Mimecast Limited
Q1 2018 Earnings Call Transcript

Published: 8 Aug 2017

[Operator:]

Welcome to Mimecast Limited First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and -answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's presentation, Mr. Robert Sanders. Sir, please begin.

[Robert Sanders:]

Welcome to Mimecast's earnings call for the fiscal first quarter of 2018 ended June 30, 2017. I'm Robert Sanders, Director of Investor Relations. With me on the call tonight are Peter Bauer, our Co-Founder, Chairman and CEO, and Peter Campbell, our CFO. Tonight's conference call is being broadcast live via webcast. A replay of this call will be available two hours after the live call has ended. During the course of this call, 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. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release and this conference call. These risk factors are further defined in Mimecast's most recent Form 20-F filed with the Securities and Exchange Commission. During this call, we will present both GAAP and non-GAAP financial measures. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results, and we encourage you to consider all measures when analyzing Mimecast's performance. A reconciliation of certain GAAP to non-GAAP measures 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 August 7, 2017. 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 would like to turn the call over to Peter Bauer. Peter?

[Peter Bauer:]

Thanks Robert and welcome everybody. We are really delighted to be sharing our results with you this evening. On tonight's call, I'll highlight some of our key business results and then I'll discuss what we are seeing in terms of the market and the rapidly evolving threat landscape. Next, I'll cover some of our recent success in expanding our processes and services. And finally I'll share some customer stories from the quarter to illustrate where we having success penetrating the market. So, starting with our first quarter, we are very pleased with our results. Revenue of $58.2 million which exceeded the high end of our guided range and that represents 40% year-over-year growth as reported and 43% year-over-year growth in constant currency. This better than expected performance was aided by new customer adds in the mid and high end of the market as well as strong retention and up sell. Peter Campbell will talk in more about our financial shortly. Looking broadly across the markets we address, our first quarter was punctuated by several high qualify cyber attacks. Now one client picture received the bulk of the headlines, however there were many serious exploits of IT systems. In fact, during the quarter, Mimecast email security risk assessment or ESRA report identified a 400% increase in business email compromise or veiling attack sequentially from the prior quarter's report vulnerabilities were also discovered in Google docs and Microsoft security gateway. In this constantly evolving threat landscape, companies now more than ever need to consider their overarching cyber resilience strategy. Cyber resiliency means more than just keeping the bad guys off. Cyber resiliency also means planning for recovery and operational uptime in the event that attackers are successful in penetrating an organization. In this regard, Mimecast is exceptionally effective. Special security layers, high availability services and an independent copy of the data from which to recover compromise systems, strength our customer's cyber resilience while at the same time reducing complexity and simplifying IT. Mimecast architecture is well suited to adapt to today's rapidly evolving attacks. In response to the recent wave of ransomware attacks, Mimecast announced Sync & Recover for our archiving operation. Now leveraging our core micro services architecture and Mime/OS, we innovated here and delivered additional functionality to meet customer needs. Over 85% of our customers using Mimecast to protect Office 365 deployment, are also running hybrid email environment with some mail boxes on 365 and some residing on local service. A Mimecast Sync & Recover service is the only pure cloud solution on the market today to provide unified services across hybrid Office 365 environments without the need for on-premise hardware. Now we constantly innovate and we are anticipating adding additional functionality to meet more customer needs over time and further enhancing the value of our platform services. To fight expanding our product portfolio, in the first quarter we also strengthened our distribution channel with the addition of Insight to our North American partner program. They are leader in providing technology solutions for organizations of all sizes. Another indication that our channel strategy is working well for partners and customers came from the recently published CRN UK Intelligence Vendor Report for 2017. Mimecast ranked number one for overall service from the security and distributors. And we expand to new markets and further penetrate our regions, our channel partners will continue to play an important role in our success. So this recognition is important to us. Now as in past calls, I'd like to share few of our wins this quarter to illustrate the success we are having in the market and the types of problems that we are helping customers to solve. First off a global hotel chain with 5,400 employees admit to Office 365 initially without additional layer of defense and their experience there prompted them to evaluate options for more protection. Mimecast and other industry leaders were evaluated. But our ability to scale across the geographies and our global customer support capabilities were deciding factors in choosing Mimecast. Now consider a leading US based position management practice organization with 5,600 employees prior to selecting Mimecast, this organization was using a disparate sale of solutions from a competitor. Now the customers sought a more effective security solution, additionally the customers struggle with poor support and look for more responsive vendor. So Mimecast core security with our TDP offering was deployed along with our secured messaging service. Then a UK based energy company with 14,000 employees was a running a competitive set of email security appliances from two different vendors. Despite this they were struggling with spam and impersonation attacks. And as part of this company's cloud first strategy they were preparing to move to Office 365. And one additional protection over and above what Microsoft offer. So they required a cloud based vendor who could do this and also integrate into this Splunk environment. So Mimecast was selected to protect their Office 365 environment and at the same time simplify their configuration into a single integrated factor. Finally, I am delighted to share a larger enterprise when an aviation company with over 75,000 employees, it was using an industry leading competitor of us and they were not satisfied with a number fishing and impersonation and weaponized attachment that were able to enter their network. Initially, Mimecast had won business with four of this company's smaller subsidiaries. And we very effectively met their requirements. And then in recent quarters as Mimecast performed well for the subsidiaries, the parent company had struggle with malware and they were dissatisfied with the service that they were receiving from their incumbent. Mimecast's ability to provide the best protection with a fewest false positive with our targeted threat protection services won this fantastic customer over. So in summary, we do continue to execute on our financial targets, supported by the wide architecture to innovate and adapt to today's rapidly evolving threat. Our channel partnerships are strong and continue to grow. And by focusing on the success of our customers, we gained recognition and status in the market and will stay focused on that goal as we grow. With that I'd like to turn the call over to Peter Campbell, my CFO to walk you through the numbers in greater detail. Peter?

