Mimecast Limited
Q2 2022 Earnings Call Transcript

Published: 2 Nov 2021

[Robert Sanders:]

Good morning and welcome to Mimecast's Earnings Call for the Fiscal Second Quarter of 2022. 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 conference call is being broadcast live. A replay of this call will be available after the live call has ended. We will make forward-looking statements regarding future events and the future financial performance of the company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, including risks and uncertainties related to our recent security incident and the ongoing impact of the global COVID-19 pandemic. 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 will present both GAAP and non-GAAP financial measures. These non-GAAP measures are not intended to be considered in isolation from, or a substitute for, or superior to our GAAP results. A reconciliation of GAAP to non-GAAP measures and the reasons for our representation of the non-GAAP information is included in today's press release, which can be found in the Investor Relations section of our website. The date of this call is November 02, 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. Peter?

[Peter Bauer:]

Good morning everyone and thanks for joining us. I hope you and your families are safe and healthy. I'll begin with some takeaways from the quarter and progress on executing our strategy. I'll also touch on the threat landscape and why we believe Mimecast services are as mission critical as all and then Rafe will detail our financial results. Our results this quarter exceeded the high-end of our guidance ranges across all metrics, underscoring our strong execution and favorable security demand, especially in North America and the UK. We generated $147.2 million in revenues, which is up 16% year-over-year in constant currency. We drove an increase in average order value to $15,000, which is approximately 15% over the prior year in constant currency. Now this increase in AOV was partially impacted by a reduction in smaller customers that Rafe will discuss in detail later in the call. Additionally, we increased the number of services per customer to 3.8, that's up from 3.4 last year. We also delivered a strong net retention rate of 106% in the quarter, up from 105% in Q1. Of note, we drove another increase in the percentage of revenue coming from enterprise or customers with more than 5,000 seats to 20% continuing our gains in the enterprise segment. Now these results speak to our strong execution against all three-pronged growth strategy

[Rafe Brown:]

