Q3 2021 Mimecast Ltd Earnings Call
Ladies and gentlemen, please stand by your main cash Q3 2021 earnings conference call will begin momentarily. Thank you for your patience and please standby.
[music].
Okay.
Ladies and gentlemen, and thank you for standing by and welcome to the mine cash Q3, 'twenty 'twenty, one and earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question during the session new needs of course star one on your telephone please be advised that today's conference is.
And recorded if you require any further assistance. Please press star zero and I would now like turn the conference over to your Speaker today, Robert Sanders Director of Investor Relations. Please go ahead Sir.
Good morning, welcome to mine cash earnings call for the fiscal third quarter 2021 into December 31, 2020, I'm, Robert Sanders Director of Investor Relations with me on the call. This morning are Peter Bauer, our co founder Chief.
Chairman and CEO and Rafe Brown our CFO.
Today's 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.
Including regarding our recently disclosed security incident. 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.
The COVID-19 pandemic creates additional uncertainties when making forward looking statements and we are providing guidance on a good faith basis aligned with S. EC recommendations.
We caution you to consider the important risk factors that could cause actual results to differ from those in the forward looking statements contained in today's press release and on this call.
These risk factors are further defined and mine costs. Most recent form 10-Q filed with the Securities and Exchange Commission.
During this call we 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 reasons for our presentation of the non-GAAP information is included in.
The press release, which can be found in the Investor Relations section of our website.
And the date of this call is February 3rd 2021 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.
Good morning, everyone and thank you for joining us I hope you and your families of safe and well.
It's been a busy quarter from mining cost and we've got a lot to cover today.
Before I discuss our results I want to frame at a high level, how we're thinking about the future.
We continue to navigate the ongoing impacts of the pandemic, which has not yet stabilized as we'd all hopeful backend and the spring.
We're working quickly and thoughtfully to address our recently disclosed cyber incident.
And we're still in the early innings of a long term strategic plan and we remain confident and excited about capitalizing on the opportunities ahead of growth may not initially come as fast as we had expected pre pandemic.
We will continue to invest in and what areas to achieve the growth that we know and mindful of is capable of.
We also continue to demonstrate the financial leverage that is inherent in our business model through expanding free cash flows the fundamentals of that model, 98% recurring revenue and industry, leading retention and high gross margins remain intact. These fundamentals have contributed to our achieving and exciting.
Milestone as we crossed the half a billion dollar of revenue run rate before we dive into the results and our achievements during the quarter.
Let me briefly start with an update on the cyber incident, we've disclosed in January.
Our fourth priority and responding to this incident has been protecting our customers and being transparent with them.
As soon as we became aware of the situation. We launched an internal investigation supported by leading third party forensics experts and began coordinating our activities with law enforcement.
We also immediately began working with a handful of customers who were targeted on remediation measures.
And we have advised our customer base to take certain of the precautionary actions to fortify their protections on <unk>.
Customers and larger enterprises, and particular understand but this is an unfortunate reality of operating today and have been highly collaborative with us throughout this process.
We remain in close contact with them and we.
Believe that the steps, we have taken to isolate and remediate the identified threat has been effective.
We continue to examine and closely monitor our environment as.
And as previously disclosed our investigation has confirmed that this incident is related to the solar winds of run software compromise and was perpetrated by the same sophisticated threat actor. Our investigation is ongoing and we will continue to communicate updates directly to our customers if warranted and where.
The appropriate disclosed and publicly on the mine cost per loan now onto on quarter. We are pleased to have delivered results that exceeded the high end of our guidance for the third quarter across all metrics.
Q3 revenues came in at 129 6 million U S dollars.
17% year over year and constant currency terms, and we added 500, new customers, including 24 six figure deals in line with our Q3 of last fiscal year pre pandemic.
<unk> will be providing FY 'twenty two guidance later in the call, but let me touch briefly on how we're thinking about the end of this fiscal year and the next we do expect revenue growth to improve over time supported by an increase and on net retention rate and a gradual reacceleration of new logo adds.
That said.
We currently expect a U shape recovery over the coming year with total revenue growth stabilizing throughout the next fiscal year.
This was anticipated prior to identifying the security incident we.
We are continuing to build operating efficiencies into our business and that's delivering increasingly strong cash flow and meaningful margin expansion we.
We expect that to continue into FY 'twenty, two and even as we invest and strategic initiatives and our go to market team to drive growth.
To be clear longer term, achieving the rule of 40 balance between growth and profitability remains our goal.
We are on track with the bottom line and delivering top line growth at our long term targets, we will take additional time and investment.
And both our offerings and our team and.
And the context of of challenging environments and of growing threat landscape. We have been executing a three pronged strategy that is delivering results.
Lastly, expanding our footprint and the enterprise market.
And secondly, innovating on and selling our multi product platform to more customers.
And thirdly, automating to create even stronger and easier to use engagements with the SMB market and our channel efficiently at scale.
All of this is underpinned by continued investment and R&D as we continue to meet and anticipate the changing threat landscape. Our successes this quarter demonstrates that the various elements of our strategy of building momentum we had $24 six figure wins this quarter.
This included our largest whenever a U S health care organization with 190000 seats and.
And this customer previously used legacy technology from Symantec and we.
<unk> competed against other leading vendors and ultimately our integrated platform API ecosystem and the email security three <unk> of a framework where important deciding factors to win this customer's trust.
