Q3 2020 Earnings Call
And gentlemen, please standby your conference call will begin momentarily once again, ladies and gentlemen.
Conference call was getting just got to shortly so used to treat a standby. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome.
To the Mimecast third quarter 2020, <unk> earnings conference call.
This time, all participants' lines are not listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you would need to press Star then one on your telephone keypad. Please be advised to today's conference call is being recorded if you require any further assistance. Please press Star then zero I would now like to turn the conference over to your speaker today.
Mr. Robert Sanders.
Good evening and welcome to Mimecasts earnings call for the fiscal third quarter of 2020 ended December 31st 2019.
I'm, Robert Sanders Director of Investor Relations with me on the call Tonight, Our Peter Bauer or co founder Chairman and CEO and raise brown our CFO.
Today's conference call is being broadcast live.
A replay of this call will be available after the live call has ended.
Tonight, we will make forward looking statements regarding future events in the future financial performance of the company.
These forward looking statements are subject to risks and uncertainties.
That could cause actual results to differ materially from those in the forward looking statements.
We caution you to consider the important risk factors that could cause results to differ from those in the forward looking statements contained in todays press release and on this conference call.
These risk factors are further to find and Mimecast. Most recent form 10-Q filed with the Securities and Exchange Commission.
During this call will present, both GAAP and non-GAAP financial measures.
These non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results.
A reconciliation of GAAP to non-GAAP measures and the reason for a representation of the non-GAAP information is included in todays press release, which can be found in the Investor Relations section of our website.
The data. This call is February 10, 2020 any forward looking statements. We make today are based on assumptions that we believed to be reasonable as of this state. We undertake no obligation to update these statements as a result of new information or future events.
Finally, I'd like to remind you that we're having a financial analyst and Investor day on the 24th of this month in San Francisco, California, and invite you to join us.
No I would like to turn the call over to Peter Bauer Peter Good evening. Thank you for joining our earnings call for the third quarter of the school Twentytwenty.
Oh Tonight's call I'll begin with an overview of our achievements. This quarter next I'll discuss our email security suite, although strategy and how recent acquisitions, well dimmock analyze and second SEC support that framework.
I'll talk about our ongoing success with Microsoft Office 365, and then I'll discuss the growth of our Apiay integrations and how these partnerships are benefiting our customers.
Finally, I was just some examples of solutions mine cost is delivered in all third quarter and why our integrated offerings with preferred the competitors turning to the third quarter. We're delighted to once again be sharing with you results that exceed all guidance revenue of $110.2 million grew 20.
He 6% year over year as reported and 27% in constant currency.
This performance was the result of World class customer retention.
Sales of additional services job base of subscribers as the addition of 800 net new customers to our plan.
The logic home segment was notable for several high profile wins against leading competitors.
And these wins on elevating mine cost spread amongst enterprise customers and building further confidence in our technology and organization.
The success up market continues to be validated by leading research and advisory providers as my cost was named a leader in the Gartner Magic Quadrant Enterprise information archiving for the first you're in a row.
Partners also recognized all improving market position.
And the opportunities available to them in partnership with US for example, CDW named mine cost they Silva partner of the young Fourtwenty 19.
During the third quarter, we introduced mine cost email security Threed auto strategy and our cyber resilience summit.
Email security Threed auto outlines how it taxes strategies have evolved over time.
Today, the best cyber resilience moves beyond what we used to think of as email gateway.
Our solution bookkeeping organization safe.
Both a sophisticated set of email perimeter gateway defenses, they're focused on blocking the ever evolving threats that attempt to deliver malware and scams directly to an organizations users was one as we call it.
As well as two additional zones of attack the customers need to consider.
Zone to looks at threats inside the perimeter.
When a tackle leverages the employees credentials systems inside the company to proliferate attacks and then zone, three where attack is simply rip off domains and brands in the wild attacking in organizations customers partners all the public using email impersonation.
And fake web properties to commit fraud.
I am on cost email security Threed autos services delivered an integrated solution across all three zones are TDP offering defense in zone one.
I E P and awareness training delivery design to.
And then it's in zone three that we recently made significant enhancements to our platform with the acquisitions of both be Mark analyzer, and Sega SEC Dimmock analyze it is a service that offers domain based message authentication reporting and conformance the acronym Denmark.
We offer set up a management and analysis and when combined with Mimecast Gateway services Dimmock analyze it provides customers and easier to add more cost effective solution for stopping domain spoofing attacks.
Second sector as a service that protect organizations digital footprint by extending detection and defenses beyond the perimeter to protect brands customers and supply chains against attacks spoofing accompanies digital assets.
Here, we are proactively finding and removing malicious domains and properties impersonating replicating youre legitimate digital assets before they do damage.
As part of mine cost now we will call the second sick offering mimecast, Brad exploit protection will be E. P.
The availability of these new services on the Mimecast platform is already proving popular.
As we witnessed existing customers adopting these advanced technologies and in new customers being attracted to us for comprehensive email security Threed auto framework.