Thank you, Peter. I'm pleased to report that we exceeded the high end of our guidance for revenue, adjusted EBITDA and free cash flow for the second quarter of fiscal 2022. Our performance this quarter was driven by improving customer retention rates, excellent crosssell of additional products to our customer base, strong bookings early in the quarter, and an uptake of one-time fees from professional services and archived data migration fees. In the second quarter, we generated revenue of $147.2 million, which represents a 20% improvement over the prior year in absolute dollar terms. Adjusting for $5.1 million of currency tailwind, our constant currency growth rate over the prior year was 16%. Note that since providing guidance in August, foreign currency fluctuations positively impacted our second quarter revenue results by $400,000. Net revenue retention stood at 106% for the trailing four quarter period ending September 30, building off an improvement in this metric that we noted last quarter. Looking at its components, upsell improved to 114% where we saw strength in both product based upsell as well as seat and price-based upsell. On the product side, the second saw a strong interest in our awareness training, CyberGraph and DMARC solutions. Downsell and churn improved to 8% for the four quarter period. Before I turn to net new customer count and AOV metrics, I want to provide a bit of detail on a change with a particular managed service provider or MSP. As a result of a reorganization of this MSP's business, a low dollar portion of their customer base was transferred to a former affiliate. As a result 1,600 customers with a total annual contract value of less than $100,000 have been removed from our total customer count. Excluding these customers, we added 600 net new customers in the second quarter. As of September 30, our total customer count stands at approximately 39,600 customers. Given the very small average order value of this particular MSP's customers, this action by itself increased AOV of our base customers. Calculated at October 25th FX rates, AOV jumped to $15,000, up approximately 15% over the prior year in constant currency terms. Excluding this particular MSP change, average order values would have been approximately $14,400, up approximately 10% over the prior year in constant currency terms, still an impressive increase. This fundamental improvement in average order values was helped by our having increased the average number of services per customer across our customer base to 3.8 from 3.4 one year ago as well as seat expansion within our base customers, as they added new employees. This is a reminder that many of the changes to our customer count metric happened among customers with less than 100 seats and typically low annual contract values. To that end in isolation our net new customer count metric is becoming increasingly less important as the focus of our revenue growth has shifted to larger organizations. We recommend investors consider changes in both customer count and average order value as important metrics to consider when evaluating our progress toward achieving our strategy. Turning back to our financial statements, we continue to see improvements in gross margins. In the quarter, we recognized a 79% non-GAAP gross margin, up 150 basis points from the second quarter of the prior year. Adjusted EBITDA for the second quarter totaled $46.8 million, representing an adjusted EBITDA margin of 31.8% compared to 27.4% in the same quarter of the prior year, a 440 basis point improvement. Now turning to the bottom line. Our non-GAAP operating profit for the second quarter was $38 million, or 25.8% of revenue, an improvement of 540 basis points from the prior year. We've reported GAAP net income of $17.6 million for the second quarter or profit of $0.26 per diluted share based on $68.8 million fully diluted weighted average shares outstanding. Our GAAP tax expense totaled $2.8 million in the second quarter, which included a discrete stock windfall benefit of $700,000. We continue to expect our full year GAAP tax expense to be approximately $6.3 million. Our non-GAAP net income for the quarter was $27.7 million, or $0.40 per diluted share. Our non-GAAP tax expense totaled $9.2 million for the quarter, or 25%, which is consistent with the rate we discussed last quarter and the change to our non-GAAP tax methodology whereby we booked to a long-term non-GAAP tax rate throughout the year. Turning to cash flow. Second quarter operating cash flow totaled $43.1 million, or 29.3% of revenue, free cash flow totaled $31.2 million for the quarter, or 21.2% of revenue. And as of September 30, Mimecast had $367 million of cash on the balance sheet. Net of debt, our current cash balance stands at $285 million. Let me now turn to guidance. For the third quarter of fiscal 2022, revenue is expected to be between $149.2 million and $150.7 million, or 13% to 14% growth in constant currency terms. Our guidance is based on exchange rates as of October 25, 2021, and includes an estimated positive impact of $2.7 million resulting from the weakening of the U.S. dollar compared to the prior year. Adjusted EBITDA for the third quarter is expected to be between $41 million and $42 million, which at the mid-point reflects an adjusted EBITDA margin of 27.7%, up 100 basis points from Q3 of last year. Free cash flow for the third quarter is expected to be between $33 million and $34 million, which at the mid-point reflects a free cash flow margin of 22.4%. Turning to the full fiscal year. Fiscal 2022 revenue is expected to be between $589.9 million and $593.6 million or 14% to 15% growth in constant currency terms. Adding the details, foreign exchange rate fluctuations are positively impacting this guidance by an estimated $17.5 million compared to the rates in effect in the prior year. The prior guidance for fiscal 2022 provided in August was $580.1 million at the mid-point. Our overachievement in Q2 coupled with the continuing strength we are seeing in our business is leading us to raise mid-point of our full year guidance by $10.7 million in constant currency terms. This increase of $10.7 million is being positively impacted by $1 million of foreign exchange tailwind that has risen since the rates used in our August call, resulting in the mid-point of our full year guidance moving up by a total of $11.7 million in absolute dollar terms from a mid-point of $580.1 million to a mid-point of $591.8 million. We are raising full year 2022 adjusted EBITDA guidance to between $164.2 million and $165.7 million, which at the mid-point of our guidance would reflect an adjusted EBITDA margin of 27.9%, up 250 basis points from the prior year. Despite our anticipated return of costs associated with travel and in-person events for the remainder of the fiscal year, at the mid-point this represents $12 million improvement over our prior guidance. We are also raising full year 2022 free cash flow guidance to a range of $136.1 million to $137.6 million, reflecting a free cash flow margin of 23% at the mid-point of our revenue guidance. This is 550 basis point improvement over the prior year. At the mid-point, this represents $9 million improvement over our prior guidance. To conclude, we're very pleased with the business's performance for the first half of the fiscal year. Given that approximately 98% of our revenue is recognized ratably, good performance in the first half of the year provides a significant benefit to our full year of revenue results as demonstrated by our – again raising our revenue guidance for the full year fiscal 2022. And with that, I'll turn it back to Peter for some closing remarks.

[Peter Bauer:]

Well, thanks, Rafe. At Mimecast, we offer a unique fully integrated and efficient platform with a highly durable business model where 98% of our business is recurring subscription revenue. We have industry leading retention and high gross margins, and we're proud to be a trusted mission critical service provider to leading companies around the world. I'd like to thank the entire Mimecast team for their efforts and relentless dedication to our mission. And with that, operator, we could open up the call to take your questions.

[Operator:]

Thank you. Our first question comes from the line of Saket Kalia with Barclays. Your line is open.