And another example, and EU pharmaceutical company selected our security solution to build more confidence and security around their office 365 deployment and this.
Further underscores the competitive advantage provided by having a broad platform and mine cost per country sophisticated cyber deception, we continue to see an uptick and our multi product strategy. This quarter with average number of services per customer increasing to $3 five from three.
And three in the same quarter last year hundreds of existing customers added additional services.
Including a U S technology company, which added archiving to their subscription for 58000 employees. We also saw net new customers acquire bundled services.
Such as a U S professional services company for 100000 seats with services across on email security three <unk> solution framework.
And targeted threat protection internal email protect demos of analyze and our continuity services.
Our results this quarter and further demonstrated that advancing our multi product strategy.
Lots of well with our focus up market.
In addition to those I've already touched on we won displacement solutions to new U S health care organizations.
And then 20000 seats.
And the other 16000 and seats.
Placing their legacy provider with each selecting multiple services, including email security archiving and awareness training. We also won a large Australia and engineering firm with 16000 employees, which selected services across the email security suite of solution framework, adding sick.
<unk> awareness training day, Mark analyzer brand exploit protect and our continuity of services.
Public sector business also continued to grow this quarter with a large central government agency and one of our international markets for 14000 and seats.
And we made continued strides and key growth markets, such as Canada, and Central Europe with Central Europe, again growing more than 100% during the quarter. We continued to build out our platform of solutions with our new innovations introduced with our case review at enhancing our archive and E discovery capability.
<unk>.
Fish, which further differentiates our awareness training product and zone two and.
And from strike integration, which shares threat intelligence from our email security three of those solution to help customers. Both even more robust security architectures. We also recently hosted our setups of virtual conference co sponsored by Palo Alto networks crowd strike Splunk rapid seven of Mexico, where we delivered numerous edge.
Occasional sessions, helping customers to learn more about how to leverage my costs Apis and our out of the box integrations across their security of states.
And this underscores the power of our cloud native platform <unk> to help customers achieve their goals.
Now withstanding these wins growth continues to trend below our pre pandemic expectations and to accelerate revenue growth. We are prioritizing resources in line with a three pronged strategy I mentioned earlier moving up market advancing on multi product strategy and automating to create even stronger and easy to use engagements with the SMB market.
And of channel efficiency of scale now, we're implementing a staff restructuring which includes the reduction in force of approximately 80 roles, which is roughly 4% of our workforce and it's never easy to have colleagues depart, especially in an environment as tough as this one and.
And we did not make this decision and lucky.
However, we are confident that this is the right decision for the business and essential to being able to invest in the right areas and achieve our goals. We know that enterprise customers look for high touch customized service and so we are taking steps to expand and further strengthen this team.
We believe this will enable us to get in front of more customers win more when we do and also Missy deliver better service to them, we expect investments and our sales and product teams to fuel our multi product strategy with both existing and new customers. We will also be investing to enhance our customer service capabilities by improving access to <unk>.
Data investing in automation and leveraging our growing talent pool and South Africa. We are excited about these initiatives and confident they will enable us to realize the market opportunity and January Hill, and Oreo <unk> joined our board of directors and Helen brings significant industry expertise and international operating experience to our book.
So in summary, we have the right ingredients for success and a world that needs us more than ever there remains a very large market opportunity and favorable market drivers that position us for strong profitable growth I want to thank the team of engineers technical folks leaders and others of mine cost who worked diligently and per.
Tirelessly on the security incident over the last few weeks and I also want to thank the rest of our team departing and staying on for your relentless focus on our customers.
Our dedication to problem solving your teamwork and Youll resilience, especially this past year with that I'll turn it over to Ralph to review the details of our results. Thank you Peter I am pleased to report that we exceeded the high end of our guidance for revenue adjusted EBITDA and free cash flow from the third quarter of fiscal 2021.
Our results demonstrate our ability to deliver both top line growth and bottom line margin expansion, even amidst a challenging operating environment.
Before I jump into our financial results for the quarter I would like to take a moment to review the financial implications of the reduction in force Peter mentioned.
First and as you will see when we get to our initial guidance for fiscal 'twenty, two and a few minutes I would like to reiterate that we remain committed to driving top line growth and expanding margins and cash flow and FY 'twenty two and beyond.
Second as Peter outlined while we are eliminating approximately 80 roles today, we will be reinvesting some of the savings and growth initiatives that we believe will enable us to reach more customers from both of go to market and product perspective, as well as to continue to improve our systems and processes to drive further efficiencies and our business.
And.
And finally, please note that these head count reductions will result, and a restructuring charge of approximately $3 $7 million and the fourth quarter of fiscal 'twenty one.
Let's now turn to the third quarter results.
First of note on the continuing impact we're seeing from COVID-19.
As we've said on our prior earnings calls the pandemic has had a significant impact on our core geographies our efforts to protect our customers support our team and Derisk. Our business have helped us to navigate this challenging period, despite our customers facing and uncertain operating environment and tight budgets while.
While the macro headwinds persist late in the third quarter, our North American team did see of marginal pickup in bookings from larger customers consistent with the pipeline increases we had noted in our last earnings call Walt.
While there was a slowdown and pipeline generation activity and the month of January we continue to believe that the north American market is showing early albeit gradual signs of recovery. Unfortunately, the U K and South Africa, and economies appear to still be struggling and will likely be slower to recover.