Our deep and open Apiay strategy, which we've discussed on prior calls continues to see rapid adoption across our customer base and has been a key differentiator in new sales engagements.
Over the course of 29 team, we've more than doubled the number of customers accessing services straw npis to over 600 organizations.
Our fast expanding ecosystem of integrations with leading technology vendors grew in the third quarter. Two include IBM resilient complementing mimecast integration with IB MQ radar. Additionally, dymista recently upgraded remediation capabilities, enabling removal of email from.
Uses mailboxes directly from within Dymista.
This further enhances the value customers can realize by adding mimecast to the cyber resilience strategy.
Now I'll success with Microsoft Office, 365 continues to be strong more than half of our new customers in the third quarter came to us to help them to be more confident and secure with Microsoft office 365.
Today over 19000 organizations use mimecast to enhance their cyber resilience with office 365, meaning that for the first time over half of our total customer base is now on Officethree hundred 65.
Other over 200 million business uses active on Officethree hundred 65 today.
And we can easily imagine a world of near total office 365 deployment and dependency now this of course represents a huge concentration of risk on this critical business infrastructure.
There's tremendous scale can advantage the attack as security homogeneity across a wide range of organizations means a single successful scam can be used to exploit multiple targets.
I'm cost can help customers mitigate the risks they face in this new digital reality characterized by new dependencies need to dependencies that pose different risks and require new plans and mitigations.
Our email security Threed auto strategy emphasizes a more pervasive view of email and security generally expanding beyond the perimeter as well as inside the organization systems and linking to other vendors products that are used by our customers through a p. eyes as part of.
Broader and more connected security ecosystem.
When combined with our suite of cyber security and resilience extensions such as archiving continuity and web security, we see a continued and significant opportunity to grow our subscribers in an office 306, five ubiquitous world.
Now I'd like to share with you some of the reasons customers are choosing mimecast and the types of solutions with delivering to the market. So firstly, a U.S. based healthcare technology company with the staff about 600 move to office 365, and recognize the need for enhanced cyber resilience. In addition to what Microsoft offered to protect user.
Customers and they brand.
An RFP was commenced with mimecast in another leading vendor and after running life traffic for 30 days in evaluating the breadth of capabilities are both fenders mine cost was selected for our superior efficacy and ability to protect this organization at they perimeter was on one.
But in addition to zone one hour zone, two solutions were deployed to scan insider threats and to empower employee defenses.
In zone, three they purchased both our Dimmock and brand exploit protect offerings.
They understood the value of our integrated platform during their evaluation and they ultimately included continuity and archiving and web security in their subscription to mine cost unique ability to cover multiple customer needs.
Across what used to be sort of as separate product categories differentiated our service and delighted this customer secondly, a U.S. engineering firm with 25000 employees was using several legacy technologies in an attempt to block dangerous emails. It was not proving to be as successful as they didnt.
We ended and so they look for a solution with better efficacy.
They did a side by side proof of concept between Mimecast and another leading vendor and Mimecast was selected for efficacy and our ability to integrate through our open a p. eyes with other vendors in the network, including Splunk and Palo Alto networks to Mr.
Additional consideration was given to Mimecast integrated suite of services.
Provided a roadmap for future work load consolidation.
And then a U.S. health care organization with 30000 employees.
Experienced lower efficacy and rising costs from the existing email security provider and they sort of better solution and after completing a comprehensive proof of concept involving a side by side comparison versus the incumbent mine cost was selected.
The customer also valued our recently acquired Dimmock analyze the service to bolster the zone three defenses then a children's health care organization with 6000 employees was using legacy technology from multiple vendors for email security and archiving. They simultaneously had projects looking for an email security.
Solution with better efficacy and a more streamlined archive and he discovery offering.
Therapy, you see involving other leading vendors mine cost was selected for our integrated platform delivering both of their needs in a cost effective and easy to deploy platform.
Some of the added platform benefits. This customer chose to take advantage of include internal email protect and Mimecast sync and recover.
A global sustainable Transportation company with 50000 employees, an important ikea infrastructure looked to prove efficacy and integrate communication and data security with other vendors in the network.
While the incumbent vendor offered threat sharing across vendors there apiay platform was not as robust as mimecast not able to align with this customer's vision of integration.
After alive bake off versus other leading vendors mimecast was selected for improved efficacy administrative flexibility and our customer support services.
A higher education institution in Australia with over 80000 faculty and students was using mimecast to protect the staff of approximately 10000, while relying on Microsoft Office 365, ATP Standalone for student email accounts.
Over the course of 29 team this organization experience repeated compromises of student accounts.
In one incident over a thousand student accounts were compromised and while this institution was able to contain the further spread of this attack.
The sheer number of hours to remediate was unmanageable and costly and they so to implement a more effective solution.
My costs as to bundle that combines TTP and I E P.
God, both the perimeter zone, one and handful threats inside the network. So Q was selected for or 80000 faculty and staff, reducing both cost and complexity for I T.
