Mimecast Limited
Q4 2020 Earnings Call Transcript

Published: 11 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Fourth Quarter 2020 Mimecast Earnings Conference Call. Please be advised that today's conference maybe recorded. I'd now like to hand the conference over to your host today, Mr. Robert Sanders, Director of Investor Relations.

[Robert Sanders:]

Good evening. Welcome to Mimecast earnings call for the fiscal fourth quarter of 2020 ended March 31, 2020. I'm Robert Sanders, Director of Investor Relations. With me on the call tonight are Peter Bauer, our Co-Founder, Chairman and CEO; and Rafe Brown, our CFO. Tonight's conference call is being broadcast live. A replay of this call will be available after the live call has ended.

[Peter Bauer:]

Good evening. And thank you all for joining our fourth quarter fiscal 2020 earnings call. I'll start tonight's call by highlighting the accomplishments we've achieved in the fourth quarter and milestones we've crossed during fiscal 2020. Next, I'll discuss the company's response to the COVID-19 pandemic as we work to safeguard our employees and our customers. And then I'll discuss what we're seeing in the marketplace and how Mimecast is adapting to further our cyber resilience mission. Finally, I'll look ahead and share some of our vision for Mimecast in the coming year and beyond, before handing the call over to Rafe Brown, our CFO to look back on 2020, review the quarter, and the impacts of the COVID-19 pandemic in more detail.

[Rafe Brown:]

Thank you, Peter. I'm pleased to report that for the fourth quarter of fiscal 2020 we exceeded the high end of our guidance for both revenue and adjusted EBITDA. This achievement was made despite both the impact of the COVID-19 crisis and significant foreign currency headwinds experienced during the quarter. To that point, I will review our Q4 results and then dive into the impact we are seeing and will likely continue to see, as a result of the COVID-19 crisis and resulting economic slowdown.

[Operator:]

Our first question comes from Matt Hedberg with RBC Capital Markets. Your line is now open.

[Matt Hedberg:]

Thanks for taking my questions. And Rafe, in particular, your guidance was a super helpful for us kind of think about the mechanics of the model. I guess I'm wondering you noted down-sell and churn could get a little bit worse this year relative to the plan of improving a little bit. When you think about those two variables, I'm wondering if you can distinguish between them. Have you seen - and to what extent you've seen customers reducing their - active customers reducing their seat count because of layoffs and things of that nature?

[Rafe Brown:]

Yes. Thank you for the question. I think we're in very early days in terms of the overall monitoring down-sell and churn, principally what we've had from customers, so thus far are some that have come back and requested things like quarterly billing for a short period of time instead of annual things of that nature. I'm sure, well, I know there's been a couple of corner cases where people are going through reductions and talking about what they - their contract might look like going forward. But I would say, to be honest, right now we're still very much in the early days of anything so there's no real data points on the Board that are meaningful as of yet.

[Matt Hedberg:]

Got it. That's helpful. And then maybe on the Symantec replacement cycle or just the broader legacy provider replacement cycle, can you talk about the cadence of that, how you think that might impact this year? Is it more of this year thing or sort of a next year thing, just sort of the willingness for customers to move off the legacy solution in times of economic stress like that that would be helpful too?

[Peter Bauer:]

Yes. Matt, thanks. I'll take that one. I think we think about that in two ways. The one is, there's many legacy implementations that they kind of have to get off because they no longer serve customers well in a work-from-home scenario. So appliances for things like Email Security and Web and so really require replacement at this time and so we're seeing an opportunity around that. Looking at Symantec specifically, obviously, that is a hot area of opportunity for us. And we've been monitoring that closely to see what the impact of customers' willingness to make changes on it. The picture that's forming is that customers are interested in moving. It was delayed slightly, but in the quarter that we've just reported, we had one of our stronger quarter's ever on displacement with Symantec and we were able to do some, I think, some pretty large Symantec migrations on Email Security, despite the fact that a lot of the work had to be done under the current work-from-home regime.

[Operator:]

Our next question comes from Shaul Eyal with Oppenheimer. Your line is now open.

[Shaul Eyal:]

And Rafe, thank you for this transparency, let me echo Matthews as well. I have two questions. When we think about some of the challenges you're seeing and putting that versus the breakdown rate you provided us with small customers 9% of recurring revenue, middle customer - middle-market customers 73%, a large enterprise, if I'm not mistaken, 18%. Where do you see the majority of impact to fiscal '21 coming from, is it just one segment or is that all of them?