Now to the results and the third quarter, we generated revenue of $129 6 million, which represents an 18% improvement over the prior year and absolute dollar terms and adjusting for the $900000 of currency tailwind or constant currency growth rate over the prior year stood at 17% from.
Quarter.
Note that since providing guidance in November and foreign currency fluctuations positively impacted our third quarter results by $1 3 million bolstering. Our top line results were continued year over year increases and average order values or any of the calculated at January 26, FX rates and it'll be for all customers.
And that $13400 up approximately 8% over the prior year in constant currency terms. This trend of improvement is attributable to favorable shift in the average number of services per customer across our customer base. Currently at 3.5 services per customer compared to three three services.
This time last year as well as our increasing success with larger organizations.
And we added 500 customers and the third quarter as we've been discussing of the last few quarters. The COVID-19 pandemic is having an outsized impact on our smaller customers and we thus expect to see pressure on the net new customer count metric and tell the broader economies of our major markets begin to recover net.
Revenue retention stood at 104% for the four quarter period ended December 31 in line with our expectations looking at its components upsell totaled of 112% helped by strong interest and our zone two solutions of internal email protection, which added 800 customers and the quarter awareness training.
And then 600 customers and our zone three day, Mark solution, which added 200 customers and the quarter.
Down sell and churn totaled 8% as of the end of the third quarter consistent with last quarter, which reflects continued economic challenges our customers are facing.
We anticipate our net revenue retention rate is likely to reach 103% by the end of the fourth quarter again in line with the expectations. We shared earlier this year.
We continued to drive improvements in gross margins, we recognized a 77, 4% non-GAAP gross margin up 180 basis points from the third quarter of the prior year adjusted EBITDA for the third quarter totaled $34 $6 million, representing an adjusted EBITDA margin of 26.
<unk>, 7% compared to 18, 7% and the same quarter of the prior year on.
On a net basis the quarter derived approximately $3 $9 million of discreet bottom line benefit as a result of COVID-19, driven cost reductions consisting primarily of travel savings.
Even excluding these cost savings from the computation or adjusted EBITDA margins would have been approximately 23, 7% representing 500 basis points of EBITDA margin expansion compared to the prior year. We achieved this expansion through operational efficiencies driven by gross margin improvements Reese.
Of course prioritization throughout our operating expenses and year on year improvements in our real estate footprint.
Now turning to the bottom line.
Our non-GAAP operating profit for the third quarter was $25 7 million or 19, 8% of revenue and improvement of 830 basis points from the prior year. Our non-GAAP net income per the quarter was 21 $5 million or 33 cents per diluted share based on $66 million.
Fully diluted weighted average shares outstanding.
Our non-GAAP tax rate was 20% from the quarter as we have implemented a number of changes to our global operating structure. We are now modeling a full year non-GAAP tax rate of approximately 21%. We reported GAAP net income of $10 $8 million from the third quarter or profit of 16 cents per diluted share.
And again based on 66 million fully diluted weighted average shares outstanding our GAAP tax charges totaled approximately $1 $2 million and the third quarter fourth quarter tax expense is expected to be approximately $500000. Our full year GAAP tax expense is currently estimated to be approximately 2.9.
Millions of dollars.
Turning to cash flow third quarter operating cash flows totaled $35 million or 27% of revenue free cash flow jumped to $24 $2 million for the quarter or 18.7% of revenue driven by higher profitability and by better than expected collections late in the quarter.
And as of December 31 mine cash had $271 million of cash on the balance sheet of $97 million from the beginning of the year net of debt. Our current cash balance stands at $165 million. Let me now turn to guidance for the fourth quarter of fiscal 'twenty 'twenty. One revenue is expected to be between <unk>.
$135 million, and 131 $5 million or 11% to 12% growth in constant currency terms of.
Our guidance is based on exchange rates as of January 'twenty, six 'twenty 'twenty, one and includes an estimated positive impact of $3 $8 million, resulting from the weakening of the U S dollar compared to the prior year adjusted EBITDA for the fourth quarter is expected to be between $28 $3 million and 29.
$3 million at this point, we are continuing to assume very little travel in the fourth quarter free cash flow from the fourth quarter is expected to be approximately $22 million.
Turning to the full fiscal year fiscal 'twenty 'twenty, one revenue is expected to be between $498 million and $499 million or approximately 17% growth and constant currency terms, adding the details foreign exchange rate fluctuations are positively impacting this.
Guidance by an estimated $400000 compared to the rates in effect and the prior year.
The prior guidance from fiscal year 'twenty 'twenty one provided in early November was $492 million at the midpoint our over achievement in Q3 is leading us to raise the midpoint of our full year guidance by $1.9 million and constant currency terms.
This increase of $1 9 million.
Has been positively impacted by $4 $6 million of foreign exchange tailwind that has arisen since the rates used in our November call, resulting and the midpoint of our full year guidance moving up by $6 $5 million and absolute dollar terms from 492 million to $498 five.
Millions of dollars, we're raising full year 'twenty 'twenty, one adjusted EBITDA guidance to between $122 $2 million and $123 $2 million at the midpoint. This represents a $12.9 million or 230 basis point improvement over our prior.
Guidance.