Proving end user experience and safeguarding the organization within Hans Cyber resilience, a beverage company with over 150000 employees operating in an office 365 deployment that covered nine geographic zones required a vendor.
It could support complex Multizone policy configuration on a global scale.
Additionally, this organization so better protection from impersonation attacks that had alluded their incumbent vendor and look to add zone to defenses to guard against careless and malicious insiders.
After an evaluation alongside the incumbent vendor Mimecast was found to have stronger efficacy and the ability to fulfil their complex global compliance requirements.
So in summary.
We continue to develop our technologies partnerships and people to enhance Mimecast services and provide our customers with the best available solutions in doing so we remain mindful of our balanced operating model driving topline growth while simultaneously delivering profits.
Constant innovation ensures that we are defending against today's threats and staying abreast of new threats and risks as adversaries alter their tactics.
This perpetual innovation and I'll focus on customer service underpins our growth as we look to 2021 and beyond.
Now I'd like to turn the call over to Rafe Brown, our CFO to cover the financial detail further Rafe.
Thank you Peter.
As Peter mentioned, we had a very productive third quarter I'm pleased to report that for the third quarter fiscal 2020, we exceeded the high end of our guidance for both revenue and adjusted EBITDA continuing to deliver a balanced scorecard of both growth and expanding leverage in the business.
We closed the acquisition of de Mark analyzer in the third quarter and as you are aware shortly into the fourth quarter announced acquisition of Sega SEC. These two acquisitions further expand our product offerings in zone three of our E Mail security Threed auto strategy, which is particularly appealing to larger organizations.
In the third quarter, we generated revenue of $110.2 million, which represents growth of 26% over the prior year in absolute dollar terms adjusting for the $700000 of currency headwind, we faced our constant currency growth rate over the prior year stood at 27% for the quarter note that since providing guidance.
Last quarter foreign currency fluctuations positively impacted our third quarter results by $300000 adjusted EBITDA for the third quarter totaled $20.6 million, representing an adjusted EBITDA margin of 18.7% compared to 16 million or 18.2% in the same core.
Under the prior year on a net customer basis, we added 800 customers in the quarter Mimecast now services 36900 customers worldwide, but please note. This figure excludes acquired Denmark analyzer customers at this time as we work to integrate the de Mark business, our average order values continue to.
Show improvement over the prior year currently average order value for all customers stands at $12100 up approximately 13% over the prior year in constant currency terms.
Average services per customers across our customer base rose to 3.3 services per customer in the quarter up from 3.1 services last year at this time new products such as the two acquisitions mentioned earlier continue to afford us the opportunity to expand our footprint within existing customer deployments and increased Mimecast appeal.
With large organizations.
The proportion of customers using mimecast in conjunction with office 365 rose past, 50% in the quarter for the first time.
We see Officethree hundred 65 expansion is helpful to our business as office 365 customers continue to demonstrate an appetite for a greater number of our service offerings as of the third quarter Officethree hundred 65 customers purchase on average 3.5 services per customer compared to three services for those customers not using.
Now for 365, our trailing 12 month revenue retention rate stood at 100, a 9% compared to 110% in Q3 of the prior year. Our gross revenue retention numbers continue to be underpinned by solid upsell result, as our existing customers continued to renew their subscriptions and purchase additional service.
From a geographic perspective, North American growth in the quarter remains strong with North American revenue up 28% over last year.
Our business outside North America continue to grow in the third quarter performance outside North America remain below our expectations.
Turning to gross margin for the third quarter, we recognize the 75.6% non-GAAP gross margin up 100 basis points from Q3 of the prior year.
Our non-GAAP operating profit for the third quarter was a $12.7 million or 11.5% of revenue and improvement a 50 basis points from the prior year driven by efficiencies of scale within our grid in bottom line terms, our third quarter GAAP net income was $200000 or breakeven.
On a per diluted share basis based on 64 million fully diluted weighted average shares outstanding.
Our GAAP tax charges totaled approximately $1 million in the quarter fourth quarter tax expense is expected to be approximately $1 million inline with our prior communication regarding full year tax expense.
Our non-GAAP net income for the quarter was $8.8 million or 14 cents per diluted share based again on 64 million fully diluted weighted average shares outstanding our non-GAAP tax rate was 20.4% for the quarter and we continue to project a full year non-GAAP tax rate of approximately 31.
Percent.
Turning to cash flows our third quarter operating cash flows totaled $19.3 million or 17.5% of revenue as noted on our prior earnings calls we made a payment in the third quarter pursuant to a patent litigation settlement for a total of $5.9 million the impact of which was split between operating cash flow.
Okay, and Capex free cash flow totaled $1.9 million for the quarter with our new offices in both the UK in South African now complete we expect full year capital expenditures to be approximately $53 million I am pleased to say that even with the approximately $20 million a one off cash expenditures expect.
