Mimecast Limited
Q4 2017 Earnings Call Transcript

Published: 10 May 2017

[Operator:]

Welcome to Mimecast's earnings call for the Fiscal Fourth Quarter of 2017 ended March 31, 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 May 9, 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:]

Thank you Robert and welcome everybody. We are delighted to be sharing our results with you this evening. On tonight's -- to look back at what's been an amazing year for Mimecast and finally I will share some of our sense of the growth for the company as we look out to 2018 and beyond. So, starting with the fourth quarter we are very pleased with our results. Revenue of 52.4 million had exceeded the high end of our guided range and represented a 42% year-over-year growth as reported and 45% year-over-year growth on a constant currency basis. So this strong performance was aided by strong new customer adds in the mid and high end of the market as well as strong retention and up sell. Peter Campbell will talk more about our financial results 4Q. In the fourth quarter at the RSA trade show we introduced a new -- suite. Now with the launch of this internal e-mail protect or IEP we are now providing customers with the ability to analyze and remediate e-mail traffic that originates and is delivered inside an organization protecting against threats that operate behind the corporate firewall. Mimecast is the only e-mail security provider to offer the service for both on premise Microsoft Exchange and Office 365 Hosted Exchange. Now initial interest in IEP has been strong and we're now approaching 100 customers using this service. Secondly, in the fourth quarter we launched a new tool called the e-mail security risk assessor or ESRA. Now this enables potential customers to identify threats that their current e-mail security provider has missed. After running this tool in several live environments we published a study sharing the details. From a sample of 26 million e-mails that had already been filtered and allowed through these competing e-mail security products, Mimecast uncovered almost 3.5 million pieces of spam, 6,681 dangerous file types, 1,207 known and 421 unknown malware attachments, and nearly 1700 impersonation attacks. So with this tool we're able to clearly illustrate the value that Mimecast adds to customers, as well as the need for multiple layers of e-mail security. Now in the quarter which ended on the 31st of December, 2016 we saw a flood of smaller micro businesses especially former McAfee cloud customers migrating to our services and this resulted in 3,100 new custom adds in that third quarter and in fact record bookings for Mimecast. Now last quarter our go-to market team focused on fewer larger opportunities and so along with the 1500 new customers that we signed, we yet again set another new record for bookings in this last quarter. We also -- larger customers have a higher product attach rate than these micro businesses and have proven to be more profitable to us over time. So let me describe some of our customer wins to help you understand both the value that we deliver for customers as well as some of our competitive success. A leading Boston based software company with over 4000 employees was using an SME focused solution for e-mail security and an enterprise grade on premises archiving solution. Now they were also preparing to move to Office 365 and they chose Mimecast to provide better protection from targeted threats and to provide them with a cloud archive that would work seamlessly with Office 365. Secondly an international early education company with about 5000 employees which was using a leading competitor's enterprise grade e-mail security offering. And along with this the vendors separate archival offering. Now they moved to Mimecast to provide their end users with better access to the data as well as to deliver the benefit of our industry leading search performance to their e-Discovery team. Now there is tight integration between our security and archive offerings, it was seen as a real benefit to the IT team. Now consider a California based higher education system with three campuses, 5000 staff, and 40,000 students. This organization was running a McAfee on premise e-mail gateway and was challenged by targeted attacks including impersonation and ransomware. Mimecast was selected for our superior ability to protect from these attacks and to provide a flexible configuration to meet the needs of both faculty and student user groups. Then another archiving win came from a recently public British company that looked to implement an e-mail archive with tight integration into their Office 365 deployment. After considering the capabilities of native Office 365 and another third party vendor, Mimecast was selected. Our advanced functionality and our independent storage environment coupled with extremely fast search performance helped us to win the deal. Finally, a Florida based healthcare customer of ours with over 5000 employees they recently upgraded to Mimecast targeted threat protection and our secure messaging product. Our ability to seamlessly provision a trial followed by a rapid live deployment of these two additional solutions made it easy for the customer to choose Mimecast to solve what are the two major issues facing the healthcare industry. Firstly, securely transmitting sensitive data and secondly protecting themselves from highly targeted attacks. So now let's look back at 2017 and highlight some of the key milestones that we've achieved. For fiscal 2017 we reported revenue of $186.6 million representing 32% revenue growth over the prior year as reported and 39% growth in constant currency. We added 8,400 customers representing nearly a third of the 26,400 customers that we serve today. So we are really experiencing the benefits of our multitenant and multiproduct architecture as we scale our services to thousands of customers globally representing millions of end users. While faced with the challenges of rapid growth and a large number of new customers we successfully balanced growth and profitability. So we grew geographically in 2017 and saw early success in the United Arab Emirates as we expand out of our South African operations into the Middle East. Additionally we added resources to our Mainland Europe presence as we prepare for Brexit and the coming requirements of GDPR. Now looking ahead -- to our core e-mail security, continuity, and information archiving markets. Collectively we consider these to be critical cyber resilience imperatives that all organizations must address. Our ability to deliver these all as one integrated Cloud Suite at a compelling price point really sets us apart in a market populated by complex point solutions and legacy architectures that are being retrofitted for the cloud. In addition the threat landscape is evolving rapidly and e-mail remains at the center of many breaches. Legacy vendors of e-mail security services are still failing to deliver consistently which is leaving Mimecast uniquely positioned to help. In the coming months we will continue to leverage our platform and Mime OS, our unique multitenant, multiproduct, micro services architecture to solve additional cyber resilience needs and helping our customers to protect their users, their data, and their operations within our target customer base. We're excited about the large market opportunity ahead of us and over the last 12 months we've demonstrated our ability to compete and win against the largest incumbent vendors and all of the leading solutions in the market today. We continue to believe that we have the right products, partners, and architecture to serve a very significant percentage of the world's corporate e-mail users. And with that I'd like to turn the call over to Peter Campbell, our CFO to walk you through the numbers in greater detail. Peter.