We are also raising full year 'twenty 'twenty, one free cash flow expectations to a range of $86 million to $87 million, reflecting of free cash flow margin of 17, 4% at the midpoint of our revenue guidance. This is 860 basis point improvement over the prior year.
And 40 basis point improvement over our prior guidance provided in November I would also like to take this time to set initial expectations for the year ending March 31, 'twenty 'twenty two.
Please note again that this guidance is based on foreign exchange rates as of January 'twenty, six 'twenty and 'twenty one.
Full year FY 'twenty, two revenue is expected to be and the range of 558 million to $568 million or approximately 9% to 11% growth and constant currency terms when measured against the midpoint of our guidance I would remind everyone that approximately 98% of our revenue is recognized ratably.
Bookings in any given quarter typically have minimal impact on back orders revenue and that the most important bookings quarter for fiscal 'twenty. Two is arguably Q4 of fiscal 'twenty one for purposes of modeling our year, even assuming a strengthening economy yields higher bookings for the whole of FY 'twenty two the nature of.
Our revenue recognition lead us to expect revenue growth will be relatively flat across fiscal 'twenty. Two we would then anticipate revenue growth acceleration as we move into fiscal 'twenty three.
Returning to guidance.
Full year FY 'twenty to adjusted EBITDA is expected to be approximately $146 million.
Which at the midpoint of our revenue guide would represent an adjusted EBITDA margin of 26% and it would be approximately 130 basis point margin improvement over fiscal 'twenty one.
For modeling purposes, I would note that on a preliminary basis, we expect full year FY 'twenty, two GAAP taxes to total approximately $7 million and a non-GAAP FY 'twenty two tax rate of approximately 25% free cash flow for the full year FY 'twenty two is expected to be approximately $121 million.
And which at the midpoint of our revenue guide would represent of free cash flow margin of 22% and would be and approximately 410 basis point margin improvement over fiscal 'twenty. One this would represent significant progress towards reaching the long term free cash flow targets of 23% to 25%, which we.
<unk> discussed at our analyst day last February.
To conclude despite the impact of the global pandemic. The mine cash business is demonstrating its resilience as our third quarter results show. The team is working hard to meet and exceed expectations. While we've had to make some difficult business decisions. We are investing to meet the growth opportunity and delivering on our commitments to expand free.
Cash flow margins with that I'll turn it back to Peter for some closing remarks. Thanks Rafe.
And it's always been and mine costs DNA to change and it's how we've been able to grow and thrive for the last 18 years and its how we will achieve our vision for the future.
We have the talent tenacity and long term commitment needed to power. The next evolution of our business.
And we're confident we will deliver.
And the near term, we remain nimble and continuing to prioritize our customers.
And taking actions to rebuild towards the higher growth rates. We know we're capable of delivering non operator, if you would please open the line for questions.
Thank you as a reminder of its ask a question you will need to press star one on your telephone.
Your question and press the pound key.
And while we compile the Q&A Eros now on life.
Our first question comes from Matt Hedberg with RBC capital markets. You May proceed any of your question.
Oh, Hey, great. Thanks for taking my question guys.
Peter I wanted to ask you a little bit about the compromise maybe I missed it at the top of the call, but could you maybe provide a bit more details about the number of customers that were actually impacted by this versus potential number and then and then kind of thinking longer term could there actually be of benefit to you guys from from the solar wind screech and terms of customers turning to mine cash poor.
And <unk>.
Additional third party email protection things of that nature.
Yes.
Good question. Thanks, Matt Okay. So I think what we disclosed was in the initial statement was that five.
Sorry of customers had been targeted.
By this and.
We've put out subsequent statements I'd encourage you to go and look at all of blog and the things that we said publicly we don't have.
Anything additional material to shape beyond that.
But we did as you know go out and more broadly to our customer base with some precautionary actions for them to take and.
They are ongoing and continue to be successful.
I think you know broadly speaking when we look at what this represents clearly there's a significantly elevated threat level in the world.
And particularly elevated threat level around public public sector and government as a result of this threat actor.
What.
What I think it has shown us is that cyber security really requires transparency and teamwork amongst vendors and we continue to be very committed to that.
And E mail remains a very significant threat vector for organizations. So I think it really on the lines and underscores the importance of the work that we're doing to.
And to help customers in particular of protective of very significant investments and and collaboration of environments like office 365.
That's great and then the other thing that stood out from your I mean, you called out the Symantec replacement of a large deal win there.
I'm curious.
And your largest whenever which is great to hear could.
Could you talk a bit about debt semantic momentum.
We've all thought that it could be a pretty significant and really long term tailwind to the business if deals come up for renewal, but maybe just a little bit of an update about the broader trends that you're seeing within that opportunity beyond this obviously very large deal.
Yeah. Thanks. This is Ralph I'll start us off on this one at least we are encouraged by the business. We're seeing from formerly Symantec customers heading our way when you look year over year on for the quarter or even a year to date basis. It has shown a nice uptick and we.
We continue to be encouraged by what we're seeing and the pipeline. So I think some of those things we talked about about long term contracts that they had with symantec and and setting us up for a renewal alright and opportunity when those contracts come up for renewal that debt is starting to come to pass and that's been helpful.
Thanks, Mike.
Thank you. Our next question comes from Catherine technique with Colliers you May proceed with your question.
Thank you for taking my question could you kind of.
And to email and email too as far as the opportunities are evolving and how they lay out and that's right.
Landscape. Thanks.
