Mimecast Limited
Q4 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2021 Mimecast Limited Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Robert Sanders, Director of Investor Relations. You may begin.

[Robert Sanders:]

Good morning and welcome to Mimecast's earnings call for the fiscal fourth quarter and the full year 2021 ended March 31, 2021. 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 conference 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 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 May 11 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 Bauer:]

Good morning everybody and thank you for joining us. I hope you and your families are doing well. I'll start with some takeaways from the quarter and the full year, as well as a view into our expectations for fiscal '22. I'd like to ground our discussion in our three-pronged strategy and growth drivers and the progress that we are making against them. Before I turn the call over to Rafe, I'll address some of the trends we are seeing in the changing threat landscape. And why we believe Mimecast provides customers the best protection and is uniquely positioned to grow market share as threats continued to evolve. I will also touch on the leadership transitions that we announced today. In a year that was more challenging given the macro uncertainties we are pleased to reported fourth quarter results that exceeded the high end of our guidance across all metrics.

[Rafe Brown:]

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 fourth quarter of fiscal 2021. Our results demonstrate our ability to deliver both topline growth and bottom-line margin expansion. Before I turn to our results I'd like to touch on some trends we're seeing as some of our core markets begin to emerge from the macro overhang brought on by COVID-19. The pandemic has had varying impact on our core geographies. Let me quickly touch on some of the patterns we are seeing. We are seeing a favorable relationship between our business and the overall economic recovery of the region. Building on our observations the last quarter, we saw continued improvements in our North American business in the fourth quarter. Likewise our Australian operations benefited from the local economy that is moving well past COVID-19 restrictions. While the impact of COVID-19 restrictions in the UK, Europe and South Africa, remain more problematic, we anticipate that with the lifting of COVID-19 restrictions and expanded immunizations we will see improvements in the overall selling environment as the year progresses. Let me now turn to our results. In the fourth quarter, we generated revenue of $133.9 million which represented a 17% improvement over the prior year in absolute dollar terms. Adjusting for $4.8 million of currently tailwind our constant currency growth rate over the prior year was 13% for the quarter. Note that since providing guidance in February foreign currency fluctuations positively impacted our fourth quarter revenue results by $700,000. For the full year we've crossed $0.5 billion revenue threshold generating revenue of $501.4 million, which represents 17% constant currency growth over the prior year after adjusting for the $1.3 million of currently tailwind. Bolstering our topline results, were continued year-on-year increases in average order values or AOV. Calculated at May 3 FX rates AOV for all customers stands up $13,900, up approximately 9% over the prior year in constant currency terms. This trend is attributable to a 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. In fact, customers with 5000 seats or more now constitute 19% of our recurring revenue base versus 18% at the close of fiscal 2020. We added 300 net new customers in the fourth quarter, bringing our total customer count to 39,900. There are two important trends one should consider in this respect. First, our focus on selling to larger customers is naturally going to increase the focus on expanding AOV versus a raw customer account metric. When we look at the year-on-year change in the net new customer metric, the majority of that change is in the small customer segment. Second, the sluggish economic environment, principally in EMEA, is weighing on the net new customer account metric. We do expect to see some improvement here as the macro environment improves in EMEA. Net revenue retention stood at 104% for the fourth quarter period ending March 31 consistent with the prior quarter, but better than our expectations shared during our last earnings call. This metric is particularly important as it is dollar based as opposed to purely customer count based. Looking at its components upsell totaled 113% where we saw strength in both product based upsell as well as seat and price based upsell. On the product side, the fourth quarter saw strong interest in our Zone-2 solutions of Internal Email Protection and Awareness Training, as well as our Web Security Solution. Down sell in churn totaled 9% for the fourth quarter period. We are seeing early signs of stabilization on down sell in churn and anticipated improving macroeconomic environment will continue this trend. As Peter noted, we were pleased to see net revenue retention begin to stabilize this quarter, which we believe is an early indication of a broader recovery in certain of our core markets. We continue to drive improvements in gross margins. In the quarter we recognized a 77.8% non-GAAP gross margin of 190 basis points from the fourth quarter of the prior year, a good step toward our long-term goal of achieving an 80% non-GAAP gross margin. Adjusted EBITDA for the fourth quarter totaled $33.3 million, representing an adjusted EBITDA margin of 24.9% compared to 21% in the same quarter of the prior year. On a net basis, the quarter derived approximately $3 million of discrete year-on-year