[Peter Campbell:]

Thank you, Peter. Revenue growth in Q4 once again exceeded the high-end of our guidance range and we achieved 3.6 million in adjusted EBITDA. Strong net new customer additions across all geographies, best in class renewal activity, and strong up selling to our existing customer base created another record quarter and a strong finish to the year. Fourth quarter revenue was 52.4 million above our guided range of 48.6 million to 49.1 million. Revenue growth accelerated sequentially to 42% on an as reported basis and 45% in constant currency over the fourth quarter of 2016. The quarter benefited from strong customer retention and new sales during the period. We also benefited from high professional services revenue in Q4 compared to the prior year which increased the growth rate by approximately 200 basis points. For the full year 2017 revenue was 186.6 million or 32% growth as reported and 39% in constant currency over the 141.8 million achieved in 2016. We saw strength in all geographies and had particular success in mid market and large businesses. The U.S. was a particularly strong area of growth for us with our U.S. growth rate increasing to 56% this quarter from 48% in the prior sequential quarter. As Pete mentioned we added another 1500 customers in the fourth quarter. New customer additions were lower as predicted due to the end of life of McAfee's hosted gateway product. With the focus of our sales and marketing efforts away from smaller Micro customers, we signed on a greater number of large customers. This had the impact of raising our overall company average order value to 8500. Going forward 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 the mix shift to larger customers in our new business each quarter. This quarter we also saw higher order values from new customers in each segment as we had continued success selling multiple products to our customers at the outset. Across our customer base our customers buy an average of 2.7 products from Mimecast and we believe there is significant opportunity to meet additional customer needs in the future as they adopt additional services. The introduction of our internal e-mail protection module to our targeted threat protection suite has increased the total ARPU of our products set to $90. We announced this product in February and feel positive about our ability to serve many existing and new customers with this product going forward. We are continuing to invest in sales and marketing efforts to take advantage of the large market opportunity in front of us. Our gross drivers continue with the demand for our targeted threat protection suite of products, the shift of organizations moving their e-mail to the cloud, and legacy vendors like McAfee not keeping up with emerging threats. Our TTB service is now deployed with over 10,000 customers. Demand continued from both new and existing customers with 1400 new and 600 existing customers adding the service in the fourth quarter. It continues to be a strong inbound demand generator as well as a substantial up sell opportunity for us as we offer the most advanced solutions to deal with customer's e-mail security issues. In total 38% 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. 21% of our customers are now using Mimecast to enhance the resilience of their Office 365 deployments up from 19% last quarter. As we noted previously Office 365 customers have a higher number of services per customer compared to our customer base as a whole. When customers purchased multiple products, the margin on the incremental products sales is higher, the result of our multiproduct, multitenant architecture. Additionally customers with multiple products tend to stay with us longer. We continue to see sales to customers of legacy competitors during the period including McAfee. The threat landscape continues to evolve and e-mail is a prominent attack vector. In order to protect our customers from the most advanced threats we evolved our product offering to meet these threats. We believe that we will continue to see movements from legacy vendors to Mimecast including McAfee and believe that the McAfee e-mail gateway opportunity will continue to benefit Mimecast with additional sales in 2018. Our revenue retention at 111% remains high and is up from 109% at the end of FY16. Our strong revenue retention rate is based on the combination of industry leading retention and up sell to our existing customer base. Now let's turn to expenses and profitability. For the fourth quarter we recognized a 74% GAAP gross margin, an improvement from the 73% recognized last quarter. As I stated on past calls gross margin fluctuates due to the addition of hardware, datacenter services, and employees needed to onboard and serve our growing customer base. Due to the rapid growth in customer additions in recent quarters we plan to invest more to support our customer base. We anticipate our GAAP gross margin will be in the 70% to 72% range over the next several quarters as we build out our capacity. Fourth quarter operating expenses were 40.9 million, sales and marketing expense of 26.5 million