Mimecast Limited (MIME) 2016 Q4 法說會逐字稿

Good evening. Welcome to Mimecast's earnings call for the fiscal fourth quarter and full year ended March 31, 2016. I am Robert Sanders, Investor Relations Manager. With me on the call tonight are Peter Bauer, our Cofounder 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 may 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 included in our press release and further defined in Mimecast's most recent form F-1 and 6K filed with the SEC.

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 16, 2016. 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?

Thank you Rob, and good evening folks. The fourth quarter was a strong finish for a milestone year for Mimecast. We exceeded the high end of our fourth-quarter revenue guidance by $1.1 million, and saw a real acceleration in new customer adds with 4,200 for the year and 1,800 in the fourth quarter alone. We also experienced terrific customer loyalty, combined with solid uptake of our newest technologies, especially targeted threat protection which helped us grow and achieve revenue retention levels at 109%.

To recap for those who may be newer to our business, Mimecast delivers the industry's only large-scale multi-tenanted and fully integrated suite of services for comprehensive email and data security, archiving and continuity. Our services protect thousands of customers using Office 365, Google apps, and Microsoft Exchange worldwide. We converge several solution categories typically purchased individually from competitors into one fully integrated service. All of our services are built on top of the same proprietary underlying software back lane, or SaaS operating system, that we call Mime OS.

Mime OS enables us to deliver services efficiently to 18,000 customers today, including some of the world's very largest, as well as the most privacy- and security-sensitive organizations. It also allows us to scale efficiently to support potentially hundreds of thousands of organizations of all sizes with similar needs. Mime OS underpins our ability to provide robust security because of our vast network and integrated intelligent response capabilities, enabling us to detect and block threats even faster and better as we continue to grow. Because the customer problems that we solve affect hundreds of thousands of organizations, we built Mime OS to deliver efficient processing capacity and application performance at great scale.

This competitive strength is demonstrated by our industry-beating data search performance. Despite adding ever greater volumes of unstructured data to our service as our customer number grows, we have improved our data search performance over time. Mime OS sits at the heart of our ability to deliver a high quality customer experience and rapid time to value. Our micro services architecture enables us to innovate rapidly in adjacent service areas, as we've done recently with targeted threat protection and secure messaging. This results in enviable customer loyalty, strong upsell potential, and ultimately solid revenue retention rates.

Our approach to product design and service delivery is gaining in popularity in the market as customers are now looking to move more IT to the cloud and simplify operations through integrated suites rather than accumulate more point solutions. Customers want to improve security and benefit from the network intelligence response benefits that we offer at our global scale. Finally, customers want to partner with providers that can prove the quality of their post-sales experience.

Worldwide, organizations continue to battle with email as a significant threat factor. And according to Wired Magazine over 90% of attacks start with email. Our own 2016 business email threat report surveyed 600 IT security professionals, and 64% of respondents said they regard email as a major cyber security threat to their business. Advanced persistent threats, spearfishing and business email compromise are outsmarting traditional defenses, as well as many so-called next-generation technologies. Mimecast protects customers from these threats.

Organizations are also struggling with large and rapidly growing volumes of unstructured data, much of it in email. They need to secure and reliably preserve information to meet a variety of use cases including compliance, e-discovery, and to make it available to their employees to support productivity. In information-intensive industries, our platform tells us that each worker sends and receives 470 emails per week communicating with 67 unique people and handling 38 file attachments that represents about 29 megabytes of data. An organization with just 1,000 employees will amass a very significant volume and variety of important data and metadata through these interactions within just a few months. So, the importance of preserving and managing this information reliably as a business asset cannot be underestimated. We help customers by making this job much easier.

Finally, email is mission-critical and keeping it working all the time is vital. But even after significant investments in business continuity infrastructure, or signing up to the SLAs offered by leading cloud email providers, organizations continue to suffer downtime with their primary mailbox services. In the last six months alone our customers have experienced nearly 400 incidents of primary mail server downtime. Over 60% of these lasted more than an hour, 38% lasted more than four hours, and 27% lasted more than eight hours.

With our continuity protection, these customers are able to avoid the serious business disruption and reputational risk that downtime causes. Besides these downtime events that impacted the whole organization, we're also seeing many instances of partial downtime where portions of the customer's email infrastructure are disrupted. Since January this year Mimecast has saved nearly 5,000 hours of employee email downtime by keeping individual users online where customers' email outages did not affect the whole organization.