bottom-line benefit as a result of COVID-19 driven cost reductions consisting primarily of travel savings. Even excluding these cost saving, our adjusted EBITDA margin would have been approximately 22.6%. We achieved this margin expansion through operational efficiencies driven by gross margin improvements and resource prioritization throughout our organization. Our full-year adjusted EBITDA totaled $127.2 million representing an adjusted EBITDA margin of 25.4% compared to 18.3% in the prior year. In line with the commentary we've given on quarterly calls throughout the year, $16.4 million or 330 basis points of this 710 basis point improvement came from discrete bottom-line cost savings during the year driven by COVID-19 such as savings on travel and facilities operation costs. Now turning to the bottom line. Our non-GAAP operating profit for the fourth quarter was $24.6 million or 18.4% of revenue, an improvement of 440 basis points from the prior year. We reported GAAP net income of $5.8 million for the fourth quarter or a profit of $0.09 per diluted share based on 66.3 million fully diluted weighted average shares outstanding. Our GAAP tax benefits total approximately $700,000 in the fourth quarter. Our full-year GAAP tax expense was $1.7 million. Our non-GAAP net income for the quarter was $18.5 million or $0.28 per diluted share based on 66.3 million fully diluted weighted average shares outstanding. Our non-GAAP tax rate was 16% for the quarter. Our full-year non-GAAP tax rate was 20%. Turning to cash flow. Fourth quarter operating cash flows totaled $31.7 million or 23.7% of revenue. For the full year operating cash flow totaled $127 million or 25.3% of revenue. Free cash flow totaled $24 million for the quarter or 18% of revenue driven by higher profitability and better-than-expected collections late in the quarter. For the full year free cash flow totaled $88.4 million or 17.6% of revenue, which is an 890 basis point improvement over the prior year and notably well above our beginning of the year free COVID-19 free cash flow guidance provided in February 2020. As of March 31, Mimecast had $293 million of cash on the balance sheet, up $119 million from the beginning of the year. Net of debt our current cash balance stands at $189 million. Let me now turn to guidance. For the first quarter of fiscal 2022 revenue is expected to be between $137.2 million and $138.6 million or 12% to 13% growth in constant currency terms. Our guidance is based on exchange rates as of May 3, 2021 and includes an estimated positive impact of $8.6 million resulting from the weakening in the U.S. dollar compared to the prior year. Adjusted EBITDA for the first quarter is expected to be between $35.8 million and $36.8 million, which at the midpoint reflects an adjusted EBITDA margin of 26.3%, up 400 basis points from Q1 of last year. Free cash flow for the first quarter is expected to be between $27 million and $28 million, which at the midpoint reflects our free cash flow margin of 20%, up 390 basis points from Q1 of last year. Turning to the full fiscal year. Fiscal 2022 revenue is expected to be between $569.7 million and $579.7 million or 10% to 12% growth in constant currency terms and in the detail, foreign exchange rate fluctuations are positively impacted in this guidance by an estimated $18.6 million compared to the rates in effect in the prior year. The prior guidance for fiscal 2022 provided in early February was $563 million at the midpoint. The strength we have seen in our business is leading us to raise the midpoint of our full-year guidance by $6.5 million in constant currency terms. This increase of $6.5 million is being further positively impacted by $5.2 million of foreign exchange tailwind that has risen since the rates used in our February call, resulting in the midpoint of our full-year guidance moving up by a total of $11.7 million in absolute dollar terms from the midpoint $563 million to a midpoint of $574.7 million. We are raising full-year 2022 adjusted EBITDA guidance to be between $148.5 million and $150.5 million which at the midpoint of our guidance would reflect an adjusted EBITDA margin of 26%, up 60 basis points from the prior year. At the midpoint, this represents a $3.4 million improvement over our prior guidance. We are also raising full-year 2022 free cash flow expectations to a range of $122.7 million to $124.7 million, reflecting a free cash flow margin of 22% at the midpoint of our revenue guidance. This is a 390 basis point improvement over the prior year. As the midpoint this represents a $2.7 million improvement over our prior guidance. For modeling purposes, I would note that on a preliminary basis we expect CapEx for the year to be approximately 6.5% of revenue which will be somewhat frontloaded in the fiscal year. Full-year FY '22 GAAP taxes to total approximately $7 million and a non-GAAP FY '22 tax rate of approximately 25%. Finally, stock-based compensation is projected to be approximately 12% of revenue for fiscal 2022. To conclude, the Mimecast business is demonstrating its resilience. We are seeing new and upsell business recover as the economies of key geographies begin to bounce back which is helping our net revenue retention rate to stabilize following a year challenged by the COVID-19 economic fallout. As our fourth quarter results show, the team is working hard to meet and exceed expectations. As we move into FY '22 we are investing to protect our customers from the ever increasing threats they are facing. Our go-to-market teams are driving new and upsell business. Our product and engineering teams are driving innovation and we are investing in our core initiatives to drive growth while making significant progress to deliver on our long-term free cash flow targets. With that, I'll turn it back to Peter for some closing remarks.

