Mimecast Limited

Good morning. Welcome to the Mimecast earnings call for the fiscal third quarter 2021 ended December 31, 2020.

I'm Robert Sanders, Director of Investor Relations. With me on the call this morning are Peter Bauer, our Co-Founder, 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 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 SEC 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 in Mimecast's most recent Form 10-Q filed with the Securities and Exchange Commission. During this call, we'll 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 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 February 3, 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 family is safe and well.

It's been a busy quarter for Mimecast and we’ve got a lot to cover today. Before I discuss our results I want to frame at a high level how we are thinking about the future.

We continue to navigate the ongoing impacts of the pandemic which is not yet stabilized as we hope for back in the spring. We are working quickly and hopefully to address our recently disclosed cyber incident and we are still in the early innings of our long term strategic plan.

And we remain confident and excited about capitalizing on the opportunities ahead. Of course may not initially come as fast as we had expected pre-pandemic we will continue to invest in the right areas to achieve the growth that we know Mimecast 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, industry leading retention and high gross margins remain intact.

These fundamentals have contributed to our achieving an exciting milestone as we crossed the $0.5 billion revenue run rate. Before we dive into the results in our achievements during the quarter let me briefly start with an update on the cyber incident we've disclosed in January.

Our top priority in 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 all activities with law enforcement.

We also immediately began working with the handful of customers who were targeted on remediation measures and we have advised our customer base to take certain other precautionary actions to fortify their protections. Our customers and larger enterprises in particular understand that this is an unfortunate reality of operating today and they have been highly collaborative with us throughout this process.

We remain in close contact with them. We believe that the steps we are taking to isolate and remediate the identified threat has been effective.

We continue to examine and closely monitor our environment. As previously disclosed our investigation has confirmed that this incident is related to the solar winds Orion software compromise and was perpetrated by the same sophisticated threat factor.

Our investigation is ongoing and will continue to communicate updates directly to our customers if warranted and where appropriate disclose in publicly on the Mimecast blog. And now onto our 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 up 17% year-over-year in constant currency terms and we had a 500 new customers including 24 six-figure deals in line with Q3 of last fiscal year pre-pandemic.

Rafe will be providing FY ‘22 guidance later in the call but let me touch briefly on how we thinking about the end of this fiscal year and the next. We do expect revenue growth to improve over time, supported by an increase in our net retention rate and a gradual re-acceleration of new logo ads.

That said, we currently expect a U-shaped recovery over the coming year with quarterly revenue growth stabilizing throughout the next fiscal year. This was anticipated prior to identifying the security incident.

We are continuing to build operating efficiencies into our business and thus delivering increasingly strong cash flow and meaningful margin expansion. We expect that to continue into FY ‘22 even as we invest in strategic initiatives and our go to market team to drive growth.

To declare 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 topline growth at our long-term targets will take additional time and investment in both our offerings and our team.

In the context of the challenging environments in a growing threat landscape we have been executing a three-pronged strategy that is delivering results. First, expanding our footprint in the enterprise market.

Secondly, innovating on and selling on multiproduct platform to more customers and thirdly, automating to create even stronger and easier to use engagements with the SMB market and our channel efficiency at scale. All of this is underpinned by continued investments in R&D.

As we continue to meet and anticipate the changing threat landscape our successes this quarter demonstrate 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.

healthcare organization with 190,000 seats. And this customer previously used legacy technology from Symantec and we competed against other leading vendors.

Ultimately, our integrated platform, API ecosystem and email security 3.0 framework were important deciding factor as to when this customers trust. In another example an EU pharmaceutical company selected our security solution to build more confidence and security around their Office 365 deployment and this win further underscores the competitive advantage provided by having a broad platform in Mimecast for countering sophisticated cyber deception.

We continue to see an uptick in our multiproduct strategy this quarter with an average number of services per customer, increasing to 3.5 from 3.3 in the same quarter last year. Hundreds of existing customers added additional services including a U.S.

technology company, which added archiving to the subscription for 58,000 employees. We also saw net new customers acquire bundled services, such as a U.S.

professional services company for 100,000 seats with services across our email security 3.0 solution framework including targeted threat protection, internal email protect, DMARC Analyzer and our continuity services. Our results this quarter further demonstrated that advancing our multiproduct strategy overlaps well with our focus upmarket.

