Mimecast Limited
Q2 2018 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the Mimecast Limited Second 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 be given at that time. [Operator Instructions] As a reminder, this conference call is may be recorded. I would like to transfer the call over to Robert Sanders, Director of Investor Relations. You may begin.

[Robert Sanders:]

Welcome to Mimecast's earnings call for the fiscal second quarter of 2018 ended September 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 November 8, 2017. Any forward-looking statements we make today are based on assumptions 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. I'd like to now turn the call over to Peter Bauer. Peter?

[Peter Bauer:]

Thank you, Robert and welcome everybody. We are delighted to be sharing our results with you this evening. On tonight's call, I'll highlight some of our key business results and give commentary on what we are seeing in the market. Next, I'll talk about Mimecast multi-purpose cloud archive offering and then I'll share some exciting news regarding our move into Germany and our operations there. I'll talk about recent successes we are having with industry specific selling and bundled solutions. And as in past calls I will share some customer stories from the quarter to illustrate where we are winning today. So, turning to our second quarter performance, we are very pleased to again deliver results that exceed our guided range, revenue of $63.1 million grew 42% year-over-year as reported and 41% in constant currency. This better than expected performance was aided by a high-quality mix of new customers, as well as strong retention and up sell of our base of customers. Peter Campbell will talk in more detail about our financial results. So, looking broadly at trends, our second quarter was another period marked by front page headlines of high profile cyber-attacks across private industry and government agencies, while Equifax and the SEC dominated the news headlines. We observed email borne threats targeting organizations of all sizes across industries and geographies. The email system of professional services firm Deloitte were exploited, highlighting a vast trove of system corporate and customer data contained in email. Beyond the headlines, organizations including universities, municipalities and healthcare providers were compromised by sophisticated email borne spearfishing and ransomware attacks. Awareness of the need of layered cyber defenses and data recovery solutions is increasing. Adding Mimecast is an effective way for organizations to both reduce their overall threat exposure and gain the ability to recover services in the event that attackers are successful. So, another trend we saw in the second quarter was the continued migration of IT to the cloud. Today more than 7400 customers of all sizes have selected Mimecast to enhance their security, archival their data and to provide uptime assurance for the Microsoft Office 365 investments. This represents 26% of our customers, which compares to 24% in the first quarter of 2018. Continuing the steady pace of clouted option that we witnessed just two years ago at the time of our IPO, this represented 11% of our customers. In addition to Office 365, we see customers migrating to independent Hosted Exchange and G Suite offerings. Now concurrent with the movement of applications to the cloud, organizations are seeking cloud based solutions to support those applications. One of the biggest challenges we see customers facing as they migrate services to the cloud is the need to consolidate and safeguard the valuable data created within those applications today. To help customers to do this, Mimecast launched the industry leading multipurpose cloud archive, a secured data repository offering a long-term storage management, e-discovery and compliance tools. Over the past several quarters, we have expanded the functionality and increased the performance of our cloud archive, new functionality includes our case review approximately, which delivers the power of Mimecast cloud archive for e-discovery professionals and is helpful for companies seeking to be GDPR compliant. Mimecast is also expanded our cloud archive API to integrate with a broader set of cloud services. For example, sales force dot com users who archive with Mimecast can now search their email archives and review conversation histories served up by Mimecast directly into their CRM application. With over 12000 customers today having deployed our archiving solutions, we believe there is an opportunity to see a diverse set of applications integrated with our archives through these APIs. Now with the recent proliferation of ransomware attacks like WannaCry and Petya - NotPetya and most recently Bad Rabbit, I am encouraged to see customers adopting one of the most significant enhancements to our multi-purpose archive, that's sync and recover. Now this service enables customers to rebuild damaged data and potentially recover from ransomware attacks without paying criminals. Unique to Mimecast's multipurpose cloud archive is our ability