[Peter Campbell:]

Thank you, Peter. In this first quarter of fiscal year 2018, both revenue and adjusted EBITDA exceeded the high end of our guidance range. We generated revenue of $58.2 million, which represents growth of 40% as reported and 43% in constant currency over the first quarter of 2017. Adjusted EBITDA was $5.1 million, representing an adjusted EBITDA margin of 9% compared to 4.5% in the first quarter of fiscal 2017. The quarter benefited from strong customer retention, up sale and new sales during the period. We saw strength in all geographies and had success in our core mid market, as well as the large enterprise segment. We closed 16 deals over $0.1 million in the quarter compared to six in the same period in the prior year. Demonstrating our competitiveness across all market segments in particular the large middle market which is architecture is uniquely suited for. The US market has been especially strong over the last several quarters and now represents over 50% of revenue. Part of this growth has been due to benefits of the McAfee end of life which we believe peaked in the third quarter of fiscal 2017. We expect to benefits from sales to McAfee customers to have a reduced impact on new business for the remainder of the year. Net customer additions which includes customers that churn in a period was 900 which was lower than fourth quarter of 2017 due to normal first quarter seasonality and fewer micro customer adds as we move beyond the McAfee end of life for their hosted gateway. This customer makeshift away from micro customers and increase in deals in the larger enterprise market and continued strong up sale to our existing customer base, positively impacted our average order value to $808,000 in the quarter. We will continue to focus our selling efforts away from micro customers and expect to see additional gains in average order value both from up selling and from larger initial orders. Product bundles introduced this time last year are positively impacting the number of products per customer. The percentage of customers with more than one service has increased. And, in fact, the percent of customers with four or more products continues to grow. Across our base, customers buy an average of 2.8 services. Our newest release, Sync & Recover for archiving customers represents an additional future revenue stream leveraging our architecture and Mime/OS. Our TTP services now deployed with 11,500 customers. Demand continues from both new and existing customers. In total, 42% of our customers are using targeted threat protection. During the quarter, the number of customers using our services in conjunction with Office 365 continued to grow. 24% of our customers are now using Mimecast to protect their Office 365 deployment. Over the last several quarters, we've seen on an average 2% per quarter increase in this percentage. That trend continued this quarter, an indication we are benefiting from the market adoption of these services. Office 365 customers have a higher number of services per customer compared to our customer base as a whole, reflecting the reduction in complexity customer experience as more workloads are consolidated on to Mimecast's platform. When customers purchase multiple products, the margin on the incremental product sales is higher, the result of our multi product multi tenant architecture. Additionally, customers with multiple products tend to stay with us longer. Our revenue retention at a 111% remains strong and is consistent with last quarter. Revenue churn was consistent with the fourth quarter and remains low at 3%. Up sale of our product continues to drive a higher revenue retention number. Now let's turn to expenses and profitability. We've recognized a 74% GAAP gross margin consistent with the prior period and improvement over the 73% reported in the first quarter of 2017. Gross margin was higher than anticipated and benefited from the timing of certain datacenter investment, as noted on prior calls, GAAP gross margin can fluctuate due to the timing of expenditure to support our ongoing operations. We anticipate gross margins to be in the 71% to 73% range over the next several quarters. First quarter operating expenses were $44 million. Our R&D expense increased as a percentage of revenue to 14% from 12% in the same period in the prior year. At the same time, G&A expense decreased to 15% from 16% in the same period. Sales and marketing expense of $27.6 million decreased as a percentage of revenue to 47% from 51% in the prior quarter. The decrease in sales and marketing expense is partly a result of efficiency and partly the result of