decreased as a percentage of revenue to 51% but increased from 25.3 million in the third quarter. Additionally our sales and marketing expense in the quarter was higher than originally anticipated by approximately 1 million due to additional commission expenses related to the outperformance of our revenue. Adjusted EBITDA in the fourth quarter of 3.6 million was above the midpoint of our guidance of 3.4 million. Adjusted EBITDA margin was 6.8%. For 2017 adjusted EBITDA was 11.8 million or 6.3%. For the fourth quarter GAAP net loss was 2.6 million or $0.05 per basic and diluted share based on 55.4 million weighted average shares outstanding. For 2017 GAAP net loss was 5.4 million or $0.10 per basic and diluted share based on 54.8 million weighted average shares outstanding. Our GAAP net loss for the quarter which reflects our GAAP net loss exclusive of the effects of stock option expense was 0.2 million or nil based on 55.4 on weighted average shares outstanding. For the year our non-GAAP net income was 4.6 million or $0.08 per basic and diluted share based on 54.8 million and 59 million weighted average shares outstanding respectively. We generated 4.8 million in free cash flow in the fourth quarter and 14 million for the fiscal year. We expect to continue to generate positive free cash flow next year. Recall free cash flow can fluctuate from quarter-to-quarter based on the timing and payment of capital equipment and other investments. Turning to the balance sheet as of March 31st Mimecast had 111.7 million in cash and short-term investments and long-term debt was 1.7 million. Now I would like to turn the focus to guidance for the first quarter and the full year 2018. For the first quarter of 2018 constant currency revenue growth is expected to be in the range of 35% to 36% and revenue is expected to be in the range of 54.7 million to 55.3 million. Our guidance is based on exchange rates as of April 30, 2017 and includes an estimated negative impact of 1 million resulting from the strengthening of the U.S. dollar compared to the prior year. This resulted from a negative impact related to the British pound of 2 million but was offset by a positive impact from the South African Rand of 1 million. Adjusted EBITDA for the first quarter is expected to be in the range of 3.3 million to 4.3 million. From a full year 2018 perspective revenue is expected to be in the range of 239.4 million to 247.6 million or 28% to 32% growth in constant currency. Foreign exchange rate fluctuations are positively impacting this guidance by an estimated 0.9 million. Adjusted EBITDA is expected to be in the range of 18.7 million to 20.7 million demonstrating continued progress toward our long-term adjusted EBITDA goals of 20% to 22%. We will continue to invest for growth as we progress in a measured way toward that goal. In summary 2017 was our first full year as a public company and we are very proud of what we have accomplished. We hit record revenue and retention rates, we saw our annual growth rate increase to 39%, and added 8400 new customers almost one third of our total customer base. With our ability to introduce industry leading products, a threat landscape that continues to see e-mail as the prominent attack vector and a continued movement of e-mail services to the cloud we think we are well positioned to build on the success we have enjoyed to date and are excited about the opportunity in front of us. 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:]

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

[Alexander Ljubich:]

Hey guys this is AJ Ljubich on for John. Congratulations on a very strong quarter once again. You talked a little bit about large customer wins, can you maybe just talk about some of the drivers there, are you seeing change in the willingness of larger organizations to adopt cloud solutions and from the McAfee channel are you seeing success in getting some of their large on premise customers?

[Peter Bauer:]

Yeah, great, absolutely thanks AJ. I think that you're absolutely right, larger organizations are embracing the cloud more willingly now and I think part of that is driven by their preparation to move to Office 365 and the need to have a classic cloud configuration things like e-mail security and archiving. So that is disruptive to their legacy implementations that they've had on their own networks. So that's definitely been a driver for us. I think also for us as a vendor and somebody that delivers a cloud based -- exclusively delivers a cloud based solution. So the recognition that you can deliver better security and you can deliver greater scalability with an architecture like ours and being part of the Mimecast network I think is also really starting to register with organizations as they are battling with being able to counter the latest types of threats, impersonation attacks and also their battle to scale their legacy archiving environments. So really speaking of the next architectural evolution and being able to deal with all of the sort of e-mail related issues at scale, I think that's really driving our success with some of the larger organizations.