to archive and recover data across hybrid environments of cloud and on-premise email services and do this entirely from the cloud with zero additional on-premises equipment. Now I believe that these enhancements and our consistent deployment of service improvements over many years have contributed to Mimecast once again being named a leader with the highest ability to execute in Gartner's 2017 Enterprise Information Archiving Magic Quadrant. In addition to this external validation from Gartner, we also recently announced that we've achieved attestation to the SOC 2 Type 2 standard and the successful completion of this attestation demonstrates our ability to serve larger clients and gives confidence to all our customers. As I noted in my opening remarks, we are very excited to be sharing with you tonight additional details of our expansion of local services into the German market. Our research tells us that there are 23,000 organizations in Germany who employ between 100 and 5000 people. And these we believe would benefit from adding Mimecast services. To service this opportunity, I'm pleased to announce Michael Heuer, has joined Mimecast in Munich to lead our European operations. Michael brings over 15 years of executive leadership experience from his prior roles at Acquia, Akamai and BT Group. With local language sales and customer support, Germany will act as a hub for our central European operations. Data residency requirements are satisfied with the addition of two German data centers coming online in 2018. Finally, I'd like to share some of the success we are having with a program that aligns our go-to-market operations with the industry specific needs of our customers. We believe customers in certain end markets have common sets of requirements across the industry. These requirements can arise due to regulations, data protection needs or other demands specific to the industry. So, to more effectively serve customers in the legal, financial, healthcare, retail and government sectors, we've developed industry specific solutions sets that align Mimecast services with challenges that customers in these industries face. Notable in the second quarter was the momentum we've witnessed with healthcare organizations globally. Services often adopted by healthcare, include our Healthcare Pack with secure messaging. Now I'd like to share with you a few wins. To illustrate the success, we're having in the market and the types of problems we help customers solve. First off, a California based retailer with 9000 employees and 600 stores globally, a long-time first-generation SaaS email security customer. Now this organization struggled with impersonation attacks and viruses looked to enhance their defenses. While the initial engagement was for a replacement of a gateway, after experiencing Mimecast's platform this customer chose to adopt an even broader range of our services and that included our target of threat protection, our continuity and our archiving solution. And in addition to this, the customer added internal email protection and secure messaging services. So, Mimecast's ability to protect the organization from malicious content in the internal email was also a key differentiator for Mimecast and an important requirement for this customer. Now consider a leading European transportation company with global operations and 13000 employees. This company had deployed Office 365 without additional layers of protection and several URL based attacks had been successful and led to some user mailbox compromises and impact to their internal networks. This customer sought a more effective security solution to enhance their Microsoft experience and our methods for handling malicious URLs and our platform of services was compelling for this customer and central in their decision to add Mimecast. Additionally, an African healthcare organization with 9300 employees had also been using legacy SaaS email security and chose Mimecast to help comply with various regulations, such as POPI, HIPAA [ph] and GDPR are across their global operations. While initially a security engagement, the breadth and simplicity of our solution and the ability to satisfy future requirements like archiving were key factors in selecting Mimecast. One additional piece of news to share. I'm very pleased to welcome Jerry Elliott to our board as an Independent Director. Jerry's experience at Juniper, Microsoft and IBM bring a powerful skill-set to our company to support our growth. So, in summary, we continue to perform very well as a company. We are addressing the market with innovations to combat constantly evolving threats. Our multipurpose cloud archive is the industry leading service for long-term data preservation and access. We expanded our addressable market, as we put down roots in Germany and our customer focus remains unwavering as we package solutions for industry groups and simplify the buying process. I'm pleased with the results that we've achieved, and I'd like to thank the entire Mimecast organization and our partners for making it possible. Now let me hand you over to Peter Campbell, our CFO.