In addition to those I've already touched on we won displacement solutions at two new U.S. healthcare organizations one 20,000 seat firm and the other 16,000 seat firm replacing their legacy provider with each selecting multiple services including email security, archiving and awareness training.

We also won a large Australian engineering firm with 16,000 employees which selected services across the email security 3.0, solution framework adding security, awareness training, DMARC Analyzer, brand exploit protect and continuity services. Our public-sector business also continue to grow this quarter with a large central government agency in one of our international markets for 14,000 seats and we made continued strides in key growth markets such as Canada and central Europe with central Europe again growing more than a 100%.

During the quarter we continue to build out our platform of solutions with the new innovations introduced without case reviewer, enhancing our archive, any discovery capabilities, safe fish which further differentiates our awareness training product in Zone 2 and CrowdStrike integration which shares the threat intelligence from our email security 3.0 solution to help customers build even more robust security architectures. We also recently hosted our SecOps virtual conference cosponsored by Palo Alto Networks, CrowdStrike, Splunk, Rapid7 and Netskope where we delivered numerous educational sessions helping customers to learn more about how to leverage Mimecast APIs in our out-of-the-box integrations across their security estates and this underscores the power of our cloud native platform Mime OS to help customers achieve their goals.

Notwithstanding these wins growth continues to trade below our pre-pandemic expectations and to accelerate revenue growth we are prioritizing resources in line with the three-pronged strategy I mentioned earlier; moving upmarket, advancing all multiproduct strategy and alternating to create even stronger and easy to use engagements with the SMB market and our channel efficiency at scale. Now we are implementing a stock restructuring which includes the reduction in force of approximately eight-year-olds, which is roughly 4% of all workforce and it's never easy to have colleagues depart, especially in an environment as tough as this one.

And we did not make this decision lightly. 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 when more when we do and ultimately deliver better service to them.

We expect investments in our sales and product teams to fuel our multiproduct strategy with both existing and new customers. We will also be investing to enhance our customer service capabilities by improving access to data, investing in automation and leveraging our growing talent pool in South Africa.

We are excited about these initiatives and confident they will enable us to realize the market opportunity. In January, Helene Auriol Potier joined our Board of Directors and Helene brings significant industry expertise and international operating experience to our board.

Now in summary, we have the right ingredients for success in 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 Mimecast who work diligently and tirelessly on the security incident over the last few weeks and I also wanted to thank the rest of our team departing and staying on for your relentless focus on our customers. Your dedication to problem-solving, your teamwork and your resilience, especially this past year.

With that I'll turn it over to Rafe 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 for the third quarter of fiscal 2021.

Our results demonstrate our ability to deliver both topline 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 ‘22 in a few minutes I would like to reiterate that we remain committed to driving topline growth and expanding margins and cash flow in FY ‘22 and beyond.

Second, as Peter outlined while we are eliminating approximately 80 roles today we will be reinvesting some of the savings in growth initiatives that we believe will enable us to reach more customers from both go to market and product perspective, as well as to continue to improve our systems and processes to drive further efficiencies in our business. And finally, please note that these headcount reductions will result in a restructuring charge of approximately $3.7 million in the fourth quarter of fiscal ‘21.

Let's now turn to the third quarter results. First, a note on the continuing impact were seen COVID-19.

As we have 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 an uncertain operating environment and tight budgets.

While the macro headwinds process late in the third quarter, our North American team did see a marginal pickup in bookings from larger customers consistent with the pipeline increases we had noted in our last earnings call. While there was a slowdown in pipeline generation activity in the month of January we continue to believe that the North American market is showing early albeit gradual signs of recovery.

Unfortunately, the UK and South African economies appear to still be struggling and will likely be slower to recover. Now to the results.

In the third quarter, we generated revenue of $129.6 million which represents an 18% improvement over the prior year in absolute dollar terms. Adjusting for the $900,000 of currency tailwind our constant currency growth rate over the prior year stood at 17% for the quarter.

Note that since providing guidance in November foreign currency fluctuations positively impacted our third-quarter results by $1.3 million. Bolstering our topline results were continued year-over-year increases in average order values or AOV calculated at January 26 FX rates, AOV for our customers stands at $13,400 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 3.3 services this time last year as well as our increasing success with larger organizations. We added 500 customers in the third quarter.

As we've been discussing over 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 until the broader economies of our major markets begin to recover. Net revenue retention stood at the 104% for the fourth quarter period ended December 31 in line with our expectations.

