Q2 2021 Mimecast Ltd Earnings Call
Hi, gentlemen, thank you for standing by your conference call what they can momentarily. Thank you for your patience and please continue to standby.
[music].
Good evening welcome to Mimecast earnings call for the fiscal second quarter 2021 ended September Thirtyth 2020.
Robert Sanders director of Investor Relations with me on the call Tonight are Peter Bauer, our co founder Chairman and CEO and reframe our CFO.
This 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 and the future financial performance of the company. These.
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.
<unk> 19 pandemic creates additional uncertainties when making forward looking statements, we're providing guidance on a good faith based is aligned with FCC recommendations.
We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward looking statements contained in today's press release and on this conference call. These risk factors are further defined in Mimecast. Most recent form 10-K filed with the Securities and Exchange Commission.
During this call we will provide 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 reasons for our representation of the non-GAAP information is included in today's press release.
Which can be found in the Investor Relations section of our website. The date of this call is November 2nd 2020 any forward looking statements. We make today are based on assumptions that we believe to be reasonable as of this date, we undertake no obligation to update these statements as a result of new information or future events now I'd like to turn the call.
Over to Peter Bauer.
Afternoon, everyone and thanks for joining us.
I'm pleased to share with you that we delivered results at the high end of our guidance range this quarter.
In large part to our solid execution.
Continued pressures relating to the Coca 19 pandemic.
In our second quarter, we drove revenue of $122.7 billion.
19% year over year with strong free cash flow.
Just talk right.
He added approximately 500 new customers.
All right, we'll take you through more details of our financial performance and our outlook later in the call.
I want to share with you how we're thinking about the road ahead from a business and market perspective.
Focus on the threat landscape affecting customers.
In fact to cope with 19 and the work we're doing to both protect all customers and grow our business profitably as we all know the pen demick has pose challenges for companies of all sizes and across industries, including mine cost.
In particular.
[laughter] pressures are muting the impact of some of the actions we've taken to accelerate our growth as.
As we confront the challenges of slow up project decision, making in the enterprise.
And the economic impact, especially on the small business segment, we are ensuring that we offer the best value to customers by expanding and innovating all capabilities, while at the same time running our business efficiently and profitably with me the 40 thinking as an important context.
We remain focused on achieving the targets that we set out in the long term model, which we described in our analyst day earlier. This year in February the cobot has the potential to impact the timing of how this plays out.
We're focusing right now on the elements, we can control winning new customers, taking care of them selling them additional services.
And while taking steps to build our bottom line.
So for example.
We're continuing strategic hires that we expect to have a positive impact on advancing all enterprise strategy.
They're reducing overall hiring we have also shifted towards virtual meetings and events given how successful we have been using remote collaboration tools. We expect many of the related cost savings to be durable often a return to a more normal work environment, as we rethink where and how we work and how we engage with customers.
[music].
To that end, we're evaluating hybrid work structures that allow people to balance office and remote working time, which we expect to drive real estate savings over the long term.
He should enable us to continue to build the bottom line. While also further investing in R&D and other strategic growth initiatives. We are building our leadership in the industry by continually evolving all platform to anticipate customer needs.
Changing nature of cyber threats.
The successful execution of this strategy, we have consistently done to the topline growth as we've seen the rise of lenders attacks. It involves email as well as social engineering fraudulent web properties and phishing sites malware and ransomware hosted on cloud infrastructures and not email me.
Switching systems being used as part of the attack chain, we've continued to innovate to protect our customers.
Holistic email and messaging security suite auto strategy and integrated suite of offerings gives customers an advantage in defending against these blended attacks.
As a reminder, we've expanded our product portfolio.
No the 12 products in our solution framework versus seven five years ago.
Oh, sorry, one offerings include perimeter defenses and threat detection through all secure email gateway and targeted threat protection or TTP platforms zone to comprises internal email protection and awareness training.
Which focuses on strengthening the human factor zone three.
<unk> our D var analyze it and right exploit protection Act as an offensive countermeasure actively fights back against cyber threats partnering and shred threat intelligence has elevated mine cost role in enhancing cyber resilience, especially with larger organizations recently my cost join crop strike.
Elevate partner program and joint customers can leverage state College security investments to benefit from a deep technical integration utilizing our rate you guys are.
Platform and partnerships all significant opportunity market in the enterprise space and recent market expansion, such as Central Europe, Canada, and the public sector position mine cost for sustained long term success.
Given our global footprint and experience, we view the public sector as a large untapped market and we actually saw good progress this quarter.
In one of our international markets. It Department of Justice purchased is on one hand.
90000 seats and the department of Health purchased a broad suite that included archiving from 4000 seats.
UK Government agency purchased zone, one for 50000 seats.
We also achieved U.S. fed ramp ready status this quarter.
And upon receiving full approval this will open up significant additional public sector opportunities in the U.S.
Which we believe we're very well positioned to capitalize on as our results. This quarter show this opportunity extends beyond the U.S. and buying cost is already competing for and winning engagements.
April regional and local government agencies around the World. We also have your central Europe, and Canada as potentially significant growth drivers longer time and continue to make progress from both in this quarter, we brought over 100% growth in our central Europe markets this quarter, making it a gain or loss.
It is growing region.
This included the storied watchmaker, who purchased our archiving services for a thousand employees.