[Rafe Brown:]

Well, I would say, in the first few weeks that's happened. In late March, we really did see it kind of across the Board. I will tell you, as the April has ticked by and the first week of May, we are seeing the enterprise come back stronger in terms of pipeline build and by pipeline build that's our day-to-day activity, where we're focused on how we're adding to pipeline. So, perhaps, not surprising, some of the bigger organizations are a little bit more able to get back to work even in a work-from-home environment. One thing I would add, you are spot on in your customer segment breakdowns. But if you just look at how much of our recurring revenue comes from customers over a 1,000 seats, which speaks to some pretty good-sized organizations. We now have 47% of our recurring revenue coming from that over 1,000-segment. And I think that we talked a lot about the broad customer base that we have of many different segments and industries, and I think that speaks to it. So we're encouraged by what we're seeing in some of these bigger accounts. Overall, as I touched on, on the call, we did see things improve from that first couple of weeks of highly disruptive time, as we look kind of to that day-to-day activity and so we're hoping the enterprise, the larger accounts lead the way on that.

[Shaul Eyal:]

Understood. And thank you for that Rafe, again. Peter on the Office 365, it would appear as if trends, for the most part, are largely intact. But have you seen any change in demand? And are customers becoming slightly more reluctant to leave the current provider and switch to a new one, probably, just playing it safe for maybe a quarter or so?

[Peter Bauer:]

Yes. Great question, Shaul. So, yes, I think, the Office 365 trend continues and that's been a tailwind for our business for some time. The percentage of our customer base using Office 365 are using Mimecast to protect Office 365 continues to climb, so that's good. And I think customers using Office 365 are having a better time of it, because of the way that it fits a remote worker scenario better. So we think that's good. Sorry, Shaul, just repeat the second part of your question. Willingness to migrate - to change provider, sorry.

[Shaul Eyal:]

Exactly. Thank you, Peter.

[Peter Bauer:]

Yes. So we've seen - obviously, we saw a slowdown at the end of Q4 in terms of decision-making. We're not certain that that was necessarily based on a reticence to change providers. I think it was more the disruption and the uncertainty around the pandemic and how it is going to impact and a lot of distraction with IT and security teams focused on work-from-home situations. What we have seen is that those customers that did continue with these migrations is that we've been able to very successfully and, on a cost-neutral basis move them to a better stronger Email Security platform. And in fact, in many cases, we expect that, that IT organizations will start to get back sometime some productivity as they settle into this and quite possibly have scope to do these projects more successfully with us as we settle down.

[Operator:]

Our next question comes from Brian Essex with Goldman Sachs. Your line is now open.

[Brian Essex:]

Rafe, maybe one quick one for you, just on the guidance and the margin expansion. As we've kind of brought down the top-line guide from February. Maybe just some thoughts on how you're thinking about spending for fiscal '21 and where any kind of, I guess, that's expense control came from to maintain some better margin expansion, I think, like, 250 basis points at this point of the mid-range?

[Rafe Brown:]

As you can imagine, as you're going through this crisis, we're monitoring headcount very closely. Look, we have recast our plan and we've really said in a tightly controlled system where we'll look at a number of indicators and then release head - headcount as the year progresses. Just to make sure we're really working in concert with the business as it develops because I think as everybody knows, yeah, this is proved hard to predict. So I think that's the first element where we've been able to really focus on it is along the headcount side. Obviously, right now we're traveling a lot less than normal so there is a couple of million of savings in Q1. That is coming from travel reductions and event reductions. That said in our plan, we are anticipating that we will get back to work as the year goes on and there's very likely some pent-up demand certainly, for some in-person events and things like that. We've shifted everything we can to virtual. But as the year goes on that has a lot to do with our general approach to pipeline generation. So there is some savings, I would say early on, related to travel, but then there is some planned investment later on in the year goes - goes on for travel and events really.

[Brian Essex:]

Got it. That's helpful. And maybe one quick follow-up on, I think, maybe to Matt's question, where - but I wanted to kind of get your thoughts in terms of your outlook and assumptions embedded in your outlook with regard to seat count reduction.

[Rafe Brown:]

Yes.

[Brian Essex:]

I guess, how - what are your assumptions? Do you kind of a sign it to one of the - any particular cohort or customers. And then if we were to see kind of unemployment or seat count reductions meaningfully impact your installed base. How that manifest itself, would have come in through on renewals or would you have interim conversations with your customers on a quarterly basis to adjust on that front?