the seasonality of investment and certain marketing initiatives. Adjusted EBITDA in the first quarter of $5.1 million was above the high end of our guidance of $4.3 million. Our adjusted EBITDA margin was 9% versus last year's results of 4.5%. The increase is due to higher revenue than anticipated, the timing of data centric expenditures mentioned earlier, as well as the timing of some marketing expenditure which we now expect to occur in the second quarter. Note that this will have the effect of a relatively flat adjusted EBITDA margin target for the second quarter as compared to this current quarter. We remain on track to show annual progress towards our 20% to 22% adjusted EBITDA margin goal. First quarter GAAP net loss was $1.9 million, or $0.03 per basic and diluted share based on $56.3 million weighted average shares outstanding. Non GAAP net income for the quarter which reflects our GAAP net loss exclusive of the effects of stock option expense was $0.4 million, or $0.01 based on 60.6 million diluted shares outstanding. We generated $3.9 million in free cash flow in the first quarter. Recall, free cash flow can fluctuate from quarter-to-quarter based on the timing and payment of capital equipment and other investments. We expect our free cash flow for the year will continue to track broadly in line with adjusted EBITDA. Turning to the balance sheet. As of June 30, Mimecast had $112.2 million in cash and short term investments, as well as $7 million in investments with maturities of between 12 and 18 months. Long-term debt was $1.2 million. Now I'd like to turn the focus to guidance for the second quarter and update for our outlook for 2018. For the second quarter of 2018, constant currency revenue growth is expected to be in the range of 33% to 34%, and revenue is expected to be in the range of $59.7 million to $60.3 million. Our guidance is based on exchange rate as of July 31, 2017 and includes an estimated positive impact of $0.7 million resulting from the weakening of the US dollar compared to the prior year. Adjusted EBITDA for the second quarter is expected to be in the range of $5 million to $6 million. From a full year 2018 perspective, revenue is expected to be in the range of $246.8 million to $252.1 million, or 32% to 33% growth in constant currency. Foreign exchange rate fluctuations are positively impacting this guidance by an estimated $3 million. Note that the strong linearity of new and add-on business generated from McAfee sales in the second half of last year will result in tougher compares in the second half of this fiscal year. This guidance also incorporates an accounting change for the link of a customer life from five years to six years. This change will negatively impact our revenue in 2018 by $1.2 million. Adjusted EBITDA is expected to be in the range of $20.1 million to $22.1 million, demonstrating continued progress towards our long-term adjusted EBITDA goal of 20% to 22%. We'll continue to invest for growth as we progress in a measured way towards that goal. In summary, I'm pleased with results of our first quarter of fiscal 2018. We had continued strong growth in top and bottom line showing the strength in our operating model and demonstrating progress to our long-term goal. We continue to focus on the success of our customers which underpins the success of subscription model and drivers our business going forward. So with that I'd like to thank you for your time. And open the line to your questions. Operator, can you please call for our first question.

[Operator:]

[Operator Instructions] Our first question or comment comes from the line of John DiFucci from Jefferies .Your line is open.

[John DiFucci:]

Thank you. I have a couple quick questions. First of all, when you look at the numbers here guys. They look really good, they are really strong. Second consecutive quarter with over 40% constant currency growth in guide gives us confidence in the future. All the metrics look good. So one and I think Peter, both Peters talked about it but you come right on say that the customer adds were lower than they have been. And I just want to make sure that was probably because of the benefit you got from McAfee and Peter Campbell you called them micro customers. Did that sort of behind you -- you are not seeing that any more and are you -- you did talk about the average order value going up, so are we seeing larger deals and are those deal -- are you also getting some of those deals from McAfee because as McAfee still have their on-premise business right. That they didn't end-up-life and they are not going to for at least a couple of years I think.

