Q1 2021 Mimecast Ltd Earnings Call
Good day, ladies and gentlemen, thank you for standing by welcome to the Mimecast first quarter 2021 earnings Conference call.
Time, all participants are not listen only mode.
<unk> speakers presentation don't be a question and answer session to ask a question. During the session you would need to press Star then one or your telephone keypad.
Reminder, this conference call is being recorded if you require any further assistance. Please press Star then zero at this time I would like to turn the conference over to Mr., Robert Sanders Director of Investor Relations. Sir Please begin.
Good evening welcome to Mimecast earnings call for the fiscal first quarter 2021 ended June Thirtyth 2020, I'm, Robert Sanders director of Investor Relations.
With me on the call Tonight, or Peter Bauer, our co founder Chairman and CEO and Rafe Brown our CFO.
Tonight's Conference call is being broadcast live a replay of this call will be available after the live call has ended.
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 considered the important risk factors that could cause actual 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 define in 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 representation of the non-GAAP information is included in today's press release, which can be found in the Investor Relations section.
Our website the data this call is August Threerd 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 event.
Now I'd like to turn the call over to Peter Bauer Good evening and thank you all for joining us on tonight's call I'll begin with an overview of our first quarter results and discuss the cyber security landscape as we continue to see attack is applying that crop, causing impactful business disruptions.
Next I'll discuss our cyber resilience side, we recently hosted with partners and customers.
Then I will take you through some exciting new identity graph technology, we have added to our platform with the acquisition of message control.
Finally, he will make some examples of how much cost is protecting customers and the types of solutions. The market is demanding before I hand over to coal to raise to cover our financial results in more detail.
So we began fiscal year 2021 with solid financial performance exceeding the high end about guidance for both revenue and adjusted EBITDA.
First quarter revenue towards $115.2 million exceeding the high end of our guidance by $1.4 million.
All conformance during difficult economic conditions is a testament to mine cost durable subscription based business model.
Highly valued services that we deliver.
600, net new customers joined fine cost during this first quarter.
As we experienced some covert related headwinds in the lower end to the market, mainly sub 100 seat customers.
Among our new customers. This quarter was a U.S. retailer, who purchased stock email security suite auto platform for 165000 employees, representing a seven figure engagement and among the largest deals to date for mine cost.
This is further evidence that I'll move upmarket is finding traction with some of the most of bonding security organizations in the world.
I'm extremely proud of the way our organization has overcome the challenges of working remotely to continuously support.
Our customers through these difficult days of global Cobot 19 pandemic.
During the quarter, we witnessed attack is carrying off several high profile attacks disrupting communications research and calmness illustrating the need for continued vigilance against adversaries looking to cause hall.
Oh latest threat intelligence reported notes that tax incorporating a boston array of threats and a combination of generic Trojan delivery with phishing campaigns and other more complex threats preceding that appointment.
So specific sectors repeatedly targeted during the pandemic.
For example, manufacturing retail and insurance, possibly due to the essential nature of these businesses as a continuous operations during the crisis.
And notable shift indeed, an attacker focus from flat heritage. Additionally, we witnessed the media and publishing sector suffering high volumes of impersonation attacks.
Essentially as a vehicle for cyber criminals to spray. This information finally, our research has noted Brad exploitation campaigns moving beyond global brands just talk at smaller organizations often have less sophisticated defenses in place.
As we observed the threat landscape, we remind that this is important work we do that mine cost as we supported our customers with defenses against these ever changing threats.
We're pleased to have recently been awarded a perfect school by excellent labs and they most recent efficacy test of email security software locking 100% of threats presented.
No in June we hosted our second annual cyber resilience soft, bringing together customers partisan prospects to share best practices and collaborate including keynote presentations from industry icon, Steve was yet and crop strike CEO George Chris.
Now moving on the success of off first cyber resilience on it.
We welcome to over 3500 attendees should this year's event, including a 2300 customers 300 partners and the solving prospects all interested in learning more about mine cost.
We receive praise from both positive and the media fraud, engaging content and good humor, while tackling complex challenges that organizations face today.
Turning to the discussion was my cost email security Threed autos strategy I'll solution framework that covers the primary attack surfaces that organizations are exposed to today.
Including perimeter defenses impersonation.
Inside a threat detection and Brad excellent protection.
This increases the awareness of a broad range of solutions that mine cost delivers our unified platform of services.
Thank you everybody who helped make this event such a success.
No I'd like to share with use details of our most recent acquisition message control and identity and intelligence led that we're incorporating into the mine cost platform to bolster our zoey one perimeter defenses.
Further enhance a threat detection this technology tuck in further this mine cost email security Threed auto solution framework, which enables organizations to continue to benefit from email as the most trusted and open electronic communications.
Message controls innovation around the identity draw.
He is another strategic component in building and underwriting that trust.
In addition to the leading edge technology that our customers will quickie benefit from we incorporate a fabulous team of engineers to R&D ranks to drive further innovation on our platform.
In the last 12 months, we've added three diverse teams of engineers to the company through technology acquisition as we invest to show mine cost remains a leader in efficacy against determine and persistence attackers.
Operating all business during the current 90 locked down we've come to understand more closely how important are digital communications, all and how important it is to be able to trust those communications networks.
We've observed customers moving away from legacy email security solutions that have failed to innovate and they'll become less effective.
Several former semantic customers have found mine cost.
To be more effective.