Almost counter-intuitively, despite the challenges growing and in the threats worsening, there has been a lack of commitment, investment and innovation from a number of the legacy incumbents serving each of these needs. So the pricing issues, rapidly evolving security threats, massive volumes of unstructured data to protect and manage, business disruption caused by downtime, the IT shift to the cloud, and the lack of competitive innovation all drive customer demand for our services.

Mimecast is proud to have continued to develop our Mime OS platform as a more efficient and effective delivery architecture for serving thousands of customers in the cloud. We're also proud of our best-of-breed services that are the result of our relentless multi-year commitment to solving these tough customer problems.

So to the numbers. The fourth quarter was a strong finish to a very strong year for Mimecast. In 2016 our revenue grew 30% on a constant currency basis to $141.8 million, exceeding our guidance. Mimecast's growth is global and strong in each region, and in particular the US which is our biggest opportunity and our fastest-growing region. Since our founding we've built our Company to deliver a high level of service whilst maintaining an eye to the bottom line. So in 2016 we generated $15.8 million in positive adjusted EBITDA whilst continuing to invest for growth.

We're still in the very early stages of penetrating what is a large and growing market opportunity for Mimecast which we estimate to be over $10 billion today. And I have confidence that with responsible investments that we are making now, we can sustain our growth for a very long time. I am especially proud of the Company's performance in the last quarter of the year, as we saw a profound acceleration in our new customer additions. Mimecast added 1,800 new customers in the fourth quarter alone, and we now protect over 18,000 customers globally.

Mimecast's ability to deliver services to 1,800 new customers, several of them pretty significant in size, in just three months is testament to not just our growing sales and marketing capacity but also to the strength of our technology. Our cloud, multi-tenant architecture and single integrated code base enables Mimecast to scale efficiently and provision services quickly, delivering an excellent customer experience even as we grow. As I mentioned, our architecture gives us an innovation advantage. And we are able to quickly respond to the rapidly evolving threat landscape our customers are facing.

In the fourth quarter Mimecast announced Impersonation Protect, a new component to our targeted threat protection service. Impersonation Protect is the first service available to tackle the growing threat from business email compromise attacks, also called CEO fraud, or whaling. This type of attack bypasses competitors' traditional security gateways, as there is no malware to detect.

Protecting employees in today's threat landscape requires technology based on modern architecture that goes beyond traditional email security. Without the right protection, organizations are losing millions of dollars in exposing their data to fraudsters. So demand for our security solutions that can identify and block advanced threats of this nature continues to grow.

Throughout 2016 Mimecast benefited from strong demand for our advanced threat solutions. However, like our customer growth, growth of our targeted threat protection accelerated in the fourth quarter, as over 1,000 customers began using the service. Now 19% of our customer base is using targeted threat protection. That's up sharply from the 13% that we reported in the third quarter. This acceleration is a clear indicator of the significant demand for the service from both new and existing customers. In total over 3,000 customers have purchased targeted threat protection.

Sales of our archiving services have benefited from our positioning in Gardner's 2015 Magic Quadrant for Enterprise Information Archiving. Gartner placed Mimecast highest in the Leaders Quadrant for our ability to execute, we believe based on our technical expertise, customer support, search and discovery performance, ease-of-use, and our administrative and compliance experience.

Now, while we continue to grow our customer base, we also take great care to provide all of our customers with best-in-class service. This is key to our customer retention rate. And customer retention is key to our growth.

During the last quarter we reported 109% revenue retention rate. The increase in our retention rate from 107% in the prior year was driven by sales of a broad range of services, with targeted threat protection being especially robust. We have a long history of strong customer retention. And the fourth quarter results show that both new and existing customers are increasingly turning to Mimecast.

In the fourth quarter I am pleased to announce that 68% of our new customers were signed through the channel. This is an increase over the 62% we reported in the prior year, reflecting the impact of our channel expansion strategy. Mimecast's strong, committed and growing network of partners and distributors globally continues to enhance our go-to-market strategy.

In the fourth quarter Mimecast enhanced our leadership team with the addition of two senior executives. Alex Bender joined to lead our Global Marketing Team and Mark Basler oversees our Product Management function. Alex' deep domain expertise in information security marketing and advertising will be pivotal in driving product demand and showcasing the value of Mimecast's cyber resilience, information governance and advanced security services.