[Saket Kalia:]

Okay, great. Hi, good morning guys. Thanks for taking my questions here. How are you?

[Peter Bauer:]

Well, thanks, Saket.

[Rafe Brown:]

Thanks, Saket.

[Saket Kalia:]

Hey, Rafe, maybe just to start with you on the customer count. I think what you said was, there were basically 1,600 customers that were removed. And so, the real sort of apples to apples net adds was about 600 customers. But can you just dig a little bit deeper into that MSP change? I mean, were those 1,600 customers that have actually churned? Or maybe just go one level deeper into sort of the mechanics of how that customer count is being adjusted?

[Rafe Brown:]

Yes. I'm happy to do that. And you're spot on the net takeaway was the 600 net new customers. But looking at this particular instance, this is a real one-off situation with this MSP. And in fact, we have like three different relationships with the provider. And this is just one of the three that – because of our – excuse me because of a reorganization they did on their side. And it really had nothing to do with us in that. They did a reorganization and it goes back years where these customers came from, but in this reorganization, they ended up transferring part of their business to a former affiliate. We don't have a relationship with that former affiliate, so we did drop them out of our customer count.

[Saket Kalia:]

Okay, got it. That's very clear. Peter, maybe for my follow-up for you. Lots of talk about, but maybe we'll stick to the competitive backdrop to sort of start out. Can you just talk a little bit about – or can you update us a little bit on the competitive backdrop I guess with now a couple of quarters since portfolio has gone private arguably a little bit more noise coming out of Microsoft on security in general. Just give us a little bit of an update on the competitive backdrop and what you've seen in the quarter or what you saw in the quarter? Thanks.

[Peter Bauer:]

Yes. Yes, thanks, Saket. So, I think, we had a very successful quarter from a competitive standpoint several large account wins and you heard me call those out in the prepared remarks. I think very, very clear that those would have been in competition with some of the usual suspects. And so we feel really good about that. And we think that that success has come through real innovation over the past year in our products as well as strong execution. I think, our Email Security 3.0 strategy moving customers to a pervasive mindset from a valid email and messaging security relative to what historically has been much more of a perimeter mindset has given us a strong differentiation and that the ability to sell solutions across all three of the zones that we described in our Email Security 3.0 strategy. So we feel good. Once again, a significant portion of our business comes to us from Office 365 customers that have not yet added a third-party solution for layered security and risk mitigation and resilience onto that, so all around a good quarter.

[Saket Kalia:]

Very helpful. Thanks guys.

[Peter Bauer:]

Thanks Saket.

[Operator:]

Thank you. Our next question comes from the line of Catharine Trebnick with Colliers. Your line is open.

[Catharine Trebnick:]

Thank you for taking my question. Excellent quarter. So MIME has to do deal with severance led and any management changes you had in the last six months and where those slots are. I remember you've changed – your Chief Revenue Officer has left, have been onboarding new people. So a little bit more color on where you are with that in the channel and then a little bit on the SLED business and how that's performing. Thank you.

[Peter Bauer:]

Hi, Catharine. I'll start this off on the – our public sector efforts. As you're aware, we have achieved FedRAMP Ready status, getting that full federal authority to operate is quite a project and it takes a good long time. Really in the immediate sense where we've seen really good progress in North America has been those states governments, we – we called out the Criminal Justice certification last quarter for a particular state. Those things build off. It's the same infrastructure. They need that extra level of security. They have those heightened requirements around support and staff. So we're harvesting immediate benefit from that because there is a great demand for that type of service out there, even as we continue to pursue the federal side. And then, of course, we frequently call out some wins we have outside the U.S. Again, where a lot of public sector organizations are looking to a cloud service provider such as ourselves to give them the protection they need.