We believe mine cost is very well positioned to service customers of all sizes, including but not boss number of SMB customers found across the central Europe region in.
In Canada last week mine cost hosted a virtual ribbon cutting commencing commercial operation of a new mine cost data center, hey, spanning Toronto and Montreal.
With data residency on the mine too many organizations.
We believe given Canadian customers the option to store process, David in country will accelerate our ability to penetrate this dynamic and fast growing market.
We were also successful in Upselling and cross selling to existing large enterprise customers and so, especially strong engagement with all designed to end zone three offerings for instance at U.S. financial services customer added additional services in zone, two and three as well as some can recover whenever.
Our cyber resilience extensions.
All 3000 employees, resulting in a multi six figure deal.
This is a good example of the tolerable multi service platform to consolidate vendors and help simplify tea for the customer.
Two or three our newest offerings and I'm really pleased to see that the targeted investments we've made to innovate on our platform and broaden our offerings are driving returns in another example, a us based engineering and construction company added archiving, our highest value service well.
25000 employees to the current security subscription.
Excellent and archiving is another reason customers adopt additional services.
My cost was identified as a leader in Gartners Magic quadrant.
Enterprise information archiving when all the sixth year in a row. These results verify all believe that expanding our share in enterprise customers will enable us to drive greater upsell and cross sell and as Rick will explain this increased engagement and upsell drives higher average order values.
Now, let me turn to efforts to increase penetration in large enterprises and acquire Smbs that are switching security platforms.
We continue to win large enterprise customers for example, this quarter and international professional services firm purchase zone, one and two.
10000 employees.
Mr continue to acquire customers previously with Symantec for example, a global consulting firm with 7000 employees.
It's just zones, one and two defenses.
Secure messaging service and our continuity service to ensure communications uptime, even when other service providers experienced downtime in.
In fact, we recently witnessed such an event as office 365 was offline for a period of time.
My cost continuity customers, a more resilient than those of the running naked on office 365.
While our second quarter topline growth is trending below our long term target of 17% to 21%.
We believe that the initiatives, we're implementing now well continue to gain traction and drive results as market conditions improve so in summary.
Amid a challenging market environment, we are adding new customers.
Cost selling and upselling to existing customers and we're operating efficiently and profitably.
And with that I'll turn it over to race to review the details of our results right.
Right. Thank.
Thank you Peter I'm pleased to report that we exceeded the high end of our guidance for revenue adjusted EBITDA and free cash flow for the second quarter of fiscal 2021.
Our results continue to demonstrate our ability to deliver both topline growth and bottom line margin expansion amid a challenging operating environment.
Before I jump into our financial results for the quarter I would like to take a moment to discuss the impact of COVID-19 on our business.
In the pandemic began to take hold in our core markets in March we undertook an extensive review of our business to understand what levers we had at our disposal to protect our customers support our team and de risk our business.
Despite the challenges of the past two quarters, we learned a great deal about our ability to work remotely and believe there are a number of important lessons that will allow us to build ongoing efficiencies into our business.
For example, we believe we can drive long term improvement in our facilities travel marketing and event driven budgets. We're also closely managing headcount increases to ensure we are responding to the business demands of this now prolonged pandemic.
As Peter noted we've worked tirelessly for our customers to deliver world class protection in the face of ever increasing risk.
As the impact of COVID-19 continues and is infection rates are seemingly reaccelerating, our customers and our team safety and health remain our top priorities.
Let's now turn to our financial results and.
And the second quarter, we generated revenue of $122.7 million, which represents a 19% improvement over the prior year in absolute dollar terms adjusting for $200000 of currency tailwind our constant currency growth rate over the prior year also stood at 19% for the quarter note that since providing guidance in August foreign currency fluctuations.
Jewish and positively impacted our second quarter results by $300000 bolstering our topline results were continued year over year increases in average order values, where it'll be calculated at October 26, FX rate it'll be for all customer stands at $12700 up approximately 9% over the prior year.
Constant currency terms. This trend of improvement is attributable to a favorable shift in the average number of services per customer across our customer base. Currently at 3.4 services per customer compared to 3.2 services. This time last year as well as our increasing success with larger organizations. This.
This strong result, it is clear COVID-19 created challenges that were felt in the second quarter. As we noted over the last two earnings calls new and upsell pipeline generation activity was significantly impacted by COVID-19 in the early months of the fiscal year, given the timelines to convert our pipeline to bookings we expect it.
There to be an impact on Q2 business look.
Looking at our current pipeline typical lead times would now suggests that larger accounts, where pipeline generation activity has improved off its lows will show a sequential rebound in enterprise bookings by the fourth quarter. We added approximately 500 customers in the second quarter, approximately a 100 of which came from recent acquisitions merging into our system.
And thus entering into our official customer count.
As we noted last quarter. The COVID-19 pandemic is having an outsized impact on our smaller customers. However, we did see decreases in net customer additions across all segments when compared to the prior year.
Copa 19 pandemic continues we expect to see the net new customer count metric continued to run at approximately these levels for the near term.
Net revenue retention totaled 105% for the four quarter period ended September thirtyth inline with our expectations looking at its components Upsells totaled 112% helped by strong interest in Arizona to solutions of internal email protection, which added 700 customers in the quarter and awareness.
Painting, which added 400 customers as well as our zone three D. Mark solution, which added 100 customers.