Good to be incurred we continue to anticipate the free cash flow for the full year, we'll be in line with our F. why 19 performance or approximately $37 million for the year after paying approximately $21 million for Denmark analyzer as of December 30, Onest Mimecast had $190 million of cash on the balance sheet.
You should note that the Sega SEC acquisition that we announced last month and disaster Q4 item will reduce our cash balance by approximately $27 million.
Let me now turn to guidance for the remainder of fiscal 20.
For the fourth quarter of 2020 revenues are expected to be in the range of 112.9 million to $114 million or 23% to 24% growth in constant currency terms. Our guidance is based on exchange rates as of January 31st 2020 and includes an estimated.
Give impact of $800000, resulting from the strengthening of the U.S. dollar compared to the prior year.
Adjusted EBITDA for the fourth quarter is expected to be in the range of 20.2 million to $21.2 million.
Full year 2020 revenue is expected to be in the range of 425.6 million to $426.7 million or 27% to 20% growth in constant currency terms.
Foreign exchange rate fluctuations are negatively impacting this guidance by an estimated $8.4 million compared to the rates in effect in the prior year.
Prior guidance for fiscal 2020 provided in November was $423.1 million at the midpoint, our overachievement in Q3, coupled with the strength, we're seeing in our business is leading us to raise the midpoint of our full year guidance by $2.3 million in constant currency terms. In addition.
This raise of $2.3 million is being positively impacted by $800000 a foreign exchange tailwind that has risen since the rates used in our November call, resulting in the midpoint of our full year guidance moving up by $3.1 million in absolute dollar terms from 423.1.
1 million to $426.2 million.
Please note that total acquired revenue from our two acquisitions, the Mark Analyzer announced in November and Sega SEC announced in January is expected to be approximately $200000 for the year.
Full year 2020, adjusted EBITDA expectations are being raised to a range of $74.3 million to $75.3 million, we're increasing our adjusted EBITDA guidance by $1.1 million at the midpoint, which at the midpoint would deliver a 160 basis point improvement over the prior year.
It is worth pointing out that we are absorbing the operating cost impact of the two acquisitions, while increasing our full year adjusted EBITDA guidance.
While we're still finalizing our planning I would also like to take this time to set initial expectations for the year ending March 30, Onest 2021.
As we close fiscal 20 and conclude our planning process, we will refine these expectations, but believe this is a good starting point and please note again that this guidance is based on foreign exchange rates as of January 30, Onest 2020.
Full year fiscal 21 revenue is expected to be in the range of 505 million to $515 million or 18% to 20% growth in constant currency terms when measured against the midpoint of our current fiscal 20 guidance.
Full year fiscal 21, adjusted EBITDA is expected to be approximately $100 million, which at the midpoint of our revenue guide would be approximately 200 basis point margin improvement over fiscal 20.
Free cash flow for the full year fiscal 21 is expected to be approximately $84 million. After capex charges that we are now modeling at 7% of revenue.
On an as reported basis that is a 780 basis point free cash flow margin improvement over our expected fiscal 20 free cash flow.
Setting aside the onetime fiscal 2000 Capex items mentioned earlier. This is still an approximate 300 basis point margin improvement year over year based on the midpoint of our current guide.
As a final comment I would like to highlight that the guidance for fiscal 21 reflects our commitment to delivering both disciplined growth, while expanding free cash flow margins.
And with that I'd like to thank you for your time and open the line to your questions. Operator can you. Please poll for our first question.
Yes, Sir ladies and gentlemen, as it as a reminder to ask a question you want me to press Star then one on your telephone keypad.
Sure withdraw your question. Please press the pound cake. Please standby, where we can probably came in a roster.
Our first question or comment comes from a lot of Saket Kalia from Barclays Capital. Your line is open.
Hey, Peter Hey, rave, how you doing thanks for taking my questions here.
Yes.
Thanks right second.
Hey, maybe hey, Peter maybe just to start with you.
You know just zooming out a little bit on the competitive environment a little bit.
You just talk a little bit about what you're hearing from Symantec message labs customers I guess.
Perfectly how do you think those customers or are you in the future of their email security now that that message labs as part of Broadcom and how do you think mimecast as maybe going to go after that opportunity understanding that that if it's probably more of a long term item.
Yeah, I think that's right and maybe just to start of them. We've we've been.
Servicing all migrating semantic messes labs customers very successfully for many years now even prior to the Symantec acquisition of message labs, and obviously with broad.
Coming in.
It introduces a level of of uncertainty and ambiguity for that customer base. So.
So we're really focused on helping those customers understand that.
If theyre feeling jump year on certain about orbcomms commitment to either them as a segment in the case of the midmarket customers or email security as a category, which will come as not.
There's not shown that it's something that they particularly interested in its one of the it's one of the product lives that hasn't been spoken about as a future growth area in their plans.
That there really is a good home for them with that with mine cost and that they would be pulling a pretty well trodden path.
Oh several thousand other companies that have very successfully migrated to might cost I think the opportunities not just with the end user community, but also with partners here, perhaps under the previous Symantec.