[Rafe Brown:]

Yes, great. Catharine, I'll dive in on the – on some of the team changes. So just to recall, we've got a new CMO in the business, Bernd Leger, who joined us about five months ago. So he is betting in weld and building his team up. And I think we're very excited about Bernd's contribution into the company. The second new executive was David Raissipour, who joined us about three months ago as our Chief Technology and Product Officer. And I recall that was the result of a change in structure where we created an integrated product and engineering organization, which we think is a better setup for us to accelerate innovation into the next several years for the company. And David has been doing a work of both continuing to drive innovation in the company, but also really bring that structural change around and integrate those organizations together. I think what we're seeing in some of the advancements around offerings, like CyberGraph, machine learning, artificial intelligence, some of the ways that we're looking to exploit data within our platform and some of the things that we've not yet announced, but we'll share with you in coming calls are really exciting us and I think creating a lot of energy inside the product and engineering organization. So we feel really good about those two new executives. And then I think as you mentioned our Chief Revenue Officer left us at the end of September to join a startup in the Boston area. We wish him well. Obviously, change is something that brings opportunity. And so, we're in markets searching for a new CRO. And I think it really brings us an opportunity to find a candidate that has significant international experience and experience at scale as we move from the knocking on the door of $600 million up to sort of $1 billion, $2 billion and beyond as a scaled organization. And so, we're excited to be sourcing talent with that kind of experience and track record. Thanks, Catharine.

[Catharine Trebnick:]

Yes, thank you.

[Operator:]

Thank you. Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Your line is open.

[Matt Hedberg:]

Hi. It's Dan Bergstrom in for Matt Hedberg. Thanks for taking our questions. Seeing the upsell, really nice improvements here. Is there a way to think about the balance and strength between say pricing upsell and additional seats?

[Peter Bauer:]

Yes. We saw good strength on both sides of that equation. Clearly, one of the benefits that we're seeing out there is a lot of companies are hiring back following the COVID downturn. And you'll recall that last year we went to great lengths to really make sure we could invest in our customer relationships, keep customers even if they had the downsell. And so we're – it's great to see that come back, but that is just a piece of the story. The product side was really strong and we're – I think it really helps us to validate it because even during all of last year where we're in the midst of COVID, we continued to invest in our products, continued to drive innovation. And that investment coupled with an environment where people are seeing a lot of very high profile attacks out there has fueled the upsell of product side of the house as well over these last couple of quarters.

[Matt Hedberg:]

Great. And then Peter, you just touched on this in answering Catharine's questions, but maybe a little more on what you're looking for maybe from a Chief Revenue Officer and the go to market in general as you look to scale the business from that $500 million, $600 million level you talked about $1 billion, $2 billion and beyond.

[Peter Bauer:]

Yes, it's great. Look, I think, there is three things that that a big opportunities for Mimecast I think Continental Europe, an experiential Continental Europe is something we're excited to gain expertise in the company. It's a massive market. And frankly, one that we're just getting started in. And so, there is a real opportunity to scale up there. I think, secondly, while we've done very well with channel, I think there's an opportunity, particularly as we're moving up markets to continue to build on our channel partnerships, not channel relationships, there are increasingly opportunities for channel partners to provide more services around our platform and our product. And we want to develop those opportunities and work with the right kind of channel partners that can capitalize on that and deliver even greater value to our customers. And that of course intersects with our API strategy to where frequently channel partners are bringing on a multi-vendor solution XDR strategies to before. So, we're excited about that. I think also the third piece would be, as we look at that next phase of scale, there's quite a bit operationally that that I think we can gain from. So looking at sort of some of the more scientific operational aspects of scaling a sales organization from an enablement an operations point of view, I think some expertise in that area to help lead us forward and build on the great platform and track record that we've created thus far is definitely an area that I'm looking for in the new candidate.

[Matt Hedberg:]

Really, great. Thanks, Peter.

[Operator:]

Thank you. Our next question comes from the line of Brian Essex with Goldman Sachs. Your line is open.

[Brian Essex:]

Great. Thank you. Good morning and thank you for taking the question. Peter, I just had – and I guess maybe we had a question for you on Office 365 penetration. Could you perhaps give us an update on how penetrated is your customer base, particularly as you go up market? And are these migrations – I think, Rafe noted some higher data migration fees in his prepared remarks. How's the environment changing? One that you – now that you're going up market and then two now that we're kind of seeing better economic improvement. What are you seeing on the migration side, particularly with Office 365? What's the penetration and how's that environment changing?