Downscale in churn totaled 8% after the end of the second quarter, driven most significantly by increases in our downside run rate, which clearly reflects the economic challenges our customers are facing returning to our gross margins. We recognized a 77.5% non-GAAP gross margin up 130 basis points from the same.
Second quarter over the prior year. This continues our progress towards our long term goal of achieving 80% non-GAAP gross margins adjusted EBITDA for the second quarter totaled $33.6 million, representing an adjusted EBITDA margin of 27.4% compared to $20 million or 19.3% in the same quarter.
The prior year on a net basis the quarter derived approximately $3.5 million of discrete bottom line benefit as a result of COVID-19, driven cost reductions consisting primarily of travel savings. Thus, even excluding these cost savings from the computation, our adjusted EBITDA margin would've been approximately 24 point.
5%, representing over 500 basis points of EBITDA margin expansion compared to the prior year. We achieved this expansion through operational efficiencies driven by gross margin improvements resource prioritization throughout our operating expenses and year on year improvements in our real estate footprint. This improvement speaks to our.
Progress executing on the stated goal simultaneously delivering top line growth and expanded margins.
Now turning to the bottom line, our non-GAAP operating profit for the second quarter was $25.1 million or 20.4% of revenue an improvement of 790 basis points from the prior year.
Our non-GAAP net income for the quarter was $20.7 million or 32 cents per diluted share based on 65.6 million fully diluted weighted average shares outstanding.
Our non-GAAP tax rate was 19.1% for the quarter as we've implemented a number of changes to our global operating structure. We now are modeling a full year non-GAAP tax rate of approximately 20%.
We reported GAAP net income of $10.1 million for the second quarter or a profit of 15 cents per diluted share again based on 65.6 million fully diluted weighted average shares outstanding are.
Our GAAP tax charges totaling approximately $600000 in the second quarter.
Third quarter tax expense is expected to be approximately $2 million our full year GAAP tax expense is currently estimated to be approximately $3 million.
Turning to cash flow second.
Second quarter operating cash flows totaled $31 million or 25.3% of revenue free cash flow jumped to $21.6 million for the second quarter were 17.6% of revenue driven by higher profitability and by better than expected collections in the quarter again, demonstrating our business.
Models ability to deliver bottom line value as we build toward our long term goal of 23% to 25% free cash flow margins.
As of September Thirtyth, Mimecast had $231 million cash on the balance sheet up $57 million from the beginning of the year net of debt. Our current cash balance stands at $123 million given the significant strength to manage the challenges of the current economic environment, Let me now turn to.
Guidance for the third quarter of fiscal 2021 revenue is expected to be between 126 million and $127 million or 15% to 16% growth in constant currency terms. Our guidance is based on exchange rates as of October 26, 2020, and includes an estimated negative impact.
A $500000, resulting from the strengthening of the U.S. dollar compared to the prior year adjusted EBITDA for the third quarter is expected to be between 28 and $29 million at this point, we're assuming very little travel in the third quarter with travel resuming in the fourth free cash flow for the third quarter is expected to be approximately.
$16 million turning to the full fiscal year fiscal 2021 revenue is expected to be between $490.5 million and 493.5 million or 16% to 17% growth in constant currency terms.
I think the detailed foreign exchange rate fluctuations are negatively impacting this guidance by an estimated $4.4 million compared to the rates in effect in the prior year. The prior guidance for fiscal year 2021 provided in early August was $490.6 million at the midpoint, we are decreasing the midpoint of.
Our full year guidance by $1 million in constant currency terms due to the continuing impact of COVID-19. This decrease of $1 million is being positively impacted by $2.4 million a foreign exchange tailwind that has arisen since the rates used in our August call, resulting in the midpoint of our full year guidance Mike.
Up by $1.4 million in absolute dollar terms from 490.6 million to $492 million.
We're raising full year 2021, adjusted EBITDA guidance to between 109 million and $110.5 million at the midpoint. This represents an $11.5 million or a 230 basis point improvement over the prior guidance is significant accomplishment.
Even as we plan to continue to hire in the back half of the year to support and enhance key product development initiatives and our ongoing shift of resources toward our enterprise go to market efforts. We're also raising full year 2021 free cash flow expectations to a range of 82.5 million to $84 million.
Reflecting a free cash flow margin of 16.9% at the midpoint of our revenue guidance. This is an 820 basis point improvement over the prior year and 100 basis points improvement over the prior guidance provided in August.
To conclude.
We are pleased with our second quarter results and despite the challenging macro environment. The mimecast business is demonstrating its resilience continuing to grow and delivering bottom line margin expansion with that I'll turn it back to Peter for some closing remarks before we open the call up to questions.
Thank you Ray.
Cyber resilience is more important than ever we have an industry, leading technology platform at a predictable business model.
As trends shift towards cloud architecture email security and customers consolidate the other email service needs.
We believe we are uniquely positioned to capture additional market share.
It remains a very large market opportunity and favorable market drivers that position us well disciplined profitable growth for years to come.
And we believe we have the right strategy and the right team in place to deliver.
In the near term, we will remain nimble and execute with discipline, taking actions within our control to deliver strong value to shareholders, even in a tighter growth environment.
Operator.
Let us please now open the lines for questions.
Thank you next or maybe said.
And ladies and gentlemen, as a reminder to ask a question you need to press star one on your telephone.