Yes, so catherine and so so in the context of our email security three <unk> strategy, which is really the framework that we've been working to communicate to customers about how to think about email security and messaging security generally and the and the modern threat landscape three breaking that down.
And two into three zone zone, one being a classic of perimeter of environments, and we've had tons of additional innovation and investment around that and that continues to be a M.
Significant.
Opportunity out there and the market.
I think you know on.
With the TTP product and and that and zone, one and we added 800, new TDP deals and this last quarter. So I think that's that's an important sort of anchor on the on the story and then when we look at zone two.
Those are really important inside the perimeter capabilities looking at.
The lateral movement of threats inside of the email network.
Identifying.
One of our abilities in terms of of the human layer.
With our awareness training product some of the new innovations that we've delivered around things like say fish that really enhance the phishing simulation capabilities to make them much more representative of the actual threat landscape.
Today, so those on key products.
And really important for customers and again and this quota of strong uptake there with 800, new IEP purchases and 600, new awareness training purchases. So that's a that's a really strong part of our E Mail security and emerging email security three out of play and then of course and zone three and some really important.
And capabilities and what we can talk about is beyond the perimeter.
I think day, Mark really is starting to.
Become a must have capability for all organizations and this quarter, we added 200 and new customers are paying.
Paying customers to your day Mark solution.
So it's a great framework, it's an important framework and its cash.
Early.
Really relevant for organizations to think about email security and much more as a pervasive.
Multi zone and strategy as opposed to historically, it's a perimeter of kind of gateway filtering service.
So thanks for the question Catherine Yeah, no. Thank you I need to clarify that when you talk about your win it seems like youre getting to have more two and three in the wind category. When you announced these bigger deals. So it's nice to see thank you.
Thank you.
Thank you and our next question comes from Steve Koenig with S. M B C.
And you go you May proceed with your question.
Hi, I'm paid on gentlemen, thank you for taking my question.
I wondered if you might be able to give us some color on.
And what what you're thinking about the breach in terms of its impact on win rates or sales cycles, and he and any initial indications about how customers are responding and how you might tweak your go to market and then just more generally.
And aside aside from the incident.
Any changes and your go to market kind of tactics or approach. This year are and greater emphasis on certain products et cetera, <unk> versus last year.
Thanks very much.
Yeah, Steve This is Ralph I'll start us off here and thanks for being up early with US This morning from the West Coast.
And with the the security is and I think the direct impact debt, we would that's worth noting is.
A couple of weeks, we've really devoted the entire company to making sure we're serving our customers helping them through credential changes and making sure. We're just available and so that did have a short term impact on pipeline generation activities and January that team is all back to their day jobs. If you will out generated generating pipeline and and working on that so.
And you know that.
Side from that.
Specific point Theres, nothing that really changes our initial expectations at least that we're seeing thus far now I think when we look a little bit.
Longer term you know one of the things as Pete noted at the top of the call.
And in times like this we focus very much on our customer success and on transparency and frankly, you know and a lot of the calls with our enterprise customers well, we've got did and has great feedback from them that they appreciate that that transparency that go on that extra mile. Because frankly, the solar winds attack is really remind all of us just how sophisticated.
<unk>. These threat actors are and how much we need to work together and collaborate to defend ourselves against them. So.
I would say for what has been and eventful last few weeks. It seems like the general feedback is that they appreciate the efforts that we've taken to be transparent with them too.
To the part of your question about.
What are the changes going forward and one of the shifts that is certainly taking place within the organization is as we are aligning our resources more and more towards of strategic initiatives that that Pete laid out and the first one of you called out was that continued focus and investment on the enterprise and certainly and our go to market function that some of the changes that they're going through.
Food.
And right now and as we look towards this next fiscal year will be continued hiring into the enterprise place whether it's.
On the rep level, whether it's more senior technical resources and sales engineers to get out there and help with those accounts or how we support those customers from a customer service perspective that that's probably the most profound change to call out I don't want to take anything away from the rest of the business. That's focused on some of these smaller customers, but you know we're.
Digging deep to make sure we're handling and the small guys as efficiently as we can and building the systems and evolving the systems to serve them and and focusing more and more of those resources on those larger customers.
Yes, Thanks, Greg and I think what I would add to that is as you know when a sophisticated act of like this this has been so successful on on industry wide scale.
One of the other things that are really underscores the importance of and integrated security architecture and so.
I think where where you know for many organizations and the early stages of building.
Truly integrated security architectures, so I'll work and in particular around all of setups Virtual conference.
In terms of building integrations.
To help customers much more seamlessly create these integrated intelligent and highly responsive security architectures with mine costs being a really powerful contributor to that architecture. I think that's one of the key emphasis emphasis for us going into FY 'twenty two.
Great. Thank you.
Thank you. Our next question comes from Sterling Auty with Jpmorgan you May proceed with your question.
Hey, guys.
And just add on for Sterling. Thanks for taking my question and.
In terms of the guidance I appreciate that some of the pieces. There that you that and you explained just trying to understand how much of that 10% growth and.
And the next fiscal year, how much of that is coming from.
On the bookings impact that you mentioned.
Possibly from.
<unk>.
And as well and how much of that interest coming from.
Lower tailwind from from office 365 migration.
Yes. Thank you so on next year's guidance, which just future role of line is 911% or 10% as the midpoint of as you noted.
