 of foreign withholding taxes associated with the repatriation of earning of foreign subsidiaries had been provided on$4,120 of undistributed earnings for certain foreign subsidiaries. The Company intends to reinvest the remainder of its undistributed earnings indefinitely outsidethe United States. As of December 31, 2016 , the Company estimated that no material additional U.S. income taxes would have to be provided if all of theundistributed earnings of the foreign subsidiaries were repatriated back to the United States as substantially all earnings from its foreign subsidiaries are previouslytaxed income. As of December 31, 2016 , the Company estimated that approximately $600 of additional foreign withholding tax would have to be provided if all ofthe undistributed earnings of the Company's foreign subsidiaries were repatriated back to the United States.101Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on February 23, 2017 . PROOFPOINT INC. By: /s/ GARY STEELE Gary Steele Chief Executive OfficerPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gary Steele and Paul Auvil, and eachof them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, placeand stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and otherdocuments in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full powerand authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as heor she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his or her substitute orsubstitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on thedate indicated: Name Title Date /s/ GARY STEELE Chief Executive Officer(principal executive officer) February 23, 2017Gary Steele /s/ PAUL AUVIL Chief Financial Officer(principal financial and accounting officer) February 23, 2017Paul Auvil /s/ DANA EVAN Director February 23, 2017Dana Evan /s/ JONATHAN FEIBER Director February 23, 2017Jonathan Feiber /s/ DOUGLAS GARN Director February 23, 2017Douglas Garn /s/ ERIC HAHN Director February 23, 2017Eric Hahn /s/ KEVIN HARVEY Director February 23, 2017Kevin Harvey /s/ R. SCOTT HERREN Director February 23, 2017R. Scott Herren 102Table of ContentsEXHIBIT INDEX Incorporated by Reference FiledExhibitNumber Exhibit Title Form File No. Filing Date ExhibitNo. Herewith3.01 Amended and Restated Certificate of Incorporation of the Registrant. S-1A 333-178479 April 9, 2012 3.02 3.02 Amended and Restated Bylaws of the Registrant. S-1A 333-178479 April 9, 2012 3.04 4.01 Form of Registrant's common stock certificate. S-1A 333-178479 April 9, 2012 4.01 4.02 Indenture between Proofpoint, Inc. and Wells Fargo Bank, National Association, datedas of December 11, 2013 including the form of 1.25% Convertible Senior Notes due2018 therein. 8-K 001-35506 December 11, 2013 4.02 4.03 Indenture between Proofpoint, Inc. and Wells Fargo Bank, National Association, datedas of June 17, 2015 including the form of 0.75% Convertible Senior Notes due 2018therein. 8-K 001-35506 June 17, 2016 4.1 10.01 Form of Indemnity Agreement. S-1A 333-178479 April 9, 2012 10.01 10.02†2002 Stock Option/Stock Issuance Plan and form of option grant. S-1A 333-178479 April 9, 2012 10.02 10.03†2012 Equity Incentive Plan and form of grant agreements. S-1A 333-178479 April 9, 2012 10.03 10.04†2012 Employee Stock Purchase Plan. S-1A 333-178479 April 9, 2012 10.04 10.05†Corporate Bonus Program. 10-K 001-35506 February 26, 2015 10.05 10.06 Lease Agreement between Registrant and Hines VAF No Cal Properties, L.P., dated asof March 28, 2011, as amended July 28, 2011. S-1 333-178479 December 14, 2011 10.05 10.07†Offer Letter to Gary Steele from the Registrant, dated November 17, 2002. S-1 333-178479 December 14, 2011 10.07 10.08†Offer letter to Paul Auvil from the Registrant, dated March 9, 2007. S-1A 333-178479 January 25, 2012 10.08 10.09†Offer Letter to David Knight from the Registrant, dated March 14, 2011. S-1A 333-178479 January 25, 2012 10.11 10.10†Offer Letter to Tracey Newell from the Registrant, dated August 16, 2013. 10-K 001-35506 March 14, 2014 10.11 10.11†Offer Letter to Darren Lee from the Registrant, dated December 19, 2011. 10-K 001-35506 February 26, 2015 10.13 10.12 Offer Letter to Bhagwat Swaroop from Registrant, dated April 27, 2016. X21.01 Subsidiaries of Registrant. X23.01 Consent of PricewaterhouseCoopers LLP, independent registered public accountingfirm. X31.01 Certification of Chief Executive Officer Pursuant to Rule 13-a-14 of the SecuritiesExchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002. X31.02 Certification of Chief Financial Officer Pursuant to Rule 13-a-14 of the SecuritiesExchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Actof 2002. X32.01*Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X32.02*Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X101.INS*XBRL Instance Document X101.SCH*XBRL Taxonomy Extension Schema Document X101.CAL*XBRL Taxonomy Extension Calculation Linkbase Document X101.DEF*XBRL Taxonomy Extension Definition Linkbase Document X101.LAB*XBRL Taxonomy Extension Label Linkbase Document X101.PRE*XBRL Taxonomy Extension Presentation Linkbase Document X____________________________________________________________________† Indicates a management contract or compensatory plan.