Mark Basler's strong commitment to a customer-driven road map aligns him perfectly with Mimecast as we innovate to meet the needs of our 18,000 customers worldwide. We see the acceleration in customer growth observed in the fourth quarter as evidence that our increased investment in sales and marketing resource is reaching the market at the right time with the right products and services.

Also in the fourth quarter Mimecast completed an independent Health Insurance Portability and Accountability Act, HIPA, security compliance assessment. We believe this independent security compliance assessment will enable Mimecast to meet the industry-specific needs of a greater audience of customers, especially in healthcare in North America.

Mimecast also continues to benefit from the overall transition of enterprise IT to the cloud, in particular Microsoft Office 365. As customers move their mailboxes to hosted providers, they are looking for additional capabilities to complement the base level solutions provided by Microsoft or Google, for example, as well as seeking ways to mitigate the risk that the single-vendor dependency creates. Many specifically seek a continuity service to ensure email continues to flow in the event of downtime. And this is particularly important for customers of Office 365.

As Office 365 adoption grows, the accumulating risk from downtime also grows. Increasingly more of a customer supply chain and business ecosystem is dependent on the same primary email provider. Downtime to the customer is likely to mean downtime to their broader supply chain too with potential unpredictable and much more disruptive consequences than if they had experienced downtown in isolation with an on-premises system. So Mimecast protects customers' move to Office 365 here.

Many organizations also seek additional layers of advanced security to enhance what's available from Office 365. Because no matter how effective Microsoft offerings are on any given day, Office 365 security is unavoidably a single and consistent attack surface in front of an asset that is highly alluring to a broad range of skilled and well resourced adversaries.

The risk is that a successful attack on one tenant means a potentially successful attack on many others, too. Being protected in exactly the same way as everyone else is on Office 365 is exposure that many risk-averse organizations do not wish for. So adding a third-party best-of-breed email security partner, like Mimecast, is proving popular with Office 365 customers. Today we protect thousands of organizations in this way.

When it comes to archiving and data protection, Mimecast provides support for a broad number of use cases in the e-discovery and compliance arena. Safely preserving data for the long term, however, is the key requirement that underpins all of these use cases. Many customers are required to keep data for over seven years. And many simply choose to keep it in perpetuity.

While Microsoft Exchange database files may expand to accommodate large volumes of data, either on the customer's own networks or at Office 365 in an archive configuration, this is not, in our view, the ideal exclusive strategy for long-term data retention. Several things can conspire to damage or destroy important data, especially when the data is stored in large multi-terabyte database files. Human error, technical failure and malicious intent can irreparably damaged data. Also we've seen recently how the rise in crypto-locker and other ransomware attacks has increased the importance of having independent and viable copies of data as a defense.

So customers are adding Mimecast as a long-term data preservation and data resilience partner to Office 365. So the move to Office 365 continues to be a positive for Mimecast. It's acted as a catalyst for customers to purchase our integrated suite as they seek a cloud-only solution that works seamlessly with Office 365 to give them the critical additional protection that they need and at a price that is affordable.

In the third quarter 12% of our customers were using Mimecast services in conjunction with Office 365. Now in the fourth quarter we saw approximately 14% of our customers using our services to protect Office 365, representing more than 600 customers choosing Mimecast to protect their Office 365 investment in the fourth quarter alone.

We're often asked by investors about competition in the market and our success in winning over competitors. I will discuss with you some of the reasons why Mimecast has won deals and provide some color around competitive situations. First let's have a look at the reasons a consumer packaged goods company with about 3,000 employees chose to replace a competing technology with Mimecast.

It came down to our ability to better protect against targeted threats with our targeted threat protection solution. The quick and easy implementation process supported by Mimecast engineers, and the easier management with rich dashboards providing real-time visibility of threats and a better overall value and lower total cost of ownership. Next there's an international entertainment company of 5,500 employees moving to a hosted email solution. Mimecast won this engagement over a leading competitor because of the completeness and effectiveness of our email security solution for Office 365.

So initially this customer was just looking to add a layer of security to Office 365. But after reviewing Mimecast's full suite, and in particular our archiving solutions, they recognized how our unified suite could help them solve a range of additional problems. And that was strategic. Mimecast's comprehensive solution enabled this customer to enhance their overall cyber resilience strategy. And that was difficult for our competitor to match.

Finally we have a healthcare provider with over 6,700 employees and offices in 31 US states. This customer was using Intel McAfee's MX Logic solution and was looking to replace this aged technology. Now the customer was suffering from attacks with weaponized attachments and needed a solution to stop nested zip files from entering the organization. Mimecast's targeted threat protection attachment protect service was evaluated alongside a competitor's sandboxing-only technology. Mimecast's ability to convert attachments and deliver safe copies in real-time without the delay of traditional sandboxing was a very important contributor to the customer's decision to use Mimecast.