[Peter Bauer:]

Well, thanks Rafe. We have a differentiated platform and a durable business model with 98% recurring revenue, industry-leading retention and high gross margins. We have the talent and passion at every level of our organization to build from a strong foundation and achieve new levels of growth and profitability. Thank you to all our employees for your hard work, your resilience, creative and innovative thinking, and your strong execution. Now, operator if you would please open the line for questions.

[Operator:]

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

[Matthew Hedberg:]

Oh, hi, thanks guys. Good morning. Also, thanks for the questions. It's great to see the stabilization here. It really seems like the year is shaping up to be this U-shaped recovery. I wanted to ask about the success in the large account wins. Obviously it has been a focus for you guys for the last several years, but with new senior leadership including a CMO, are you going to take a more profound pivot towards sort of, addressing these large account opportunities? Just sort of curious on -- from an incremental basis how you are approaching this year on that side?

[Peter Bauer:]

Yes, Matt, this is Peter here, thanks for the question. Yes, so, as you rightly said, we’ve been pulled into some really interesting enterprise opportunities steadily over the last few years, but as we entered this fiscal year, we made a deliberate plan to really invest behind an enterprise opportunity and both from a sales perspective and also from our post-sales experience perspective, some of the things that we needed to have in place to more consistently and successfully win and deliver to enterprise customers. And so that’s been really exciting for us and we've seeing that coming through in our numbers now with our 5000 plus seat category now growing from 18% to 19% of our overall revenue. So, absolutely, I think we’re being recognized as a brand that can deliver for large enterprise customers. It certainly has a complex and a very clear needs for the types of services that we offer and so it's absolutely part of our strategy as we go into this fiscal year too.

[Matthew Hedberg:]

That's great. And then on the Microsoft Exchange hack earlier this year, I mean this is another reminder I think of the opportunity you guys have in that base. Are you seeing any change in customer behavior there or maybe customers reevaluating the E5 skew or kind of thinking about redundant security like Mimecast a little bit differently?

[Peter Bauer:]

Yes, I think what we learnt again with the Zero-Day attacks on Microsoft Exchange is that there is risk in relying solely on your application provider to be your security provider too. And there’s a real need to have layered defense in depth and to have an independent cybersecurity and resilience provider and that’s exactly where Mimecast comes into it, layering, additional, unique security technologies around these mission-critical applications like Exchange and Office 365. So, painful as it was for many organizations, I think an important reminder of the importance of cybersecurity, and Sidney, you know, the vulnerability that you can face with e-mail.

[Matthew Hedberg:]

Thanks, guys.

[Peter Bauer:]

Thanks, Matt.

[Operator:]

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

[Brian Essex:]

Hi, thank you, good morning and thank you for taking the question. Yes, I was wondering if I could, -- if we could maybe unpack some of the customer adds and churn data? And if we look at 19% of your 5000 seat customers as a percentage of total, I mean that implies that actually most of the customer heads were large enterprise, what’s, maybe if you could help us understand within large, mid and small enterprise some of the dynamics there and is that math kind of directionally correct?

[Peter Bauer:]

Brian, thanks for the question. Of course, the large enterprises, because they are larger ticket items, they are driving and approachable part of the business. Now, you know, keep in mind the whole base grew quite nicely during the year, it's just that that enterprise group is growing a bit faster. And I think that’s one of the things that’s encouraging for us, as we really focus this strategy and we’re doing it on the back of a lot of great success we’ve had in the market. We’ve -- I mean essentially have a roughly a $100 million of enterprise business. It’s growing faster than the other regions when we look across and you're seeing that tweak up there. So, the customer, when you drill into the customer account elements of it, it's skewed a bit because one big enterprise customer makes a really big difference in the dollar value measures that you're highlighting.