Ownership structure, you had a level of loyalty to semantic that was that was largely reciprocated I think broadcoms.
Okay does not appear to be building long term relationships certainly with the with your typical midmarket reseller type organization and so what may have previously been loyalty between that channel and semantic I think is is certainly open and those partners are showing a greater interest and and willingness to introduce those.
Those accounts over to mine cost that you know previously they made all that.
So we're doing things from a from an educational point of view and from a promotional point of view to help.
Make it easier commercially for both customers and partners to migrate over to my cost.
Got it that's really helpful and makes a lot of sense Peter.
Maybe maybe for you Rafe.
Can you just talk a little bit about the net revenue retention metric a little bit I guess the question of how does that sort of maybe ebb and flow quarter to quarter I think it came out at 109% this quarter and maybe how do you think about that metric sort of qualitatively going forward with what some of the changes that are happening in the base. It sounds like there more enterprise.
Guys customers sounds like there are more product attach per customer how do you think about that net revenue retention.
You know sort of trending in the future as a result, some of those changes.
Yes. Thank you.
Yeah, well there aren't where there is some variance in the number over time, if you really stepping back from our net revenue retention numbers are really quite good.
One of the things, we just consistently been able to demonstrate his ability to sell additional products into our base as well as keep customers for quite a long time when you dig into the you know the math of how we calculate it it is a trailing four quarter metric. So it it's looking back over time and so you know if you went back a year in time cheating.
He was really coming on strong and driving a lot of uptake and that was.
A very attractive thing for us of course, but now that it penetrated over 70% of our base you know its natural to think well that's going to come off and now we've got some new products coming up all along the way to take its place and they I think that's what we're really excited about is making sure. We have those those new offerings and Peter went through it kind of at some length real.
Talking about email security Threed auto strategy and you know just the two acquisition that we announced in zone three which.
Brand new to us great opportunity, but then you know on top of that we're thinking about archive into our base further our web solution into our base further awareness training you know just across the board were really working to make sure that you know as one product it seems to penetrate the base, we've got other things coming up behind it.
Got it makes a lot of sense I'll get back in queue guys. Thank you.
Exactly.
Our next question or comment comes from a line of Matt hurt Berg from RBC capital markets. Your line is open.
It's Dan Bergstrom for Matt Hedberg, Thanks for taking your questions.
So you pointed to some softening and M&A last quarter or sounds like it underperformed this quarter as well any change or is that just a continuation and then you know probably too early in a few weeks sold at this point, but any early signs of the debit stability or more certainly following the Brexit vote here in journey.
Right.
So yes.
That has been.
Something that we've called out a couple of quarters in a row right.
On our call.
In the first thing not to get lost in the discussion our EMEA business is still growing it's just not able to keep up with the north American growth that we've seen over the last couple of quarters.
One of things really when you step back and look at Mimecast. It's always important remember that we are an international company impact started outside the U.S. and I think right now our North American revenues, just 51% of the total so we have a very broad.
French across the World and you know certainly when you see issues like Brexit come up which has had some you know very obvious impacts in the local GDP numbers or some of the challenges in South Africa on their economy. We are touched by those because we do you know our customer base reflects the local economy in that we have.
A lot of mid customers, but also enterprise and some small customers as well.
You know, we're really looking at it Ed.
What can we do to make sure that we're in the best position for the market at hand, you know and that's something we take into account when we've done our planning where we're deploying resources. We moved some people around to make sure. We have the right people in the right role you know, we're we're doing our best it to make sure that we're firing on all cylinders, even if there is a bit of headwind.
Out there from the economy.
Great. Thanks, and then with the three zone approach to email security just curious you know after a quarter or so with that how's that resonating with customers, particularly I guess, the inside and beyond the perimeter sounds like it's been brand and now you talked a little bit about the asked to bundle enough and the customer examples on a call here should we expect any additional.
Changes to go to market here or or bundling, new skews any thoughts there.
Yes, so the email security Threed, although I think intuitively is making a lot a sense to prospects that we talk to you to customers.
As well as our channel partners and it is it is certainly providing that context that we.
Look for helping them understand the offerings.
Contextualize the problems that they face and understand the offerings.
Putting into that fitting into that framework. So yeah, we've seen strong adoption of our both IP and awareness training.
The zone to place during this last quarter.
Obviously, the the de Mark.
The brand exploit protect a brand new offerings. So we have we have some good anecdotal evidence to suggest that that's a that's going to be popular with that with customers too.
Thank you.
Thank you. Our next question or comment comes from the line of show your from Oppenheimer. Your line is open.
Thank you all good afternoon guide.
[music].
Quick question.
Oneo, Germany operation.
No you read.
Invested in Walt the prior year.
Peter can you talk talk about.
The update.
And how that has been progressing over the course of that that's all I can a few quarters now.
Sure. Thanks shale.
I saw obviously, we implemented or.
Local data centers in the German market about 18 months ago.
And we well today.
At a local team with local in country language support.