[Peter Campbell:]

Thank you, Peter. In this second quarter of our fiscal year 2018 both revenue and adjusted EBITDA once again exceeded the high end of our guidance range. We generated revenue of $63.1 million, which represents growth of 42% as reported and 41% in constant currency over the second quarter of 2017. Adjusted EBITDA was $6.7 million, representing an adjusted EBITDA margin of 11% compared to 6% in the second quarter of fiscal 2017. The second quarter benefited from strong customer retention and up sell, as well as 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. Net customer additions of 900 was in line with the first quarter. This customer mix shift away from micro customers, an increase in deals in the large enterprise market and continued strong up sell to our existing customer base positively impacted our average order value, which increased to 9100 in the quarter. We have seen a small increase in micro customer churn related to X-McAfee customers which has impacted our net customer additions. It is important to note that this churn represents very small customers and our revenue churn continues unchanged at 3%. Our TTP Service is now deployed with 13,000 customers. Demand continues from both new and existing customers, which represents a significant opportunity as we expand the TTP family with add on products like internal email protect. Approximately 90% of our new customers are buying TTP when they buy our gateway product and in total 47% of our customers are using targeted threat protection. We have also seen customers buying our new products, like Internal Email Protect and Sync & Recover. We now have 300 customers using Internal Email Protect, which was launched in February and 100 customers using Sync & Recover which was launched in August. We continue to expand our product offerings, with and ARPU of $35 across our customer base, we could more than double our revenue by selling our current products to our existing customer base. Product bundles introduced this time last year are positively impacting the number of products per customer. The percentage of customers with four or more services has increased and now represents 31% of users, across our base customers by an average of 2.8 services. When customers purchase multiple products the margin on the incremental product sale is higher. The results of our multi-product, multi-tenant architecture, customers with multiple products also tend to stay with us longer. Our revenue retention at 111% remains strong and is consistent with last quarter. Up sell of our products, especially TTP continue to drive a higher revenue retention number. Now let's turn to expenses and profitability. We recognized a 74% GAAP gross margin consistent with the prior period, an improvement over the 72% reported in the second quarter of 2017. Gross margin in the quarter was higher than anticipated and benefited from the timing of certain data center investments. These year-over-year gains are reflective of the ongoing improvements in efficiency of our Mime/OS cloud platform. As we roll out our German data centers, we expect a nominal reduction in our gross margin, while the German operation gets to scale. 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. Second quarter GAAP operating expenses were $47 million, up from the $34.4 million last year. R&D expense was 13% of revenue compared to 11% for the same quarter in the prior year, an increase of 2%. At the same time, G&A expense was 14% compared to 15% in the prior year. Sales and marketing expenses reduced to 48% of revenue from 52% of revenue in the second quarter of 2017, driving the gains we've seen in adjusted EBITDA. The decrease in sales and marketing expense as a percentage of revenue is partly a result of efficiency and partly the result of a seasonality of investments and certain marketing initiatives. We expect to increase our investment in sales and marketing in absolute value terms for the remainder of the year. Adjusted EBITDA in the second quarter at $6.7 million was above the high end of our guided range of $5 million to $6 million. Our adjusted EBITDA margin was 11% versus 6% in the second quarter of 2017. The increase is due to higher revenue than anticipated, the timing of some marketing expenditure which we now expect to occur in next quarter and focus spending discipline across our global operations. Second quarter GAAP net loss was $1.3 million or $0.02 per basic and diluted share based on $57 million weighted average shares outstanding. Non-GAAP net income for the quarter which reflects our GAAP net loss exclusive of stock option expense and related tax effects was $0.1 million or nil per share. We generated $1.7 million in free cash flow in the second quarter. This was impacted by $3.2 million of capital expenditure related to the fit out of new facilities. As previously mentioned, free cash flow can fluctuate from quarter-to-quarter based on the timing and payments of capital equipment and other investments. The rollout of new facilities this year, along with the expansion of our German data center, which we have decided to pull forward to this fiscal year is expected to have a one-off impact on cash flow in H2 of approximately $8 million. Turning to the balance sheet. As of September 30, Mimecast had $123.1 million in cash and marketable securities, including $3.5 million investments with maturities of 13 months. Our property and equipment increased by $38 million in the first half of which $27 million relates to our new U.S. headquarters in Lexington, Massachusetts. We have not acquired the building and are only leasing this property. However, under the build-to-suit accounting rules, we will be recording this as an asset on our balance sheet. We expect to amortize this asset over the estimated useful life. Now, I would like to turn the focus to guidance for the third quarter and update our outlook for 2018. For the third quarter of 2018, constant currency revenue growth is expected to be in the range of 31% to 32% and revenue is expected to be in the range of $64.3 million to $65 million. Our guidance is based on exchange rates as of October 31, 2017 and includes a positive impact of $1.3 million related to the weakening of the U.S. dollar compared to the prior year. Adjusted EBITDA for the third quarter is expected to be in the range of $5.8 million to $6.8 million. From a full year 2018 perspective, revenue is expected to be in the range of $251.8 million to $254.5 million or 34% to 36% growth in constant currency. Foreign exchange rate fluctuations are positively impacting this guidance by an estimated $1.4 million related to the weakening of the U.S. dollar relative to the pound. Relative to the prior annual guidance we gave in August, foreign exchange rate fluctuations are negatively impacting this guidance by an estimated $1.5 million. Our expected growth rate takes into account the McAfee End of Life which resulted in high linearity of sales in the third quarter and second half of last year, resulting in tougher compares in the second half of this year. Adjusted EBITDA is expected to be in the range of $21.9 million to $23.9 nine million demonstrating continued progress towards our long-term adjusted EBITDA goals of 20% to 22%. In summary, I'm pleased with our results this quarter, in particular, the achievement in both revenue and adjusted EBITDA. We continue to balance our growth and profitability through measured investments that drive the business. We are excited about both our new product and geographic expansion opportunities and are quietly confident about the gains we expect to drive from these investments. So, with that, I would like to thank you for your time and open the line to your questions. Operator, can you please poll for our first question.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of John DiFucci of Jefferies. Your line is now open.