I would draw your question simply press the hospital.
And our first question is from Shaul Eyal with Oppenheimer. Please go ahead.
Thank you good afternoon, gentlemen, congrats on the performance and improved outlook.
Two questions on my end Peter already.
Back back in you're doing well, let's see.
Really the beginning of our it say Wow things right now likely ancient history.
You provided some metrics about the office 365 customer base.
And how underpenetrated that landscape is key.
Can you talk to us maybe about any changes you've seen things at analyst day.
Have you continued to.
To see ongoing success.
Getting to creating.
That customer base and shifting them into the Mimecast platform.
I have a follow up.
Yes, great. Thanks, so much.
So at the analyst day in February we certainly outlined some of the.
Size of the market available to us in office 365, just as a reminder, today over 20000 organizations.
Use us in addition to that.
To to make their officethree hundred 65 investments more secure.
I think what you know what we've seen during covered generally.
Oh, it's a little bit of a slowdown and project decision, making and because of economic pressures. Some organization simply sticking with what Theyve got for the time being having said that organizations that are in a position to make decisions and implement new systems and in previous security certainly we've seen a continuation of that theme and we've continued to build.
Our office 365, <unk> customer base.
With those organizations.
Quite well since since February two.
Got it got it and Peter you both mentioned the archiving being the highest value product offering in your prepared remarks from incorrect.
I know, it's hard to provide for sort of metrics about maybe the bundled versus unbundled versus unbundled archiving offerings, but can can you will wait maybe provide a little bit of color, whether the Ark I think it's mostly going to out bundled or and bundle it wouldn't.
The quarter or kind of gets get already speaking over the course of the past.
A few quarters now.
Great. So so we see probably the greatest uptick of archiving.
Taken as an attachment alongside our the solutions, although so that customers may come along because they.
Looking for our email security solution, and then learn about the opportunity to to do archiving with us alongside that and archiving as a diverse set of use cases that can range from security requirements today to resilience through the compliance E discovery, even storage management getting out of the legacy archiving business. So.
So we were quite often picking up archiving business, along with the security sales motion.
Do have certain situations.
Vicki large enterprise situations, where customers are buying archiving standalone.
And.
Those are typically bigger deals.
And from a look at Cadone point of view those would be a minority of deals in those last quarter. We added 200, new archiving purchases to offset and then we also have a an archive extension the sink can recover offering.
Used to be called archiving power tools, the sinking recovery capability.
300 additional customers at a sinking recovered during this last quarter, so nice nice growth in our archiving business that.
Got it. Thank you so much good luck pickup.
Thanks, Phil.
Thank you. Our next question comes from Matt Hedberg with RBC capital markets. Please go ahead.
Hey, Thanks for taking my question guys.
You know I guess I wanted to ask about Europe. You know there were certainly some more positive comments on central Europe, which is really great to hear and he gets invested.
A bunch in continental data centers, there the past couple of years.
I wanted to ask a little bit more about you know sort of the sort of the expectations for that particular region and then also UK I know, obviously you guys have a lot of exposure there.
At more of an update on the UK would would be helpful as well.
Yes. Thanks, So we are quite pleased with the central European team.
It is still coming off a much smaller base and some of our more established locations, but it's nice to see them getting their feet under them and and really coming together to execute it.
We actually think there's quite a bit of long term opportunity in central Europe I've been to a great extent, we're just scratching the surface with our operations. There. So it should be a growth driver for us for years to come now turning to the UK, it's a bit of a complicated situation in the UK right now because there is.
We're hearing now they're going back on lockdown due to covert but we also are dealing with the Brexit side of the house.
That said do you know we've seen some nice strength on a number of deals.
A couple of which were featured in Peters call out that he went through on the call. So you don't much like the rest of the world that Unum business has to be done and and the teams out there hustling to keep moving the ball forward. Despite some of these shorter term challenges.
That's great and then one other thing that I certainly you guys highlighted on the call that I thought was great to hear awards was public sector success like you know clearly it is a.
It's a huge market globally and it sounds like there were some good good progress there this quarter both both here in the U.S. as well as abroad you know.
Maybe a bit more on that.
Just in terms of kind of the health of that market.
When we look out another couple of years, how important of a driver could that be to to sort of your long term growth rate you talked about at analyst day.
Yes, so Matt.
In the prepared remarks, I called out a number of of.
Of solid public sector wins in our international markets.
That's really building on all our public sector.
Customer base that we started building up internationally some time ago.
Well I think what what we're really excited about.
Over and above that is this a north American public sector opportunity and.
Particularly as we make progress with our fed ramp certifications now having the fed ramp ready status having.
Having dedicated.
Good infrastructure datacenter infrastructure for that client base.
And beyond that you know besides just the specific agencies. There are obviously a number of people in the in the supply chain around public sector, they're looking for these certifications to.
Give them confidence that they are working with cyber security providers that are going to be acceptable today.
To the major public sector clients. So we actually think there's quite a lot of spend and sort of halo ring effect around that of additional spend.
That we're setting ourselves up to have greater access to and really.
An increase in the opportunity for our teams.
That's really good to hear a boat and both sides, both kind of out of Europe and public sector. Thanks, a lot guys.
Thank you. Our next question comes from second Kalia with Barclays. Please go ahead.
Okay, Great Hey, guys. Thanks for taking my questions here Peter.
Peter maybe maybe for you I.