For some time we have had success in winning customers from Intel McAfee security solution, and this trend continued in the fourth quarter. We are seeing an opportunity as the install base of McAfee users reevaluate their email security needs, and are also considering how continuity and archive play into the competitiveness of their required solutions.

So in summary, our fourth-quarter results topped a record year for Mimecast. In 2016 thousands of organizations adopted Mimecast's industry-leading security, continuity and archiving services, all developed in-house by Mimecast engineers and built on Mime OS, our proprietary single code base multi-tenant pure cloud architecture.

I would like to take this opportunity to thank all of our customers who have entrusted Mimecast to protect their employees, their data, and their business operations. Thank you. And likewise, I would like to thank our staff globally who've remained so committed to our customer experience and to our own success through out this year. Thank you, too.

Looking forward to 2017, Mimecast will continue to focus on our customers and delivering services that protect them from advanced and emerging threats. In addition, investments we are making in research and development will allow Mimecast to deliver new services that protect customer information and enhance the value of it using the power of our architecture. The investments we are making in sales and marketing will allow Mimecast to continue to expand our customer base as we reach the market with industry-leading solutions and service. This sets the stage for what we believe will be another great year for Mimecast. Now with that, let me turn it over to CFO Peter Campbell.

Thank you, Peter. Q4 was a great finish to a record year for the Company. Revenue growth exceeded the high end of our guidance range and we continue to generate significant adjusted EBITDA, all while successfully investing for growth. Mimecast's better than expected revenue was driven by strong renewal activity, increased upsell into our existing customer base, and the addition of 1,800 new customers across all geographies. Customer growth accelerated across all regions, and was especially strong in North America, our largest region.

Fourth-quarter revenue grew 29% on a constant currency basis year over year to $36.9 million, above our guided range of $35.2 million to $35.8 million. Full-year 2016 revenue grew 30% on a constant currency basis to $141.8 million, beating the top end of the range we guided to last quarter by just over $1 million. Turning to fourth quarter, revenue grew 20% on an as-reported basis over the fourth quarter of 2015. Headwinds in the South African rand and the British pound negatively impacted our growth by $1.8 million and $0.8 million respectively. In total, foreign exchange impacted revenue by $2.7 million.

Our total customer count is now over 18,000. The investments we have made in sales and marketing have created increased awareness in the market for our leading-edge technology and contributed to the sharp acceleration in customer additions in the fourth quarter. We have not yet seen the full benefit of revenue recognition from these customers. The fact that we recognize revenue ratable means that strong customer additions this quarter will start to fully contribute to revenue next quarter.

With continued customer growth, the North American market remained our strongest, achieving revenue growth of 40% for the year. Our US region now represents 43% of our global revenue, up from 38% for the same quarter in the prior year.

This quarter we experienced 109% revenue retention rate, ahead of the 107% realized in the fourth quarter of 2015. This improvement was a combination of maintaining our exceptionally strong customer retention and continued growth in upsell, driven by the sales of our targeted threat protection product. It is a significant gain, representing very strong renewals in our existing base and sales of additional products into that base.

We ended the fourth quarter with 19% of our customers having purchased target threat protection, an increase from the 13% in the prior quarter. As Pete mentioned, over 1,000 new customers bought the service. And we now have more than 3,000 customers who have purchased it. We still have significant room to upsell into our existing base with this and other products, and expect to see our customers invest in these advanced technologies in the coming year. In fact, we could double our revenue by just selling our current products into our existing customer base.

You may recall from our IPO road show that once we acquire a customer we keep them for a very long time. Our unit economics are very compelling. As customers buy additional services the margin profile of that customer increases, as does the likelihood of renewal. As of March 31, 2016 we now have close to 25% of customers buying four or more products from us. On average, our customers have 2.6 products, up from the 2.5 products on average we spoke about in our F1 in November.

Now let's turn to expenses and profitability. For the fourth quarter and FY16, we recognized a 70% gross profit percentage, consistent with the 70% recognized in the same quarter in the prior year and an improvement over the 68% reported in FY15. Gross margin gains came from investments in our unique pure cloud architecture and efficiencies in our ability to service our customer base. These margin improvements occurred during a year where were we added a record 4,200 customers. Gross margin can fluctuate due to the addition of hardware and employees to serve our growing customer base. We anticipate our gross margin will remain in the 69% to 71% range over the next several quarters.