[Alexander Ljubich:]

Okay, that's really helpful. Maybe one follow-up probably for Peter Campbell, I think you said professional services in the quarter added about 2.2 revenue growth, can you just talk about what was the driver there and what happened in the quarter and I would assume that was sort of one time and not continue going forward, would that be an accurate sort of assumption?

[Peter Campbell:]

Yeah, that would be accurate. I mean as you know we're a very high subscription revenue business, specifically about 99%. I mean the timing of our professional services mainly related to injections [ph] on our guiding customers and large volumes of data that customers are looking to bring on to our grid and onto our network so we can access this and make them available and usable again going forward. I think that was the anomaly this quarter so I just wanted to point that out and that really has to do with the timing of availability of the data from the customers that I think gets ingested and get put on really quick. So no one to make sure that is [indiscernible].

[Alexander Ljubich:]

Great, thanks again and congrats on the quarter.

[Operator:]

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

[Saket Kalia:]

Hi guys, how are you doing.

[Peter Bauer:]

Good, thanks.

[Saket Kalia:]

Hey Peter, thanks for taking my questions here. First, maybe for you Pete Campbell can you just talk about the average order value or maybe even subscription fee for IEP and realizing you only have 100 customers so it's still very early, are you seeing those customers adopt IEP for all of their inboxes or is this something that maybe only a subset of subscribers within a customer would use, maybe just publicize how big that business could potentially be?

[Peter Campbell:]

Sure, when we talked to -- I think I mentioned the -- when I mentioned the increase in our average revenue per user in the script, I talked about that increasing to about $90. And so what we're seeing is very early days and we're seeing it about $12 per user per year net to us from sales of that product. Obviously it is a little early to tell and to see exactly what any AOB would be around those types of deals will be depending on the size of customers that we bring on board. You know with the mix of customers we've seen at the end of Q4 there were customers of all sizes that were looking at that product and then buy that product. I mean just as a note to your point, a company would buy for all of its mailboxes not just a subset and that's what we've been seeing in terms of the purchases that have been made to date. And so you know with that we look at the kind of the size of the market we have to address that are fully loaded user of $90 per user, per customer per year and how that increase was the advent of this product. So, just a couple of -- with that number of customers adopting it and we're feeling pretty good about that opportunity and we expect to see more of that in the coming year.

[Saket Kalia:]

Got it, that's really helpful. Maybe for my follow-up for you Peter Bauer I think it was mentioned at the call that Office 365 customers attach more services than the broader customer base, I think the number was 2.7, can you just walk through which services are maybe seeing a higher attach rate with Office 365 and why you think that's the case?

[Peter Bauer:]

Yeah absolutely, so across our full base now the product development 2.7, I think that's up from 2.6 previously. But as you say, within the Office 365 user base penetration of two products in particular is meaningfully higher than in the base. The first is continuity which is about two thirds of our broad average customer base adopt with Office 365 base that's at 80%, with archiving we have 45% of our broad base using archiving where the Office 365 base is 60% of the base. So you can see how those both we have greater penetration within Office 365. TTP is also an interesting one, 38% we've just updated that in terms of penetration in the broader base. In fact it is just under 50% about 49% in the Office 365 base. So we are seeing really strong traction with that product in Office 365 too.

[Saket Kalia:]

That's great, congrats again, thanks very much guys.

[Peter Bauer:]

Thanks Saket.

[Operator:]

Thank you. Our next question or comment comes from the line of Sterling Auty from J.P. Morgan. Your line is open.

[Sterling Auty:]

Yes, thanks, hi guys. Just two questions, one I think you gave a percentage of customers or users where protecting against Office 365, I am kind of curious about the rest of the users, in other words how would you break down the deployment of e-mail and the rest of what you're protecting, so how much is cloud based e-mail that not offers Office 365 and how much is on premise?

[Peter Bauer:]

Sterling, thanks for that question. I think we would say less than 5% is other, which would be a combination of Google Apps and a third party hosted exchange environments, independent cloud e-mail host. And then the rest would likely be on premise or it would probably on premises exchange of various different versions.

[Sterling Auty:]

Alright, great, and then a follow-up, I often get this question so McAfee is the one that we talk about most but when you look at the installed base of on premise solutions on the e-mail side and even archiving where are the other big chunks of installed base to go after, in other words how much is that Cisco or Trend Micro or others, where are the bigger other opportunities in terms of vendors that try to dispose?