[John DiFucci:]

Thank you. And nice to see this guys, especially given a lot of - I guess your broader peers in the security space have reported sort of sloppy results, maybe soft results. I guess that's the first question. Are you seeing - and you in proof [ph] point put up solid results too. But as you look out there and I don't know, maybe you don't - if you do see it, are you seeing any change in the demand for security at all, especially given that you're providing email security, but also archiving in continuity. I know there is - usually have a certain mix as to what customers typically bid with and what they buy, but are you seeing any new movement like away from security and into the other two broad areas in demand?

[Peter Bauer:]

Yeah. John, thanks. So, Peter Bauer here, as if you couldn't tell from the accent. So, you're right, across our portfolio we benefit from demand that comes from both security, as well as some of the other business resilience or cyber resilience teams like archiving and continuity. We haven't seen any change in the mix of demand across the portfolio. We've seen a pretty consistent demand for our security offerings, in particular our advanced Targeted Threat Protection product. And you can see that in our - in a pretty consistent quarter-over-quarter, new customer adds. I think that you know we're still operating in environment where there been a number of high profile public breaches, email has had some centrality to a large number of them and we're at a place in the market with the right products to be able to address these issues, so I think we're benefiting from that.

[John DiFucci:]

Okay…

[Peter Campbell:]

I'll just add John. You know, security has been a good inbound demand generator for us, particularly the Targeted Threat Protection products and you know you'll see when our investor deck comes out as well that you know the number of customers that are buying security continuity archiving and TTP are all kind of growing in line. So, we're not seeing a movement between one of the others, but you know as far as inbound demand is concerned, certainly security and in particular TPP are at the front of that.

[John DiFucci:]

Okay, great. That's great to hear. I just had a follow up and just on competition, there is a couple of things that are happening out there. [indiscernible] it's some noise out there. One of the thing that CA announced the End of Life of its Orchestria archiving solution. And I guess - I am wondering if that - you see any benefit from that. And then also two of the very large vendors that are typically categorized as legacy Siemens and Cisco. They really recently have been talking about you know, reengaging in the email security market and are working on cloud solutions and/or organic cloud solutions. And I'm just curious if you're seeing any increased presence from these vendors, another presence, or any increased discussion about them with your customers in competitive scenarios?