Including a UK based financial institution with 1500 employees that selective mining costs full email security suite to suite of defenses. Additionally, this customer adopted mine cost archiving solutions with our supervision extension to comply with financial regulation requirements.
Looking to leverage the breadth of mine cost services, while consolidating point solutions and simplifying IP.
Discussed also purchased our awareness training.
Ill secure messaging and on launched five sending services then a north American media company with 10000 employees.
Following this symantec set up less than effective and adopted my costs on one end zone two services to strengthen perimeter defenses.
And to take risks originating inside their organization.
Serious threat vectors that another north American based Microblogging service, who is not a customer recently found can have devastating consequences to their operations.
And Australian retailer with about 60000 employees moved away from Symantec in favor of a more integrated solution had adopted off through email security Threed auto platform.
Includes up to most recent offerings of Denmark, analyzer, and I'll, Brad exploits protection service.
This custom added awareness training to ensure they employees are an integral part of it over cyber resilience strategy and a final example of an organization finding that legacy semantic equipment to be ineffective and responding dynamically to the threat landscape is a north American healthcare provider with 7000.
500 employees they purchase of zone, one and two defenses are continuity service to ensure availability of communications and our archiving service with the privacy pack to comply with industry specific archiving requirements.
In all of these examples we find the simplicity of mine costs unified platform and our ability to address a broad range of customer needs, including industry specific archiving requirement underscores the desire of our customers to reduce point solutions and adopt cloud native technologies that integrate well.
With other modern cloud vendors, we were delighted to be named a leader in the Infotech data archiving data quadrant published in July ranking mine cost first across a number of capabilities, including business value created.
Products features.
Ease of implementation and vendor support among others.
In summary, we're on a solid footing financially as we exceeded our first quarter guidance and our raising our outlook for the full year 2021.
And with some customers alike continue to recognize our best in class efficacy.
Enabling our customers to continue to rely on email for the most important communication.
We continue to strengthen our relationships with our partners and customers and attract new organizations platform.
Finally, we are excited by the rapid pace of innovation as we invest behind our current and future offerings.
The adoption of our newest offerings is an indicator of our strategy for meeting additional customer needs and it's working in its targeting the right areas.
With that I'll turn the call over to race for more in depth review of our financials.
Right.
Thank you Peter as Peter mentioned, we had a very productive first quarter. Despite the cobot 19 headwinds we all faced I'm pleased to report that for the first quarter fiscal 2021, we exceeded the high end of our guidance for both revenue and adjusted EBITDA continued to deliver a balanced scorecard of growth and expanded margins.
In the first quarter, we generated revenue of $115.2 million, which represents growth of 16% over the prior year in absolute dollar terms adjusting for the $45 million of currency headwinds, we faced our constant currency growth rate over the prior year stood at 21% for the quarter.
Note that since providing guidance and may foreign currency fluctuations positively impacted our first quarter result, but $300000.
Adjusted EBITDA for the first quarter totaled $25.7 million, representing an adjusted EBITDA margin of 22.3% compared to 13 into half million or 13.6% in the same quarter. The prior year. We're pleased that our focus on operational efficiencies and fiscal discipline continue to pay off in measurable way.
Ways, but since the reality is that the cope with crisis materially impacts ability to make a year over year Bottomline comparison, let me dive into this a bit further.
Like many companies, we're learning a great deal about our ability to work remotely travel less and conduct large scale online meetings.
A number these changes drove savings in the first quarter. For example, we had significant travel savings in the quarter across the board augmented by the cancellation of our annual sales club a bit and conducting our fiscal 21 company kick off in an all virtual environment.
As Pete mentioned earlier, our cyber resilience summit, which was also conducted in a virtual environment. This year was fabulously successful it reached far more customers and prospects than the in person event last year and generated content that can be easily re purpose for internal training and future marketing events and it was done at a fraction of the costs.
Cost of an in person event, we have continued to expand our teams, though our overall hiring has slowed as we closely examined the economic environment in each of our markets.
Taken together, we realized a net benefit of approximately $6 million as a result of the sudden changes to our operating environment as we look across the year in its entirety, we're planning to reinvest a portion of the savings we expect to see in the first half into your as we hopefully returned to a more normalized business environment in the second half.
For example, given the importance of pipeline generation, we're investing in additional virtual events and more broadly our digital marketing experience on an end to end basis.
We are assuming that we will be able to travel in the coming months and believe that despite the success of online encounters there will be significant demand to visit prospects and customers in fact, our central European team is already reporting that customer visits are beginning to return now that the virus infection rates have improved in their part of the world.
We're also using the short term savings to accelerate longer term systems projects that will focus on customer success and driving greater efficiency throughout the organization turning to average order values. We continue to see increases currently average order values for all customers stand at $12400 approximately 10%.
The prior year in constant currency terms.
This trend of improvement in average order value is attributable to to favorable shifts within the company.
First our continued expansion up market further to Pete's comments, our success in the enterprise market. This quarter demonstrates impressive work. The team has undertaken to serve some of the biggest companies in the world currently 40% of our revenue now comes from customers with more than 1000 seats up from 46%. This time last year.
Second we continue to see an uptick in the average number of services per customer across our customer base, which rose to 3.4 services per customer in the quarter up from 3.2 services last year at this time.
I also want to point out the customers with four more services now make up 42% of our customer base, which is a 300 basis point improvement since Q1 last year in the first quarter. We added 600, net new customers, bringing our total customer account to 38600 customers worldwide compared to 900 and.
The first quarter of last year.