[Peter Bauer:]

Yes, that's great. So within our base and I think we used to provide the numbers fairly frequently around some percentage of our face that's on 365. And I don't think we've shared specific numbers for a while, but it's probably in the sort of two thirds realm of our base that sits on Office 365. We see a significant proportion of our new business coming to us already on 365. And I think your point – when you look at larger organizations, there is frequently a hybrid configuration that that they have, and they want to be prepared for hybrid configurations one way or another. And what I mean by hybrid configurations is that can mean combinations of on-premise exchange and Office 365 tenancies. It can also mean combinations of alternative mail environments, like G Suite and Office 365, multiple Office 365 tenancies to – because larger companies are constantly evolving with M&A activities and the like. And so having a partner like us on the cyber security and infrastructure side, it can really help them mitigate risk across a heterogeneous mail setup is quite valuable. So, Brian does that covers everything or you have…

[Brian Essex:]

Yes. I think – I guess, maybe just a follow on, on the back of that. Are you seeing an acceleration in I guess 365 migrations? And is this – is the activity that you're seeing more a function of new customers coming on that are adding you kind of in synchronization with coming onto the platform and going Office 365? Or is this – are you more frequently seeing your installed base migrate?

[Peter Bauer:]

I saw – look, I think, we've historically spoken about sourcing business before the migration to Office 365 in preparation for that. At the time of migration, a combined project that looks at both and then post migration once they're on and they recognize the need for additional risk mitigation, resilience and layered security. And naturally that mix has shifted over time. So going back some years, obviously a great deal of it was in preparation for and then during – and over time as Microsoft has been more and more successful in – and their customers moving to 365, a greater proportion of it is already on 365 and selecting to add us to that deployment.

[Brian Essex:]

Got it. That's helpful. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Steve Koenig with SMBC. Your line is open.

[Owen Haworth:]

Hi, guys. This is Owen Haworth on for Steve. Thanks for taking the questions. Congrats on the great quarter. So, Peter, it's great to see the enterprise segment get up to 20%. It seems like your offering sure is resonating well with the large customers. I'm wondering now that we've hit that 20% mark. Where do we go from here? Kind of, where do you see that segment settling in the mid and both the long-term?

[Peter Bauer:]

Yes, Owen thanks. It's such an interesting question. I think we expect it to continue to grow. However, we have a considerable opportunity in the SMB and the commercial or mid-market sector two which continues to grow. So, there is constant sort of pressure within the segmentation of the revenue pie, if you like. And so, I think, we see that enterprise segment as a considerable growth opportunity, and we continue to invest in our capabilities to service large enterprise customers and to build that momentum. So directionally more but I don't think we've specifically shared quite how we see that playing out.

[Rafe Brown:]

Yes, no, I would say that, and I think we're just really pleased to see the mid market and the – that commercial space growing as well. We – I think it's validation of our strategy, focused on bigger customers and delivering that differentiated value. But one of the byproducts is, it helps commercial accounts continue to buy our platform and grow with us. That's a great outcome.

[Owen Haworth:]

Yes, great. Thank you. Also real – as the second one, I'm sure, I mean, everyone saw the article out earlier this week from the journal potential buyout or M&A. I'm wondering – I mean, I'm sure you can't comment publicly on that. I don't know if there's anything you can share it, but the second question kind of how do reports like these affect your ability to drive net new expansion business? Has that changed anything in customer decision-making? And if you can't share anything on the article, that'd be great as well. Thank you guys.

[Peter Bauer:]

Yes. I think you're right. We're not surprised that really comment on those rumors and rumors can care all the time. But I think the speculation is indicative of the value that people see in email security and the importance of the space. And we're really focused on running our business, taking care of customers competing in the marketplace and continuing our growth journey as Mimecast. So, yes, we tried not to be distracted by what we read.

[Operator:]

Thank you. Our next question comes from the line of Brent Phil with Jefferies. Your line is open.

[Joe Gallo:]

Hi, guys. You have Joe on for Brent. Thanks for the question. I have a two parter. I guess simplistically, Rafe, can you just talk through the puts and takes of guidance? You've accelerated constant currency revenue growth two straight quarters; put a lot of hard work into this U shaped recovery. Any reason to expect a decline in the next few quarters constant currency when we have easier comps? And then maybe you could just provide a little bit of color on the GOs and what's embedded into guidance as well. Thanks.

[Rafe Brown:]

Yes, no, happy to add that. Like as I noted on the – in the kind of prepared remarks, really happy with how the first half has played out and it has allowed us to be able to deliver those nice upticks to the full year guidance. One thing just about our business, the way that we recognize revenue with almost – approximately 98% of it recognized ratably clearly as the year goes along, even a great Q4 just has very little impact to move the revenue as you would imagine. So, as the year progresses, the scope of change of where we are starts to narrow, but if we're – we've had that great first half of the year and remember when we gave that initial guidance, there – the world was still rather unsettled. And despite all of that, we've really been able to take advantage of – North America first coming out of COVID, then the UK. And just getting to your next part of your question, parts of our business that lost 20% are in different stages of bounce back after the pandemic. Our Australian colleagues are delighted because they're just now coming out of lockdown. And I think that opens up a lot of new opportunities there. But as the year goes on, while we still have a lot of wood to chop that the numbers start to become tighter just because of the ratable nature of our business.