[Peter Campbell:]

Right, right. Hey, John, Peter Campbell here. Thanks for the questions and the comments. Just a couple of things there and taking these one at a time. As we talked about in prior calls, we were saying -- we did say that we are moving away from micro customers. And our focus has been and will continue to be on the large, mid market looking over the distinct movement away from those micro customers. So that your comment that we are not seeing those anymore and that is having effect on a customer number, that is absolutely, absolutely correct. I think the last few quarters some of the customer count in terms of volume of customers we were receiving was atypical. But with Q1 seasonality which I mentioned in the call along with focus away from these micro customers, we are seeing a smaller number of large customers come across. And as you said, as we move away from that A or B continues to increase and we saw that in Q1 was a shift from 8,500 up to 8,800 and that's across the entire customer base. That's not just the customers that we added this quarter. So we are seeing larger customer come across and we did see guide in the prior quarter, I did talk to the number of customers we added being 16 customers greater than 100k compared to six in the same quarter in the prior year. Some of those are from McAfee as we continue to win some of that, those mega opportunities. But there are large numbers of customers of that size that are under served out there. And we are going after those from a number of different competitors.

[John DiFucci:]

Okay, great, thank you. So that's very clear. And if I might just a quick follow up here Campbell. You mentioned the accounting change going from five to six years. Could you just give a little more detail on that? You are not talking about 606 there are you? Or are you?

[Peter Campbell:]

No, 606 come into effect for us in April of calendar 2018 or fiscal 2019. So that doesn't come into effect until next year. What that as we have small amount of revenue for professional services that comes across and we amortize that over the life of our customers. As you can see the effect of five to six years is about $1.2 million. So these are not kind of massive amounts of revenue. But we amortize and have amortized that over our customer life and as we moved out and increase the average customer life to six years, we saw kind of a slightly downward effect on the forecast for 2018 as a result of that. So that's purely an accounting change and that's purely for the account of the current revenue standard of customer life and how we amortize that. We actually just did not plug this we don't expect to see any impact on revenue for 606 in the coming year.

[Operator:]

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

[Matt Hedberg:]

Hey guys, allow for my congrats as well. Maybe as a follow-up to John's question, it was great to hear large airline win and I believe there were 16 deals over 100,000 which was great. I'm curious as you continue to target this larger end of the SMB market, how do you think about the additional investments in the sales or distribution you talked about the large I believe distributor in North America just trying to get the sense of maybe the change of investments that are needed to continue to move up into the higher end of this market?

[Peter Bauer:]

So, Matt, yeah, great question. I think to be clear we have -- we've always done a proportion of our business in the 5,000 seats plus base of the year. And we would consider larger enterprises. Importantly, $100,000 deal doesn't necessarily need to come from a 5,000 seat plus organization, it can come from a company with only a few thousand seats, and likewise our focus isn't on the mega enterprise although as you pointed out we do periodically get pulled into opportunities that are very large like the airline deal that we referenced winning in the prepared remarks. So given that a percentage of our revenue will always come from the upper end of the mid market and perhaps the lower end of larger enterprise. We are sustaining our investment in that area and continuing to win but very keen not to take eye off the ball of that very large scale price of the tens or hundreds of thousands of mid market organization. So really our focus has been on putting some flow pricing in to discourage the micro business aspect of it. And so what you are seeing in our numbers is in uptick in AOV reduction of new customers logo add compared to when we had less flow pricing in place. And so that's very consistent but the goal is to be getting better at all segments at all the time. So we are naturally refining our pitch to refining our product across all segments and that will include working with some of the larger opportunities.

[Matt Hedberg:]

That's great. And then maybe as a follow-up. When we look at it opportunity we think Office 365 is significant and I think we're seeing in the results. And I think you mentioned 25% of your customers are now running Office 365. You also mentioned the take rate of new product is higher in that space then sort of outside of Office 365. Can you refresh our memory, what's sort of take rate you're seeing on TTP continuity or archiving, just to give you some sense of the magnitude of that works is sort of outside of Office 365?

[Peter Campbell:]

Hey, Matt. It's Peter Campbell here. Yes, I mean that is something historically that we've seen. We've seen a higher tick up from a multi product point of view from customers that are running 365. As you mentioned, we have 24% of our customer base now that are running us in conjunction with 365. And as you also mentioned, we see a higher tick up in many products. First one being continuity, we are about 60% of our customers have continuity but 72% and over a little over 72% of our customers are running continuity with us when they are on 365. Archiving, we have about 40% of our customers run archiving and about 53% of our Office 365 customers run archiving. And then similarly you also mentioned TTP, where we are looking at about 42% of our customers have bought our TTP product, but when you look at just a subset of our Office 365 customers, over 50% of them have bought TTP with us. So it's very strong multi product uptick when they are on 365 and as you know the products the customers buy, the higher the margin and the longer they stay with us.