Fourth-quarter operating expenses of $29.8 million are consistent with the third-quarter levels, but remain elevated as a percentage of revenue as we invest in our direct sales force, marketing initiatives and R&D aimed at the creation of new services to drive future growth. I should note that the large volume of customers we signed in the fourth quarter and the significant additional sales to existing customers resulted in commission expense in the period being $0.6 million higher than expected.

Our investments in sales and marketing are paying off. We're in the market with the right services at the right time. And these investments are increasing awareness of Mimecast and enabling us to capture more of the very large market opportunity in front of us. While we recognize the enormous opportunity to grow our business, we have been mindful to extend our resources in a sustainable way. This measured investment approach should enable us to grow in a large market for a very long time. As a percentage of revenue, we expect to maintain this level of investment for the first half of FY17, and anticipate seeing gradual improvement sequentially.

Adjusted EBITDA in the fourth quarter was $0.5 million, in the middle of the $0.1 million to $1 million guided range. This includes the impact of the higher commission expense mentioned earlier. Adjusted EBITDA margin was 1.3%, which reflects our investments in R&D and sales and marketing. For FY16 adjusted EBITDA was $15.8 million. I anticipate adjusted EBITDA will remain positive in each quarter of FY17, even as we continue to invest behind our go-to-market expansion. Our three to five year target for adjusted EBITDA margins is unchanged and remains in the range of 20% to 22%.

For the fourth quarter GAAP net loss was $1.9 million, or $0.04 per basic and diluted share based on 54.2 million weighted average shares outstanding. For FY16 GAAP net loss was $3.2 million, or $0.08 per share based on 40.8 million weighted average shares outstanding. The difference in weighted share calculations in the quarter and year is a result of the conversion of preferred shares to common shares and the issuance of new shares, both associated with our IPO on November 18. Our non-GAAP net loss, which reflects our GAAP net loss exclusive of the effects of stock option expense, was nil, or $0 per basic share for the fourth quarter. For FY16 our non-GAAP net income was $4.6 million or $0.11 per share.

Looking to cash flow. During the fourth quarter we generated $1.9 million in free cash flow and for FY16 free cash flow was $10.4 million. Reviewing the balance sheet, as of March 31, Mimecast had $106 million in cash and cash equivalents. Total debt was $6.9 million at the close of the year, of which $4.9 million represents the current portion of debt.

Now I would like to turn the focus to guidance for our first quarter of FY17 and our outlook for the full year. Regarding revenue for the first quarter of 2017, we expect revenue to grow 24% to 26% year over year in constant currency, or to be in the range of $39.5 million to $39.9 million. Our first-quarter revenue guidance is based on exchange rates as of April 30, and includes a negative $1.8 million impact from the strengthening of the US dollar compared to the comparable period in the prior year as our international customers renew their subscriptions at generally consistent pricing, but translated into dollars at a more favorable exchange rate.

Approximately $1 million of this impact is related to the South African rand and $0.8 million is related to the British pound. Regarding adjusted EBITDA, we expect this to be in the range of $0.3 million to $1.4 million for the first quarter. This is consistent with our continued strategy of investing in R&D and the build-out of our sales and marketing organization globally in the current quarter.

Now from a full-year perspective, we expect revenue to grow between 22% and 26% year over year in constant currency, and to be in the range of $170.2 million to $175.9 million. At current exchange rates, we are seeing a $3.2 million impact in our revenue forecast for the full year. Approximately $1 million of this impact relates to the South African rand and $2.2 million is related to the British pound.

In summary, we had a very strong close to a great year. Our revenue retention of 109% show the confidence customers have in our ability to protect them and their data from the most advanced threats. I am especially proud of our retention rate, which is an indication we are delivering a high-value service. The addition of 1,800 new customers in the quarter and 4,200 during the year is evidence of the momentum we have seen where customers of all sizes across the globe are choosing Mimecast to be the protectors of their most important assets. We are in the early stages of penetrating a very large market opportunity.

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 Instructions)

John DiFucci, Jefferies.

Thank you. I have a question for Peter Campbell first and then a follow-up for Peter Bauer. So Peter, the top-line this quarter, really strong, nice uptick. We look at -- we try to calculate new business and retention rates, really unseen, especially given your customer base. And even in this quarter your bottom line was really impressive, regardless of how you measure it.