Looking at its components upsell totaled at 112% helped by strong interest in our Zone 2 solutions of internal email protection which added 800 customers in the quarter, awareness training which added 600 customers and our Zone 3 DMARC solution which added 200 customers in the quarter. Down sell in 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 expectations we shared earlier this year.

We continue to drive improvements in gross margins. We’ve recognized the 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 26.7% compared to 18.7% in the same quarter the prior year. On a net basis the quarter derived approximately $3.9 million of discrete bottom-line benefits 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 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, resource 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, an improvement of 830 basis points from the prior year.

Our non-GAAP net income for the quarter was $21.5 million or $0.33 per diluted share based on 66 million fully diluted weighted average shares outstanding. Our non-GAAP tax rate was 20% for 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 for the third quarter or a profit of $0.16 per diluted share again based on 66 million fully diluted weighted average shares outstanding.

Our GAAP tax charges totaled approximately $1.2 million in the third quarter. Fourth quarter tax expense is expected to be approximately $500,000.

Our full year GAAP tax expense is currently estimated to be approximately $2.9 million. 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.

As of December 31 Mimecast 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 spans at $165 million.

Let me now turn to guidance. For the fourth quarter of fiscal 2021 revenue is expected to be between $130.5 million and $131.5 million or 11% to 12% growth in constant currency terms.

Our guidance is based on exchange rates as of January 26, 2021 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 for the fourth quarter is expected to be approximately $22 million. Turning to the full fiscal year.

Fiscal 2021 revenue is expected to be between $498 million and $499 million or approximately 17% growth in constant currency terms. Adding the details foreign exchange rate fluctuations are positively impacting this guidance by an estimated $400,000 compared to the rates in effect in the prior year.

The prior guidance for fiscal year 2021 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 in constant currency terms.

This increase of $1.9 million is being positively impacted by $4.6 million a foreign exchange tailwind that has arisen since the rates used in our November call resulting in the midpoint of our full-year guidance moving up by $6.5 million in absolute dollar terms from $492 million to $498.5 million. We are raising full year 2021 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 2021 free cash flow expectations to a range of $86 million to $87 million reflecting a 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, 2022.

Please note again that this guidance is based on foreign exchange rates as of January 26, 2021. Full year FY 22 revenue is expected to be in the range of $558 million to $568 million or approximately 9% to 11% growth in constant currency terms when measured against the midpoint of our guidance.

I would remind everyone that approximately 98% of our revenue is recognized radically. Thus, bookings in any given quarter typically have minimal impact on backorders revenue and that the most important bookings quarter for fiscal ‘22 is arguably Q4 of fiscal ‘21.

For purposes of modeling our year even assuming a strengthening economy yields higher bookings for the whole of FY ‘22 the nature of our revenue recognition leads us to expect revenue growth will be relatively flat across fiscal ‘22. We would then anticipate revenue growth acceleration as we move into fiscal ‘23.

Returning to guidance, full year FY ‘22 adjusted EBITDA is expected to be approximately $146 million. Which of the midpoint of our revenue guide will represent an adjusted EBITDA margin of 26% and would be approximately 130 basis point margin improvement over fiscal ‘21.

For modeling purposes I would note that on a preliminary basis, we expect full year FY ‘22 GAAP taxes to total approximately $7 million and a non-GAAP FY ‘22 tax rate of approximately 25%. Free cash flow for the full year FY ‘22 is expected to be approximately $121 million, which at the midpoint of our revenue guide would represent a free cash flow margin of 22% and would be approximately 410 basis point margin improvement over fiscal ‘21.

This would represent significant progress towards reaching the long-term free cash flow targets of 23% to 25% which we discussed at our analyst day last February. To conclude, despite the impact of the global pandemic, the Mimecast 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 will turn it back to Peter for some closing remarks.

Thanks Rafe. It's always been Mimecast DNA to change and it how we’ve been able to grow and thrive for the last 18 years and it's 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 are confident we will deliver. In the near term, we remain nimble continuing to prioritize our customers and taking actions to rebuild towards the higher growth rates we know we capable of delivering.

Now operator if you would please open the line for questions.

Great. Thanks for taking my question guys.