[Brian Essex:]

Got it. That's super helpful. And then just, I guess if we could maybe impact the churn a little bit, what's the primary driver and where are you primarily seeing some of the churn come from? Is it still maybe kind of going out of business as opposed to competitive displacement or maybe just highlight some of the dynamics there? Why we might look towards the stabilization in that number?

[Peter Bauer:]

Sure. And the one thing I would just remind everyone is that, that's a trailing fourth quarter metric. We're really looking at customers a year ago and what's transpired, so we pick up all the renewals. And so it is covering this full COVID period influenced by that. I think what you're hearing from us is, we are seeing signs of stabilization, which I think both on the upsell and the down sell side to take that down sell and churn side first. There was serious economic impact that's hit a lot of our customers over the course of the year. We've talked a lot about how we saw quite a bit of down sell going through the COVID environment, but one of the conscious decisions we made is to make sure we're supporting our customers through a tough time where we would choose down sell over churn in a customer and we think that sets us up for a nice recovery coming out of the economic fallout. I think we are seeing the first elements of it even in the current quarter where you started to see upsell move up, not just in buying products which we are always excited about that, but you are seeing additional seat adds coming back in. And I think that speaks to both the broader economic recovery, but also our investment in our customer's success.

[Brian Essex:]

Got it. That's super helpful. Thank you.

[Operator:]

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

[SaketKalia:]

Hey folks, thanks for taking my questions here. Peter, maybe for you, just to make sure the question is asked. Now that the SolarWinds breach and the related impact to Mimecast is a little further in the rearview mirror, can you just talk about any customer feedback or observations on whether you feel that incident at Mimecast impacted demand at all? Based on the numbers it would seem like no, but again just to make sure the question is asked.

[Peter Bauer:]

Yes. Thanks Saket. So, look nobody wants to have a security incident like that occur and there is some inevitable impact that this will have to customer base and prospect opportunities. But I think as you pointed out, our numbers remained really strong through this process and I was really proud of the way our teams handled their interaction with customers and navigated us through this. I think on the positive side, it gave us an opportunity to get even closer to some of the security teams within our customer organizations that we work with as we handled this. And I think that it allowed us to look at a variety of ways that I think coming out of this situation, you leave Mimecast an even better, even more robust organization as you'd expect from some of the learnings that we were able to take from our experience here. So, all-in-all I think the numbers sort of speak for -- absorbed any of that impact and we're moving forward out the other side of it.

[SaketKalia:]

Absolutely. Rafe, for my followup maybe for you, great to see the EBITDA guide go up for next year. Can you just remind us how you kind of thought about return to office expenses sort of layering in and if your assumptions there have sort of changed at all?

[Rafe Brown:]

Yes. Thank you. So, we're expecting to try and get back to business more than the usual sentiment as quickly as we can. So certainly in our numbers we do have those travel costs coming up a bit in Q1, but certainly by Q2, travel returning to a more normal pace, people getting back to work. We're aware that, we've all learned about new ways of doing business remotely, but we are also very anxious to get back together. And I am pleased to say that we have pilots going on, where the Australians are back in the office, Israelis are back in the office. We'll be back in just a couple of months here much more regularly in the Lexington office, although a small group of us are here today doing our duty. So, I think that's just really important just for the team morale and also being able to work together as teams and take advantage of the recoveries we are seeing more broadly. And then of course the cost side of that will also kind of again buffer in a little bit in Q1, but really picking up steam to more normalized rates through the rest of the year.

[SaketKalia:]

Makes sense. Thanks guys.

[Operator:]

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

[Catharine Trebnick:]

Thank you for taking my question and excellent print in tough times guys. One question I guess I have is on, last year at the Investor Day, before the entire world closed down, you talked about free cash flow inflection. Can you begin several but more looks like you are headed on that trajectory this year can we talk about that some more? Thanks.

[Rafe Brown:]

Yes. Catharine, thank you for the question. And just as a reminder everyone, we talked about free cash flow going into a range between 23% and 25% percent on our long range plan. We've just completed our first year and with just one year behind us as you noted in our free cash flow guidance, we're targeting 22% free cash flow for the year. So, I think that inflection has very much come to us and I think what we're showing, it's not just the COVID travel savings, we're taking that forward and building that into how we're thinking about the business. So, you know and we're feeling good about the free cash flow side of it perhaps even ahead of schedule.