[Peter Bauer:]

Yeah, great question. So Cisco with the import [ph] install base, that would be a meaningful on premise e-mail security incumbents. Symantec also has some on premise technology from the old Brightmail acquisition. So those would be big ones on the security side. Barracuda has a lot of appliances out there in the SME sector that also need to be moved to a cloud based service in time. When we looked at archiving Veritas, their enterprise bulk on premise archive is pretty significantly the market leader and we see a great deal of that with customers showing a strong interest in having cloud archiving delivered. We also see a little bit of Autonomy, we see a little bit of the EMC SourceOne product as well.

[Sterling Auty:]

Great, thank you.

[Operator:]

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

[Shaul Eyal:]

Thank you so much, good afternoon guys. Congrats on ongoing great execution and improved outlook. Starting with Peter Bauer, I want to go back to the point on the enterprise level or in other words companies with a greater than 5000 employees, definitely nice acceleration on that front. Is it mostly displacements or is it mostly Greenfield opportunities you guys are seeing on that end?

[Peter Bauer:]

I am starting with -- so, I think it depends by product offering. Security is typically at a base level, always a displacement but the target of threat protection piece is typically always new. It's new Greenfields opportunity. So often these customers are moving perhaps from a Symantec message adds or former Cisco line port over to our cloud solution displacing the basic e-mail hygiene [ph] solution capabilities with us and then buying Targeted Threat Protection on top of that. When it comes to archiving it’s a mix. So we have many of those larger organizations will have an archive in play already. But there are still some that you know perhaps PST files or a much more sort of democratic set of retention regime is in place and there will be a Greenfields archiving opportunity there.

[Shaul Eyal:]

Got it, that’s understood. The Office 365 picture continues to improve. I think you've indicated it was 21% this quarter. I think since you guys have gone public I think it's about probably 2 points that you've added every other quarter give or take. All things being equal should we expect similar rates going forward all things being equal?

[Peter Bauer:]

I'm sorry Shaul I think we're growing pretty much in line with the shift of the rate of sort of movement to Office 365. Maybe we lag it slightly so, I think as long as customers continue to move to Office 365 at the same rates which I think we expect them to, we expect to continue to win new business -- new Office 365 business at a similar pace.

[Shaul Eyal:]

Got it, congrats, good job.

[Peter Bauer:]

Thank you.

[Peter Campbell:]

Thanks Shaul.

[Operator:]

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

[Matthew Hedberg:]

Hey guys, thanks for taking my questions. It was nice to see the acceleration of this quarter, that was impressive. I guess I'm wondering I wanted to ask a little bit more on the competitive side as well. I mean it's been well documented as you move up to the larger -- to the mid and larger enterprise, there's a whole host of legacy peers there but I'm curious in your thoughts on the competitive position versus proof point whether or not you're seeing them more so these days as you sort of move up into the larger enterprise space?

[Peter Bauer:]

You know Matthew so, when we are in North America in particular and looking at larger opportunities, Proofpoint is a well known vendor to those types of accounts. So quite often we will be put side by side with Proofpoint in those opportunities. And so we feel good that when we are winning those larger opportunities we have really shown all differentiators and shown all strengths relative to a broader number of small enterprise competitive players and we've come out and win some accounts in those cases. So we're happy with that.

[Peter Campbell:]

Hey Matt, Peter Campbell here. Just to add, I think it’s important to note in particular with the increase in the AOV that we saw you know, kind of the customer adds that we had this period coupled with that and kind of larger deals size increasing the AOV and kind of topping the number that we had last quarter in terms of new business adds, it doesn't necessarily mean that we're going on changing our focus and we are keeping our focus on that mid and the kind of the lower end at large. And you know there's still a very under penetrated opportunity out there not only in the U.S. but globally and we're still very early at penetrating that opportunity

[Matthew Hedberg:]

Got it, that’s helpful and then I think about a third year revenue is from the UK and as you think about addressing European customers desire to position themselves really in front of the GDPR go live, what are some of the best opportunities for growth I guess in continental Europe and what sort of investments though would be required there?