Peter, I wanted to ask you a little bit about the compromise. Maybe I missed at the top of the call but could you maybe provide more details about the number of customers that were actually impacted by this versus the potential number and then kind of thinking longer term, could there actually be of benefit to you guys from the solarwind screech in terms of customers turning to Mimecast for additional third-party email protection, things of that nature.

That's good question. Thanks Matt.

Okay. So I think what we discussed was in the initial statement was a five or so customers had been targeted by this and we put out subsequent statements.

I would encourage you to go and look at our blog and the things we said a publicly. We don't have anything additional material to ship beyond that.

But we did as you know go out more broadly to our customer base with some precautionary actions for them to take, another ongoing and continue to be successful. I think broadly speaking when we look at what this represents clearly there is a significantly elevated threat level in the world particularly elevated threat level around public sector and government as a result of this threat factor.

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 email remains a very significant threat factor for organizations. So I think it really underlines and underscores the importance of the work that we're doing to help customers in particular protect their very significant investments in collaboration environments like Office 365.

That's great and then the other thing that stood out to me I mean you called out the Symantec replacement of the large deal win there. I'm curious which is your largest win ever which is great to hear, could you talk a bit about that Symantec momentum?

I think we've all thought that it could be a pretty significant and really long-term tailwind to the business as 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?

Yes. Thanks this is Rafe.

I will start 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 continue to be encouraged by what we're seeing in the pipeline.

So I think some of those things we talked about long-term contracts that they had with Symantec and setting us up for a renewal or an opportunity when those contracts come up for renewal that is starting to come to pass and that's been helpful.

Thanks Rafe.

Thank you for taking my question. Could you dive in a little bit more into email 3.0 to an email 2.0 as far as the opportunities are evolving and how they lay out and that's what landscape?

Thanks.

Yes. For sure Catherine.

So in the context of our email security 3.0 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 in the modern threat landscape. It's really breaking that down into three zones; Zone 1 being our classic perimeter environment and we've had tons of additional innovation and investment around that and that continues to be a significant opportunity out there in the market.

I think with the TDP product and that in Zone 1, we added 800 new TDP deals in this last quarter. So I think that's an important sort of anchor on the story.

Then when we look at Zone 2 those are really important inside the perimeter capabilities looking at lateral movement of threats inside the email network, identifying vulnerabilities in terms of the human layer with our awareness training product some of the new innovations that we've delivered around things like safe phish that really enhance the phishing simulation capabilities to make them much more representative of the actual threat landscape today. So those Zone 2 products really important for customers and again in this quarter strong uptake there with 800 new IEP purchases and 600 new awareness training purchases.

So that's a really strong part of our email security emerging email security 3.0 play and then of course in Zone 3 some really important capabilities in what we talk about is beyond the perimeter and I think DMARC really is starting to become a must-have capability for all organizations in this quarter. We added 200 new customers paying customers to our DMARC solution.

So it's a great framework. It's an important framework and it's clearly really relevant for organizations to think about email security much more as a pervasive multi-zone strategy as opposed to historically.

It's a perimeter kind of gateway filtering service. So thanks for the question Catherine.

Yes. No, thank you.

I always need to clarify that when you talk about your wins it seems like you're getting to have more two and three in the win category when you announce these bigger deals. So it's nice to see.

Thank you.

Thank you.

Hey gentlemen thank you for taking my questions. I wondered if you might be able to give us some color on what you're thinking about the breach in terms of its impact on win rates or sales cycles?

Any initial indications about how customers are responding and how you might tweak to go to market and then just more generally aside from the incident any changes in your go-to-market kind of tactics or approach this year or greater emphasis on certain products, etc. versus last year.

Thanks very much.

Yes Steve. This is Rafe.

I'll start this off here and thanks for being up early with us this morning from the west coast. With the security I think the direct impact that we would that's worth noting is for a couple 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 in January.

That team is all back to their day jobs if you will out generating pipeline and working on that. So aside from that specific point there is nothing that really changes our initial expectations at least that we're seeing thus far.

Now I think when we look a little broader or longer term one of the things is Pete noted at the top of the call in times like this we focus very much on our customer success and on transparency and frankly a lot of the calls with our enterprise customers what we've gotten is great feedback from them that they appreciate that that transparency that going that extra mile because frankly the solarwinds attack has really reminded all of us just how sophisticated these threat factors are and how much we need to work together and collaborate to defend ourselves against them. So I would say for what has been an eventful last few weeks it seems like the general feedback is that they appreciate the efforts we've taken to be transparent with them.