*These exhibits are furnished with this Annual Report on Form 10-K and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filingof Proofpoint, Inc. under the Securities Act of 1933 or the Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in suchfilings.April 27, 2016Bhagwat Swaroop864 Renetta CourtLos Altos, CA 94024Dear Bhagwat,Proofpoint is a next generation cyber security company that protects the way people work today. We give organizations thepower to do three critical things; 1) Protect people from advanced attacks that target them via email, mobile apps and socialmedia; 2) Protect the information people create from advanced attacks and compliance violations, and 3) Equip people torespond quickly when things go wrong.It is my pleasure to offer you the full-time position of EVP & General Manager, Protection at Proofpoint Inc. (“Proofpoint” or“Company”). This letter shall serve to confirm the terms of your employment with the Company.1. Duties . You will report to Gary Steele, CEO, who will assign and direct your job duties and responsibilities. You will work fromour office located in Sunnyvale, CA. The Company may change your position, duties, and work location from time to time as itdeems necessary.2. Compensationa.Salary. Your annual base salary will be $350,000 less payroll deductions and all required withholdings. You will be paidsemi-monthly on the Company’s regular payroll dates.Variable Compensation. Variable compensation is a key element of Proofpoint’s Total Rewards program. The positionyou are filling qualifies you to participate in the Proofpoint Executive Corporate Bonus Plan with a target of 50% of yourbase salary. Actual participation is based on two factors: date of hire (must be an active employee on or prior toSeptember 30 th of the Plan year) and establishing and submitting MBOs (agreed to by you and your manager) within 30days of your start date. Actual funding and payment amounts are contingent on corporate performance and you meetingyour individual MBOs. This annual bonus, its associated payment amount and format (delivery method) is subject to theterms and conditions of the Proofpoint Bonus Plan Document located on the Company intranet. The Company reservesthe right to change, amend or cancel this program at any time. Bonus amounts in the first year of employment areprorated based on date of hire.b.Benefits . You will be eligible to participate in the Company’s benefit programs and plans offered to our employees whowork more than 30 hours per week (medical, dental, vision, life insurance, disability insurances, 401(k), sick leave andpaid time off, etc. in accordance with the terms of the respective benefit plans.The Company reserves the right to change or otherwise modify, in its sole discretion, the preceding terms of employment.c.Equity .a.Upon the commencement of your employment, and subject to approval by the Company’s Board of Directors, theCompany will recommend to the Board that you be granted an option to purchase 25,000 shares of theCompany’s Common Stock (the “Option”) at an exercise price equal to the fair market value on the date of grant.The Option shall be subject to the vesting restrictions and all other terms of Proofpoint’s 2012 Equity IncentivePlan and your Stock Option Agreement, and related agreements.b.Upon commencement of your employment, and subject to approval by the Company’s Board of Directors, theCompany will recommend to the Board that you be granted a Restricted Stock Unit (“RSU”) award of 47,500shares of Proofpoint Common Stock. The grant shall be subject to the vesting restrictions and all other terms ofProofpoint’s 2012 Equity Incentive Plan and your Restricted Stock Unit Agreement, and related agreements.c.Upon commencement of your employment, and subject to approval by the Company’s Board of Directors, theCompany will recommend a grant of 11,000 Performance Restricted Stock Units (PRSUs). Vesting is subject toCompany achievement of specific growth targets within the specified timeframe as outlined in the grant documentand is subject to all other terms of Proofpoint’s 2012 Equity Incentive Plan and your Restricted Stock UnitAgreement, and related agreements.d.Upon commencement of your employment, and subject to approval by the Company’s Board of Directors, theCompany will recommend to the Board that you be granted a Restricted Stock Unit (“RSU”) award of 4,000 sharesof Proofpoint Common Stock. The grant shall