[Peter Bauer:]

Sure, so I think it’s a big opportunity for growth in continental Europe. We are a UK company. We have been selling into UK and Europe for years and we're going to continue to do that. I think GDPR is something that’s come up and is going to be an issue for companies particularly in the back half of this year as they kind of wrap around getting compliant with the May 2018 deadline and I think as an organization we're very well positioned with our products to not only support UK and European businesses but also U.S. businesses that are in Europe that has to follow the same guidelines and the same rules that were coming out in the EU. So I think there is going to be an opportunity for us in the back half of the year. I think we'll be looking at investing in all of our markets in the coming year. We're certainly going to be investing a little bit more into the European market this year and off the back log and investments in UK will be -- in Europe a little more closely as we look to capitalize on that. But given the growth rate that we've seen in the U.S. and the size of the U.S. markets we will still have to kind of laser focus on growing that business.

[Matthew Hedberg:]

Got it. Peter C, if I could sneak in one more I guess on the -- it is really a follow up to your investment comment. I think you said you expect to generate positive free cash flow and I guess in that context could you help us on what the right level of CAPEX spending for fiscal 2018 is sort of given this idea of expanding opportunities?

[Peter Campbell:]

Sure, I mean I think I talked in the past about, we have generated free cash flow this year and we expect to generate free cash flow next year. And we will kind of [Technical Difficulty] I'm not sure if we are cutting out the line again, since we had that earlier on the call.

[Matthew Hedberg:]

We hear you now. I think I missed the answer to the question, this is Matt again.

[Peter Campbell:]

Matt what part did you catch.

[Matthew Hedberg:]

Not a lot of the answer. Okay.

[Peter Campbell:]

Okay sorry, let me go through the whole thing, I am not sure if it would happen again. I think we have some technical difficulties. If you would e-mail it wouldn’t be a problem. I will send it to you on e-mail. So, in terms of the CAPEX spend the coming year, what I did highlight was I talked about how we've had substantial growth in FY17, certain investments in order to support that growth lag behind the Euro and you will be seeing some additional capital investment in the and we thought the end of Q4 into this fiscal year in order to support not only the growth of customers that we've added but the expectations of our future growth. You know I would expect to see a similar percentage of revenue in terms of our CAPEX in the current year to support that growth that we saw in 2017. I'll also add that there is going to be some additional CAPEX with respect to office expansions that we are looking at in the latter half of the year, a little bit in the beginning of the year as we grow our UK and European business but some in the latter half of the year as we expand the office space for the U.S. business.

[Matthew Hedberg:]

Great, thanks a lot guys.

[Peter Campbell:]

Thanks Matt.

[Operator:]

Thank you, our next question or comment comes from the line Jack Rohkhol from Doughtery. Your line is open.

[Jack Rohkhol:]

Hi, good afternoon. Thanks for taking my question. One quick one on the timing of the remaining mac the opportunity [Technical Difficulty].

[Operator:]

The volume is back, can you try your question again sir.

[Jack Rohkhol:]

Oh, sorry. Yes, just one quick question on the remaining mac the opportunity, you talked about one large customer that came over that had an on premise version. Where are we really in the timing of people evaluating the move from there on prem or towards another solution, are we -- are people moving over actively evaluating, are we seeing more preference to sweat their efforts longer toward the official end of life date?

[Peter Bauer:]

Sure, so less urgency then we saw around the cloud. The end of life is over an extended period, I think it’s about another three years in full. We have been winning new accounts fairly steadily. I think we've spoken about them in the last three earnings calls, different examples of customers that we've won. So we think switchovers, we think evaluations been done, so we think that the opportunity plays out probably for the full duration of the remaining supported life of the product.

[Jack Rohkhol:]

Great, congrats on a great quarter.

[Peter Bauer:]

Thanks Jack.

[Operator:]

Thank you. Our next question or comment comes from the line of Srini Nandury from Summit Redstone Partners. Your line is open.

[Srini Nandury:]

Alright, thank you for taking my question, really appreciate it. Can you talk about that GDPR regulation that is coming in the EU and what are your expectations for growth in EU and I have a follow-up please?

[Peter Bauer:]

Great, so I think the two drivers around it, the first is that there is a breach notification component which will drive demand for security. Nobody wants to be in the next headline and Europe has been a little bit more sheltered from that...

[Operator:]

We’re reconnected, you may want to give your answer again sir, I apologize.

[Peter Bauer:]

Okay, so two sides to the GDPR opportunity. One is the breach notification requirements which drive them on for security as the press and the media pick up on that and raise the temperature and the tone of the security conversation. In Europe a little bit more in line with what happens in the U.S. where we had reached the notifications and a lot of publicity around these events. So nobody wants to be the next headline, they will be shopping to make sure that they have the right security solutions in place I think a lot more aggressively and we have added service. The second piece is really about how they manage and store data about citizens and a big part of that problem is all the unstructured data that they have and how they manage retention and how they can discover and expose that data to meet requests from citizens. There's significant penalties for noncompliance and so that is a real driver for demand of archiving solutions like ours which help customers to have much tighter control over their unstructured data to state and be able to answer these queries and really know where they stand.