To service, not just Germany, but that sort of broader central European.
Market opportunity.
Hi, Thanks to the sort of ratable nature of our business on the tremendous growth of our North American and that's the size and scale of our others.
Take awhile before that shows up meaningfully in any in any revenue distribution Pie chart, we continue to.
Sign on your customers and partners into that region.
And yeah, we think among other things that the semantic opportunity.
Extends over into Europe, as well and that our.
Our email security Threed auto framework.
We'll continue to help us drive growth into that market opportunity as well.
Got it got it and if I may Peter.
Think about the office.
As by opportunity.
And without a doubt.
Extremely well over the course on a path from here.
As we think about probably the next.
Two years its though.
And we you know we try to break it out in between a meal.
And in America, where do you see probably all made up at our teammates who operates me I'm not asking Bobby in our business that opportunity will be more Europe or will it be more North America.
Yeah, I think that's that's an interesting one because.
We classically our sourcing business about a three categories of prospect that you're the one is.
Pertaining to the corporate email arrangements. This slick contingent that has on premise and they're looking maybe the offload security and archiving and some of those things to a cloud provider, but they have no immediate plans to.
To this the on premise technology, and you've got a cohort that all either because youre planning their migration and they're talking to us. So that we can help underwrite the success of that migration and they can they can disband some of the on premise equipment that they had to avoid backhauling data onto their networks.
And then the third bucket is always that already on office 306, five either with a competitive solution or with nothing in place and they're not looking to add better security layer in a and they talk to us about that.
I think what are we seeing across those different markets.
Is that a in the U.S. and in the UK. We have we are quite advanced penetration of office 365 and so.
Most of the business that we're we're deriving is actually coming out of that said bucket. What's interesting is if you go to markets like Central Europe in Germany. In particular, you have many more in that sort of first and second bucket and so that represents an interesting opportunity for us as well and we're you know we're excited to be there.
Sort of early in that cycle.
Gration as well.
Got it thank you for that very helpful.
Thank you.
Thank you. Our next question or comment comes from the line Brent feel from Jefferies. Your line is open.
Hey, guys. This is Joe on for Brian Thanks for the question.
Appreciate the color on revenue from acquisitions, and assuming that 200000 has mostly in the fiscal fourth quarter. So if I annualize it at about a million dollars when should we expect email security 3.0 to more meaningfully contribute to revenue.
Well I think you know the.
Keep in mind email security Threed auto is a very big contribution to revenue in that you know the two acquisitions are just don't read so.
You know just make sure like our primary product is a zone, one product and at some very good products fourth or in zone too. So just to make sure. We're on the same pace.
The zone three is that really where your question is around the acquisition that which again is on three counter.
Yeah, and so you know that those products. There there obviously were small companies with great products, great technologists, and we're integrating them into our solution. The nice thing, though I think within that we're going to lose sight of is that we already have partnerships in place with both the mark and legacy.
So it's a great opportunity for us to really we had a running start if you will add are working together and I think that's going to be quite helpful. That said they are working off a small base you don't get into this much bigger organization. So it's going to take a bit of time for that to really ramp up you know in the kind of mid term.
What you would look to in terms of the strategy or some products like the awareness training product, what we're seeing very nice growth in it that began with an acquisition last fiscal year. We've now fully integrated into our platform. We're seeing good customer adoption. You know those are the products that will start to see things.
Coming along much.
More quickly and driving more of a revenue and.
Okay. Thanks, and then just in regards to your fiscal 21 guidance.
You guys have sustained how high growth from the high Twentys constant currency for a while now it implies a steep ish b cell I'm, assuming there's some prudent conservatism in there, but then also on the adjusted EBITDA, It's above the street and at the 200 basis point improvement, but it's a little bit below what you guys laid out in the long term model in your.
Our investor presentation. So just how should we think about growth first profitability going forward. Thanks.
Yeah, you know.
Where this will be a significant topic at our analyst day that that's coming up on.
And just a couple of weeks here, so we'll dive into that a lot more you know.
Our focus is to make sure we're balancing both growth and building profitability and I think one of the things you're seeing at least in our guidance and as we execute on it is is that less exercise of both levers where we were focused on growth, but we're consistently focused on on how can we deliver bottom.
Line value as well you know hitting $100 million adjusted EBITDA in terms of guidance you know with of course, we stopped execute on that but that's a big milestone for us and shows a nice improvement and likewise.
One of the things that you probably noticed in the call is an emphasis around free cash flow, which again, that's just as a metric for us something we feel is very important to demonstrate an unambiguous fashion the bottom line value we're delivering.
Makes sense thanks, guys.
Thank you. Our next question or comment comes from the line of Terry Tillman from Suntrust. Your line is open.
Hey, how are you guys actually Nick on for Terry Thanks Air questions.
The first one I was I guess, what what that I think I've seen so far from your sales gains as a result at the second second teamwork analyze acquisitions I guess anything in particular is resonating with Midmarket enterprise in terms of.