vest in its entirety one year from your date of hire with the Companyand will be subject to the vesting restrictions and all other terms of Proofpoint’s 2012 Equity Incentive Plan andyour Restricted Stock Unit Agreement, and related agreements.e.Employee Stock Purchase Plan (ESPP) - If you are regularly scheduled to work 20 or more hours per week youwill also be eligible to participate in the Company’s ESPP program. ESPP enrollment is available in May andNovember of each calendar year.3. Company Policies . As a Company employee, you will be expected to abide by Company rules and policies, and execute andabide by the Company’s Confidentiality, Noncompetition, and Invention Assignment Agreement, a copy of which is attachedhereto as Exhibit A for your execution. You must sign this agreement as a condition of your employment.4. Former Employers . In your work for the Company, you will be expected not to use or disclose any confidential information,including trade secrets, of any former employer or other person to whom you have an obligation of confidentiality. Rather, youwill be expected to use only that information which is generally known and used by persons with training and experiencecomparable to your own, which is common knowledge in the industry or otherwise legally in the public domain, or which isotherwise provided or developed by the Company. You hereby represent that you will be able to perform your job duties for theCompany within the guidelines described above. You also agree that you will not bring onto Company premises any confidentialinformation or property belonging to any former employer or other person to whom you have an obligation of confidentiality. Youfurther agree that your employment with the Company, and your signing of this offer letter, agreement(s) concerning equitygranted to you, if any, and the Company's Confidentiality, Noncompetition, and Invention Assignment Agreement, will not violateany agreement currently in place between yourself and current or past employers.5. Exposure to Offensive Content . As an employee of the Company, your work may include regular exposure to, and work with,visual material and words of a sexual, racially derogatory, or other offensive nature (“Offensive Content”). Such exposure toOffensive Content may cover a substantial part of the work day. By signing below, you voluntarily consent to proceed withemployment by the Company with the understanding that you may be exposed to Offensive Content.6. Alternative Dispute Resolution. As a condition of your employment, you must sign the Arbitration Agreement attached asExhibit B .7. Conflicts . As an exempt employee, you are expected to work the number of hours required to get the job done. However,you are generally expected to be present during normal business hours, which will be established by the Company and may bechanged as needed to meet the needs of the business. You agree that during your employment with Proofpoint, you will notengage in any other employment, occupation, consulting or other business activity directly related to the business in whichProofpoint is now involved or becomes involved during the term of your employment, nor will you engage in any other activitiesthat conflict with your obligations to Proofpoint.8. Employment Status . Your employment with the Company is “at-will,” meaning that you may terminate your employment withthe Company at any time and for any reason whatsoever simply by notifying Proofpoint. Likewise, the Company may terminateyour employment at any time, for any reason, with or without cause or advance notice. Any modification or change in your at willemployment status may only occur by way of a written employment agreement signed by you and the Chief Executive Officer orVP, Human Resources of the Company.9. Miscellaneous . This letter, together with your Confidentiality, Noncompetition, and Invention Assignment Agreement and theArbitration Agreement, constitutes the entire agreement between you and the Company with respect to the subject matter hereofand supersedes any other agreements or promises made to you by anyone, whether oral or written.Please note that because of employer regulations adopted in the Immigration Reform and Control Act of 1986, within three (3)business days of starting your new position you will need to present documentation demonstrating that you have authorization towork in the United States. This offer is contingent upon a satisfactory verification of criminal, education, driving and/oremployment background. This offer can be rescinded based upon data received in the verification.Please sign and date this letter, and its exhibits by close of business on Tuesday April 26, 2016 if you wish to acceptemployment with Proofpoint under the terms in this offer letter. Employment is subject to first