[Peter Bauer:]

Yeah, great. So, John, on the CA Orchestria, we've got a handful of inquiries coming in. I think that solution has been much more deployed you know, right at the top end of the financial services industry and some of the highly regulated spaces. It's not a space that we traditionally played a great deal. So, you know, we expect to pick up some business and some partnerships, as a result of that, that fall off it will help us grow the business. But we're not expecting that to be a profoundly significant for us. Then on the - as you describe the legacy vendors in the email security space, again, we haven't seen any change in capabilities or performance or customer experience from customers that used those solutions and we continue to be successful in helping customers transition over to our platform.

[John DiFucci:]

Great. Great. Thanks a lot guys. And nice job.

[Peter Campbell:]

Thank you.

[Peter Bauer:]

Thanks, John.

[Operator:]

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

[Ugam Kamat:]

Hi, guys. This is Ugam Kamat on for Sterling Auty. Thanks for taking the question. I mean, strong results across the board. Definitely you are seeing huge amount of opportunity within the corporates. But just trying to go level further, how are you seeing those opportunity go beyond the corporate, especially something like government our universities. What are the solutions or products that you see are gaining maximum traction over there and is there anything that you can do to further the opportunity in those verticals?

[Peter Bauer:]

Great. So Ugam, we've sold into some of those markets very successfully over a period of time, particularly in the international markets we do quite a lot of government business, we do quite a lot of educational business in the UK, South Africa, the Australian market. And we've also started to pick up traction more so in state local government and education organizations here in the US as well and we find that we've got certain partners that are very adept at selling into those customers. So that definitely helps us as we built our partner base. Where we really finding that the issues facing the corporate customer are very similar to those facing these other organizations and that they've been targeted for credentials, they've being targeted for data that attackers are trying to expel trade out of their organizations and they need to - they need to have the same kind of defenses. They also - I think very commonly with many of the types of customers that we've been successful with have what we would talk about is lean IT and lean cybersecurity teams. They don't have the large-scale capabilities that you would see within a very large corporate environment. And so, our solution which is really comprehensive, very easy to use and very affordable for these types of organizations is really relevant and compelling for them for those reasons.

[Ugam Kamat:]

Perfect. That was really helpful. And secondly if I could on your Targeted Threat Protection, I mean solid adoption with almost 47% of your customers using the product. Do you think at some point of time we would see the growth deepening off as it kind of heat roof or are we like years out until we see that happening? What are you seeing currently in your pipeline that you could throw some color on it?

[Peter Bauer:]

Sure. Sure. So first of all, I think you know we're very happy with 40% - 47% take up. We continue to see our existing customers, more and more of our existing customers purchase that product and we think that's going to continue for quite some time. You know, we think eventually that all of our customers are going to need that product, because I think the threat that it deals with are really the new normal. These threats aren't going away and in fact, you know, they're becoming even more developed. And we still see a lot of internal opportunity to sell to our existing customers, particularly with as we add additional products like internal email protect to that family of products. But I'd also add that you know, the biggest opportunity for TTP comes from new customers. So, there's a huge opportunity out there. We're still at the very beginning of penetrating what are - you know hundreds and hundreds of thousands of customers. We have 28,000, there are many hundreds of thousands of customers that we haven't yet penetrated, many, many of these customers aren't protected, many of them don't have solutions like this in place. So, we think that the growth opportunity for that TTP product, the existing TTP product is very large, as we continue to develop and build on top of it and it'll be even better.

[Ugam Kamat:]

Great. Thank you so much and congrats on a solid quarter.

[Peter Bauer:]

Thank you, Ugam.

[Operator:]

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

[Gabriela Borges:]

Good afternoon. Thanks for taking my question. Congrats on the results. Maybe I'll start with Peter Bauer, you mentioned a couple of times in the prepared remarks on the industry selling. Could you talk a little bit more about what you're doing differently there and how that process came about? Thanks.