Our customers are receiving both these acquisitions. Thanks.
Yes.
Good question. So ER. So it's early days obviously these.
These are fairly new acquisitions and the this email security $3 framework is.
While we.
We've been talking through our megaphone about it it it's a process to get that story out into the market.
The early evidence is that it's extremely well received it makes a lot a sense to two customers.
And there's a lot of interest I think particularly up market around the two problems sets that.
Both dimmock a and b.
Brian exploit protect offerings cater for these are pretty tricky complex issues that a that customers have to have to deal with.
And they really like the fact that.
They can rely on on there.
Secure email gateway provider to be able to take care of these issues as well so they really responding well to us costing a kind of a broader frame around the email security issues holistically.
And having native offerings that we cannot that we can bring to the table and certainly with some of the wins that we've seen a it's been influential in in a in US winning the zone, one and designed to place specifically because we have zone three as well.
Got it okay. That's helpful.
And I guess, you guys mentioned prepared and I'm not prepared remarks, but.
It's a larger companies typically back at the most from years on three products I guess should we expect continued focus on zone three moving forward.
And if so is that more I guess, how should we think that that in terms of buy versus build thanks.
Yeah, that's that's a great question sorry.
So we'll continue to innovate obviously second second Dimmock analyzer, both fairly young companies with great technology, but with with Roadmaps to so there are organic opportunities to continue to extend their capabilities.
You know both within the context of their products, but also some of the intersections between what they offer and what what is in the rest of the Mimecast platform, so they'll be they'll be solid.
Organic innovation that continues there.
It is an interesting area beyond the perimeter.
A lot of challenges and and threats the present themselves.
So you know, we're certainly going to keep all eyes open.
Or you know opportunities inorganic opportunities that could help us.
Innovate further there, but I think it's important to recognize all our style of organic and it's largely focused on technology and talent that we can bring into that into the company that can help capitalize and accelerate.
Our our ability to add additional monetizable used cases on the same platform and so a very disciplined and steady approach to.
Sure M&A, there will continue to to play out.
Yes, but certainly nothing imminent EMEA in the pipeline. We've got we've got enough work to do to to digest and onboard and enable across a across these news on three plays.
Got it thanks guys.
Thank you. Our next question or comment comes from a line of Keith Bachman from BMO. Your line is open.
Hey, good afternoon are good evening gentlemen.
Two things one if you could just clarify.
What is the organic growth guidance for 21 in other words, how much is M&A contributing.
And then secondarily could you just talk about your win rates and what I mean by then in two dimensions is.
Number one is there any change in your win rates.
In aggregate, but then more specifically are you and more specifically I should say are you also seeing.
A broader field and what I mean why that is.
As Microsoft getting more at bats here.
For their security story, and it sounds like you've probably seen Palo Alto and Splunk more than you had previously but just a clarification on organic and then b when rates both in terms of the numerical but also what's the field looked like thanks.
Yeah, So I'll, let ray jump in with the with the growth rate thing.
In a in a second but I.
I think our win rates continue to be strong.
Certainly good where we are being pulled into more of these larger opportunities, which is very exciting for us a and we're having good success in those you can you can probably tell from some of the examples that.
I called out in the prepared remarks.
We're delighted with that with with those logos.
We think it's very good validation of Oh are both our sales process, that's improved over time as well as our technology and and our brand.
As well your question about Microsoft getting more at bats.
I mean, I think by default Microsoft gets tobacco.
No matter, who is used play.
As the incumbent sort of office 365 provider so.
So I I think it's it's always been a game of you know why not them and then are you know who who else if we got to layer on additional technology, let's let's assume they'll be Microsoft in the frame. It at some point. So so I wouldn't say that's changed Palo Alto.
Splunk those are not say sort of competitive solution supposed to be oh, the other things that the customers using that we would integrate with so I think the example, we used as you know Palo Alto that Mr which is there a this for two or.
Our Splunk, that's just the the some product you know our integrations with those and so it's really about helping particularly larger organizations to build an integrated and coherent overall security system, where my cost as the email component in that system is a very.
Well integrated and highly contributing.
Service component, so that's where we see players like that fitting in okay. If you're going up market just to be clear you see improve proof more proofpoint more.
And these larger.
Yes.
Absolutely so I think what what.
Most larger organizations, particularly in North America, they would consider.
His Microsoft going to be a good enough standalone for them do they need to be talking to a proof points and then increasingly which is very exciting for us is mine cost is.
Is that sort of second contender in that in that race and I think that's that's exciting for us because that's a that's a fairly new fairly recent phenomenon.
And I think that Oh, you know between ourselves and pre poynton, Microsoft that's really where I think the lions share of consideration is going for how are these problems should be solved.
Yeah. Thanks, Ted just to close off on the on your question about the you know the impact you know the impact of de Mark and Sega SEC on it in our revenue guidance BRAF by 21 is really quite small we are in the the part where we're still doing the accounting for the acquisition and as you're aware with the deferred revenue with its a bit involved.
