Mimecast Limited

Good morning, and welcome to Mimecast's earnings call for the fiscal first quarter 2022. I'm Robert Sanders, Director of Investor Relations. With me on the call this morning are Peter Bauer, our co-founder, Chairman and CEO, and Rafe Brown, our CFO. Today's conference call is being broadcast live. A replay of this call will be available after the live call has ended. We will make forward-looking statements regarding future events and the future financial performance of the company. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements, including risks and uncertainties related to our recent security incident and the ongoing impact of the global COVID-19 pandemic. We caution you to consider the important risk factors that could cause actual results to differ from those in the forward-looking statements contained in today's press release and on this conference call. These risk factors are further defined in Mimecast's most recent Form 10-Q filed with the Securities and Exchange Commission. During this call, we will present both GAAP and non-GAAP financial measures. These non-GAAP measures are not intended to be considered in isolation from or a substitute for or superior to our GAAP results. A reconciliation of GAAP to non-GAAP measures and the reasons for our representation of the non-GAAP information is included in today's press release, which can be found in the investor relations section of our website. The date of this call is August 3rd, 2021. Any forward-looking statements we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. Now, I would like to turn the call over to Peter Bauer.

Good morning, everyone, and thank you for joining us. I hope that you and your families are doing well. I'll begin with some key takeaways from the quarter, which underscore our continued progress and highlight the improving macro environment in some of our markets. I'll also address the threat landscape and touch on the appointments of our new chief marketing officer and our new chief technology and product officer. Both bring great new capabilities and talents to our organization to help us execute on our strategy. And then Rafe will take us through detailed financial results. We are pleased to report results this quarter that exceed the high end of our guidance across all metrics. We generated $142.5 million in revenues, which is up 15% year over year in constant currency terms. We also drove an increase in average order value to $14,000, which is up approximately 9% over the prior year in constant currency. And we increased the number of services per customer to 3.6, which is up from 3.4 last year. And importantly, we delivered a sequential improvement in our retention rate, with net revenue retention of 105% in the quarter. As these results suggest, we had great success selling our multi-product portfolio to new and existing customers. We continue our growth across all segments, including the enterprise, where we have 19% of revenue coming from organizations with 5,000 seats or more. As a growing number of larger organizations place their trust in Mimecast, we continue to strengthen our brand reputation, amongst this customer set, better positioning us to continue to win. In total, we brought 600 net new customers into the Mimecast family this quarter. We achieved an important milestone. Mimecast now serves over 40,000 customers. We saw particular strength in North America and the UK, our two largest markets, while in some of our international markets, recovery has lagged. Our growing customer base brings scale to our platform, and we generated $31.6 million in free cash flow, a 22% free cash flow margin. And we'll continue our bottom line expansion as we grow. We continue to advance our three-pronged growth strategy as we expand our footprint in the enterprise market, we sell our multi-product platform, and we automate to create even stronger and easier-to-use engagements for our SMB customers and our channel partners. Let me share some highlights from the quarter. Now, our UK business showed signs of recovery, and let me share some anecdotes of new enterprise wins here. A UK-based animal wellness organization purchased our Zone 1 products for their 6,000 employees. And a UK-based professional services firm, also with 6,000 employees, selected our Zone 1 protection. and two of our more recent offerings in DMARC Analyzer, Zone 3, and web security. A global medical technology provider based in the EU purchased our Zone 1 product, added awareness training in Zone 2, and included secure messaging in their subscription for 11,000 employees. As noted earlier, we had significant success upselling to existing customers too. we achieved our largest ever upsell this quarter, a seven-figure deal with a customer that's been with us for several years. This financial services company based in the UK added seats following an acquisition and now relies on Mindcast to protect all 35,000 employees with services across all three zones of cyber defense and our data governance offering. Then a U.S. healthcare provider added services for their 75,000 employees, and they now use five Mindcast services across zone one and two, as well as our secure messaging service. Then a South African-based financial services firm chose to consolidate vendors onto Mindcast multi-service platform for their 50,000 employees. And they now deploy security services across zones one, two, and three, as well as our continuity, large file sending, and secure messaging services. And we also had success selling bundled services to new customers. For example, a U.S. manufacturer of medical products with 4,500 employees purchased Zone 1, internal email protect, brand exploit protect, continuity, and two of our newest offerings, browser isolation and CyberGraph, enabling us to provide comprehensive protection to this customer. We also had a few significant new customer wins in the U.S. public sector, including a U.S. municipal government We purchased nearly our entire product suite, 10 products, for their 2,500 employees. Then the government of a large U.S. county purchased Zone 1 and Internal Email Protect for their 7,900 employees. Additionally, we achieved Criminal Justice Information Services Certification, or