As you would expect to cope with 19 crisis appears to be impacted smaller customers more significantly than their larger peers. The year on year change to net customer additions can be largely attributed to the lower in the mercy segmentation focus solely on these smaller customers. We saw approximately 200 fewer new customers in the quarter.
And noted an uptick of churn of approximately 100 customers when comparing the same segment of smaller customers to Q1 of last year. Despite the covert 19 related challenges I would note a bright spot on our efforts to acquire semantic customers for the second quarter in a row, we noted a meaningful uptick over the prior year in terms of new.
New bookings attributable to customers, leaving the message lapse platform net revenue retention, which we measure on a trailing four quarter basis totaled 106% looking into its components Upsells totaled 113%. The ended the first quarter, while down sell in churn stayed steady at approximately 7%.
There are few points to consider when evaluating these numbers. So let me give you a bit more color.
First these figures are clearly being impacted by the coven 19 crisis in particular as we license on a per seat basis, both upsell and downscale are sensitive to overall employment numbers within our customer base.
Unsurprisingly, we're seeing headwinds related to our ability to up sell customers and to customer downtown.
Second well our downside churn rate stayed steady from Q4 to Q1, the economic fall out of the covert 19 crisis is continuing to play out across the world. We are aware of a number of customers currently restructuring their business and reducing their workforces as we discussed in our May call. This is very likely to create additional.
Short term pressure on the down sell in churn rate as economic downturn progresses, finally, and turning to upsell. We've been discussing the fact that we are in the midst of a product transition our zone one product offerings targeted threat protection has now penetrated 75% of our customer base and file accounts has been a great success in terms of.
Driving up sell in addition, and even higher portion of new customers by TTB as part of their initial purchase as such TTP its ability to drive up sell is now limited. Fortunately, we have five new products introduced to our existing customers and we're seeing successful sales engagements across all of these products among which are zone.
On to internal email protection solution is finding significant traction.
As we examine current trends and now anticipating economic challenges caused by the covert 19 crisis will push into the second half of the fiscal year I want to give you a bit more granularity on our financial modeling of net revenue retention, we're maintaining our estimates for downside in churn, which we believe me rise to approximately 8%.
Economic crisis drags on assuming the economic headwinds continue distress, both the seat and product driven aspects of Upsale. We've modeled in scenarios that further challenge our up sell rate pushing that to between 11 and 12% for the year.
We do believe there are a number of factors at play that will drive better performance and ultimately improvement in these rates first a better economic environment without significant impact on net revenue retention beyond the macro we're confident that are zone to offerings awareness training and internal email protection are important solutions that.
Central to reach a significant portion of our installed base and thus drive up sell in addition, our newest offerings in zone, three and web are gaining momentum as our sales team becomes a custom to presenting these solutions.
From a geographic perspective, all of our major markets North America, UK and South Africa are still struggling with the Corona virus crisis. However, I would note that the economic challenges in South Africa from which we derive 10% of our revenues are particularly acute and being felt across all segments of the business.
Including enterprise.
We are pleased with the continued progress in central Europe, which is our fastest growing region in terms of revenue turning to gross margins for the first quarter of 2020, we recognized a 77% non-GAAP gross margin up 130 basis points from Q1 of the prior year driven by efficiencies, we are finding within our customer support organization.
And grid operations.
This continues our progress towards our long term goal of achieving 80% non-GAAP gross margins.
Our non-GAAP operating profit for the first quarter was $17.7 million or 15.3% of revenue an improvement of 870 basis points from the prior year.
Bottom line turns our first quarter GAAP net income was $3.1 million Orient profit of five cents per diluted share based on 64.7 million fully diluted weighted average shares outstanding our GAAP tax charges totaled approximately $600000 second quarter tax expense is expected to be approximately one point.
$1 million and our full year GAAP tax expense is estimated to be approximately $4 million. Our non-GAAP net income for the quarter was $14.2 million or 22 cents per diluted share based on 64.7 million fully diluted weighted average shares outstanding.
Our non-GAAP tax rate was 24.5% for the quarter.
Turning to cash flows.
Our first quarter operating cash flows totaled $29.3 million or 25.4% of revenue free cash totaled $18.5 million for the quarter.
Please note the Q1 free cash flow benefited from covert 19 related incentives enacted by the U.S. and UK government. The UK offered to be a tentative that differs certain be 80 payments until March of 2021. This served to increase free cash flow for the quarter by approximately $5 million. However, please.
Take note that these funds will be due to be remitted in our fourth quarter. So there will be no net benefit to the year.
In the U.S. free cash flow benefited by approximately $800000 due to an ability to delay payroll tax remittances to the government.
We will continue to see this benefit through Q3. These tax payments are deferred to fiscal 22 in fiscal 2003.
As of June Thirtyth, Mimecast had $199 million of cash on the balance sheet.
Turning to our acquisition a message control. We're pleased to have the message control team as part of Mimecast the range of services and their talent will be another important differentiator over the competition as we go forward after acquisition accounting deferred revenue adjustment acquired message control customer revenue is expected to total.
Approximately $400000 for the remainder of fiscal 2001.
In terms of taking the message control product marketing the first of order of business will be to fully integrate the message control solution onto our platform, which we believe will drive significant market opportunity in future fiscal years as such additional F. why 21 revenue benefit will be limited.
Let me now turning to guidance for the second quarter of 2021 revenues are expected to be in the range of 120.8 million to $121.8 million or 17% to 18% growth in constant currency terms. Our guidance is based on exchange rates as of July 20 Threerd.