[Joe Gallo:]

Thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Jonathan Ruykhaver with Baird. Your line is open.

[Jonathan Ruykhaver:]

Hi, good morning. So, Peter, I'd like to revisit the company's strategy on M&A which historically has really been more about small tuck-in technology deals relative to, let's call, a larger transformative M&A. But specifically when you look at the Email 3.0 strategy, you've obviously been pushing the boundaries of serving markets beyond traditional Email Security. And I'm just curious, I mean, are there areas that you feel might justify more sizeable M&A relative to what you had done historically? And if possible, any color of what those complementary opportunities might look like?

[Peter Bauer:]

Yes, thanks, Jonathan. So, I think, you'll reference to Email Security 3.0 strategy is good in terms of how it's created a wide aperture for us to deliver solutions and a context for us to incorporate some of the adjacencies that really add value to the email security space. I think for us the direction – the direction is in a few areas. One is obviously there is messaging and collaboration activity happening on beyond the email that we have kind of core domain expertise to be able to add risk mitigation and security capabilities around. So we're interested in the areas like that. I think also as a platform, we have such considerable exposure to the threat landscape, given the size of our customer base and the global deployments that we have and the – really diversity of types of customers across segments and industries. And so, we're interested in ways that we can make that data more useful to customers to strengthen their overall security system and an infrastructure. And we've seen some of that value really playing out in terms of our integrations to date. So, we're interested in ways in which we can expand the contribution that we make in some of those areas like threat intelligence and kind of intelligent data utilization. So as we look at what's been our historical formula, I think as you point out the longest part of the history of the company was building this organic platform and then in the last five or six years a succession of technology and talent orientated acquisitions. We continue to scout and explore opportunities to grow the company and to grow our technology platform. And there is some interesting – there were some interesting things out there. As a larger company, we also have some optionality to do things that that might be a little bit bigger than what we've done historically and so on. But I think very much in keeping with the strategy that we've described in terms of value to customers and not getting too far ahead of our skis in terms of other themes.

[Jonathan Ruykhaver:]

Yes. You know that's very helpful, Peter. And just a quick follow-up, I think, Rafe, this one is for you. Just you mentioned some contribution from one-time PS fees and some archive migration fees. Any way to quantify that contribution?

[Rafe Brown:]

Yes. It was relatively small above our run rate. There – I was just talking about how we – 98% of our revenue comes from ratably recognized sources. It picked up in the quarter about a half a million more than our typical run rate. I think it's particularly worth – I just felt it was worth calling out because that year-over-year comparison of last year was perhaps a particularly low quarter on those types of fees. So, the careful observers of the quarter by quarter growth rate would pick up that. It stood out. So nothing huge, but I thought it was worth noting.

[Jonathan Ruykhaver:]

I appreciate the color. Thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Brian Colley with Stephens. Your line is open.

[Brian Colley:]

Hi, guys. Thanks for taking the question. So apologies if I missed it, but did you guys disclosed the annual revenue impact from the MSP change that you discussed?

[Rafe Brown:]

Yes. It was – approximately, it was actually less than $100,000, so those were really quite small customers.

[Brian Colley:]

Got it. Okay. And then just thinking about kind of your key geographies and where they are from a recovery perspective, I mean, which regions are you seeing still struggling the most kind of would be key to driving a further acceleration in revenue from here. And similarly, I mean, from a product perspective, I'm curious which modules or products you kind of expect to be the biggest drivers of upsell moving forward?

[Peter Bauer:]

Sure. So on the geographic side, maybe just – for everybody say give the rundown of the benefits. The U.S. has clearly been the quickest and the strongest to emerge. We noted last quarter, the UK seemed to come out from under the COVID doldrums and performed well and that happened again this quarter, we were quite excited about it. And the important thing there is when we have North America and the UK, that's 80% of our business, so it really puts us in a good position. I would say that the group that's probably still has their hands fold is – the most would be our South Africa team. They actually are performing well on the upsell side of the house, but the broader economy has its challenges. And so, that's going to take some time to work out. And then there's a bit of a spectrum. I think, Australia did fairly well considering, but there's some hope that they get out of lockdown and they go through the summer holidays here. But once that bounces through that that gives them a green light to grow in the future.