I think you hired a new head of channel sales recently can you just refresh us on what percentage of the business roughly is coming through the channel currently and how you think about your channel strategy going forward.
Great. Thanks, a second so yes, we recently announced a new appointment on to my Chief revenue office the team.
That's Jon Corzine, who is now running global channel sales for us color.
Got it a couple of weeks ago. So.
In terms of our channel mix, it's actually quite a high percentage of our business that is done through through channel today and that.
Obviously.
Total mix across our entire base has.
You know some history and that's so as we've gone into new markets, sometimes the initial Ah.
Part of the business is done on a direct basis as we recruit new channel partners and.
And we've been really pleased with or without channel program.
Progress over the last couple of years, I really looking to refine that and develop that in a couple of directions on the one hand as we've made progress a pocket with the enterprise looking at what are the right type of channel partners to help us continue that growth.
He is that we've demonstrated that.
And then secondly down market in the <unk>.
You know the MSP and the MSS piece space, where we have a considerable number of partners, but I won't be room for improvement in terms of programmatic Sun and how we work with those partners. So we're excited about that opportunity with the with the channel on on both ends of the of the market.
That makes a lot of sense right, maybe my follow up for you great to see the EBITDA beat this quarter you know I think the guide for next quarter.
Implies margin down sequentially, a little bit I know you talked about some travel maybe starting to come in.
Later on this year, but is there anything to consider just in terms of seasonality of expenses or pace of hiring that would maybe drive those margins are down a little bit here in the third quarter.
Yeah, as we look to the back half of the year and increasingly start preparing for the following year.
There is some more hiring activity that we have targeted in the next couple of quarters. We're very much focused on some of the things Pete called out in our strategy to making sure. We're funding R&D heads for key projects as well as as on the go to market side. Some enhanced resources on the enterprise side of the house, which is a big priority.
Fourth as you know and as you noted we do expect some travel in the fourth quarter.
If things free up of course, and then finally, just the art annual raises kicked in at the beginning of this quarter. So that's probably also touched on the numbers as well.
Got it thanks again for taking my questions here guys.
Thank you.
Thank you. Our next question comes from Keith Bachman with Bank of Montreal. Please go ahead.
Hi, guys. Thanks for taking my question. My question is related to bottoming and just wanted to get your thought process on a bottoming.
Sequence, how does that unfold and to be more specific excuse me. Let me that's great I thought it was actually pretty good this quarter at one or five you had four warned us that it was going to drop a little bit.
When do you see that bottoming and I know that your calculation is on the latest 12 month basis, So it's a little bit.
Different and the corollary part is might your revenue growth actually increase before your net retention rate bottoms. So that's that's my first question I have a follow that cycle.
Yeah no. Thank you for that you do I think that the virus is humbling people, who are trying to forecast exactly how quickly. It will will come and go you know I certainly right now as we sit here looking at the virus rates picking up that makes a particularly challenging you know what the way we have approached us consistently.
For the year is try to be as transparent as we can and the details of a number of metrics as you.
Pointed to like on the net revenue retention side.
Well, we do expect is over the coming quarters, there is still going to be pressure on those down so rates and things like that coming out of markets, where the virus is really hitting them hard and so.
We expect to see in line with the guidance that we gave earlier that will gradually be working through the virus that will hopefully start to get a better view of of a recovery along with the virus hopefully in the coming quarters, but I think we have to be quite cautious on that front I think to your broader question.
You know on the revenue versus the down sell in turn rates you know our fundamental growth drivers are in place, whether it's going up market to enterprise customers, whether it's getting new products out there expanding our markets or taking away business from some of those legacy players. So we're we're seeing positive proof.
Points, if you will <unk> on that side of the house that the fundamentals are in place, we just need to keep our eye on them and hopefully we'll get clear sailing as we move along.
Okay, well, let me let me ask my second question on net.
Net customer adds and you indicated that you will be around 500 for the next couple of quarters.
You've seen anything any differences and the change in the win rates is that one of the reasons why you think it stays at 500 or is it just that though.
The pipeline does that suggest that you can do more than that in other words when rates are the same.
And I wanted to add a couple different dimensions theres.
Within the net retention rate or excuse me the net win rate there was some emerging companies like iron skills or abnormal security that might be standing up with the Microsoft 360 solution.
Perhaps you're not seeing the same kind of opportunity associated with 360 situations, but.
Hey can you just talk about your win rates and then be the competitive situation that might feed into those win rates. Thank you Oh and Peter congratulation.
Congratulations on the ribbon cutting ceremony in Canada.
Oh, yes, [laughter] yeah [laughter].
[laughter] Yeah, we got we got we got your city and then what about data centers yeah.
Okay.
Customer.
Custom add two things to consider that.
Yes, I think we would like more custom adds bushel, but to two things at play.
Oh, one being remember, we all focusing more market now so so where we would have accumulated some of those logos through more work down market are we seeing a little bit less of that and a focus on on on bigger customers with greater seat counts and you're seeing some of that flowing through in terms of all our average order value.
I think secondly in the cobot economy. There is there are many organizations that are a little bit of a standstill.
From a new project perspective and solar.
Momentum over the lost city through pipeline is is challenged in certain geographies certain sectors and.
On an account by account basis for sure. So so those those back to the coming coming through.
Well I guess interesting question in terms of other models too.