2020, and includes an estimated negative impact of $100000, resulting from the strengthening of the U.S. dollar compared to the prior year.
Adjusted EBITDA for the second quarter is expected to be in the range of 26.8 million to $27.8 million.
Free cash flow for Q2 is expected to be approximately $13 million.
Given the ongoing cobot 19 crisis it remains difficult to assess how quickly the global economy will recover.
The persistence and now the resurgence of the virus in our operating geographies is pushing us to remain cautious about how quickly the global economy will recover which we expect will directly impact our short term growth opportunity. However, as we've said before the recurring nature of our revenue base and our disciplined approach to expense management.
Is this a solid baseline on which we can model our business.
As such we are updating our guidance to reflect the following full year 2021 revenue is expected to be in the range of 488.1 million to $493.1 million or 16% to 17% growth in constant currency terms.
Foreign exchange rate fluctuations are negatively impacted this guidance by an estimated $6.7 million compared to the rates in effect in the prior year. The prior guidance for fiscal year 2021 provided in early May was $480 million at the midpoint, our overachievement in Q1 is leading us.
To raise the midpoint of our full year guidance by one and a half million dollars in constant currency terms.
We have also raised the midpoint of our guidance by $400000 to reflect the acquired revenue message control is bringing to the company.
In addition, this raise a 1.9 million is being positively impacted by $8.7 million of foreign exchange tailwind that hasn't risen since the rates used in our may call, resulting in the midpoint of our full year guidance moving up by $10.6 million in absolute dollar terms.
From $480 million to $490.6 million.
Full year 2021, adjusted EBITDA expectations are being raised to a range of $97.3 million to $99.3 million, even after absorbing the operating costs associated with message control with this raise we are increasing our adjusted EBITDA guidance by $3.3 million at the midpoint, which would.
Equate to a 175 basis point improvement over the prior year.
Full year 2021 free cash flow expectations are being raised to a range of 77 million to $79 million. This would reflect to free cash flow margin of 15.9% at the midpoint of our revenue guidance and a 720 basis point improvement over the prior year.
We are truly proud of our team's performance this past quarter given the increases in email based attacks are customers are depending on mimecast more than ever.
We are confident that by remaining focused on our customers and our team we will be able to achieve our financial goals even during these uncertain times.
With that operator, let us please now open the line two questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one or your telephone keypad. If your question has been asked what are your wish to remove yourself from the Q simply press the pound.
Okay.
Again, if you have a question or comment at this time. Please press Star then one or your telephone keypad.
Our first question or comment comes from the line of Matt Hedberg from RBC capital markets. Your line is open.
Hey, it's Dan Bergstrom for Matt Hedberg, Thanks for taking your questions.
You called out a number of semantic customer wins in their prepared remarks sounds like their purchasing additional products from you.
How should we think of that opportunity unfolding in fiscal year 21 seems like you've had good success there over the last several quarters and I guess sounds like the opportunity could be accelerating here that is that the case.
Yes, Dan Thanks for the question that Peter here.
I think the way to think about it yes, Symantec has a pretty large they were pretty substantial player in the cloud email security business.
Probably between 100 $200 million of of cloud email security business and then some on premise.
Business as well.
In the last year.
So since the both come acquisition.
Migration away from semantic.
Has certainly picked up a little bit, but we think it's yeah. These are large enterprise organizations in many cases.
With multiyear contracts. So there is some friction in terms of them.
Migrating off.
But we have certainly had success for many years in migrating semantic customers over onto our platform.
And I think they add the anecdotal examples that I called out in the prepared remarks as you say.
Illustrate that got some really nice wins and.
We think it's an opportunity that will continue to work for us for quite a few quarters spoke to come.
Thanks, and then I don't know if you.
I had any thoughts on business trends are activity in July here anyway to think about July relative to June perhaps or July relative to prior to lies in terms of.
Activity or pipeline built.
Yeah. It inside I'm, sorry, just making sure I understand the great year, just if we can you just repeat the question have you quite a good quarter was strong just just curious about any initial thoughts around you know flow through July.
So.
No I think.
We're not going to break down specific details on the month, it's very clear that the crisis is.
It is still going on in number parts of the world that that are quite important to us and so.
Yes, I think we're still dealing with that economic headwinds out there more broadly that said it is very clear that.
The world is figuring out how to work in a remote environments. So.
I think we're kind of do pleased with the demand out there is certainly very pleased with our team in the way theyre executing in this environment.
And so.
We've taken all that account as we gave our guidance for the for the year.
Thank you.
Thank you. Our next question or comment comes from the line of branch deal from Jefferies. Your line is open.
This is Joe on for Brent I appreciate the question.
I also appreciate the extra color on the customer count increases just to be clear the weakness was in the smaller customer segment was that below 1000 seats and otherwise the larger customers was in line with seasonal.
I think last quarter that you had noted 200 customers were buying standalone products or the next gen products that trend continue this quarter.
So on the smaller account it it would you know even even on the smaller end of the sub 1000 group by customer accounts, where we saw the most volatility.
It was the numbers that I highlighted as you can imagine in and then crisis like this just hit those customers quite a bit harder.
And directly impacts the customer count number I'll.
Because they're smaller not as much on the on the dollar side, if you will.
In terms of customer on ramps this quarter. It we certainly saw the trend continuing.