[Srini Nandury:]

I see, okay so how does this -- but thank you for the clarification. I got one more follow up if I can. If you look at the -- there are many companies which are domiciled in the U.S. but they also operate in the EU. So do they also some under the Rubric of GDPR and how does that work?

[Peter Campbell:]

Sorry, I'm not sure I quite got the question.

[Srini Nandury:]

Okay, I was wondering know whether the GDPR rubric applies to the companies which are domiciled in the U.S. but operate in the EU?

[Peter Campbell:]

Yes, sorry. Absolutely, so any organization that is doing business in the EU will have a requirement to comply with that law particularly as it pertains to managing data around EU citizens.

[Srini Nandury:]

Alright, thank you so much.

[Peter Campbell:]

Thank you.

[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 the question. Maybe just for Peter Bauer, maybe you could give us an update on the go to market at larger customers, is there anything that surprise you that's different as we focus the self worth on the larger opportunity, anything in terms of competitive environment or the sales cycle how involved the RFPs are, Peter perhaps that resonates more perhaps with larger customers and small customers, any detail there would be appreciated? Thank you.

[Peter Bauer:]

Yes, thanks Gabriela. So I mean we've been winning business with larger customers for quite some time. I think we've spoken through our sort of mix from a revenue point of view with about three quarters of our revenue being in that 100 to 5000 seat space and about 14% 15% being above and the balance below a 100 users. So we have many accounts and we've been winning more accounts to keep that mix -- as the business is growing to keep that mix the same we've been adding more and more comps in all segments. Now naturally there are some slight different requirements in that north of 5000 seat space and again I think it's important as Peter mentioned this isn't about selling to mega enterprises necessarily, it's about selling to the sort of upper end of the mid market with vast organization with 10,000 or 15,000 or 25,000 employees. We see with them some of the things that we do that really appeals to those larger organizations, things like more complex administrative capabilities for conglomerate type organizations. So, companies that have got the need to have a federated administration have lots of different brands, different companies that they hold has a lot of M&A activity. And what that implies is a much more complex underlying e-mail set up with past of [indiscernible] and Google Apps, on premise exchange environments. So the level of sophistication that they need and the ability to administer that will be much more complex to state that is something that we're extremely good at in the like. The other thing that we found is really appealing to them is as we share more of our architectural story with them and show them what the scalability advantage is that they get from our service. So when they're comparing what we do perhaps with another vendor that might be hosting an appliance as the strategy and we show them that the service is delivered by us. They're really getting the benefit of a platform that's running on thousands of devices with a very scalable elastic backend for long-term data retention with full high speed processing of mail and all of the rich security services that plug into that messaging pipeline. The sophistication of that backend is really appealing to the more discerning buyers that drill down and pay more attention to that. And then of course I think longer-term as that story plays out and as we start exposing more of the API strategy that becomes much more relevant to larger enterprise organizations. We’re thinking about how can they leverage this as a platform, how can they integrate their other applications into the platform using a consistent API across the entire suite of services that they have purchased from us.

[Peter Campbell:]

Hi Gabriela, just want to add, usually I kind of have Pete kind of kick that off and just make sure that, that was picked up as well. We have always had a portion of large deals, we've always had a certain amount of investment in large deals and we're certainly seeing more of these large deals come in kind of quarter over quarter over quarter. But we haven't changed our focus or our investment. And I think part of the shift I just want to make sure people are aware that and partnership is seeing more of the large deals and partnerships is the fact that we've moved away from those Micro customers so I just wanted to make sure that you had that point.

[Gabriela Borges:]

That makes a lot of sense and it's very interesting. So thank you for sharing that. One follow up for Peter Campbell if I could on the full year guidance relative to the first quarter guidance and modest deceleration at the midpoint there, I'd imagine that's a function of some of the tougher comps in the back half of 2017 versus 2018 and then maybe discounting some of the pipeline further out in time but I'd love to get your opinion on that and some of the swing factors than are influencing that full year growth number?