[Peter Bauer:]

Yeah, great. Thanks, Gabriela. So, we identified that a significant amount of the business that we do, in fact, in all of our global markets fits into a seven or eight specific verticals. And so, what we looked at is one of the common requirements within those verticals, are there any unique feature capabilities or unique service offerings that would have relevance within those fairly deep sectors. And the one that we spoke about on the prepared remarks, specifically was healthcare. Healthcare has been subjected to some pretty damaging cyber-attacks, lately information theft and some pretty operation ecrippling attacks. And so, we were itself drawn to see how do we optimize our solution to help healthcare, IT organizations again they felt that that lean IT, that lean security mode quite well in terms of the amount of investment that's available inside those organizations to resource teams that deal with these issues. So, we're really focused on that. And in healthcare specifically we've got some very good HIPAA regulation compliance to some great DLP functionality that works seamlessly with our encryption and our secure messaging technology. And so, we put that together with additional educational materials, some promotional campaigns, some training of our sales organization and some product capabilities and we're seeing some good success with those types of propositions. And we expect to roll out somewhat similar types of focused selling activities across additional verticals as we go.

[Peter Campbell:]

I think just add to Pete's comment. I mean, this product is relevant to all customers in all segments and we see that you know, in the diversity of their sectors that we sell to and that's also in the Investor deck. But it goes across all sectors and all regions.

[Gabriela Borges:]

That's helpful. Thank you. And as a follow up if I may, congrats on the launch in Germany, maybe you could just talk a little bit about why you picked that as your first non-UK, European market to expand into. How should we think about the relative size of the opportunity? And I would imagine that this is part of a small piece [ph] phase approach to expand further into Europe. So, I would love to talk about your strategies at the high level as well? Thanks.

[Peter Bauer:]

Yeah, absolutely. So actually, we've been - we've been selling into Europe out of our UK business for a number of years and doing that through some partnerships and through some sort of inbound activities that have brought us customers and opportunities. But those are typically being in the countries that are much sort of more inclined to buy a service that is being represented as a UK based company. So, the Benelux and the Nordic regions have a much more open to that and, so we've had some success in selling into those and generating some initial market share and revenue there. We took the decision to go into Germany, specifically because it really is a sizable and significant market, but it's also a market that we feel needs to be served by a German subsidiary and a German team that is in country and is building the partnerships and building the customer relationships directly on the continent. And that gives us an opportunity to leverage that as a broader central European play over time. So, when we looked at the market, we saw - I think I mentioned this in the prepared remarks, so you know, about 23,000 organizations that employ between 100 and 5000 people. So that's a very good market. You know, right in the Mimecast sweet spot. And when one expands and looks you know broader across central Europe you know, that number starts to climb quite nicely as well. So, we're excited about that. It's a key investment for us. We're building a good team there on the market - on the ground. And we look forward to that really being a strong contributor to our business over the years as we ramp it up.

[Gabriela Borges:]

That's helpful. Thank you.

[Operator:]

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

[Matt Swanson:]

Thanks. This is actually Matt Swanson on for Matt Hedberg. Building on that previous question, it sounds like we're talking about CapEx and maybe this German investor was put forward slightly. Does this have anything to do with kind of getting out ahead of GDPR? And then again just on the GDPR standpoint, do you have a sense from customer conversations if those implemented today what percentage would it be compliant or who would need to make additional purchases?

[Peter Bauer:]

Great. So, in terms of the timing of the investment and the decision to move in there, I guess the two pretty important things that are going on in Europe right now, the one of the Brexit negotiations and then the other one is obviously the implementation of GDPR. So, both of those you know, informed our thinking in terms of timing for setting up a local German capability. And we think it will help drive opportunity towards that market. The specific breakdown of who is and who isn't compliant with GDPR that is very difficult to tell because it's not an explicit sort of certification that any organization can kind of earn or give themselves. So, I think that we're in - we're in stages of developing readiness and market education. Again, it's not something that one achieves, buying a particular product or solution there's naturally some business process, some organizational capability and technologies that come together to help customers meet their regulatory obligations around GDPR. So, we think that that creates a generally supportive demand environment for solutions like ours which naturally span both data management with the archiving solution, as well as preventative measures and security technologies, specifically like our Targeted Threat Protection product for email.