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 those strategic initiatives that Pete laid out and the first one he called out was that continued focus and investment on the enterprise and certainly in our go to market function that some of the changes that they're going through right now and as we look towards this next fiscal year we'll 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'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 we're digging deep to make sure we're handling the small guys as efficiently as we can and building the systems and evolving the systems to serve them and focusing more and more of those resources on those larger customers.

Yes. Thanks Rafe.

I think what I would add to that is when a sophisticated factor like this has been so successful on an industry-wide scale, one of the other things that it really underscores is the importance of an integrated security architecture and so I think we're in for many organizations in the early stages of building truly integrated security architectures. So our work and in particular around our Secops virtual conference our work in terms of building integrations to help customers much more seamlessly create these integrated intelligent and highly responsive security architectures with Mimecast being a really powerful contributor to that architecture, I think that's one of the key emphasis for us going into FY ‘22.

Great. Thank you.

Hi guys. This is Pat on for Sterling.

Thanks for taking my question. In terms of the guidance we appreciate some of the pieces there that you explained.

Just trying to understand how much of that 10% growth in the next fiscal year, how much of that is coming from the bookings impact that you mentioned possibly from [DMARC] as well as how much of that is just coming from lower tailwinds from Office 365 migrations? Thanks.

Yes. Thank you.

So on next year's guidance which just make sure we're all aligned is 9% to 11% or 10% is the midpoint as you noted, we've been talking all year long for our most of the year anyways about the impact that 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 revenue force for FY ‘22. It goes without saying but worth reinforcing that we're very much still in this COVID 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 just 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 the rest of this quarter and the next just because it gives them full time to amortize into the revenue and that sets us up for this next five-six months being extremely important in terms of next year's guidance and when we look at that with COVID still raging and markets still being a little slow to recover it does cause us to have to consider that the recovery on the revenue line will lag the bookings and so thus will probably impact FY ‘22 as we've described.

Great. That's very helpful.

And then one follow-up you talked about some of the long-term growth. At the analyst day you guys mentioned 17% to 21% growth kind of in that fiscal ‘23 to ‘25 range and just wanted to make sure in terms of do you think that those targets are still achievable given within the time frame that you gave given some of the bookings headwinds that you mentioned for this next year?

Thanks.

Sure. I think we still think like that 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 that is quite that remains strong and true for us. I think we gave that guidance shortly before the COVID crisis came along.

So what we're likely to see is that it'll probably take us 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 topline guidance that you mentioned we also talked about a free cash flow range of 23% to 25% and you're seeing in our guidance that cash flow inflection we talked about at the time is really coming to pass.

We've seen in FY 21 the guidance for FY 22 is arguably ahead of schedule. So on a balanced score card perspective the free cash flow numbers I think are showing nice improvement and we're going to get there on schedule or a little bit early and in terms of the top line they are the right way to think about the business but given COVID it's going to take a little longer to get there.

Great. That's very helpful.

Thanks guys.

Yes. Thanks for taking my questions.

I guess the first question Peter is just a bigger picture question about the Office 365 opportunity and this pandemic just grinds on. How is that opportunity changing as well as with even the sunburst incident recently what's different now about the O-365 opportunity compared to three months ago six months ago and then thinking going forward and then I will follow up.

Yes. A 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 365. More than half of our customers are using us to protect Office 365.

So that's north of 20,000 organizations. I think what this sunburst threat has really underlined for us or clarified for us once again is how significant a target, the Office 365 environment is for adversaries and that while Microsoft is very determined to provide a robust and secure environment there is some level of an intractable problem in terms of securing that environment continuously and successfully in isolation and that I think is really showing the need for additional independent specialist layers of security to help shore up and protect Office 365 so that customers can feel confident and secure doing business with a considerable dependency on Office 365.

So we remain bullish about that opportunity.

Yes. And my follow-up I'm not sure 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 ‘22 guidance I mean how do we think though about the mixes of business and just how much of, are we looking at more of a stair step increase in the enterprise 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?

I'm just trying to understand how to think about that into ‘22 and really even into ‘23 in terms of how quickly will this pick up in terms of proportion of total? Thank you.

Yes. That's very helpful.

I think the right way to think about it be it'll be somewhat gradual. We've been talking about having that highest end of our market at 18% of revenue.