[Peter Campbell:]

Sure, I think as I looked at it, we've prepared the guidance and looked at it in kind of the year and then kind of the pipeline and the strength of the business that we seen in 2017. We are looking at very early stages of what is a very large opportunity. We are at the early stages of penetrating that. We've benefited in 2017 from the continuing evolution of the trend environment and sales of leading products like TTP. We've benefited of the movement of the cloud specifically 365 and we've benefited from legacy competitors like McAfee who are getting out of the market and some who haven’t given up yet but really just starting innovating. And we expect to continue to benefit from those same tailwinds into 2018. I think there are some other things like our new IEP product which is still in the early days and something like GDPR which we're looking out to 2018 on. But as we prepare again, we want to put out a number that we could sustain for a very long period of time. And as we looked at that focus and looked at that guidance that’s how we came up with that number of taking into account you know that large market and feeling very bullish about the opportunity but wanting to make sure that we did something that was a long term sustainable number.

[Gabriela Borges:]

Makes a lot of sense, thank you.

[Peter Campbell:]

Thank you.

[Operator:]

Thank you. Our next question or comment comes from the line of Tim Klasell from Northland Securities. Your line is open.

[Tim Klasell:]

Yes, most of my questions have been asked but just this is the beginning of your fiscal year and your sales planning, maybe you could give us a little bit of color on maybe where you're going to maybe emphasize a bit more spending as a percentage of let’s say the new sales force adds this year, are there particular GOs that you're finding maybe more attractive this year, thank you?

[Peter Bauer:]

Sure, I think there's many attractive GOs. It is event focused looking at where we get the best bang and best return on our dollar spent. You know I think as you look at each of our core markets we will be investing in each of those. And I mentioned on the call that our U.S. business grew 56% last quarter which was the new high for us. So the U.S. approaching about 50% of our revenue is obviously a very large market and still very early days about 49% approaching about $90 million of revenue in the U.S. for us. So, that's certainly an area of investment that we're going to focus on. That said where we were we started in UK and Europe and looking at the opportunities that is there, we are still in the very early days of penetrating that opportunity as well. And as we look at continental Europe and things like GDPR we are certainly going to be continuing to invest in that area. I think if you're going to try and look at proportionately to the revenue that we have and the kind of record [ph] revenue we have is more or less symmetrical in terms of how we're going to be investing our dollars spent based on the proportion of revenues that we have seen and expect to see in each of those core regions.

[Tim Klasell:]

Great, thank you very much, very helpful.

[Peter Campbell:]

Thank you.

[Operator:]

Thank you. Our next question or comment comes from the line of Young Kim [ph] from Benchmark. Your line is open.

[Unidentified Analyst:]

Great, thank you so much. Just, a lot of good questions and answers on GDPR but just trying to quantify the incremental growth opportunity provided by the GDPR, for instance do you potentially see European business showing faster growth this year versus last year?

[Peter Bauer:]

So, I think it is going to be an issue for companies in the EU. I think they haven't quite wrapped their head around it completely. We're certainly starting to see a lot more activity and a lot more discussions on it over the past couple of months and I think companies are starting to gear up and trying to look at different ways that they can deal with those issues. So I do think it is a big opportunity for us in Europe in the coming year. I do think there is an opportunity for that to increase as we progress through the year. It is still a little bit early but I think we're well positioned with the product that we have and our knowledge of Europe kind of data protection in Europe being a UK based and a European based business. So while I don't know how to put a number on the growth rate of a portion of the business, in Europe this year I am feeling quite strong about the opportunity there and I think we'll see that start to turn in the second half of this year.

[Unidentified Analyst:]

Well, thank you very much for that answer and then also for Peter Campbell, the company had a huge influx of Micro customers in Q3 this past year. Do you expect that to have some effect on some of your metrics sometime this year like revenue retention rate as you're likely to see higher churn rate from that to customer base?

[Peter Campbell:]

I think that’s a good question. So during Q3 we saw 3100 so obviously a large number of Micro businesses were part of that base. This quarter we saw 1500 new customers but with those 1500 customers we saw more new business in Q4 than we saw in Q3. So obviously you know the Micro customer shift has kind of -- we're moving away a little bit from that as we specifically geared ourselves and making efforts away from that customer base. While I think on a customer level, we will see potentially higher churn from those Micro tiny customers. I fully expect to see a higher number of those customers churn. I don’t expect that to impact our overall churn rate because our churn rate is based on dollars of revenue. And those micro customers are very small proportion of revenue dollars.

[Unidentified Analyst:]

Okay, great. That's it from me. Thank you very much.

[Peter Campbell:]

Thank you.

[Operator:]

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

[Peter Bauer:]

Yeah, folks thanks very much for your interest in our call this afternoon. We enjoyed sharing our results with you and answering your questions and we look forward to presenting again to you in about another quarter's time.

[Peter Campbell:]

Thanks everybody.

[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.