[Catharine Trebnick:]

All right. Thank you.

[Operator:]

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

[Steven Koenig:]

Great. Hey, thanks for taking my question. I will ask two questions in one here and by the way congrats on the results this quarter and the outlook looking promising here. Wanted to ask you for comments on changes in the competitive landscape, you know what consolidation and change of ownership, are you expecting anything that changed really in that competitively? And also might as well toss this out upfront, maybe just update us on what you're seeing in the field with your partnerships, especially tech partnerships including players like Netskope? Thanks again and congrats.

[Peter Bauer:]

Yes, thanks Steve. Let me check the partnership side first. I think that's such an important area for our customers as they leverage our API integrations along with some of the other leading cybersecurity products in the market, CrowdStrike, Palo Alto Networks, Netskope and others, Splunk. And so we're engaged with those partnerships and some of the joint customer value propositions that we're able to present folks with our channel reseller partners and also joint marketing and sales engagements with some of those vendors. So, I think really important for cybersecurity and obviously positive for our business too. Just you know on consolidation and I assume you're referring to Quick Point and the deal that is recently announced with them . Look, I think it's really powerful validation of the space to see something like that happening. Clearly, a lot of interest in the potential and recognition of the significant threats that email and messaging poses to organizations and the importance of solutions that can resolve that. From a competitive standpoint, I think it's too early for us to call the ball, but we have obviously seen M&A activity in the past with competitors and consolidation in the space. And generally it's known to have some distraction for staff and partners and so on at these organizations. And that can present opportunity potentially to Mimecast. I think increasingly we're being seen as the credible, perhaps sometimes preferred alternative for larger organizations. And so, you know this may indeed present a clearer shot and goal for us in some of those selling situations. So, again I guess that's -- some of that we have to see how that plays out in the market, but we have a positive perspective on it going in.

[Steven Koenig:]

Great. Thank you, Peter.

[Operator:]

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

[Unidentified Analyst:]

Hi, here for Alex Henderson. Thanks for taking the questions. On the EMEA, South Africa, some of these international markets that have been weaker to rebound versus what we're seeing in North America and Australia. Can you comment on what gives you the confidence for these improvements or how the pipeline looks? And I just did want to hawking back to an earlier comment. It sounds like part of the seat increases you're seeing is based on the Mime's ability to support its customers through the year. So, we should expect that these customers will be coming back to you based on those efforts that you had previously put in place, is that fair?

[Rafe Brown:]

So, I'm yes, happy to take that on. What gives us confidence is we're seeing such a strong relationship frankly with these other economies as people have gotten back to work. Hiring has picked up. We see people that had or companies that had reduced work forces bringing those employees back. All of that is translating into a better selling environment for us in those stronger markets. And so, we do believe that the UK, which is now listed they're very heavy lockdown, people are getting vaccinated. You know we're seeing more vaccinations across EMEA pick up. We expect that same behavior to continue. There's just such a dramatic impact on the overall economy of people being able to get out from under lockdowns and get back to work. And you know we've very much seen a world that's frankly asking to get back in the office and return to some state of normalcy if you will. That's really what pushes us there and I think that's exactly right. On the second part of your question, when we talk about the supporting customers, you are spot on. I think we do sell on a per seat basis, it is certainly if a customer had vastly reduced headcount and they ended up having a down sell if you will last year, as those numbers come back we're going to see an upsell on our renewals. And I just think the strengthening of our relationships, the fact that we invested with our customers through a tough time, helps people realize that there's more to the story, they are certainly about greater product efficacy, but there's great service and there's an investment in each other in a long term relationship.

[Unidentified Analyst:]

That's great. And then if I could just one more on the combination of the product management and engineering organization into a single team, curious if you could just lay out the details as far as what's already under way at this point? What's involved from a communications to the team, getting them on board? Is there any change in headcount from removing duplicative positions, what can we expect there?

[Peter Bauer:]

Yes, great question, thanks. So, from a communications point of view I think it's been clearly communicated inside the organization. Everybody understands what we're trying to achieve strategically. Excited about how we can be more agile as an integrated team under a single leader. I think you know as we started to get folks back into the office, it's a good time to bring people together into a new structure, really to use this shift as a base to continue to invest strongly in our R&D and product development initiatives and to propel us forward as a growth company to achieve our vision and our long term objectives. So, I think it's a very positive move. We have a very talented team of leaders in our product management and engineering organizations and I'm certainly looking forward to working even more closely with them as we move forward with this change.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Your line is open.