[Matt Swanson:]

That's great. And then if I could just ask one more, you guys mentioned all the high-profile breaches we've been seeing lately and then may be kind of hard to get an exact answer to this because there's been so many. Is there a way to think about kind of the timeframe from when a breach happens to maybe the pipeline build, when those conversations with customers start and reaction to it?

[Peter Bauer:]

You know, I think if we went back a few years, we might be able to discretely track that. But you know, I think as Peter Campbell mentioned that you know, to some extent it's the new normal that these attacks come up and they disclosed, and they publicize. So, I think it's just part of the landscape that we're dealing with today and very difficult to be able to track a specific demand reaction to a specific event nowadays.

[Matt Swanson:]

All right. Thank you for your time.

[Peter Bauer:]

Thank you.

[Operator:]

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

[Catharine Trebnick:]

Thank you for taking my question and really nice quarter gentleman, very good. So, two questions. One is it seems like the opportunities and the awards you discussed your knocking on the door of moving up market. Can you give us any color on how flush the pipeline looks with newer sized deals? And then also this quarter how many deals you closed above 100,000? Thank you.

[Peter Bauer:]

Hi, Catherine. So yeah, we are, and we talked in the past couple of quarters that we are seeing more bigger customers come on board. We're continuing to see that. We're continuing to see a larger number of bigger customers come on board. We're seeing a smaller number of what we call micro-customers or sub-20 so both of those are having effect as we kind of - as we have a little bit of a shift there. We're seeing those effects in AOB. We're seeing the effect of the larger customers - really talk to kind of the freshness of the future pipeline if you will. But you can see the effects of that shift in the movement of our AOB which was 8800 last quarter and is 9100 this quarter. I mean, there's a couple of things affecting that, but those larger deals coming in, that's certainly affecting it. I mean, this is across our entire base, not just our new customers. So those are fairly significant effects when you talk about the entire base of 28000 customers. So, we're seeing larger customers affecting that. We're also seeing that not only kind of the large but the middle - you know, we're up selling our base, which is a key competency of our new customers to keep them forever and sell them new products. So, we are we are seeing a bit of a move up market. We are seeing more of those that's affecting the AOB and you know we'll keep talking to that as it moves. But I can't really talk to kind of the future pipeline effects.

[Catharine Trebnick:]

No, I understand. Thank you for taking my question.

[Peter Bauer:]

Thank you.

[Operator:]

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

[Dan Park:]

Good afternoon. This is Dan Park on for Alex. Thanks for taking my question and congrats on the great quarter. So, I was just wondering if you could just elaborate on the competitive landscape, especially in regards to proof point. I know, previously you had mentioned the attestation SOC 2 standards allowing you to reach larger customers. Just want to get your sense of your expectations moving forward?

[Peter Bauer:]

Yeah, great. We certainly continue to be invited to bid on more larger opportunities. I think our capabilities about platform of being recognized across the market, the recognition that we've had from Gartner once again been placed at the top of the leaders Quadrant for Enterprise Information Archiving. And then the unique capabilities that we have and the momentum that we have are on a Targeted Threat Protection offering. I think as we look at some of the larger opportunities there are some very competent competitors at the top end of that market and we continue to showcase our capabilities, put those in front of customers and we're very happy with that successes that we're having in some of those larger sort of mid-market types of opportunities today.

[Dan Park:]

Okay, great. Thanks.

[Operator:]

Thank you. Our next question comes from the line of Tim Klasell [ph] of Northland Securities. Your line is now open.

[Unidentified Analyst:]

Yeah. Thanks for taking my question. Just I wanted to touch on what you mentioned about your Sync & Recovery. Obviously, that's doing quite well for you. Obviously, your entire business is doing quite well, so congrats on that. But getting back to Sync & Recovery how often are you seeing incoming customer you know, coming onboard looking at that initially and how often are you seeing an existing customer who maybe begins to realize that you know, maybe Microsoft's offerings there are protection there isn't quite the same and they obviously need the addition of yours. So i.e. how often is Sync & Recovery new customer and how often is it like an Office 365 customer operating?