We continue to watch how that grows over time but it does grow somewhat gradually and that is we talked on these calls a lot about the enterprise but we have some really strong business with some mid and mid to large size customers as well as even on the lower end of the business. So with the whole business growing the enterprise is we're getting a lot of attention and good investment but at our size and scale you'll recognize that growth on a somewhat slow basis.

Operator next question.

Hey guys this is Joe on for Brent. Thanks for the question.

Great to hear about the public sector being strong in the quarter. Has here been any issues with the recent compromise in that regards and then perhaps just elaborating further on the sense of the size and the future growth aspirations in that business?

Yes. Okay.

So I mean government business and education sector as well remain important target markets for us. We recently announced our FedRAMP ready status on that grid and it'll be several quarters before we have our full authority to operate in FedRAMP but that's clearly a focus sector for us.

I think in the U.S. it's a key market but also internationally in the prepared remarks I called out a large international government agency that had had signed with us in the quarter.

And interestingly, our government sector business and education grew in the last quarter from 6% of our revenue to 7%. So we feel like we're making good progress through those results there.

One thing that we've seen very clearly with this solarwinds sunburst attack is the elevated threat level presented to public sector generally and how governments really have to take the cyber security threat significantly more seriously. I think encouraging signs coming out of the new administration in terms of commitment of resource and skill to counteract this threat and we think it's such an important market A, for us to serve but also most likely a lucrative market on a global basis for Mimecast going forward.

Awesome and then Peter everything you said on the call was logical and appreciate all 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 in with Microsoft maybe Microsoft's good enough in email security?

Well, it's a great question. I mean we have operated in a competitive environment for the duration 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 indicated that it's really important for organizations to layer in additional specialist security and not merely rely on the underlying application vendors to secure their environments.

It's important that they do secure their environments but I think recent events have proven quite clearly that may not be enough and that additional specialist focused security and tooling that can help organizations feel more confident be more resilient with that dependency, with that dependency being on the juiciest target for adversaries being mitigated significantly. So yes again we feel really good about that opportunity but very conscious that we have to message and innovate and serve really well in order to go and continue to grow in this environment.

Make sense. Thanks guys.

Hi thank you very much for taking the question. I had two I want 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 as you look at the next fiscal year.

Directionally does it, how quickly can it move back to something as you get throughout the new fiscal year? And then I'll ask my follow-up after.

Yes. So I think the 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 is I noted that the customer count metric is probably going to continue to run a little bit suppressed for a while as we're still working through COVID but that's an important metric to watch because it's going to speak to that those net customer ads number we'll 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 in it.

So we'll continue to be watching that in the coming quarters and I think that's a key piece. I would caution as everyone though on this it needs to be looked at in tandem.

So take the net customer ads number look at the AOV 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 that as some of these companies come out of the COVID crisis we saw a lot of down sell and remember we'd really focus on let's keep them as customers even if it's for a smaller stake but as they come out of the COVID crisis a lot of these businesses in 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 an uptick in those numbers as the year progresses.

Again somewhat dependent on the COVID recovery in the respective markets.

Okay. Peter I'll direct this to you and again I missed the very initial discussion on the conference call but if you could just talk about how you balance taking a head count reduction to make sure that you're trying to set up the company for future growth on a durable basis and where are some of those reductions but more importantly how do you balance this as you look at the organization over the next two and three years?

Yes. Great question Keith.

So we we've been extremely thoughtful about this and looked at our strategic plans and looked at what are the key initiatives that we want to be able to invest more in and then by implication there is certain areas that we're going to be investing slightly less in and so that rebalancing to be able to say how do we double down on enterprise, how do we double down on automation and efficiency for our mid market and our long tail of SMB customers and what are those changes that we need to make to set ourselves up to execute well on that long term plan. So I think that the changes that we've made I mean some of them are difficult it's not easy to make these organizational shifts but they help us to be able to both invest in the right areas of the company but also yield some of the efficiencies and demonstrate some of the strength on the bottom line 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 22 to just get out there and execute.

Okay. All right.

Many thanks. Good luck.

Thank you.

Yes. Thank you.

Could you give some color on the U-shaped recovery? What do you expect constant currency growth rate to bottom up throughout the course of fiscal year ‘22?

Yes. Thanks.