[Rafe Brown:]

And then just to weigh in a little bit on when we see some of the big opportunities in product I think we were delighted, obviously we're approaching pretty good saturation on targeted threat protection, but we were really pleased to see continued penetration with 3,000 customers new and existing – adding TDP to their product stack, but that's another sort of really great areas of opportunity. IEP, for example, now at about 25% penetration within the base adding 700 customers in the quarter. DMARC is something that is driving a lot of conversations for us, again early days for that with 1,100 customers in total in the base with a tick up there and awareness training now at 5,000 customers. So, there's plenty of room to run with even those modules in the base. And then there is another technology that we've launched, which we don't efficiently count within the product count, which is CyberGraph. And we've seen that have tremendous amount of interest within our base and I think very exciting levels of adoption coming through on that.

[Brian Colley:]

Got it. That's all really helpful. Thanks for the time.

[Operator:]

Thank you. Our next question comes from the line of with Needham. Your line is open.

[Unidentified Analyst:]

Hi, guys. Thanks for taking the questions here. Just first to clean up – I know an earlier questioner had asked about the upsell dynamic, and I know that there was commentary regarding the strength of the product uptake as well as some contribution from the seat count and pricing. And I think when you revisited it in the Q&A, it almost sounded like the seat count and pricing was somewhat beneficial, but the real dynamic there was product. Can you, I guess, further layer into that and help parse out those three dynamics as far as how they fed into that upsell?

[Peter Bauer:]

Yes, absolutely. And I think there were all big contributors in the quarter, right. So, there are multiple things going on there. But I do want to underscore that that the product side, which you can get a good feel for when you can – when you look through in our investor deck, where we talk about or we lay out for everybody kind of our current customers byproduct. You can really see where some nice uptick is on that product expansion side. So that's been just really important to us helping drive that. The mix varies, of course, quarter to quarter, but I mean in very rough figures. It's around 50

[Unidentified Analyst:]

That's helpful. And then one other question, if I could, but can you talk to the investments in the channel and specifically MSPs to ensure that you're continuing to grow alongside those partners? And maybe just as a reminder here, how much in revenue are you guys generating from channel and MSPs today?

[Peter Bauer:]

Yes, so that's a great question. We talked about a three-pronged strategy, but that third leg of that, that third-prong is really focused on how we, as an organization, continue to grow and drive efficiency through our systems, through our processes, as well as through modernizing a bunch of our relationships, in particular on the channel side. So, we've launched a number of efforts in that respect. We're focused on making it easier for our channel partners to transact with us making everything from easier to get a quote, easier to put us through, easier to upsell, all of that. But really focusing on some of the – frankly, the friction that builds up in a system over time. Now, a lot of those projects are going to be rolled out over the coming quarters. We're looking at ways with MSPs in particular to really modernize our relationships, so that those MSPs that are investing in that relationship provides we're reciprocating every time and really making sure we're focused on organizations that help us grow to be frank. And likewise, you do that by making sure that they can have a profitable business and provide great service to their customers. So they're – that all kind of fits in the broader quote to cash project that our IT team and the finance team are working on together. So there's a real big focus on how do we build an organization that is the ones efficient, but actually using technology and the way we go to market to help accelerate that growth. And at the end of the day, we get the majority of our business comes through the channel in one form or fashion whether it's MSPs or distributors and resellers. So it's really an important thing as we go to market.

[Unidentified Analyst:]

Great, thank you.

[Operator:]

Thank you. Our next question comes from the line of Nehal Chokshi with Northland Capital. Your line is open.

[Nehal Chokshi:]

Yes. Thank you and awesome quarter. The cost of currency growth rate continues to tick up to – up 16% year-over-year. Can you put that in context of your February 2020 Investor Day long-term growth targets of 17% to 21%. Is it still on the table? And what's the timeframe for returning to that now, now that you're almost there actually?