[Operator:]

Thank you. And our next question or comment comes from the line of Sterling Auty from JPMorgan. Your line is open.

[Ugam Kamat:]

Hi, guys, this is Ugam Kamat on for Sterling. I just wanted to touch upon the geographic diversification related to demand. Europe has been a key discussion topic for many security companies this quarter. And in terms of GDPR drivers that are going on, I understand that it's more of a long term perspective. But what are you seeing right now in the short term? Is it relating to more demand for your solution or are you seeing customers getting distracted and trying to push security out for the next year?

[Peter Campbell:]

Okay, hey, Ugam. Peter Campbell here. So a couple of points there. So it's a good question. I mean as you know we are a global organization about 50% of our revenues are in the US and 50% are outside of the US. Mean we are originated in the UK or UK Company and we've been selling into Europe for many years. And so we are going to continue to invest in all of our core markets. There is a real focus on the US which is our largest market and our fastest growing market. But we are also going to continue to invest in Europe. We do see an opportunity for us with GDPR. And as we are looking at it now, we are seeing a lot of companies that are still I think trying to come to grips with what it means to be compliant in May of 2018 and people are asking a lot of questions and trying to figure out exactly what they have to do. And I think there are solutions and our position as a kind of UK company that's been selling there for sometime and we are using uniqueness of our proposition to be able to help our customers with GDPR. I think we'll see us benefit from that opportunity in the back half of this fiscal year.

[Ugam Kamat:]

Perfect. And just a follow up on your email security risk assessment product ESRA, so I saw a press release couple of weeks back which stated that around 45 million email pass from other incumbent solutions and of which 25% were unsafe. Have you seen any customer conversions from enterprises that took on ESRA and noticed that their current solution is not capable of detecting the threat? And, if yes, what are the conversion rates you are seeing?

[Peter Bauer:]

Great. So, Ugam, Peter Bauer here. So ESRA is not a product that we sell to say it's a security risk assessment tool that we offer to prospect in order for them to understand their risk profile and then ultimately convert -- give us the opportunity to solve that problem for them by migrating or adding our solution. So we run that solution continuously with many different organizations and the report that you referencing is the quarterly update that we provide that gives the latest view on what we are seeing on a cumulative basis having put ever more traffic, ever more content through that solution. It's very effective for us a conversion too. And as a way of quantifying the additional benefits that we would bring to customers over and above whatever their incumbent is. It's also effective as a report itself is also effective is a conversion too because generally not every prospect needs to run an ESRA you understand. They can look at the experience that is come from other organizations running it and they can get a pretty good picture of what it might look like for them. So it's a great tool. It's just another way in which we can quantify for customers or give them an ability to test drive the Mimecast technology in someway ahead of a purchase.

[Operator:]

Thank you. Our next question or comment comes from the line of Shaul Eyal Oppenheimer & Co. Your line is open.

[Shaul Eyal:]

Thank you. Hi, good afternoon, guys. You have good quarter, congrats, running -- well joined a little late to the call, apologizes on my end. Pete Bauer, one of your -- one of Mimecast major differentiator is a multi tenancy architecture that you guys bring to the table. In recent quarters have you started to see that as becoming a key decision making point to your customers over some of the competition out there.

[Peter Bauer:]

Sure, great question. So from an architectural perspective, multi tenancy has tremendous benefits for us a provider in terms of our ability to address a very large market opportunity denominated in number of organizations. So to be able to spin up services very efficiently for tens of thousands or in time hundreds of thousands of organizations. So profound benefit to us operationally, profound benefit to our partners in terms of our speed of being able to provision services. Now from a customer point of view, I think the two primary benefits that they are drawn to and in many situations these are important parts of the deal making process. The first is the fact that the infrastructure is a grid style infrastructure, so when a customer signs up and they receive a tenant that tenant is being serviced by hundreds of devices underneath the cover which is very different from when a customer works perhaps with the competitor and they are provision with the hosted appliances or a hosted virtual machine and their service, they have dedicated hardware and software resources specifically for them. So the benefit from a customer being serviced by a hundreds of devices across a grid and across multiple datacenters is a performance and a reliability benefit. So the speed of our archived search, the resilience of our email gateway infrastructure, those are great benefits that customers are really drawn to. I think the second key benefit of this integrated architecture is the ability for us to respond faster to security threats. So because we have such a large volume of customers, as we detect threats , all parts of the grid, all of the tenants can instantly get the protection that is afforded at customer that under a particular attack. So there is a reliability and performance benefit in this architecture for customers. And there is a security benefit in terms of speed of response and the power of the immune system that is built into this infrastructure. So very attractive.