To supplement office 365.
And does that impact customer's appetite you know I think the reality is that our value proposition.
Which is a comprehensive wrapper around 365 the coverage.
Just sort of tactical problem or on a fishing.
Issue or an approximation issue.
Comprehensive shielding of bad things coming at the office 365 environment spanning a mail security also capabilities for web security protection from office 365 downtime data protection.
Recovery capabilities compliance capabilities sophisticated reporting and then 80 I capabilities that wrap all of this and the law went to integrate it really well into the broader security environment.
I think that's a very compelling value proposition and we're seeing that playing out as being you know.
Enterprise grade.
A solution that.
But we you know we have a lot of confidence in.
The demand cycle for that in the office 365 base.
Okay. So don't feel like your win rates are changing because the short answer.
So I think as I described the win rates.
As a result of coated I think all impacted for sure, but I don't believe that that it's impacted as a result of a.
Uh huh.
Competence competitive he says yes.
Okay. Okay. Thank you.
Thank you. Our next question comes from Terry Tillman with Chili's Securities. Please go ahead.
Yeah, Thanks, Peter Ray.
I just two questions for me first in terms of I think one of the comments was on the enterprise side.
In terms of Ah an expectation that you start seeing an improvement or a kind of recovery in bookings in Fourq, you I guess kind of where does that confidence come from are you just seeing improving sales coverage from some of these go to market about Smith or arduous to conversations the verbal interaction, suggesting that you know some moneys are just gonna start freeing up or the resources will start putting up as we get in.
Into the new calendar year, and then I had a follow up.
Yes that comedy really centers around what we're seeing on deal activity and specifically around the pipeline generation activities on the enterprise.
Clearly in the early in Q1 pipeline generation activities dropped off across the board. What we started to see is the bigger organization, that's what popped back more quickly than the rest and and so we're now a couple of months into that we're seeing good activity and so I think that's what's given us that.
Competence that sequentially, we should start to see some of those deals you know enterprise deals do take a bit longer to mature and and come to fruition, but that pipeline activity would indicate that we should start to see more deals coming later this year.
Okay, and Peter just bigger question as it relates to emerging products are researches picked up or suggested message controlled actually had some interesting kind of traction quickly Oh I don't know if that's the right emerging product that you'd want to call out, but I would love to hear your perspective, either on that or something else that maybe we should kind of hone in on they could.
Start to add up to something more than just an emerging product. Thank you.
Yes, that's a great question, so yes, the product portfolio and the way we built it out an expanded that I think has a lot of potential and we saw some some some encouraging and.
Good signs that a across the across the portfolio.
P., adding 700, new customers this last quarter.
Which is great to see an obviously a another part of also true value proposition as the awareness training product.
400, new customers there.
Each of the components doing quite well I think right called out earmarked 100, new customers that's a.
The brand new offering in zone, three and obviously you.
Web security, making a an additional contribution to the base with 200, new customers too. So so we feel good that all our product expansion strategy is showing signs of working well within the base and also providing on ramps to new customers and.
And we think message control will ultimately complement that over time too and certainly the technology and how we broke that out as well because he building that out on our platform as the Mimecasts cyber grew up using machine learning and ER.
And dropped a database technology.
Add additional efficacy and an insight into the message flow for organizations we.
We think is a nice differentiator and you know potentially.
Potentially something that can can be an additional revenue generator in time too.
Thank you.
Thank you. Our next question comes from Sterling Auty with JP Morgan. Please go ahead.
Yes, Thanks, Hi, guys in your prepared remarks are and answers to other questions you talked about how in terms of customer acquisition, some strength up market, but then in central Europe, you know, saying all sizes. What I'm curious about is if the net customer additions are supposed to be around 500 for the for.
Our seeable future what should the mix of those customers look like in terms of their size, that's going to comprise that that customer addition profile.
Instead of the you're talking by customer count correct.
Correct. So in other words, so should average order value go up because theres a bigger percentage of those that are larger customers well for the profile remained consistent yes.
Yeah I'm with you. So you know of course, the the biggest impact on the raw customer number is <unk>.
It is often to smaller customers, but as you're talking about the you we have to look at both elements of both the customer accounts and the Lvs. So.
Your progress is we would expect to know we're working towards making sure. We're driving a bigger deals. If you will from two perspectives, one more products being sold to customers, including up sell to our base and our continual trend of selling to larger customers. So yes. I think you know good kind of moves that are turns out the battle.
I'll shift pace, if you will it takes time for those to play out, but but that is the trends we're seeing in the business and as we've been reporting and that's what we really look to see over the next few quarters as well.
All right got it thank you.
Thank you. Our next question comes from Brian assets with Goldman Sachs. Please go ahead.
Hi, good afternoon, and thank you for taking the question. Peter just had a quick question for you and then a follow up you know last time, we we spoke to you you talked about.
You know you're hiring profile into this year, how you know youd hired head of the pandemic and then a pandemic happened and you.
Maybe you're going to.
Hang on to those to those hires and maybe not hire as aggressively or or or at a lower pace into.
Into next year and enter the next fiscal year with the more mature sales force how should we think about.
Any adjustment to that strategy as you're throwing some better profitability to the bottom line might might you kind of throttle that forward you know given the better growth rates that we've seen and penetrate accounts, where you might have better opportunities like and you know like in Europe. As you highlighted and then you know what do you think.