We've been talking all year long, while most of the year anyways about the impact of Covid has had on our business and I think that is really the place to focus in terms of.
Looking at those bookings how those bookings translate into into revenue force for FY 'twenty two.
And it goes without saying, but worth reinforcing that we're very much still in this COVID-19 environment I did call out that we'd seen a bit of strength in the north American market in December in particular, and I think that's encouraging but remember that we get almost half of our business from outside the U S and some of those areas are appearing to be a little.
Slower to recover so you know just as you know as you well know the SaaS revenue recognition model really puts undue weight. If you will on next year's guidance on how the bookings come in for for the rest of this quarter and the next just because it gives them full time to amortize into the revenue and and that sets us up on this next five six months being.
Dreaming of important in terms of next year's guide and so when we look at that with them.
Covid still raging and market as still being a little slow to recover it does cause us to have two to consider that the recovery on the revenue line will leg of the bookings and and so that will probably impact FY 'twenty two as we've described.
Great. That's very helpful. And then one follow up you talked about some of the.
And the long term growth you know at the Analyst Day, you guys mentioned, 17% to 21% growth.
And that fiscal 'twenty three to 25 range and just wanted to make sure in terms of do you do you think that those.
All of which will give them.
Within the timeframe that you gave that you gave given some of the bookings headwinds that you mentioned for this next year. Thanks.
Sure I think.
We still think like debt mid to upper teens range is the right way to think about our business in terms of the market that's available our products and the opportunity that's before us. So I think I think that is quite that remains strong and true for us.
And we gave that guidance shortly before the Covid crisis came along so what we're.
Likely to see is that it will probably take a bit longer to get to that revenue range than we had originally anticipated.
What I would also note, though that in addition to the top line guidance that you mentioned, we also talked about of free cash flow range of 23% to 25% and you know.
Youre seeing and our guidance that cash flow inflection we talked about at the time is really coming to pass we have seen in FY 'twenty, one and the guidance for FY 'twenty. Two is arguably ahead of schedule. So.
On a balance scorecard perspective, the free cash flow numbers, I think of showing nice improvement and we're going to get there.
On schedule or a little bit early and in terms of the top line there the right way to think about the business, but given COVID-19 and it's going to take a little longer to get there.
Great. That's very helpful. Thanks, guys.
Thank you. Our next question comes from Terry Tillman with Truth. You May proceed with your question.
Yeah. Thanks for taking my questions I guess the first question. Peter is just a bigger picture question about the office 365 opportunity and is this the pandemic just grinds on.
Was that opportunity changing as well as what's even the sunburst incident recently.
What's different now about the O 365 opportunity compared to the three months ago six months ago, and then thinking going forward and then a follow up.
Yeah.
Great question. So I mean office 365 continues to be a significant source of business for us.
In terms of adding additional layers of security and capability on top of $3 65.
More than half of all customers are using us to protect office 365. So that's that's north of 20000 organizations.
I think what this sunburst.
Threats is really on the line for us so clarified for US. Once again is is how and how significant of target. The office 365 environment is for.
And the adversaries and that.
While Microsoft is very determined to provide a robust and secure environment. There is some level of and intractable problem in terms of.
Securing that environment continuously unsuccessfully and isolation and that I think is really showing the need for additional independent specialists layers of security to help shore up and protect office 365, so that customers can be cut.
And feel confident and secure doing business with a considerable dependency on on office 365, So we remain bullish about that opportunity.
Yes, and and my follow up I'm not sure. If this is for I'll just throw it out there and then you all can fight over my Ultimate question, but if I look at the FY 'twenty two guidance I mean, how do we think about the mixes of business and just how much of our we look into more of a stair step increase and the enterprise's exposure as opposed to the small business and the mid market.
Or is it still going to be a gradual kind of uptick in enterprise and I'm just trying to understand how to think about that into 'twenty, two and and really even into 'twenty. Three in terms of how quickly will this pick up in terms of proportion of the total thank you.
Yeah, No. That's very helpful. You know I think the right way to think about it it'll be it'll be somewhat gradual we've been talking about having that highest and of our market at 18% of revenue. We continue to watch how that grows over time, but it does growth somewhat gradually and that is we talked on these calls a lot about the enterprise, but we.
And have some really strong business with some mid and mid to large sized customers as well as.
Even on the lower end of the business, so that with the whole business growing the enterprise is where it's getting a lot of attention and good investment, but at our size and scale youll recognize that growth on a somewhat slow basis.
Operator next question. Thank you and our next question comes from Brent Thill with Jefferies. You May proceed with your question.
Hey, guys. This is Joe on for Brian. Thanks for the question Great to hear about the public sector being strong and the quarter has there been any issues with the recent compromise in that regards and then perhaps just elaborating further on the sense of of size and the future growth aspirations and that business.
Yeah.
Yes, Okay, so and government business and.
Education sectors, while remain.
Important.
Target market for us.
We recently announced our of fed ramp ready status on that growth and you know it'll be several quarters before we have a pool of authority to operate and fed ramp, but that's a that's clearly a focus sector for us.
And the.
And the U S.
It's a key market, but also internationally and the prepared remarks I called out of a large international government agency that it had signed with us and the quota and interestingly.
And our government.
<unk> of business and education group and the last quarter from 6% of our revenue to 7%. So we feel like we're making good progress.
Three of those those results the one thing that we've seen very clearly with this.