CEGIS, in Missouri and led to a new customer win in Q1 with over 4,000 employees. Now, we believe CJIS certification is an important milestone that could lead to additional public sector customers selecting Mindcast in the future. As these examples highlight, our expanding footprint in the public sector supports both our enterprise and our multi-product strategy. In terms of products, our DMARC Analyzer service continues to be popular among our customers, contributing to new subscription revenue in the quarter. We also saw particular strength in awareness training and internal email protect with 500 and 700 net new customers respectively. Our underpinning all of our success is our continued focus on innovating and expanding our platform consistent with our email security 3.0 and cyber resilience strategy for customers. And this quarter we launched CyberGraph, a new product module which uses AI and machine learning to mitigate human error and counteract the most advanced email-based attacks. And we have seen strong early engagement with CyberGraph and believe this will support our market-leading position. Our API and alliances program also continue to pioneer new integrations with security technology partners this quarter. These integrations allow organizations to incorporate minecast threat intelligence and automation capabilities into their broader security ecosystem. And they help us win new customers and deepen existing relationships. among the partnerships we launched this quarter was with Humio, a CrowdStrike company that orchestrates alerts and actions across an organization's IT estate. The CrowdStrike partnership is one of our fastest-growing API partnerships with over 300 joint customers already, and this integration is also supporting our enterprise growth strategy, some of our largest customers using it, including a 160,000-person global beverage company. Now, turning to the threat landscape, You may have heard me say that cyber resilience is more important than ever. And we blocked nearly 790 million malicious files from January through June 2021. And that's more than a 15% increase over 2020. And in 2020, we saw more than a 65% increase from the year before as attackers capitalized on companies across the world moving to remote work. Emboldened attackers are targeting larger and more high-profile companies, as we saw from the ransomware attacks that disrupted the U.S. food and energy supply, transportation networks, and hospitals over the last several months. Importantly, more than 90% of all threats, including ransomware, originate via email. From April through June, approximately 35% of attacks were impersonation attacks, targeting employees with privileged access to systems and information. illustrating the targeted nature and high stakes of these campaigns. Our email security 3.0 from Mindcast is helping companies protect against the most determined attackers, and our multi-product platform works together as an integrated system to provide companies with early detection and prevention to help them mitigate attackers' progress. We believe organizations with all of our products have the strongest cybersecurity and resilience available on the market today. and at the lowest total cost of ownership. We believe that recent attacks have made companies take cyber risks even more seriously and re-evaluate their security budgets and email security systems. We continue to expand and transform our platform, with our progress accelerated through the creation of an integrated product and engineering organization, now led by our new Chief Product and Technology Officer, David Raciport. And we are confident that the actions we have taken over the last several quarters to strengthen our marketing teams, led by new Chief Marketing Officer Bernd Lieger, and our investments in go-to-market generally will help us to continue our momentum. And with that, I'll turn it over to Rafe.

Thank you, Peter. I'm pleased to report that we exceeded the high end of our guidance for revenue, adjusted EBITDA, and free cash flow for the first quarter of fiscal 2022. As I begin, I would like to note that we are now seeing signs of economic recovery in both of our largest markets. North America continued to see an improving selling environment, and we were particularly pleased to see UK performance bounce back as they turned in a strong Q1. While the impact of COVID-19 remains dynamic, particularly in some of our smaller geographies, the continued improvement in North America and the first signs of recovery in the UK are encouraging, as these two regions comprise approximately 80% of our revenue. Let's now turn to our results. In the first quarter, we generated revenue of $142.5 million, which represents a 24% improvement over the prior year in absolute dollar terms. Adjusting for $9.7 million of currency tailwind, our constant currency growth rate over the prior year was 15% for the quarter. Note that since providing guidance in May, foreign currency fluctuations positively impacted our first quarter revenue results by $800,000. Our top-line results were helped by continued year-on-year increases in average order values, or AOV, calculated at July 26 FX rates. AOV for all customers stands at $14,000, up approximately 9% over the prior year in constant currency terms. Driven by the average number of services per customer across our customer base rising to 3.6 services per customer compared to 3.4 services this time last year, as well as seed expansion within our base customers as they added new employees. We added 600 net new customers in the first quarter, bringing our total customer count to 40,600. The sequential net new customer improvement was seen in all segments, but in particular, we saw a noticeable improvement among our smaller customers, with a sequentially higher count of new customers and decreased churn. Net revenue retention stood at 105% for the four-quarter period ending June 30, building off stabilization of this metric that we noted last quarter. As a reminder, we calculate this metric on a trailing four-quarter basis and feel it is particularly important as it is dollar-based as opposed to purely customer account-based. Looking at its components, upsell totaled 113%, where we saw strength