As I noted one of the things that we think will be roughly in this range of the guidance range across FY 22 obviously depending on how bookings go we might have an impact on late in the quarter rates but again with SaaS revenue recognition that revenue growth rate it needs to have bookings activities well in front of the ultimate uptake in revenue growth. So yes I think the right way to think about it is we'll be roughly within that range for FY ‘22.

And how would you expect a net revenue retention rate to profile throughout that also relatively even at the current rates?

I think that roughly speaking and again based on how things play out over the course of the year, I think that's roughly the right way to think about it in approximately this range.

Okay. And then for my follow-up question of the three prongs described in terms of returning to the rule of 40 or really accelerating back up to the long-term growth rate what's the most important?

Which prong will be experiencing the biggest benefit from the restructuring that you guys have taken?

Well, I think it's difficult to sort of single them out specifically but I do feel that our focus on the enterprise is clearly one of the very important parts of that strategy that will benefit from additional investment but importantly our investment in R&D generally and our ability to continue to be successful with multi-product sales across the platform. So driving higher levels of penetration you've seen our average products per customer move up from 3.3 to 3.5 year-over-year.

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 are both set to benefit from this investment plan.

Great. Thank you.

Thank you. Good morning gentlemen.

I have just one question. I know the aftermath or the derivative of the recent sunburst to differ materially from the outage that you've experienced back in I think it was 2016 or maybe 2015 but maybe can you compare some of the lessons learned from that average five-six years ago?

What did you learn that could be applied this time because if I'm looking back I think for everybody who covered you for such a long time you actually came out much stronger over the course of the past five-six years. So maybe just a compare contrast for us will be greatly appreciated.

Yes. That's a great question Shaul.

I think every time we have a setback I think as a company we're wired to learn and to come back stronger whether that's in terms of things 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 key things that we've learned historically is that being very open and transparent with our customers and really engaging with them as part of their teams is crucial to getting through some of these setbacks. And so what you've seen from Mimecast particularly in this incident is how open we've been and as soon as we have information that customers 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.

I think there is a lot of things that one learns when one has an encounter with a sophisticated adversary like this and certainly we are going to absolutely indulge in all of those learnings and look at all of the opportunities that we can extract from that to both develop products on our side as well as sort of improve the robustness of Mimecast as an organization.

Operator we'll take one final question.

Good morning and thank you for taking the question. I really appreciate it.

Sorry about if this was covered previously but just had a question on from a geo perspective thoughts on Europe and the UK we've heard in other segments that UK was pretty weak but just from a geo perspective where you saw strength and weakness and what your outlook is given the I guess maybe softer 1Q and then flatter full or I guess a flatter full year guidance that you've given?

Yes. Thanks.

I think our experience in the UK is in line both the UK and South Africa are very much feeling the impact of the COVID crisis and the impact on the economy. I will say our UK team, I think is optimistic though as we look forward some of this is BREXIT is now behind everyone and we're still moving forward.

So 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 across the year as a whole. Likewise in COVID with people getting vaccinated I think there is a general sense of optimism but to be sure it hasn't really shown up yet is certainly through Q3 and frankly I think until the COVID crisis is more in check, the UK and South Africa are going to struggle a bit and those are very important economies to us.

Where I did note a little bit of a positive is as the third quarter went on in December we started to see some positive momentum at least a bit with some of our customers late in the quarter and so there was again this is Tim we should be moderate here like it but there was certainly some positive indications that companies in the U.S. or North America certainly was starting to look beyond the COVID crisis and getting back to work.

Got it. That's helpful and again I apologize if you discussed it already but interested in competitive dynamics up market particularly what you're seeing in the pipeline and what you've seen in the quarter, the ability to land larger customers.

How large I guess might those customer wins be 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.

We feel really good about that enterprise market opportunity. I think in the prepared remarks I called out that we had 2400K plus deals and then also some really nice anecdotal examples of large account wins with tens of thousands of seats some north of a hundred thousand seats.

So we think the very large enterprises have sophisticated needs that Mimecast is extremely capable of addressing and that's being proven out each quarter as we add more of these very large enterprises to our platform. So yes, significant opportunity.

No particular limit in terms of where we feel we can hunt now as we evolve as a company as we've built our technology and our engagement teams and yes.

Okay. Great.

Very helpful. Thank you.

Folks thanks for joining our FY ‘21 Q3 earnings announcement this morning. Thanks for those on the west coast who got up early to join us.

Have a great rest of the week and we look forward to updating you in the three months or so time.