Not quite at the pace that we'd side in the prior quarter in terms of those single Onramp customers, but that trend does continue where you know we think of it has additional on ramps to using Mimecast, where you might come on for a particular.
Particular solution one of our emerging products, but that of course sets up the relationship where we hope to to expand down the road.
Awesome. That's helpful and then I'm glad to hear about the strength in Central Europe, I think last quarter. You had noted some geo weakness in UK in South Africa, how did those regions due this quarter and any further context.
Yes.
Very much those two regions are very much in the midst of the corner crisis I would as I noted in my prepared remarks, South Africa is probably particularly challenged and worthy of taking no doubt just because they were having some economic challenges coming into the covered crisis.
It is certainly.
Quite complex there in terms of both the double whammy between a tough economy and the virus really having significant strengthened and that without a doubt it is going to make doing business they're harder.
On the UK side, you know it it was much like North America, which wasn't the best corridor in the world in terms of environments to sell into would just with.
All the changes afoot, but but again people really figuring out how that how to do their business from home.
Great. Thanks, guys.
Thank you. Our next question or comment comes from a line of Terry Tillman from Truest Securities. Your line is over.
Hey, guys. This is actually Nick on for Terry. Thanks for taking my questions I'm personally I was actually kind of pivoting back toward the cyber resilience summit I heard you guys mentioned some capabilities such as safe score and then kieser view and threat intelligence.
How are these near capabilities resonated with customers so far and these capabilities potentially helped you move further up market in land some larger enterprise accounts. Thanks.
Yes, thanks for calling those out yes. So those are really exciting new capabilities that we're delivering.
Definitely resonating with customers it was a strong reception.
To those.
You know new features in the inland platform.
As we as we showcased what we're working on there.
Certainly as Weve talked to logic customers.
It's not just those features it's the broader strategy that they fit into and the way the way the particularly on the email security Threed auto strategy how concepts.
Like safes going threat intelligence and I'll Apiay integration strategy, how they work in concert across all three of the zones the parameters on inside the parameter and beyond the permanent solar as a collective we think it's very powerful and definitely creates a value multiply for customers as they adopt more of the sweet.
I'm very appealing a pocket in the enterprise space.
Got it that's helpful. And then just as a follow up on given the recent acquisition of message control and even the acquisitions you guys did last year and second second and Denmark analyzer, Yes, how should we think about product development product development moving forward in terms of buy versus build thank you.
Yes, so if you recall our history, we've spent a lot of time in fact.
The first decade, and a half of our company's history building inorganic cloud first multi tenant multi product micro services platform.
And really getting those those foundations and that design ideology right.
And.
What we've done in the past few years is really pulled off with some some very selective technology and talent tuck ins to build out our portfolio. So if you think about email security three though we've really been able to build out those zones over the last.
A couple of years with acquisitions that brought us into the awareness training market that gave us more advanced malware detection and efficacy.
Capabilities with the SEC out of Israel.
We bolt ons zone, three capabilities with the Dimmock analyzed and ER, sorry, so but it was the.
While we're fighting technology second Sequa's these on three.
Brian to exploit protect offering that we now have solar.
I think a very effective strategy for layering in capabilities that capitalize our ability to move into some of these adjacent sees a and provide a more broad based strategy that is really I think expanded from our original email security an email archiving.
Question.
Which landed very well in the mid market and below up into a more broad based value proposition, but not traverse is all away from SMB right up into the large enterprise space.
Got it that's helpful. Thanks, guys.
Thank you. Our next question or comment comes from a line of Sterling Auty from JP Morgan Your line is open.
Hi, guys, Matt on for Sterling. Thanks for taking my question.
So first question around in terms of the headwind that you talked about.
On the smaller and and even just in general have your customer base is that more a function of downsizing or outright cancellations.
You know is that from business closures have you seen customers moving to absolutely no email security or even to you know some Microsoft solutions. Thanks.
Yes, I think in the earlier days as a crisis I think it's playing out more that we signed a downsizing where customers would stay with mimecast, but it was more about a reduction in in the number of seats and you know obviously some of the industries were really directly.
I am very quickly impacted by the crisis think traveler retail and we called out in last quarter's call. We have about 14% of our overall customer base that we had done as really heavily impacted areas and so you know that's where we saw it down so in the earlier period of time.
And frankly are kind of running hypothesis is is that some of the businesses going or people closing their businesses and things of that nature will play out over a longer period of time, you know that for three months. It was certainly very sudden and there is lot of companies had to shrink their workforces, but we're still.
You know in the fight in a big way as I mentioned to particularly in South Africa. We're aware of a couple accounts there that are being restructured rather significantly and so you do worry that some of those won't make it through the crisis.
Great. That's very helpful Man out one follow up in terms of billings could you remind us are there any large contracts in terms of using first quarter second quarter of last year, you're just looking at billings over the Mac you know the last two quarters have been in the nine to you know a low double digit.
Range, how should we think about that thanks.
Yes, we obviously do caution people with the calculated billings that everybody.
Does go through that they can be quite inaccurate just because they do have FX. They don't reflect shifts in billing cycles, and and whatnot I would say that.
The measure that you should take into account is in this first quarter. We were engaged with a lot of these companies that were having a tough time and and we allowed some of them to shift from annual upfront contracts to quarterly for a shorter period of time bed.
But it certainly would impact the billings calculation for that first quarter.
So you know again billions I think is quite a.
Interesting measure when you're trying to recalculated them back into it and that's why we.
We tend to just point people towards our are issued revenue guidance as the best measure to look at.