Solid when sunburst attack is the elevated threat level presented to public sector generally and.
And how governments really has to take the <unk>.
Cyber security threat significantly more seriously I think encouraging signs coming out of the new administration in terms of commitment of resources and skill to to counteract this threat.
And we think it's such an important market for us to serve but also most likely a lucrative market on a global basis from mine costs going forward.
Awesome and then Peter everything you said on the call is logical and appreciate all of the added detail. What gives you. The comfort that this is truly a macro issue and a no decision issue versus a competitive issue and people go on with Microsoft maybe Microsoft good enough and E.
While security.
So great question I mean, we have operated in a competitive environment for the duration of of our history. So we know we have to earn our business. We know we have to demonstrate higher efficacy and keep innovating and keep serving customers more successfully but I think the current threat landscape has has indicated that.
It's really important for organizations to layer in additional specialist security and.
And not merely rely on the underlying application vendors.
<unk> to secure their environment, it's important that they do secure their environments, but I think recent events have proven quite quite clearly that that may not be enough and that additional specialist focused security.
And tooling that can help organizations.
<unk> confident would be more resilient.
With that dependency with that dependency being on the Juiciest targets of four adversaries.
Being mitigated significantly so again, we feel we feel really good about that opportunity, but very conscious that we have to message and innovate and sort of really well in order to to.
To go and continue to grow in this environment.
Makes sense thanks, guys.
Thank you. Our next question comes from Keith Bachman with Bank of Montreal, and you May proceed with your question.
Hi, Thank you very much for taking the question I had two I wanted to ask.
The first one is I was wondering if you could give any context or comments on the net retention rate that you see you've given one of three.
For Q4, just any kind of color on how that may unfold.
And as you look at sort of <unk>.
Next fiscal year.
Directionally does it how quickly kind of move back to something.
As you get throughout.
The new fiscal year, and what else and I'll follow up after.
Yes, so I think.
First keep in mind with that net revenue retention number it is a trailing four quarter metric with most of our contracts being approximately a year, we look back to those contracts and see how they perform so it is by its nature is going to move somewhat slowly I think the key here and the key indications that we'll all be watching it.
Notice that the customer count metric is probably going to continue to run a little bit suppressed for a while does we're still working through COVID-19, but that's an important metric to watch because it's going to speak to that those net customer adds number will speak to how we're experiencing some of the challenges out there.
You'll note, it's stabilized between last quarter and this quarter and so it does feel like we've worked through some of that initial shock and we're seeing some stability and it. So we will continue to be watching that in the coming quarters and I think that's a key piece I would caution everyone know on this.
It needs to be looked at in tandem so take the net customer adds number look at the a O V number and that's going to give you a much better view of how the organization as a whole is performing but I think that's a good indication we would certainly hope.
Hope that has some of these companies come out of the Covid crisis.
We saw a lot of down sell and remember would really focus on let's keep them as customers. Even if it's for a smaller of state, but as they come out of the Covid crisis, a lot of these businesses and the retail hospitality sector and.
Places like that they need people to function and so we're quite hopeful would see as we move through that and uptick in those numbers.
As of year progresses that again somewhat dependent on the COVID-19 recovery and the respective markets.
Okay, Okay, Peter I'll direct this to you and again I missed the very initial.
A discussion on the conference call, but if you could just talk about how you balance taking of head count reduction to make sure that you're trying to set up of companies for future growth on a durable basis, and where are some of those reductions, but more importantly, how do you balance that as you look at the organization over.
The bulk of two and three years.
Yeah, Great question and Keith So we've been extremely thoughtful about this and looked at our strategic plans and looked at what are the key initiatives that we wanted to be able to invest more in and then by implication there are certain areas that we're going to be investing slightly lessen and so that rebalancing to be able to say how do we double.
And on enterprise, how do we double down on automation and efficiency for all of them.
M.
Mid market and a long tail of of SMB customers.
And one of those changes that we need to make to set ourselves up to execute well on that on that long term plan. So.
Yes.
I think that the that the changes that we've made and some of them of difficult. It's not easy to make these organizational shifts, but they help us to be able to both invest and the right areas of the company, but also yield some of the efficiencies and and demonstrate some of the strength of on.
On the bottom line on and cash generation, that's inherent in our model. So I feel good about how we've got that balance right and.
We now set up for FY 'twenty, two to just get out there and execute.
Okay, Alright, many thanks good luck.
Thank you. Thank you.
Thank you. Our next question comes from Niihau trunk Chew it non from capital you May proceed and your question.
Oh, yeah. Thank you.
Could you give some color on the U shaped recovery.
And what would the looking at the constant currency growth rate to bottom that throughout the course of fiscal year 'twenty two.
Yes, Thanks Ed.
As I noted one of the things that we think will be with.
We'll be roughly and this range of of the guidance range across FY 'twenty, two obviously, depending on how bookings go with Mike.
And impact on late in the quarter rates, but again your SaaS revenue recognition that debt revenue growth rate needs to have bookings activity as well in front of the ultimate uptick and revenue growth. So yeah, I think the right way to think about it is we'll do roughly within that range for FY 'twenty two.
And how would you expect to net revenue retention rate too.
And profile throughout that also relatively even at the current current.
Great.
I think that you know.
Roughly speaking and.
And again based on how and how things play out over the course of the year that I think that's roughly the right way to think about it and approximately this range.