I think a great benchmark here is in the F. why 20 guidance.
I I noted that we'll have about less than $200000 from both acquisitions, and that's a quarter and a half roughly speaking of the market and a full quarter of Sega stack. So you know it's relatively small impact on the total and you know certainly we'll be working to finish up the accounting impacts and integration of those.
Customers in the coming periods, but it's not going to move the needle very much from the wire. We're just hoping we can not gone share with lot of new customers great. Thank you.
Thank you. Our next question or comment comes from the line of Sterling Auty from JP Morgan Your line is open.
Hi, guys. This is Matt on for Sterling. Thanks for taking my question.
You know just was wondering what areas.
International market are still lagging and what are some of the main reasons at this point that you guys can point to thanks.
Sorry, Matt what do you mean by areas of international markets that are a lagging.
So in terms of the product adoption as well as any specific geography.
Okay. Yeah, Great question, So I think we.
As Ray mentioned earlier, Yeah, we were born as an international company, a and the U.S. is a.
Isn't AXT has been an expansion market for us, but obviously our biggest a base.
Today.
But we are deployed in many international markets, we have favored English speaking just because as a company we are.
We're doing many hard things and thing many hard things in many different languages is is a.
Potentially unnecessary for us in terms of our current growth, but also would would defocus us from certain of the things that we've we really started to do in English speaking markets, having said that European expansion was our first non English speaking expansion and so we feel good that we have access to that.
Docket, but beyond that we have a very good access across South African the African market, Australia, New Zealand UK, a north American Canada. So we feel we have good market access.
Obviously, what's not on that list is or some of the some of the other parts of Asia Pacific, which we certainly not ruling out as a as market opportunities, but they're not in our enough in our very immediate plans.
Great. That's very helpful. And then just one quick follow up you guys talked about a growth from new customers and existing what portion of the growth you know it's coming from you know from existing customers and is that coming more from you know customers buying more products or covering more users. Thanks.
Yeah and.
Our upsell numbers of remain really you know quite steady in the mid teens and that's that's up sell off our base measured in dollars and that's been trending for quite some time when you take that apart. It is a blend you know.
We're obviously benefit if our customers grow and they need more seats, they buy more seats promise, but there's a strong mix in there of new products and that's really a big focus for us, making sure we're able to to.
Take new products and sell them with two our base as well as attract new customers, you know and that kind of bears out you see that both in the Lv, which was up quite nicely and 13% in constant currency terms and in that metric that we give out about you know average services per customers, which that also has had a nice rise on a year over year.
Basis so.
When you take that apart you do see that gross revenue retention number that I quoted a 109% that's a big contribution to our growth on a year over year basis.
Great. That's very helpful guys. Thanks for taking my question.
Welcome.
Thank you. Our next question or comment comes from the line of Steve King from what bit Wedbush Securities. Your line is open.
Oh, Hi, there hey, thanks for taking my questions gentlemen.
Hey, you're.
Your answer on the Marcus Hook up this is very helpful.
Maybe just digging into that for a second since.
You know you're seeing more and more of your base that offices pod that scenario where they.
I have offices by becomes more important can you kind of help help us understand.
How many of those competitions are their customer had the three without any email contract or or might not be five and now I gather from your answer that if they do have Microsoft protection.
Yes, theoretically et cetera mine is using an anchor now after that maybe you can just help understand the nature.
Play with it does Microsoft the partner.
Yeah, great. So.
So we don't have a reliable way at scale to tell what our customers or licensing arrangements are with Microsoft. So so I'm pretty sure within our base. We have you know with 19000 organizations using us with office 365, I'm sure that we have we have a pretty good.
Six of of all types of of Microsoft licensing. The one thing we do say to our customers is whatever level you license that whatever you reasons for being license at that level, yeah, absolutely use as much of the Microsoft Security technology as you can.
Turn it onto the Max.
But he very sure.
At the mine cost layers and the mimecast layers about layers of security to provide better efficacy.
To radically reduced the likelihood of the wrong thing lining up in People's Mailboxes.
But also the brought a suite of risk mitigation technologies and offerings that deal with.
Some of the new issues that we face as the world becomes a massively dependent on apples 365, or so things like our continuity offering, which which provides a plan b in the event of downtime, our syncon recover capability, which provides.
An external backup of the data.
Inside your Youre, a exchange online tenants and allows you to reconstitute data.
The awareness training offering.
And all of the other strategies that come with it. So so there are many flavors and solutions that golar.
No way way beyond the scope of what any three when he five may offer.
Although where they may be some conceptual overlap in terms of ER in terms of the classic zone, one blocking bad things from getting into mailboxes, a we certainly add considerable value and.
And and continued to be a very popular offering in just in that regard with Microsoft customers.
Great. Thanks, Peter that's my only question I'll stop there.
Thank you. Unfortunately, that's all the time, we have for your Q in a period at this time at this time I would like to close todays conference call. Thank you for participating you may now disconnect everyone have a wonderful day.
Oh.
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