Great. Thanks, guys appreciate it.
Thank you. Our next question or comment comes from the line of Brian Essex from Goldman Sachs. Your line is open.
Hi, good afternoon. Thank for taking my question. Yeah. I was wondering maybe just comment on you know kind of tracking every quarter just the traction from Officethree hundred 65, how much penetration was there. This quarter in are you seeing any kind of a pause there as enterprises, maybe or a little bit less reluctant to migrate from on premise into the cloud.
So we talked a couple of questions back weve crossed that threshold, where more than half of our base is on Officethree hundred 65.
And so it and that continues to gradually drift upwards.
We haven't been breaking out the same number because it's it's.
Breaking out the details of that number quarter to quarter, but but certainly the trend is their work.
Officethree hundred 65 is broader dominance in the market exists and we find a lot of Officethree hundred 65 customers coming to us each quarter. It's one of the lead sources, what if you know from where we we gather customers as people who tried to go as we say naked on Officethree hundred 65, and realize they needed data protection of Mimecast. So.
That trend very much still continues I think we're aware that you broadly in these tougher financial times. The the finance guys might push back harder on solutions and then they would in more lucrative times, but.
The the value that Mimecast brings to and Officethree hundred 65 implementation you know just cannot be ignored and given the de risks that are out there and the increasing risk because of the crisis, it's more important than ever to have mimecast in conjunction with your office 365 implementation.
Got it that's super helpful and maybe just a follow up on some of the large enterprise wins.
Any any way to put a little bit more color around how many of those are some ethic related how many of those are other vendors, where you have competitive displacements in any other substantial trends like vendor consolidation playing out in the market as maybe a little bit a tailwind for you.
Yeah, Great question Sir.
So I think a number of the Oh, the stories that I called out in the prepared remarks.
Those were semantic not all of them, but a number of them with semantic.
Displacements.
Which was a exciting.
I think.
The competitive landscape of the displacement landscape is fairly broad still so there's naked on office 365. This semantic this Cisco there's a number of other vendors.
Yeah.
Vendor consolidation opportunity I think sort of shows up in in two ways one is.
Customers looking at.
Abroad, cyber resilience strategy.
Looking to deploy a suite of solutions that can cover off a number of the risks around.
Concentrate to dependency on office 365, and it's not just an individual companies dependency on office 365, it's the.
Mobile dependency of almost all companies going forward that are dependent on office 306, five in the inherent risks of a homogenous security environment in Oh excuse me.
Compelling attack surface.
So many getting those risks comprehensively with an integrated.
But it's also.
Really looking at how to simplify tea and save costs going forward with an economic downturn and we learnt through the economic downturn about eight to nine nine as well that.
Organizations are going to have smaller budgets.
Teams and as Rice mentioned.
Credit risks in the sub security landscape right now.
And those need to be addressed and so our ability to.
Consolidate solutions.
Offer customers an opportunity to have less complexity in the environment because of our architecture, we're finding to be very very compelling in the marketplace.
Great very helpful. Thank you.
Thank you. Our next question or comment comes from the line of <unk> <unk> from Barclays. Your line is open.
Okay, Great Hey, guys. Thanks for taking my questions here and apologies if this a if these have already been addressed.
Maybe maybe first for you Peter.
Can we just talk a little bit about the increased usage on average.
I think there, but I think users there has gone from.
From 3.2 products per customer up to 3.4 I guess the question is what products are moving that needle the most and which one do you think are sort of getting ready to contribute more to that metric going forward that makes sense.
Yes second yeah. Thank you.
You're absolutely right sure year over year, 3.2 products moving up to 3.4, which youre considering the size of the based off 38600 customers.
I'm, making those movements.
Hi is exciting for us and it's great to see particularly as we built this expanded product portfolio since going public.
Four and a half years ago, almost five years ago now we've really expanded from what was a seven ish product six seven products up too, but 11 12 products now or in the portfolio. So as Ray mentioned that TDP.
Runaway success, and we both a fair amount of saturation in the customer base. They of course, a lot of new customers out there in the market that we can still sell that too.
Well, we really finding.
Great traction with knowledge is what we talk about as long as zone to play. So that's really the IBP product and the awareness training products. Those are really strong sellers and gaining good traction for us.
We've also found we're just looking at the numbers. The other day secure messaging has been a a really strong growth for us in the mix, we don't talk about very often but.
With data loss prevention.
ER and compliance requirements that organizations have or the ability to have I really slick well integrated encryption solution for email has grown increasingly important.
I think the mainstays of archiving you know there those are big numbers that continues to be a driver of demand for us.
And then going forward, we're excited about signed three.
We think that ER that is a that is a market that is going to start to pick up and then obviously those two acquisitions in that space. We think we have really good offerings there.
And then longer term you know the direction that the web security market is going in and growing in.
We see that as a very big opportunity, but we've got a very much burn off space in that in that market and continue to develop capabilities you probably saw we recently announced but browse isolation as part of that solution, but.
The real secret sauce, yet is that all of these capabilities.
Delivered as part of an integrated suite, that's really simple to manage.
And we also really easy to consume subscription plans for customers to get on board and and stop taking things will stay to do list or in a really slick way.
Got it gone if that's really helpful. Maybe maybe if I follow up for you Rafe.
Great to see the revenue guide up go up by about 10 million for the year at the midpoint.
And Paul again policies. If this was addressed in the prepared remarks, but how much of that is perhaps the.