Okay and then for my follow up question of the three pronged subscribers in terms of returning to the rule of 40 of really accelerating back up to the long term growth rate what's.
What's the most important which probably will be experiencing the biggest benefit from the restructuring that you guys have taken them.
Sure.
Well I think it's difficult to sort of single them out specifically, but I do feel that that I'll focus on the enterprises.
Clearly one of the very important parts of that strategy that will.
And we'll benefit from from additional investment.
But importantly, our investment and R&D generally and our ability to continue.
Continue to be successful with multi product.
Sales across the platform, so driving higher levels of penetration and you've seen our average products per customer and move up from from three three to three five.
Year over year.
You know being able to really invest in that and drive that multi product strategy into the customer base and into new business.
I think those two of both are set to benefit from from this investment plan.
Great. Thank you.
Thank you and our next question comes from Shaul Eyal with Oppenheimer. You May proceed with your question.
Good morning channel.
I had just one question.
I know the after math on the derivative of of the roofs and fun birth.
Different.
Differ materially from out of.
And that feeling and back and I think of a 2016 and making 2016, but.
Comparison.
Some of the lessons learned from.
That out of it.
Peter.
And that could be applied this time, because if I'm looking back I think for everybody who covered new for such a long time.
He came out much stronger.
Over the course of of the path.
Five six years. So it wasn't just the compare contrast for us will be greatly appreciated.
Yeah. That's that's of Great question of show I think.
Yeah.
Every every time, we have a setback I think as a company, we why it too to learn and to come back stronger.
Whether that's in terms of.
Things, we can we can take on from a product development and R&D point of view, whether it's our own security posture, whether it's our operations, but I think one of the one of the key things that we've learned historically is that being very open and transparent with our customers and.
And.
Really engaging with them.
Yes.
And part of their teams is crucial to getting through some of the setbacks and so what you've seen from from mine cost, particularly and this incident.
Is how open we have been and as soon as we have information that customers can can use to mitigate risk.
We lead with that regardless of how difficult or complicated or.
How much we might worry about the impact of doing that so we're very kind of forthcoming with that.
Yeah.
And I.
I think this is.
There's a lot of things that one learns when one has and encounter with a sophisticated adversity like this.
And certainly we are going to absolutely indulge and all of those learnings and look at all of the opportunities that we can extract from that too.
And both develop products on our site as well as sort of improve the robustness of mine cost as an organization.
Right.
Okay.
Operator, we'll take one final question.
Thank you. Our next question comes from Brian Essex with Goldman Sachs. You May proceed with your question.
Hi, good morning, and thank you for taking the question and I really appreciate it.
Sorry about this if this was a if this was covered previously but just had a had a question on.
From a from a geo perspective.
Thoughts on Europe, and the U K, we've heard and other segments that debt.
U K was which was pretty weak, but just from a geo perspective.
And where you saw strength of weakness and what your outlook is given given the I.
And I guess, maybe softer <unk> and then.
Flatter or.
Alright, guys flatter full full.
Full year guidance that you've given.
Yes. Thanks.
Our experience and the U K.
Is in line, but both of the U K and South Africa, very much seal and the impact of the Covid crisis and the impact on the economy.
I will say, our U K team and I think he is optimistic though as we look forward and some of this is Brexit is now behind everyone and and we're still moving forward. So it is having some certainty there is given at least to the degree we have it is giving our sales team some confidence when they look out of across the year as a whole.
Likewise on Covid with people getting vaccinated and I think there's a general sense of optimism, but to be sure. It hasnt really shown up yet and certainly through Q3, and frankly, I think and tell the Covid crisis is more on check.
The U K and South Africa are going to struggle of bed and those are very important economies to us where it did note a little bit of a positive is as the third quarter went on in December we started to see some per.
Positive momentum at least a bit with some of our customers late in the quarter and so there was a you know again this is Tim.
We should be moderate theory of it like it is but there was certainly some positive indications that companies and the U S of North America, certainly, we're starting to look beyond the COVID-19 crisis and getting back to work.
Got it that's helpful and and again apologize if you discussed it already but.
Interested and competitive dynamics up market.
And particularly what you're seeing and the pipeline and what you've seen in the quarter.
The ability to land larger customers and how large I guess might those customer wins b and.
And is it significantly larger than you've seen in the past or are you just penetrating a substantial segment of the larger enterprise market.
Yes, that's great and we feel.
Really good about that enterprise market opportunity I think and the prepared remarks I called out.
And we had 24 100 K plus deals and then also some really nice and.
Total example salts.
Of logic held wins with tens of thousands of seats.
And some north of 100000 seats so.
Yeah, we think the very large enterprises have.
Sophisticated needs that might cost is extremely capable of addressing and that's been proven out each quarter as we add more of these very large enterprises too.
Our platform.
Sure.
Yes significant opportunity.
No particular limits in terms of of of where we feel we can now as we've evolved as a company as we've built on our technology and art and.
<unk> teams.
And.
Yes.
Okay, great very helpful. Thank you.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Peter Bauer for any further remarks.
So thanks for joining our FY 'twenty to 'twenty, one sorry, FY 'twenty one Q3.
Our earnings announcement. This morning, thanks for those on the West Coast of got up early to join US have a great rest of the week and we look forward to updating you and.
Three months of time.
Okay.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Sure.
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