[Sterling Auty:]

Yes, thanks. Hi guys. Actually I wanted to ask about the guidance first. I want to make sure that I looking at this properly. It looks like the guidance for the June quarter has grown near 20%, but the full year near 15 which would suggest a slowdown at some point or through the year. What's kind of factoring into that pattern?

[Rafe Brown:]

Yes. Sterling, thank you for calling that out and just to keep everyone aligned there, you know their growth rates you're talking about are on actual rates. I quoted constant currency in my script. Yes, we've talked about a U-shaped recovery that we'll see throughout the year. And I would just remind everyone because we recognize such a high percentage of our revenue on a deferred basis, and then amortized across the year, even drastic improvements still bleed into the revenue line on a fairly gradual basis. So what you're seeing is, as we get into this U-shaped recovery, we are seeing strength that we've talked about in a number of areas on the quarter as well as on the net revenue retention. We still need to -- you know, we need to see those trends continue certainly before you can really start seeing an uptick out of the bottom of the U, if you will. I would call out that with a constant currency raise on the full year of $6.5 million, I think that does speak to us feeling better about the year as it is certainly based on the way we finished Q4, and based on our current outlook there. But it is going to take a few quarters to work through the bottom of that U.

[Sterling Auty:]

Understood. And then Peter, you had commented about survey work that you've done talking to increase security spend, when do you think those increases will begin to manifest themselves, both in results and outlook? See if you start to see it in June quarter or is it the more of a back half there?

[Peter Bauer:]

Sterling, thanks for the question. Look, I think the outlook and what we've seen there certainly factors into the guidance that Rafe has shared. And so that’s part of our perspective on what we can achieve during this year. I think it is sort of really interesting to see how the kind of current new cycle is also impacting desire to spend on solutions, ransomware clearly posing significant threats to organizations obviously here in the U.S. with the colonial pipeline shutdown. Organizations understanding that there are significant financial costs associated with ransomware. I believe that the average payment for ransomware release is now over $300,000 and includes average downtime of about 21 days on average. So, the impact that these incidents can have on organizations I think is really part of the story driving an appetite to make sure that one has both preventative as well as recovery capabilities in place, which is, you know, a key component of the Mimecast suite and our sales motion.

[Sterling Auty:]

Got it. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Keith Bachman with Bank of Montreal. Your line is open.

[Keith Bachman:]

Hi. Thank you very much and congratulations on a solid set of results. Peter I wanted to direct this to you and it's really a two-part question, if I could. As you think broader, longer term to the next call at three years, you have on average right now customers using 3.5 solutions. You have a total of 12 .What does that look like longer term if you look out 3.5 years? And is there anything that you think could provide some step function change associated with a greater impact or greater distribution? And part B of the question is, if you look at your AOV, it was actually up nicely 9% year-over-year constant currency. As we think about the next 12 to 18 months, as you look at the current portfolio, is that kind of a steady cadence that we should be thinking about in terms of the economic model? Thanks very much.

[Peter Bauer:]

Keith thanks. So, yes, so and mega rates, spoke about the economic model and how he sees that moving on. But from a cross seller and upsell perspective and a broad suites adoption perspective, that steady growth seen in additional product adds is something that we expect to continue. We have as you may know about 12 products in the overall portfolio. So, there's plenty of headroom for us to increase adoption. In fact we are seeing that playing out across some of the newer modules that we've introduced. So, a strong quarter for products like IEP and Zone-2 along with Awareness Training, 900 and 800 additional customers are purchasing that there. So encouraging signs, and then of course some of the other Zone-3 DMARC, 200 additional customers, Web Security 300 additional customers. So, as those products are maturing and becoming part of the story in customers minds, we're seeing continued adoption of that. We'll continue to lay out additional capabilities in. Obviously CyberGraph is something that we recently introduced has been available initially in the North America and rolling out globally. So we expect to see some positive results from that. So, overall I think the suite has a really strong model with multiple kind of monetizable category plays there that we continue to benefit from.