That that's going to you know what opportunity you think that would would drive in terms of your ability to reaccelerate revenue Uh huh.
Heading into what's that's fixed that's definitely yes.
Yes, great question, Brian So.
So I think to do the overarching philosophy, you guys really informed by.
Hi.
So looking at where all the growth opportunities, particularly during the economic challenges in the code the crisis well the best growth opportunities for us to invest in.
And.
How do we realign although our workforce around those.
How do we hum back a little bit from areas that are naturally going to be softer.
And in doing so benefit from some efficiency, but getting that mix, so optimizing that that mix.
And part of that has also been slowing down hiring.
And seeing some of the benefits of that flow down to the bottom line.
But I think a big growth opportunity and what will be hunting for you know before during and after this crisis is gone.
It's really around that move up market and that big enterprise opportunity.
Making sure that we're executing well in these expanded geographies like central Europe, and I mentioned that the traction that we're starting to get there.
And then executing on this multi product strategy. This expanded product portfolio that we've got with email security suite, although strategy.
And the broader solution framework that we've laid off.
So we'll make sure that were well stopped to be able to grab hold of those opportunities.
And transform and make the most of those as we move forward into into next fiscal.
Okay. That's helpful. And then is there I guess Rick is there a way that we can maybe quantify what you think might be that the quarterly savings are generated by operating in a remote environment and what your levers might be for maintaining margin expansion in that environment.
You might expand into next year.
Yeah. So we've been trying to call out you know that the very the very obvious covance savings, which frankly starts with travel in there. There was a short list of things that are are particularly unique to our time you time here, but you know and especially once we start giving guidance for next year, we will be able to.
A little bit more refined but we certainly think there's savings opportunities. You know you start with gross margin has continued to uptick I'm over the last few quarters I kind of want to a march up towards that 80% margin that we've talked about and then we think more broadly things like hybrid work environments. So you're getting much more efficient use out of the same.
Real estate platform.
You know, we found quite a bit of success with a bunch of these virtual events. It's not right for every situation, but those are the kind of things that can drive a lot of the travel savings that are good for the environment. Good for the bottom line and we think those are our it's something we can maintain well into the future even as we can hopefully enter into a more normal work environment.
And then I would say lastly, we're going to continue on those fundamentals that we had in mind back before this all began when we set out a long term.
You know targets, if you will for a 23% to 25% free cash flow, we think there's room for DNA overtime to get more efficient we think we can do.
Throughout the organization continued to drive efficiencies of scale. So.
But hopefully as we come through this we can take what we've learned from this unique working environment and get to kind of a best of both worlds environment coming out of it.
Got it that's helpful. Thank you very much.
Thank you.
Question from Brent.
Brent fell with Jefferies. Please go ahead.
Thanks, just wanted to clarify the seat count I think in February you mentioned 13 million today your machine around 15 million so it looks like.
Seats growing faster than customers I, just wanted to clarify that that stat.
Yes, [noise] pardon me Ed.
As.
Over the last few calls if he knows Pete's announced some very big customer. It's some customer wins that had very large seat count numbers behind them and so we are continuing to as we.
Again move up market start to see some real nice benefits from some of these very large customers that that are helping.
Okay, and then I I know thing I think many of US have heard you know during the pandemic is you.
Going to the cloud and what's kind of the number one objective customers went to Microsoft and Google and.
Really it was like that was their focus and ultimately now that they have little more time on their hands and are coming back and realizing the architecturally might not be the.
Best decision or are you starting to see some of those customers now say look I've I've actually got some time to refocus back on this that those customers are in the pipeline.
You feel that that they're coming back to you I'm just curious if you could talk more directionally about the pipeline, how how you're feeling around transitioning some of those customers because I think there's a.
Affect effectively in a very different impact numbers that they're seeing versus kind of what you're seeing so I think I was just trying to reconcile what what might be going on that may be one example.
Of Oh, something we're hearing in the field that they may they may actually be coming back then have the time that they had to get they had to race to get in and and now they can.
Yeah I.
You know I think.
The many different pieces of the market Yeah, I think by the time the pandemic fit a there was a significant amount of Uh huh.
The market already on office 365 goes that would some of those fragments where are.
We're moving over there so certainly where we.
We're seeing some of those addressing their security issues.
It's really a mixed bag because.
So they're equally companies that are unable to move forward and make changes would be different projects. So its still playing catch up in terms of getting those infrastructures rochon, enabling remote working.
Sometimes distracted by you know real old Sim and other challenges like that so.
It's a little bit all over the show, but certainly the idea that there may be some sort of pent up demand.
As a as the crisis dissipates I think is a isn't alluring thought.
And we're working hard to continue to both pipeline and maintain our visibility even amongst the more distressed organizations to make sure that a win win that back and ready to launch projects.
We are the preferred preferred provider to help them with us.
Thank you.
Thank you. Our next question comes from Catharine Trebnick with Collier. Please go ahead.
Thanks for taking my question guys on nice quarter, Hey, you know you're getting on your prepared remarks talk about Canada in data centers and could you outline the opportunities there and then the follow on question Ed you have gotten fed ramp.
Ready right or what are you doing in terms of your sales force or the federal government versus a year ago. You had hired someone to really go after North America state local government. Thanks.
Great. Thanks.
Katherine so so the <unk> Canadian opportunities is the large.