[Shaul Eyal:]

Got it, got it. And second question if I may. So you guys are bringing onboard in the US and site as one of the bigger security bars out there. Are there sales people already onboard or there are going to be like a one or two quarter education phase, how should we think about it?

[Peter Bauer:]

So typically when we bring on partner there is ramp up and there is a training process and there is an alignment of the sales organization. So I think that's very typical in our engagement with Insight. So we are not changing any of our forecasts or pointing to any sort of bump expected directly as a result of signing them as a customer but we are very excited that they form part of our channel and our go-to-market expansion opportunity in North America. And we are looking forward to doing great things with folks with Insight.

[Operator:]

Thank you. Our next question or comment comes from the line of Alexander Henderson from. Your line is open.

[Alex Henderson:]

I was hoping if we go back to the geographic display for a second term. So a lot of the companies in both security and network space have seen some slowdown in the high end customer base in Europe as a result of -- the consideration process around what's the best way to attack the GDPR problem. Did you see any evidence of that? It seems to be somewhat more skewed to the higher end customers and less skewed to the lower end and mid range type companies. I'd think that you might be able to see some of the differentiation.

[Peter Campbell:]

So I think, hi, its Peter Campbell here. So I think the GDPR, the opportunity really hasn't really begun in earnest yet even from a kind of small and medium and a large customer point of view. I think companies -- as the larger customers have been I think spending a longer amount of time trying to evaluate what it means to them and sort of the mid and some of the smaller customers are in the process of doing that to maybe a more in compressed timeframe. So I do think that while the larger customers are maybe taking their time to see what really was the impact of that are as they are much broader in a larger organization, the medium and the smaller customers are doing something similar but in a smaller timeframe. And but they are earlier again that -- they are earlier in their discovery than say a larger customer would be. So I don't think you are really seeing that much from account of what you would expect from that opportunity at this point in time. I think it's still to come because even though they are smaller and they are not taking as long to figure it out, they are at a very beginning of that process. So I think again we'll see that little later in the year.

[Alex Henderson:]

So you are seeing some slowdown in the decision making process at larger companies because of how do I do this considerations.

[Peter Campbell:]

So I think for us, I don't know that we are seeing any slowdown in the addition of customers in Europe to our services. We are more of a mid market focused organization. So maybe we are not seeing the same kind of things as those who focused solely on a very large customers would. I think what I am trying to highlight is that smaller customers are in earlier stage of evaluating what it means to them. So I am not -- we are not seeing that as a part of our selling cycle just yet. But I do think that there will be an opportunity down the road. I'd say I am not seeing a slowdown of large customers but I have not yet -- I wouldn't say that's the case. But I'd expect to see is to see more mid sized customers come our way and but I don't expect to see that yet as they are still evaluating it. That's the way that I would frame it.

[Alex Henderson:]

On a broader strategic perspective. One of the things that I've heard from virtually every security companies I have talked to over the last six to nine months is that user behavior analytics and other big data applications to the data being captured on the security front is becoming the critical determinant to performance and viability of security companies. To the extent that you guys are sitting in what looks to me like the high ground of the security market relative to being the focal point, entry point into the enterprise. How do you see taking that strategic advantage and expanding it from here? Will you be going next into social media and how do you see expanding that into cloud application?

[Peter Bauer:]

Yes, that's a great question. So if you think about -- if we think about our platform and we think about the fact that all of our products and technologies are built on a common software backplane that we call Mime/OS with a strong micro services infrastructure and a common API set the backend and as we build out more products, they can all seamlessly benefit from all of the code and capabilities and underlying big data infrastructure that our current products can benefit from. That certainly sets the stage for exploiting those capabilities with new products into certain adjacent areas around email and even going deeper into some other areas of email security and data management. So, yes, we are very excited about that. You've seen us release a new product in the last couple of months called Internal E-mail Protect which really does look at that issue of the malicious or the compromised inside an organization and leveraging some of those techniques to help an organization deal with the threat that can be presented on that front. So we absolutely expect to continue this journey to continue building more capabilities, more micro services in the backend and extending the product portfolio to be able to benefit from those in different areas of the security and data management and cyber resilience market.