[Peter Bauer:]

Sure. So, we - this is the first quarter that we've had this product. We launched at the end of August. We now have at the end of September 100 customers using that product. So, we're pretty excited about that and the future potential of that product. You know, at this point in time it's very early. We haven't broken out where that probably is coming, whether it's 365, non-365, whether it's new customers or whether it's existing customers. It had a fairly good acceptance for our product out of the gate. But it's pretty early to tell. And we expect it to be a good additional contributor to our archiving product line, as we continue to kind of sell that product in future quarters, we'll look at breaking out some additional information of that kind.

[Unidentified Analyst:]

Okay, great. Thank you.

[Peter Bauer:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Saket Kalia of Barclays Capital. Your line is now open.

[Saket Kalia:]

Hey, guys. Thanks for taking my question here.

[Peter Bauer:]

Hey, Saket.

[Saket Kalia:]

Hey, Peter. You know, Peter Bauer, maybe just to start with you. Obviously very nice attraction again on the AOD, bigger customers maybe some of them coming from next, the email gateway. Can you just qualitatively talk about the pipeline of those types of - that the email gateway customers, how it looks through the rest of the year. And I guess looking back at the last couple of quarters, how do your win rates in those types of situations sort of trended?

[Peter Bauer:]

Yeah. Great. So that McAfee gateway solution opportunity really there is kind of two ways in which customers have deployed that solution. The one is as a perimeter, where it's really on the frontline of their defenses and then the other way is with further back on - as part of the on-premise infrastructure, that's principally a mail router and a policy engine, as opposed to sort of being on the cutting edge of being a security solution. So given those dynamics you know, and the timeframe of the End of Life of that solution which is much more sagot [ph] and pushed off. You know we see that as a much more slower moving opportunity. Obviously, the big migration of the old MX Logic or the McAfee cloud based customers had some real momentum and also from a kind of logo comp perspective some significant volume. So this is definitely a - slightly different type of opportunity, but we continue to sign customers over onto Mimecast and helped them with migrations from the McAfee gateway solution onto Mimecast.

[Saket Kalia:]

Got it. That's helpful. Maybe for you Peter Campbell. You know, I think we all see the solid EBITDA beat. But it felt like there were just maybe a couple items below the operating line, maybe taxes that bounced around a little bit, understanding very well that those aren't operational. Can you just help us understand those? And then going forward how we should think about non-GAAP taxes in particular?

[Peter Campbell:]

Sure. Sure. So first off, I think the income tax provisions to our GAAP income tax provision relates mainly to our South African enterprise, which has been profitable for some time. And then mere to the amount of cash that we're paying - you know the amount of cash taxes that we pay globally, because that is one operation that reduced up all the NOLs. And so our tax provision mainly relates to our South African entity, as it relates to the cash that we pay in that entity and you expect that non-GAAP tax provision to grow in line with revenue. Our non-GAAP tax provision is a function of our use of NOLs versus excise tax benefits in regions and particularly our U.S. entity. So we are not paying any cash taxes related to that non-GAAP provision. That is really a function of whether we use NOLs or excess tax benefit related to share option exercises in a particular region. We have enough excess tax benefits and NOLs to offset any taxes payable in that region for the next couple of years. But I do expect that depending on the amount of NOLs we use versus those excess fat tax benefits, one of these days I'll be able to say that, so that we turn to straight excess tax benefits. The amount of NOLs versus the amount that we apply to excess tax benefits can affect our non-GAAP EPS by a couple of cents, you know, $0.02 to $0.03 each quarter. That'll depend on in the future on how much we use of either one or how much we're able to use either one.

[Saket Kalia:]

Got it. That's very helpful. Thanks very much.

[Peter Campbell:]

Thank you.

[Operator:]

Thank you. I'm showing no further questions at this time. I'd like to hand the call back over to Peter Bauer for any closing remarks.

[Peter Bauer:]

Great. Thanks everybody for joining the call this evening. We've enjoyed presenting our results to you and we look forward to being back in about three months' time to take you through our next set of results. Have a great evening.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone have a great day.