[Rafe Brown:]

Yes. And just on the economic model, I mean you are spot on. I think that's a key part of the strategy is making sure that we're driving those AOVs up over time. And that's really going to be driven by of course the emphasis on larger customers as we've been talking about, but also on the upsell elements. As we taking these four products and that we had talked about step change or at least the strategy is, on the one hand making sure we're continuing to expand the platform in ways that work together such that customers get more when they buy one plus one equals more than two kind of approach. So, if we can continue to build that platform and then we combine that through good bundling, good pricing of packages, to help customers be successful, that's going to drive AOVs. And I think another really important element to understand there is, we see much better retention rates with customers who have more products, because they get more value out of Mimecast. Right? And I think that's a key part of the story as well. So, we're at that point in our trajectory where we realize that while new customers are really, really important, also how we take care of our basic customers and keep bringing them new offerings, incredibly important to our long term success and of course the economic model.

[Keith Bachman:]

Makes sense. Many thanks.

[Operator:]

Thank you. Our next question comes from the line of Terrell Tillman with Truist. Your line is open.

[Terrell Tillman:]

Yes, thank you for taking my questions and I'll echo the solid job on the results. I guess Peter, the first question is on Web Security, I have asked about in the past, I know you just talked about it. But has that product reached an inflection point? And also it sounds like it's been more successful at this point yes and in the market, could it actually help you strengthen your small business or SMB sales?

[Peter Bauer:]

Yes, Terrey, good question, thank you. Yes, I think definitely Web Security we've seen it increase in popularity. I think particularly as you point out within the SMB segment in that kind of sub 500 seats category, maybe sub 1000 seat category, especially as smaller organizations have been continuing to look at ways to keep their remote workforces secure and of course even at the end of COVID, we got into kind of a hybrid working arrangement which organizations are expecting and preparing for. So, the capabilities that we've delivered around Web Security that includes some interesting advanced functionality like browser isolation, application control, shadow IP detection, selective proxy capabilities, using the same kind of malware interrogation stack as our email platform. It's a really interesting solution particularly for customers that have already selected Mimecast to be their security partner for email as a part of our suite. So, yes, I think we're quite bullish on what we can achieve with Web Security in the SMB market over time.

[Terrell Tillman:]

That's great. And I just have one followup Rafe. In terms of the enterprise business you characterized it well. So, $100 million kind of run rate revenue business. Could you remind us what the profitability on this 5000 plus seat enterprise business is like and are you in more of a getting leverage out of it mode or investing for growth? Thank you.

[Rafe Brown:]

It's a great question. I think one of the encouraging thing with enterprise customers is, they come with a real handsome lifetime, customer lifetime value. And I think that's when we approach a market, and we really like look at it in those terms that we think on the long-term investment of them, those customers present great opportunity for us and strength for the customer -- strength for the company, if you will. And I think that's part of the overall formulation is we're looking at this as we feel like that can be a driver to help us achieve those long-term goals both from the topline as well as on the bottom line is we've discussed.

[Operator:]

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

[Nehal Chokshi:]

Thank you. So, looks like a really strong bonus quarter where there is year-over-year growth accelerating relative to the December quarter. Can you talk about what was linearity in the quarter?

[Rafe Brown:]

Linearity in the quarter, it was very much in line with prior quarters. There was nothing really to call out exceptional on linearity in the quarter. I think it just would be around the edges, that cycle of strengthening, and certainly some of the activity in the company came on later in the quarter, but that's really going to have a bigger impact on future quarters in the way that translates into strength in our business. And I mean, that by kind of the geographic breakout that we talked about earlier, where we’re seeing those economies get stronger as they’re emerging from their COVID hangover.

[Nehal Chokshi:]

Okay. And what are your metrics you can point to say that the utilization of automation in the mid market is working given the further slowing and customer ads and what’s seems to be an improving SMB sentiment here?

[Rafe Brown:]

Yes, no, so- we have several projects going on in that respect and some of them are going to take a few quarters to fully implement. What we’re really focusing is, and first of all I would say making sure we continue to leverage our channel relationships and maybe take those to the next level. And I think that's a key piece of the strategy and part of it is just, if you look at some of the trends we’re seen out there with smaller customers relying on MSPs more, we want to improve that working relationship. And as you know we've made an important hire last year for a channel leader. He's implementing a lot of his work and laying the groundwork for continuing improvements in that respect. I think more broadly, we have some good IT projects that are going to go and really approach the whole code to cash cycle, helping people in a digital way transact with this much more efficiently. And then Bernd is going to be coming in and really taking it to the next level and is a big part of his focus about how we help these customers find Mimecast services and offerings and really again transact with this more efficiently. So, it's going to be a multi-quarter track, but I think that's really focus now there.