The better you know what sounds like better bookings performance here in Q1 and for the rest of the year versus perhaps some FX tailwinds versus inorganic is or what is sort of parse out that that kind of delta and guide.
Yeah, you bet ticket and thank you.
Just as a reminder for everyone. We use the FX rates as of July 23rd So our guide so I'm just to set up so the total raised at the midpoint was $10.6 million and that's comprised of $1.9 million.
That it is from the Q1 beat as well as the additional $400000 that have acquired revenue that's coming in from the acquisition to message control and then 8.7 of FX tailwind. So the 1.9 million plus the 8.7 million of FX tailwind.
That makes a ton of sense. Thanks, Thanks, a bunch guys.
Oh, Thanks second.
Thank you. Our next question or comment comes from a line of Keith Bachman from BMO. Your line is open.
Hi, Thank you I wanted to go back to the net retention rate her second you'd indicated some a couple different hertz associated with perhaps lower retention and less up sell so it sounds like it could be.
Called a 104 number this quarter.
How should we think that what's implicit in your guidance as you look out for the subsequent quarters. Thereafter D. Do you anticipate that net retention will be in the.
Amid one O five ish kind of range or do you anticipate with some improvement in economy.
That might go up so what's what's embedded in your expectations as it relates to the Rev. Guide you just gave.
Yes, no. Thank you for that clarification, because it's it's a bit detailed so what does it seems to remember with with all of these numbers for the net revenue retention numbers that they're on a trailing four quarter basis and so it does take some time for the numbers too to reflect.
The full measure up the crisis says we're going to that so just to hit on the components you. When we're modeling. This we're looking now what we think it's going to play out over the course of the year. So it will take some time, perhaps for the numbers to move and we we've assumed that the crisis and the economic recovery are going to drag on.
Perhaps if even a little bit longer than we had hoped just three months ago as we're seeing resurgence in some places and so.
I wanted to break down give you a bit more details so on the downside in churn side.
We believe that that rate may rise to approximately 8% as the crisis drags on 8%.
As we move through the year and then on the upsell within that overall up say resell rate might come down to between 11 and 12% and this is not necessarily for this next quarter, we're thinking that will be reflect the economic crisis dragging on and playing out over the rest of the year.
Okay. Okay, yes. Thank you some clarification.
Yes, so it's probably going to tick down as we run through the year because because the forces you've mentioned as essentially how we should be thinking about it.
You know if the crisis continues to drag on yes, I'm afraid will have you know some.
Some additional headwinds there, but you know very much naturally as if we get the economy starts to bounce back I think that has probably the single biggest most dramatic effect, but also to remember you know we are.
Out to market with a lot of new product, a new offerings and so again to some of these just tendencies of business returning more to normal even if there is a tougher environment out there. It certainly gives us a lot of opportunity to to get back in there and drive sales of additional products, even if the seat count numbers are somewhat surprised.
Yes.
Yeah, I understand okay, well that leads into my second question, then because I want to return to competition and just make sure I focus more directly in that it's understandable that you're.
Your attrition rate is going up because you do have some exposure to the SMB community. So lower seat count South Africa Ah things along those lines. So it under I think it's totally understandable that your seat counts getting a little bit of pressure.
But put to ask it more directly are you seeing customers migrate away from.
Mimecast to a competitive offering in the courses. This crisis in other words are you losing share directly that's impacting the attrition or is the vast vast majority the seat count and things like that.
Certainly what we've seen thus far in the crisis. It's been it's been really seat count driven is the is the biggest driver for where we.
Felt the the crisis. The you know and I think that was particularly so in that first quarter as I called out earlier, we're worried about some of the company's making it through the the crisis in that in our Im really directly impacted industries. So those are our two biggest concerns by far.
Okay. So in other words, you're not seeing more customers just go native with Microsoft and that's crowding you guys out at all.
Did you do I.
Called out a little bit in the in the net customer numbers on the very very low ended the business, but the real callers in the big trend or or as I described.
Okay fair enough. Many thanks best of luck.
Steve.
Thank you. Our next question or comment comes from the line of Daniel Bardas from Bank of America. Your line is open.
Hey, guys. Thanks for taking the question maybe this one's a little bit more for you raised first your exposure to the impacted industry. I think was 14 at 20% last quarter wondering if you guys seen any notable improvement in any verticals. Since you gave that metric and if you think the 14% to 20% is still the right way to think about.
Revenue exposure right now.
Yeah, It and that's why they do you know the 14% just to make sure. We're on the same pace was our hospitality transportation retail in oil and gas was in there. It's relatively small amount and then we have a approximately an extra 7% to 7.5% in the medical space.
So and you know not surprisingly that especially within that 14% group was the group very directly hit during during the quarter and so you know it that's playing out as you would expect and no real changes there I would say on the on the hospital side or the medical.
Side, it's been a bit of a mixed bag, there's instances where people.
We're looking for better security responding to new attacks that were coming their way, but then likewise a lot of medical groups are under some severe financial pressure, whereas elective surgeries or whatnot dried up so that that one has been a bit more of a complicated read it's kinda differs on a case by case basis.
Gotcha Gotcha that makes sense and then just on the churn. It's good to see was flat at 7% sounds like it's going to 8% in your assumptions, but can you just talk a little bit about the improvements you guys had made to customer success are you guys starting to see that those investments bear fruit and could that be a potential all that to open headwinds.