[Alex Henderson:]

If I can throw one last question. Great detail around the take rate around the Office 365, where do you think Microsoft is at this point in terms of converting the 90 million plus enterprise globally to Office 365? How far into that process do you think we are at this point?

[Peter Bauer:]

Yes, so we've sort of commented on this from time to time, it's a good question. And it comes up that people are trying to get read on it. I think that our customer base is a reasonable sort of proxy for the world and its migration to Office 365. So we are at 24% of our customers using us with Office 365. So whether we might lag the market slightly because we are in certain geographies where Office 365 takes up is lull because of no local service is like South Africa for example. But if one assumes that terminal velocity for Office 365 is -- I don’t know pick an arbitrary figure 75% of the market, if we are at 25% today that's a third of the way in and Office 365 I guess is being in market for more than five years. So let's assume a third of the market moves every five years, you got another -- I don't know maybe it accelerate at a point, 5 to 8 years of migration, so that would be my read in terms of where we are in the general cycle of moving to Office 365.

[Operator:]

Thank you. Our next question or comment comes from the line of Catharine Trebnick from Dougherty. Your line is open.

[Catharine Trebnick:]

Hello. Can you hear me now? Hi, guys. Thank you. Very good quarter. So my question is around North America. You've really done a very good job in North America. Is there anything in particular that you've done with adding new partners? Can you give us some other background flavor and how you are gaining more larger partners like the recent won Insight and then what are some of the mechanics that are going into driving the good adoption in this mid market segment? Thank you .

[Peter Bauer:]

Great, thanks, Catharine. So, yes, we made program investment in channel partner recruitment, channel partnering enablement and the like. I think what the most significant thing is that we do as we focus on having an excellent product and in particular focus on really demonstrating leadership in the burning issues of email security. And I think partners are really looking for not just any product, they are looking for a great product if they can offer at a reasonable price point delivered as a clog service that they can really take to customers of all sizes. So it's certainly not shortage of solutions that will work for the high end of the market. But then will the pricing scale down and enable them to go have a conversation with thousands of mid market customers with that same technology. And likewise there is plenty of low end solutions that don't quite cut it when dealing with advanced threats that can be solved to little customers but can they take those technologies, can they take the knowledge of those products and scale them up to some of their larger opportunities. And so we really in this exciting sweet spot of being able to scale up and scale down and remain relevant to those partners, as well as demonstrating a great opportunity to land and expand within those accounts. So getting into those accounts landing with perhaps an email security opportunity but then really being able to expand out into the broader cyber resilience and grow their revenue opportunity, grow their customer loyalty and the stickiness of that proposition or the time. So it really places our product at the center -- as the key stone of our formula for success in both North American markets generally but also with those channel partners.

[Catharine Trebnick:]

And then just may one follow on. The government vertical is really with Office 365 and their movement there. What are your plans to really tackle their market? Thank you.

[Peter Bauer:]

So, Catharine, our focus is on state and local government. We see that as a big opportunity. It's an area that have had some success typically lean organization in IT there not able to deal with a lot of complexity, not a lot of budget, looking at how they can leverage cloud solutions and so we see that as the focal area particularly in the North American market. And some of the other markets that we are in, we have had good success with both central government organizations as well as state and local organizations and in fact some of our biggest clients in Africa, some of our biggest customers in the UK and some of our biggest customers in the Australian market are in fact government customers. So we transfer in lot of that knowledge into our work in the US market too.

[Operator:]

Thank you. Our next question or comment comes from the line of Gabriela Borges from Goldman Sachs. Your line is open.

[Gabriela Borges:]

Great, good afternoon, thanks for taking my questions. For Peter Campbell, I am hoping you can level set us on the magnitude of customer adds and the average order value numbers as we go through the year. Just the 900 in customer number 1Q, 2018, how does that compare to your original expectations when you guided for the quarter? And as we think about the rest of the year based on the pipeline, could give us any color on how to model that going forward? Thanks.