successfully clearing thebackground check noted above. New Hire Orientation is held each Monday at 8:30 AM. Y ou will be provided informationregarding your scheduled orientation before your start date.We look forward to you joining the Proofpoint team and working toward our continued success. If there are any aspects of ouroffer which you would like clarified, please let us know.Best Regards, /s/ Sharyl Givens Sharyl GivensVice President Human ResourcesI have read and understood this offer letter and hereby acknowledge, accept and agree to the terms as set forth above andfurther acknowledge that no other commitments were made to me as part of my employment offer except as specifically set forthherein.Understood & Agreed:/s/ Bhagwat SwaroopBhagwat SwaroopExhibit 21.01List of Subsidiaries of Proofpoint Inc.Wholly-Owned Subsidiaries Jurisdiction of IncorporationPROOFPOINT CANADA INC. Ontario, CanadaPROOFPOINT GMBH Federal Republic of GermanyPROOFPOINT INTERNATIONAL, INC. Delaware, USAPROOFPOINT JAPAN KK JapanPROOFPOINT LIMITED England and WalesPROOFPOINT MALTA LTD Republic of MaltaPROOFPOINT PTY LTD Commonwealth of AustraliaPROOFPOINT SINGAPORE PTE. LTD. Republic of SingaporeNEXTPAGE, INC. Delaware, USAPROOFPOINT NI LTD. Northern IrelandABACA TECHNOLOGY CORPORATION Delaware, USAARMORIZE TECHNOLOGIES, INC. (US) Delaware, USASENDMAIL, INC. Delaware, USASENDMAIL INTERNATIONAL, INC. Delaware, USASENDMAIL SOFTWARE GMBH GermanySENDMAIL SARL FranceSENDMAIL KK JapanNETCITADEL, INC. Delaware, USANEXGATE, INC. Delaware, USAEMERGING THREATS PRO, LLC Indiana, USAMOSCOW ACQUISITION CORPORATION Delaware, USASOCIALWARE, INC. Delaware, USAONTARIO ACQUISITION SUB CORPORATION Delaware, USAPROOFPOINT ISRAEL LTD IsraelPROOFPOINT ISRAEL HOLDINGS LTD IsraelCLEVELAND ACQUISITION CORPORATION Delaware, USAExhibit 23.01CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statement on Form S‑8 (No.333-180839, No.333-187321, No.333-194599, No.333-202312, No.333-209712, and No.333-214366) of Proofpoint, Inc. of our report dated February 23, 2017 relating to the consolidated financial statements and theeffectiveness of internal control over financial reporting, which appears in this Form 10‑K./s/ PricewaterhouseCoopers LLP San Jose, CaliforniaFebruary 23, 2017EXHIBIT 31.01CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Gary Steele, certify that:1. I have reviewed this Annual Report on Form 10-K of Proofpoint, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (theregistrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internalcontrol over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’sauditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financialreporting.Date: February 23, 2017/s/ GARY STEELEGary SteeleChief Executive Officer(Principal Executive Officer )EXHIBIT 31.02CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Paul Auvil, certify that:1. I have reviewed this Annual Report on Form 10-K of Proofpoint, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant andhave:a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (theregistrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internalcontrol over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’sauditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financialreporting.Date: February 23, 2017/s/ PAUL AUVILPaul AuvilChief Financial Officer(Principal Financial Officer)EXHIBIT 32.01CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002I, Gary Steele, Chief Executive Officer of Proofpoint, Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002, that:•the Annual Report on Form 10-K of the Company for the year ended December 31, 2016 (the "Report") fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934; and•the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: February 23, 2017/s/ GARY STEELEGary SteeleChief Executive Officer(Principal Executive Officer )A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by it and furnished to the Securities andExchange Commission or its staff upon request.EXHIBIT 32.02CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TO SECTION 906OF THE SARBANES-OXLEY ACT OF 2002I, Paul Auvil, Chief Financial Officer of Proofpoint, Inc. (the “Company”), do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002, that:•the Annual Report on Form 10-K of the Company for the year ended December 31, 2016 (the "Report") fully complies with the requirements ofSection 13(a) or 15(d) of the Securities Exchange Act of 1934; and•the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: February 23, 2017/s/ PAUL AUVILPaul AuvilChief Financial Officer(Principal Financial Officer)A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by it and furnished to the Securities andExchange Commission or its staff upon request.

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