[Rafe Brown:]

I think, when we talk about that revenue retention rate, which I - as I mentioned, we're modeling between 106% and 107% and we kind of bring together a number of scenarios here as we're working through that, that is obviously, net of a few numbers, the upsell, the down-sell and the churn. As we think about it, we're kind of - we're solving for this end numbers. So we have gone through a number of scenarios. Frankly, the - it's hard to say until it actually happens, I guess, the lower end of the market. You can see some of those companies struggling as we go through tough times like this. They're generally smaller dollars in terms of recurring revenue from any one of them. But I think that's the running hypothesis that a lot of people are using that there could be some elements there and we're excited about the activity that's going on that market. I think it's also important to think about and we touched on it briefly, just our exposure in certain verticals, we tried to put together a group of those verticals, which we think are most likely to be impacted by this and that's our retail, hospitality, transportation and then even oil and gas. And together it's 14% of our total recurring revenue base. You really do each of that great diversity that we have and that we rely on. So it gives us some variant of where kind of the hotspots could be. Your last question on when do these changes happen. As a general rule that the - any kind of changes like that usually happen at the contract renewal time. They are in dire circumstances in very unique situations, perhaps, there could be an exception to that. But the general rule is that any kind of down-sell, if you will, reduce seat counts or things like that happens at renewal time.

[Operator:]

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

[Keith Bachman:]

I wanted to ask my first question around customer adds, despite the backdrop, the customer adds in this quarter were actually reasonable. How are you thinking about customer adds fueling the model over the next couple of quarters? And I wanted to add one particular dimension to that, one of the previous questions was around switching vendors. That's not the way I was thinking about it from a competitive dynamic standpoint for the situation but in particular consolidation. What I mean by that is, if Office 365 continues to get rolled out, particularly at the low end. Does that create a higher propensity to go with Microsoft solution in this case given the weak backdrop of the economy? So really new customer adds with the competitive twist and then I had a follow.

[Rafe Brown:]

Sure. I'll start off on the new customer adds. As we're looking forward to the year, remember the number we quote is a net customer add numbers.

[Keith Bachman:]

Yes.

[Rafe Brown:]

So small and larger number of small companies if they struggled during this period that could obviously impact that statistic even if it's a relative small number of dollars. But let me tell you, we think about it has, it's very important for us to be bringing on new customers onto our platform, right? It sets us up for additional sales and our - kind of our longstanding proven ability to upsell those customers. So it is absolutely a focus of the organization. That's why we kept very well pleased to see the activity we had of that 200 customers coming on where we think of that as new on-ramps on to the Mimecast platform. Now those are coming from some very brand new solutions, but there are things that now standalone apart from our typical and traditional security approach - Email Security approach, whether it's our Web Solution, which had a nice quarter, DMARC - as if products that came out of the DMARC acquisition and the Segasec acquisition. Those set us up we think over the long-term to keep bringing customers onto the platform, and then, obviously, our hope is that we can sell those customers more over time. So I think that's probably the right way to think about that.

[Peter Bauer:]

Yes. Keith.

[Keith Bachman:]

Okay. Go ahead, Peter.

[Peter Bauer:]

Just to answer your question around sort of economic pressure and smaller customers on Office 365. It was interesting I was looking the other day what our - how the company grew during the financial crisis of '08 and '09 and I'm just looking back at those numbers. We grew incredibly strongly during that time and we were selling to a lot of smaller organizations during that period. And I think that the formula that we had been is very similar to the formula that we have now, albeit that the product portfolio is considerably richer. So we're able to say to a smaller company on Office 365. Here is a very economically compelling suite, a combination of capabilities that is kind of unmatched in a single integrated suite in the industry that combines Email Security, Web Security, user awareness training, and data protection. All in one very affordable, very easy to manage package. Given the increased cyber risks that we're seeing around this pandemic and given the dynamics of the work-from-home situation, these are really important things that companies of all sizes, but certainly smaller companies cannot simply ignore. So we think we have a very strong opportunity to compete for that business, given the economics and the form factor that we can deliver to them.

[Operator:]

Our next question comes from Brent Thill with Jefferies. Your line is now open.

[Brent Thill:]

Just on the guidance, obviously, 26% growth, 19% to 20% this quarter, and then down to mid-teens, is a pretty sharp fall off. And I guess, many are asking, is this just you being a little more conservative based on assumptions or are you actually seeing this impact already in the close rates you mentioned the pipelines up, that would I guess imply that your close rates are down. So I am just curious if you could just put a little more color around the decele that you're planning for the rest of the year? Thank you.