[Peter Campbell:]

Sure. So, yes, as you know we guide, we guide to revenue rather than customers. And as we kind of guide we look at the opportunity in front of us, we are looking -- we start -- obviously we start with the base, the basic customer we look at the retention rate then we look at a new customer as in the size of customer that we are going to add in any given quarter and in any given year. So we did know that we had moved away from those micro customers as I mentioned earlier. And we did know that those customers, while they can increase the customer account like the number of customers that are added, they don't affect the revenue as much. So if you consider in previous quarters and we try to -- we called out some of the larger number of very small like sub 10 seat customers, 800 sub 10 seats customers who's won sub 800 seats customers. So these large numbers of very small customers may have been increasing the customer numbers but not affecting my revenue as much. So I was able to kind of gauge my revenue a little bit with a bit more clarity because I know that the larger volume of these tiny customers wont' affect as much. That said, and you mentioned talking about AOV and about customers numbers going forward, I do expect -- so the first thing I'd call it is Q1 seasonality because Q1 typically is a smaller quarter for us, Q4 is a biggest quarter, Q1 often is the smallest quarter. So I'd expect the customer numbers, I'd expect those customer numbers to be moving in a kind of upward direction throughout the rest of the year. But I wouldn't expect them to kind of shoot heavily away from the 900 that we saw in Q1. I'd expect them to be more in line with that. And I would expect that we are going to see as we moved away from the micro customers, we are going to see more larger customers and you are going to see that AOV shift up throughout the year as it did in this quarter from 8,500 to 8,800.

[Gabriela Borges:]

That makes a lot of sense. A follow up to Peter Bauer if I could. It's on the commentary on operational uptime and the high availability for success that you guys are able to achieve is really interesting. How does that compare to competitor? Is that conveyed via an SLA at the time you sign the deal? Is it a function of maybe the multi tenant fee and integrations with the continuity software? And any additional color there would be helpful? Thank you.

[Peter Bauer:]

Yes, absolutely. So I mean email is mission critical. That's not news. It's critically important when a customer is choosing somebody that is going to receive and deliver all your email from you at internet level. Irrespective of the security functions that the infrastructure provided to send or receive email is critical that it operates in a high availability mode. And our architecture is very much designed for that capability. What we do is we leading SLA in the industry in two key areas. The first is a 100% uptime SLA and that is something somebody might argue and say, well, it's impossible to provide an uptime of a 100%. We come extremely close but that's the standard that we hold ourselves to and we are -- we will compensate customers if we ever fall short of that. So that is a unique standard that we hold ourselves to and we have confidence in that I think far beyond our competitors because of the architecture and because of our track record in delivering at. I think the second area is SLA is on the -- the actual performance of the functionality of the system and we offer SLAs around these two areas there. One is security effectiveness, and so standard one malware protection. And the second area is in terms of archive search where we have the fastest SLA on archived search feed for the industry. And that is despite the fact that extremely large volumes of data are housed in our system and they are of a very high number of search requests that are made against our system because it's been optimized and presented with end user tools as well as the discovery compliant professional using it. We offer a seven second search SLA but we actually delivered consistently well below three seconds in terms of our search performance. So that architecture, yes, translate directly into -- we put our money where our mouth is and we offer specific performance SLA and that’s very compelling to customers particularly customers that have suffered outages of performance problem with competing solutions whether those be on-premise technologies that they had to run themselves or cloud providers that have let them down in the past. [Multiple Speakers]

[Operator:]

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

[Saket Kalia:]

Hey, guys, thanks for fit me in here. I think most of my questions have been answered here but maybe one for you Peter Bauer. And again apologies if this has been asked already but how did the internal email protect product perform in the quarter? I think we got about 100 customers last quarter introduced right really at the tail end of RSA, how did that do this quarter? And more importantly how would you compare the adoption of IEP versus end pricing perhaps of IEP versus TTP at sort of comparable point in its lifecycle if that makes sense?

[Peter Bauer:]

Yes, great. So, Saket, as you said we introduced IEP couple of months ago I think when we last spoke as you said was about 100 customers, we are approaching double that now. So encouraging uptick of that solution. One of the interesting things and we consider that part of the TTP family. It extends the revenue or the ARPU headroom within the TTP family so it creates some additional wide space there. Its early days so we are seeing adoption. We are talking to customers about it. I think we will have good tax rates of the solution with TTP, it's obviously not as painful as spear fishing or impersonation in terms of a capability at something that's relevant to a subset of our TTP customers but we are not sort of forecasting what percentage of it is likely to take it up. But we are watching it build nicely and we think that it's going to be a good incremental revenue generator as part of the product portfolio. And certainly it's a used case that our ability to address is also relevant to landing some new customers too on to the platform.

[Operator:]

Thank you. I am showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

[Peter Bauer:]

Great, well, everybody thanks for joining the call today and for your interest in our results. We've enjoyed presenting and we've enjoyed answering your questions. And we look forward to doing this once again in about quarter's time. Thanks folks.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.