[Nehal Chokshi:]

Great, thank you.

[Operator:]

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

[Unidentified Analyst:]

Hi, guys this is Joe on for Brent. Appreciate the question. Congrats on passing the $500 million revenue threshold, a lot to be proud of there. Were there -- following up on the billings, were there any outsized FX or other dynamics in packing billings? I’m just trying to bridge the current billings strength we’ve seen in the past few quarters. Obviously, you’re lapping some pandemic impacted numbers, so just trying to bridge that to your constant currency revenue guide going forward or is there just a ?

[Rafe Brown:]

Yes, no, I think that’s key and this was, we've got a lot of currency tailwind in this quarter. We certainly called it out, both in the prepared remarks around Q4 as well as the guidance. And so I think you need to adjust it in your calculations, take that into account. We’re of course pleased after -- when COVID came on the currencies worked against us for a bit, so now as things are kind of normalizing we’re seeing that strength. And obviously it does flow through not just the revenue line items, but if you're trying to calculate a billings number, you’d want to adjust for that as well.

[Unidentified Analyst:]

Okay, that’s helpful. And then being in the 4Q is the most important quarter of the following year and I think you've touched on it a little bit, but any sense of how the pipeline is looking? I believe last quarter you said generation was lacking slightly due to increased focus on the security breach, just kind of curious how you view the pipeline.

[Peter Bauer:]

Yes, no, look, I think ultimately the best indicator of our confidence is the fact that we're able to have a nice raise on the full-year revenue number, that’s $6.5 million constant currency raise plus some FX tailwind behind that. I think that’s your best indicator. As we've touched about on the last call, yes there was a period of time where we’re making sure we're taking care of all of our customers and we're all very focused on that. The sales team quickly got back to their day jobs and going out and building pipeline and closing deals and I think that's encouraging, that -- we’re very focused on that currently and I’d say there’s no distractions right now, so it’s all about building a good year.

[Unidentified Analyst:]

Awesome. 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 I’m curious just on the guidance kind of what you're assuming from a macro perspective in terms of the recovery in some of these more challenged international markets? And then secondly, I’m curious if the guidance raise that you made this quarter, if that what you're seeing drove that guidance change has changed your, the timeline for reacceleration of revenue or if you're kind of just raising the base of the U?

[Rafe Brown:]

Sure, great questions. So, first in terms of great question so in terms of our kind of macro recovery we're expecting to start to see either certainly there are bigger markets in EMEA start to bounce back, I would expect it’s going to be likely a Q1, Q2 kind of recovery as they get their engines rolling, and I’m basing that entirely on just a bit of what we've seen certainly in North America and Australia and end markets that have just gotten a bit of a head start in that respect. So, I would again start to hopefully see strengthening throughout Q1, Q2 in those markets. Now, of course I would caution COVID has thrown me more twists if you will, over the last year than I would have ever bargained for, so one has to always take that into consideration. I think in terms of the overall recovery, I think it’s key to remember that North America is half of our revenue base that’s really and more roughly half of our revenue bases and that’s key. The U-shaped recovery as I mentioned a bit earlier, just because of the way we recognize revenue that the timings of the bookings really matter a lot. Somebody said that Q4 is the most quarter of the next year, absolutely true. So, there is a little bit of a timing element to judging when revenue will start to build up. I think the important thing here is strength like we were able to show with a nice raise really solid on the free cash flow side shows you that we’re executing and as we take advantage of hopefully the better selling environment, we’re going to be able to build that and make sure that we get to the other side of the U as quickly as we can.

[Brian Colley:]

Got it. And then just following up going back to the security breach from earlier this year, I mean do you guys think that the worst of that impact is behind you now or do you think that the impact from that incident is going to bleed into 2022 so?

[Peter Bauer:]

We believe the worst is behind us.

[Brian Colley:]

Got it. All right, thanks for the time.

[Peter Bauer:]

Thank you.

[Operator:]

Thank you. I’m not showing any further questions from the queue. I would now like to turn the call back over to Peter for closing comments.

[Peter Bauer:]

Folks, thanks for joining us this morning for our full-year and our Q4 FY '21 results. We look forward to presenting all results again to you in about three months’ time. Have a great day.

[Operator:]

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