[Peter Bauer:]

Yes. And the first thing I would just - on the pipeline just to be abundantly clear. I was speaking to pipeline build, which is really look into the daily activity of the pipeline, the day-to-day generation that we track quite closely that's that where we saw that fall off the day-to-day build in late March, early April. Now, we've seen that activity climbing back up so just to be really clear on that point. But your broader question about the guidance. The guidance as we tried to layout reflects a number of things we're seeing in the business across the Board, as well as in the activity we already saw in late in the quarter. So, for example, that first one where we called out, in Q4, we can identify right around $4 million of business that we felt was on track to close that really got pushed hard by the COVID crisis and everybody shifting to home, right? Obviously, that translates straight into revenue for the very next year. Things like that and - have an impact on FY'21. Also in our assumptions, it - as we've tried to layout, we - obviously, the crisis is hitting us hard now in this first quarter of the year and in a model where we have approximately 98% of our revenue recognized on a ratable basis because it's recurring that's the quarter that impacts is very significantly. What happened in Q1, Q2 hits revenue a lot harder than the same booking that happens later in the year. So even in our assumptions that the business starts to return to a more normalized place later in the year, a lot of those bookings might come along late enough that it doesn't really have a chance to directly translate into FY'21 revenue.

[Operator:]

Our next question comes from Saket Kalia with Barclays. Your line is now open.

[Saket Kalia:]

Thanks for taking my questions here guys. Hi, Peter, maybe first for you. I'd love to touch on the Web Security part of the business, realizing that's still a developing offering. Clearly, it sounds like you benefited from that since as early as February back to Analyst Day. Can you just talk a little bit about why that is and why you feel like you're maybe differentiating here?

[Peter Bauer:]

Yes. Thanks, Saket. So, yeah, I agree with you, I think, Web Security is - it's a big opportunity for us, it's a very big market. We introduced the Version 1 of our product, I think, it's about 18 months ago and we've continued to incrementally innovate in that product to make it more and more competitive and to attract more customers as we go. And remember our position on this is that we want to be the most compelling Web Security alternative to Mimecast customers. So customers that have already chosen us as the Email Security partner to give us a very serious look as being their Web Security partner. And if we just look at it in the context of that, it's a significant opportunity. What we've started to see at the same time, and perhaps, capitalized by the COVID situation is, as Rafe mentioned, we've seen customers joining the platform with non-email security products as they first on rent on to Mimecast. So that's pretty exciting. I mean, we'll have to see a few more data points before we call it a trend, but I think it's a good validation of the increasing maturity of our web offering. So 600 customers now, and I think, as you mentioned at the Analyst Day, we called out I think, about 400 customers back in February. So, in a fairly short space of time, we onboarded a several more about 200 more customers onto Mimecast web security. We did also at the start of the crisis launch a free 90-day production service of web security for customers. And we saw really good interest in that, obviously none of those accounted in the 600, those are all paying customers. And that has allowed us to expose more of the web security capabilities to more of our customer base that we are excited about. And I think frankly, on-premise web security and appliances don't serve customers particularly well in the work-from-home situation. So, the power of our integrated suite and our ability to very quickly onboard customers on web security I think, has paid off nicely and we will continue to grow that piece of the business.

[Saket Kalia:]

Got it, that makes sense. Maybe for my follow-up for you Rafe and somewhat related, can you just give some broad brush on sort of how you're thinking about new product contribution in fiscal 2021, specifically, sort of that Zone 2 and Zone 3 portfolio. I know you talked about some of the puts and takes of 106% to 107%. Clearly new products are going to be a part of that, but can you just go one level deeper in terms of how you plan for some of the Zone 2 and Zone 3 products?

[Rafe Brown:]

Yes happy too. At the Analyst Day, we put up a chart that showed our emerging products, Zone 2 and Zone 3, and then you would add web to that to kind of get the full group of the emerging products. And I think at the Analyst Day, it was 8% of our recurring revenue. It still remains below 10%. So a lot of these products they are in the earlier days as we roll into the year. We obviously see that starting to build as we move through the year. But it's still going to be a relative minority. I think the key for us is, is opening up those avenues both for up-sell to our existing customer base and as these products have gotten stronger and stronger and the team is getting ramped-up on and being able to push that out to hit that up-sell number that we talked about. As well as the on-boarding activity to let that be the lead product in a lot of cases and then we come back around on them and try and sell them the product portfolio. So I think there is a very nice energy around those emerging products that can be helpful as it plays out over the longer term. It's clearly - those emerging products are clearly very much part of our long-term strategy.