[Peter Bauer:]

Yes, Nehal, that's a good question. And maybe just to make sure everyone is aligned. So back – right before we all realized that COVID was going to be the thing that has become, we had an Analyst Day and we set out long-term targets, which on the top-line were 17% to 21% growth on the bottom line the free cash flow line, we called out 23% to 25% growth. So on that margin, excuse me, yes, - and so, to focus on the revenue side where your question was, we've said repeatedly as we've gone through it. When we look at the market, when we look at the need for solutions like ours, and frankly when we look at all of these attacks that keep coming out of the woodwork, there – we believe that's the right way to think about our business that those long-term targets apply. Obviously with COVID hitting right after that, it threw off the timing somewhat from what we might have initially planned, but those long-term targets are the right way to think about our business. On the bottom line, down on the free cash flow margin side of that, are we just guided to that 23%, which we think is a really big accomplishment because that actually coming earlier than we dared to think back when we gave that original guidance. So they're the right targets or the right way to think about our business. And we've said repeatedly FY 2022 was going to be about stabilization of the growth rate and that puts us in a position obviously to see how we can get back to reacceleration.

[Nehal Chokshi:]

All right, great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Yun Kim with Loop Capital Markets. Your line is open.

[Yun Kim:]

Thank you. First congrats on a solid execution. Rafe, first just on the downside or the churn rate that went down sequentially from 9% to 8%, congratulations on that. Does that also include the effects on the MSP change or the dollar impact on that is just too small, so it didn't really impact that number at all?

[Rafe Brown:]

Yes, because that one is a dollar impacted, technically yes, but it's such a tiny, tiny element there – if – in the grand scheme of things it doesn't move it, because remember we looked back to four quarters ago with our whole base of customers and see how that goes. But what we're really pleased, we were absolutely really pleased on seeing that rate improve because that I think it's a sign that COVID tail out there from last year has obviously fallen off, but it's also the execution that the team did working on making sure we're retaining our customers, making sure we're making them successful and making sure they have the solutions out there to protect themselves. So that's what's really helping us on the downsell and churn side.

[Yun Kim:]

Okay, great. Thanks for that answer. Peter, as the company continues to move up market, which you guys are executing very well on that front, I am assuming your initial land deal size has improved I am assuming pretty meaningfully and also the velocity of the expand and then also the follow on deals is changing quite a bit. If you can just give us some insight into how the land and expand dynamics are changing as you focus on larger customers? And to that end how – has your view on the overall structure of your sales organization has changed? I am assuming that you're hiring direct sales people as fast as you can just like everybody else. But is there any kind of shift towards maybe providing greater sales incentive for new logo lands for this expansion deals and such. Just kind of get a better understanding of the dynamics there on the land and expand? And how are you thinking about your sales organization to support that? Thanks.

[Peter Bauer:]

Yes, great, Yun. So, quite a few layers to your question there. I think, firstly, what we're seeing in terms of land and expand with larger customers is they really buy into this multi-zone mindset of solving the email security challenge. And so each of the zones and the capabilities that we offer within each zone resonate with them as a strategic approach to dealing with these threats and these sophisticated threats. And so what we find is that – that's a strong differentiator and that an enterprise may embark with a pretty broad purchase of those solutions and I called out some of those anecdotes in the prepared remarks, but equally they may start the journey with impacts just one of the zones, or replacing an incumbent in one of the zones with a roadmap and an idea to then subsequently rollout additional modules. And so, we really see a mix of broad-based adoption early in the land phase and then also expansion over time. I think it's also fair to say that some of the new modules and the 3.0 strategy has only come about in the last few years. And so, we do have large customers in the base that are now adopting those solutions. I think when we talk about sales team structure and how are we optimizing that to capitalize on the opportunity? I think in the larger account space where it's the most strategic and more complex account, there isn't really strong differentiation between land and expand because those are accounts, you know, an expansion motion may require a significant amount of account management work and effort. And so, we really do incentivize that quite strongly with our enterprise sellers. Obviously, that is different as we move downmarket into more of the transactional part of the business. But I think we're seeing how the incentive structures that we have in place are working effectively to drive some of the results, particularly with that that uptick to 106% in net revenue retention. Thanks, Yun.

[Yun Kim:]

Okay, great. Thank you.

[Operator:]

Thank you. I'm showing no further questions in the queue. I will now turn the call back over to Peter Bauer for closing remarks.

[Peter Bauer:]

Folks, thanks for joining our Q2 FY 2022 quarterly earnings results. We appreciate your interest in our business, and we look forward to sharing our results with you again in about 90 days time.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.