in both product-based upsell as well as seat and price-based upsell. On the product side, the first quarter saw strong interest in our DMARC and awareness training solutions, as well as good traction with our newly released CyberGraph solution. Downsell and churn totaled 9% for the four-quarter period. We are seeing contiguous signs of stabilization on downsell and churn rates and anticipate an improving macroeconomic environment will further this trend. It is worth noting that this is the first quarter since the pandemic began that we've seen an improvement in the net revenue retention metric, providing further evidence of the improving strength of our business. We continue to drive improvements in gross margins. In the quarter, we recognize a 78.3% non-GAAP gross margin, up 120 basis points from the first quarter of the prior year, a good step towards our long-term goal of achieving an 80% non-GAAP gross margin. Adjusted EBITDA for the first quarter totaled $38.6 million, representing an adjusted EBITDA margin of 27.1% compared to 22.3% in the same quarter the prior year, a 480 basis point improvement. Now turning to the bottom line, our non-GAAP operating profit for the first quarter was $29.9 million, or 20.9% of revenue, an improvement of 560 basis points from the prior year. We reported GAAP net income of $10.1 million for the first quarter, or a profit of 15 cents per diluted share based on 66.9 million fully diluted weighted average shares outstanding. Our gap tax expenses totaled $400,000 in the first quarter, which included a discrete stock windfall benefit of $1.3 million. Given recent windfall tax benefits, we expect our full-year gap tax expense to be approximately $6.3 million. Our non-gap net income for the first quarter was $21.7 million, or 32 cents per diluted share. Consistent with the methodology followed by a number of other successful technology businesses, I would like to note a change we're making in calculating our non-GAAP tax rate. To provide better consistency across interim reporting periods, starting this quarter, we've adopted a long-term projected non-GAAP tax rate of 25%. This non-GAAP tax rate excludes the income tax effects of our non-GAAP adjustments. This change was made in accordance with the SEC's Non-GAAP Financial Measures Compliance and Disclosure Interpretations 102.11. Under this methodology, we've calculated an effective non-GAAP tax expense commensurate with our level of non-GAAP profitability using an estimated long-term tax rate applied to our non-GAAP pre-tax earnings. It is important to note that this approach is solely for purposes of applying a notional tax rate to non-GAAP pre-tax income, and as such, these figures have no impact on our GAAP consolidated financial statements or the cash taxes we pay. We've included a table in today's press release, which presents a reconciliation of net income to non-GAAP net income, as well as the summary non-GAAP tax recast for the prior fiscal year. I would also note that our projected 25% non-GAAP tax rate is consistent with the guidance we provided last quarter. Turning to cash flow. First quarter operating cash flows totaled $40.7 million, or 28.6% of revenue. Free cash flow totaled $31.6 million for the quarter, or 22.2% of revenue. As of June 30th, MyCast had $338 million of cash on the balance sheet. Net of debt, our current cash balance, stands at $236 million. Let me now turn to guidance. For the second quarter of fiscal 2022, revenue is expected to be between $141.8 million and $143.3 million, or 12% to 13% growth in constant currency terms. Our guidance is based on exchange rates as of July 26, 2021, and includes an estimated positive impact of $4.6 million, resulting from the weakening of the U.S. dollar compared to the prior year. Adjusted EBITDA for the second quarter is expected to be between $39.8 million and $40.8 million, which at the midpoint reflects an adjusted EBITDA margin of 28.2%, up 80 basis points from Q2 of last year. Free cash flow for the second quarter is expected to be between $24.5 million and $25.5 million, which at the midpoint reflects a free cash flow margin of 17.6%. Turning to the full fiscal year, fiscal 2022 revenue is expected to be between $576.7 million and $583.4 million, or 12% to 13% growth in constant currency terms. Adding the details, foreign exchange rate fluctuations are positively impacting this guidance by an estimated $16.2 million compared to the rates in effect in the prior year. The prior guidance for fiscal 2022 provided in May was $574.7 million at the midpoint. Our overachievement in Q1, coupled with the strength we've seen in our business, is leading us to raise the midpoint of our full year guidance by $8 million in constant currency terms. This increase of $8 million is being negatively impacted by $2.6 million of foreign exchange headwind that has arisen since the rates used in our May call. resulting in the midpoint of our full-year guidance moving up by a net $5.4 million in absolute dollar terms from a midpoint of $574.7 million to a midpoint of $580.1 million. We are raising full-year 2022 adjusted EBITDA guidance to be between $152 million and $154 million. which at the midpoint of our guidance would reflect an adjusted EBITDA margin of 26%, up 100 basis points from the prior year, despite our anticipating a return of costs associated with travel and in-person events for the remainder of the fiscal year. At the midpoint, this represents a $3.5 million improvement over our prior guidance. We are also raising full-year 2022 free cash flow expectations to a range of $126.8 million to $128.8 million, reflecting a free cash flow margin of 22% at the midpoint of our revenue guidance. This is a 440 basis point improvement over the prior year. At the midpoint, this represents a $4.1 million of improvement over our prior guidance. To conclude, the Mimecast business is demonstrating its resilience. The strength we noted in North America and the UK is giving us confidence as we look forward to the full fiscal year. As our teams continue to focus on keeping our customers safe and growing our business, we are pleased with their execution and our strong start to fiscal 2022. With that, I'll turn it back to Peter for some closing remarks.