[Operator:]

Our next question comes from Daniel Bartus with Bank of America. Your line is now open.

[Daniel Bartus:]

I'm curious first Peter, if you - could talk about how the current environment might change demand per product. And are there certain products that you see are feeling the pain much more right now because maybe they're not as mission-critical or maybe there a little bit more complex?

[Peter Bauer:]

Yes great questions. So I think, what we're finding is that there is demand - there is strong demand for each of the aspects of what we do. The number one attack factor continues to be email, followed by web and then of course, the human factor which spans both of those as users of email and web. And so this tri-factor of capabilities that we offer in that regard is compelling in all cases. It's also - it's a mission-critical capability. So you have to have an email gateway type solution. You've got to have a web DNS resolver and web proxy environment and those capabilities tend to be pretty sticky and required. There is - it's more on the continuum of sort of oxygen or jewelry, it's much more on the oxygen end of the spectrum as a requirement. I think they all aspects of cybersecurity that are more emerging themes that are perhaps people are less inclined to adopt during this time. But our focus has really been on taking things that have really established use cases and drivers of demand, doing them better, doing them as an integrated suite and giving customers the greater than the sum of the parts value of having an integrated cloud suite that solves a collection of mission-critical problem. So we feel pretty good about that.

[Daniel Bartus:]

Thanks, that's helpful, Peter. And then quickly for Rafe, just a clarification on your revenue retention assumption for fiscal 2021 are you assuming that the down-sell and churn stays at roughly 7% each quarter through the year?

[Rafe Brown:]

So, I didn't break that out in large part because as we've gone through that number of scenarios whether it hits up-sell or down-sell or churn, you get back to the same point, right? And so, we haven't broken that out because, in our own scenarios, we've modeled it out in many different ways. And so, that's why I think that net number where you net all of that off is probably the best measure of exactly how we're modeling it, the 106% to 107% net revenue retention.

[Operator:]

Our next question comes from Sterling Auty with JPMorgan. Your line is now open.

[Unidentified Analyst:]

This is on for Sterling tonight. Just a quick one on maybe the initial deal size of what you're seeing during - kind of the slowdown, the number of services per deal either in March or here in April, have you seen any material change on the initial land?

[Peter Bauer:]

I'm not sure we have - we haven't broken that out specifically. I think we did note that our - and it's kind of too early to tell I think as well. What we did note was an increase in the number of products per customer across our base up to 3.3 which I believe is up from 3.1 a year ago. So, we continuing to drive an increase in the number of products within our base.

[Operator:]

Our next question comes from Catharine Trebnick with Dougherty. Your line is now open.

[Catharine Trebnick:]

Can you describe how the go-to-market sales motion has changed before the pandemic and now into the pandemic, because I think that would really give us some good color into your guide and how you're actually approaching it? So that's what I'm really looking at? Thank you.

[Rafe Brown:]

Yes, sure I'll start it off and then Pete can jump in. So Catharine - to a great extent look, we are fortunate in that, a very large portion of our business has traditionally always been done remotely to a lot of our customers. The way they are marketed to, the way they're sold to all of that has been remote, if you will. Clearly, as you move up the stack towards the enterprise side, as you get bigger and bigger customers, there is this expectation of customer visits and what have you. So I think the real change certainly in the enterprise side, which obviously everything is remote now versus kind of the traditional way where there would be a lot more kind of client visits, that piece has changed. But even if you go one step further on what about after a customer joins that has always been remote. So there are subtle shifts with the bigger customers, but beyond that, we're well-trained and well-practiced at doing this remotely. So I think that piece is going quite well. I think there is one shift further up the pipeline build, which is around events. We've obviously, a number of events have been canceled everywhere around the world they used to be in person. So we are going very hard at making - virtual events. Pipeline generation is obviously very important because that pipeline we generate right now is impacting Q2 and Q3. And so, we're hustling as hard as we can on that even though - the way those are being conducted has changed dramatically. Pete anything to add there?

[Peter Bauer:]

Yes, I would say, across the stack our promotional marketing mix, we’re shifting more towards the digital type opportunities. There are a number of new products and digital marketing opportunities that are literally coming to life every day from creative providers. So, we're looking at. We've also

[Operator:]

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