In the second half the year, perhaps thanks, Yeah, No I think that's a great point, you're one of the things that we've talked about over the last few quarters is being brought into new leader to run the customer success group I'm, she's implemented and it's continuing to implement improvements in the group you know a lot of which we're really focused on making sure we're probably.
Probably Matt having our very best people working on the Big Enterprise accounts, making sure. They werent those enterprise accounts word siphoning off too many resources from other parts of the business and then really getting to know the accounts and getting early warning mechanisms. If you will built into the system. So we get can get out in front of potential churn.
Risk.
And I think that it's starting to pay off you know we've seen and notable improvement in enterprise a large account level down southern churn over the last couple of quarters. So that was certainly been encouraging. So you know I think to answer your question as as this plays out I do think that you know there are fruits of that labor.
The out there for us it's unfortunate that it's perhaps in playing out in a comp and in this environment. So it's not as readily apparent broadly.
Got it makes sense thanks, guys.
Thank you.
Thank you. Our next question or comment comes from the line of Jonathan Ruykhaver from Baird. Your line is open.
Yeah. Good afternoon, I just have one question and it's it's regarding the security awareness training service in the synergies you see with the email gateway products. How important is that in competitive situations or is it the content that is the prime differentiator what do you go to market.
Yeah, John wasn't great question. So so I think most of them all quite important certainly we're a big believer in the power of content and the power of of really well put together content and its ability to change and shift a culture inside it organization towards being.
Much more security savvy.
And away from being the weakest link in the security chain sorry content is is really a important then we put a lot of emphasis on that having said that.
We think they're all real advantages for us as a gateway provider in delivering the service SAR.
Couple of examples the opportunity for us to take actual live attacks that are being targeted at the customer do Fang those and have those used by the customer as fishing simulation tests, we think is really compelling sort of.
This.
Capability that we talk about now is a safe fish.
Which will be coming out in our product. Shortly we think is really compelling. The other thing is that we have really good telemetry on walk customers or what the customers end users actually clicking on.
Sample, we re write all of that you all roles that come through emails on an inbound basis.
We can monitor what the king behavior is on those Urals, regardless of whether that you are all is bad or not.
When a an injury is a clicks, we don't do that real time look up.
So we noted that the person has kicked something bad.
And we can stop them from going there, but we can record. The fact that they are behaved in a in a risky fashion one of the things that we've seen which we thought it was really interesting was all customers that have bought our awareness training product, which is about 2300 or across all base.
Then the propensity of they uses to click that links is 5.2 times lower.
On the propensity of the users in all brought a user base.
Sorry that shows us.
Some really good evidence of the power not just of of our awareness training product, but the value of being able to show you that telemetry through the integration of the Gateway service and the awareness training or platform.
That's that's interestingly that very helpful to Peter Thank you very much.
Great Jonathan.
Thank you I'm afraid we are trying for just a one more question or front of question will come from a lot of Josh what children from Baron.
Your line is open.
Hi, guys. Thanks for taking my question.
I just wanted a a follow up on socket question.
I had the momentum around the zone two products slowed at all and the current environment and if so how do we think about their contribution to Upselling cross sell relative today relative to what's baked into your full year guide and even the long term growth targets that you presented at the Investor day.
So.
We have our emerging products the more mature of the of the sad live in zone too and that's the internal email protection solution as well as awareness training solution.
The other emerging solutions are are just a little bit newer working off a smaller base I think what we benefit from what the zone. Two solutions is that they've they've been out there a bit longer they get the sales team is it is just much more custom met at present them to customers. They know the ins and outs. They know how to help make people success.
And so I think that gives us quite a bit of confidence in their future in the organization and we know in investor deck I'm you know you'll see in particular I <unk>. There's strong corridor in terms of just the number that would been deployed out their awareness training is continuing to grow. So I you know I think we have quite a bit.
Runway from those products and certainly you know as we look forward it whether it's just a short term at the mid term, they're gonna be an important part of that story, what I would add to that is that is that we have some seasonality.
With this having been all Q1, sorry, we have a oh a peak of momentum that comes through in our Q4 typically and this is just one of the rhythms of all business and then our Q1 has ER has.
Seasonally lower and it builds up through the through the yet so I think we co that probably compounds that a little bit as we as we look back at it but I would I would definitely factor that in your observations as well.
That was helpful. Then if I could just follow up go you guys highlighted that very large you at retail customer win in the quarter could you called out any specific reasons why that customer you know chose mimecast over the incumbent solution in the state.
Yeah I think.
I think dissatisfaction with the incumbent was one was one factor.
But I think they really liked our cloud native platform and the fact that this is both from the ground up with the inherent.
Scalability and reliability and the open apiay season, and the future proof nature of Oh, the way our platform is Bolton architected and the kind of agility that it offers them as a.
Very large and distributed and dynamic organization. So I think the technological superiority of what we offer the focus and attention of what are you know we demonstrated to them during the sales cycle.
Of course efficacy is a key factor full for these larger organizations. So it it was a number of factors, but you know we.
We were selected I believe because we can solve the problems as they see them going forward in a far better way than a dozen incumbent was that was able to.
Convinced them.
[noise] that was helpful. Thanks for sneaking me.
Thank you.
Thank you I'd like to turn the conference back over to my management team for any closing remarks.
Hi, Thanks for joining our Q1, a aflac 21 earnings call. We've enjoyed presenting our results to you.
And stay safe and healthy out there.
Ladies and gentlemen, thank you for participating in todays conference. This concludes the program you may now disconnect everyone have a wonderful day.
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