In GDP terms and in terms of the.
The organizations that we can go in targets not just in public sector up there, but it's significant so private sector solid SMB market as well, which.
Is.
I really don't sell broader suite. So we feel good about that Canadian opportunity and I'll I'll sales team up there is is doing their work and capitalizing on the differentiation that we have with local services.
Tom in terms of the U.S.
Public sector business.
Oh, that's you know that.
Net sales team has has grown a fed ramp ready is a milestone along the journey.
We are still working towards our our Oh, a T O authority to operate.
Which will create even more opportunity in excess but some of the preliminary market opportunity today, we're already capturing.
As you said the state local education and some of the.
Sort of bring around that of organizations. So we'll we'll continue to build out we what preemptively.
You too much spend in that area. That's what we've got a little bit more line of sight, what's happening economically as well as the timelines for a t. or.
<unk> costs.
[laughter].
All right. Thank you.
Hi, Kevin.
Our next question comes from Josh what characters with Banbury. Please go ahead.
Hi, guys. Thanks for taking my questions I, just two quick ones for me I.
I just wanted to follow up on the profitability question. So when we look to the remainder of the year last quarter, you expected travel to pick up in the second half. This doesn't look like it's going to happen out until the fourth quarter. So the way to think about it that if we all work from home in Q4, and you don't traveled to meet customers should we expect the bottom line beat going into the end of the year.
I I guess you would do is the short answer you know we were hopeful they'll be traveling again, we got that in our model and I think this is consistent where we're putting that out there. So you can see how we're modeling the business.
Okay, and then just one more for me on the zone two products looked like they had a great quarter in terms of customer additions. So how do we balance that relative to the 12% up sell number because it's like a land and expand type situation.
And then just to clarify have your expectations changed at all for Anoro are for the remainder of the year.
That's border.
Oh, yeah, well on the phone to customer count number that does reflect both the new and up sell so that's a combination thereof. Those two products are getting you know they're getting good interest I think this is one of the things we look forward with new products as the sales team becomes very accustomed to selling them they find.
Traction that you know you get this positive loop, whether it is on new or up sell business. So I think that's what's where you're seeing those you know that traction there in terms of the net revenue retention numbers. We're still on course with what we talked about last quarter I broke it out in in detail and I.
You mentioned that overall, we're modeling one or three to one or 4% on a net revenue retention and we are pleased this quarter to still get the one before.
That was helpful. And then just maybe if I could squeeze one more in how do we think about the gross margin going forward as you increase the utilization of this new counter to the data center and maybe even some of the public sector infrastructure.
Sure you know I think the best way to view that as we you know back when it back in February when we gave out our long range target. The target we set out for ourselves. There is an 80% gross margin in that 3% to 5% or three to five year timeframe. So you know we've had some really nice upticks in a lot of the hard work of the team.
Has paid off and showing up we think that will continue to improve over time, but somewhat gradually.
Thank you very much guys really appreciate it.
You bet.
Thank you and our last question is from that House Shaanxi with Northland Capital markets. Please go ahead.
Yeah. Thank you.
Talk about message mussel control no you've got it for about a quarter now can you talk about the opportunities you're seeing what's message control in terms of potentially help to address some of the more advanced phishing threats, but you know you hinted to that with the bone spring or.
So on one technology is last call.
Yes, great. So.
So two two pieces to that three we closed the message control or acquisition at the start of a loss or at the start of the quarter.
Yeah, the start of this last quarter.
And so.
A bunch of technical work looking at architecture, and automates that into the platform. So that it can become a more mainstream part of the offering.
And then in the meantime, continuing its life.
For a period of time as a standalone offering and using that really to bolster and supplement.
Our.
Our co product and does it differentiate in some of the enterprise opportunities that we're working it so.
Great technology, great a talented team and we're excited to have them as part of mine cost them.
We will keep you posted in terms of progress and product capabilities that we bring out in subsequent quarters.
Thanks, what I was going with that is that the some of these smaller players are touting the ability to leverage <unk>, the cloud email providers as being able to have a better mouse trap and I believe that's just control utilizes the same sort of approach.
So will you continue utilize approach and bring some of the IP that you have and so on one towards that delivery mechanism.
Leveraging the <unk> utilizing the message control IP there.
Sure, we haven't made any announcements around that but the the option of a of a deployment model that doesn't require an MX record change.
It is an interesting one and to be able to bring the full weight of the mine cost capabilities into a model like that.
Is is interesting and compelling.
For us.
Basically there are considerable benefits of having the the <unk> as well as the in line but.
Traffic capabilities.
Rob some of the other offerings that we have see that a secure messaging and encryption oh, the continuity capabilities and others. So we think that there are opportunities to provide alternative deployment models like the ones that you describe them.
Great. Thank you very much.
Controlled.
Office today.
Thank you and we have no further questions. Thank you Sir you can.
Continue with your co selling line.
Great. Thank.
Thank you very much for joining our call today I would like to just express my appreciation.
I'll stop work really hard to deliver these results on the.
Not ideal conditions.
There appreciate that cyber resilience and security is really important to our customers into the world in general and so we appreciate their efforts and their work. We appreciate the support of our customers and our partners to in continuing to build our mine cost business.
And stop that things from happening to good organizations in the world.
With that we'll speak to you again in about another quarter's time.
Thank you and good night.
Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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