But your guidance for adjusted EBITDA for the first quarter was a bit below what we were looking for. So, and I know you say you're going to build out R&D and sales and marketing, should we be expecting to see more product releases like Impersonation Protect? Or can you help us out a little bit more with that? And how we should think about this throughout the year?

Sure, sure. Thanks John. So as we said, a great year for us and another good quarter, strong growth, strong adjusted EBITDA. I know you are saying that into Q1 it's a little bit lower than you expected. But it is higher than we guided to this quarter and as you know, we are impacted by $600,000 related to commission expense from higher than expected sales in this quarter. And so then we have upticked that into Q1.

I would expect that we are going to continue to invest in R&D. We're going to continue to invest in sales and marketing. This is in line with what I said last quarter and at the IPO. You will expect to see that increase. Our adjusted EBITDA will start to increase in the second quarter, and even more in the third and fourth quarter of the year.

With respect to new product additions, I think we'll start to see more investment in that area. As you know, investments in one quarter can start to deliver benefits further on. But I will leave that off to Pete and let him answer the rest of that question.

Yes, great. Thanks. John, was that the question you intended for me to cover, just on the product road map piece?

No. I actually had another follow-up for you Peter.

Okay, no problem. We can just touch on that very quickly. But absolutely, as Pete said, both investments in R&D go into improvement of our current products set improvement of engineering efficiencies to give us a better yield, a better return on our CapEx over time, as well as exploring some interesting adjacent opportunities to the current work that we do. We see particularly as customers are moving more and more of their IT to the cloud and getting into what we talk about as this post-infrastructure era, a number of new types of problems start to emerge. So we're really interested in those in our R&D team and our product team has got things that they are looking at specifically that would yield additional product modules over time. But we'll talk more to that in the future as we are ready.

Okay. So we should expect adjusted EBITDA to ramp throughout the year. And we will wait on the products. But the follow-up I had for you Peter, appreciate you going through a lot of information on Office 365, and we hear you on that. And you mentioned you had an uptick, 14% of your customers are on it versus 12% last quarter, which only 2%, but that's quarter to quarter which sounds pretty -- that's meaningful. And over 600 of the -- I want to make sure I understand that. Over 600 of the 1800 new customers, so over one-third of your new customers, are on Office 365. Is that -- I think that's what you are saying. So, I guess, when you talk about --

just let me clarify there. The increases was on the existing customer base. So at the end of the third quarter we talk about 12%, that was of the 16,200. And when we are looking at the 14%, that's on the total 18,000. So those 600 new customers are both new and existing customers. We're certainly seeing a lot of interest, both on the new and the existing customers for that.

Okay. Thank you for that clarification, Pete. But when you talk about Office 365 as an opportunity, but listen, and I know you guys hear it because we hear it, too. The biggest pushback we hear from Mimecast is, Office 365 is also a threat. And it is thought of as a risk, especially in the mid-market and below.

So can you talk to us a little bit about why there shouldn't be more of a risk here, especially, again in the mid-market and below? And I don't know if you have any data points that you can quote that indicates smaller customers are just not settling for just a Microsoft-only solution if they migrate? Or even if you don't have it, maybe you'd think about in the future providing it, if you can grab it, customers that -- existing customers that perhaps do migrate to Office 365, and even especially in the lower end of, what they actually do with Mimecast after they migrate? Is there anything to talk about?

Yes, that's great. What we find really interesting is that's really customers across all segments that are leveraging us with Office 365. So that 14% is pretty consistent across very small customers, medium-size, and then larger customers as well. In fact, for us more than 2000 customers less than 500 seats are using us to protect Office 365.

So I think the solution has universal appeal. And I think for all the reasons that I mentioned in the script itself, that's what's driving demand. It's the security issues, it's the data diversity and data protection issues, it's uptime assurance that they are seeking, it is that combination. And I think because we deliver this in such a simplified form factor as a fully integrated suite and at a price point that's really affordable and compelling, I think that drives that appeal at the low end of the market and that stickiness at the low end of the market. But that also scales up and meets the needs of medium-size and larger organizations too, with their Office 365 accounts.

That makes sense, Peter. I just want to make sure I get what you said, because I think the concern is more at the lower end of the market they might be just satisfied with Microsoft could provide. You said over 2000 customers, with how many seats, less than how many?

Less than 500 seats.

Okay. Great. Thanks. Nice job, guys. Thanks.

Thanks John.

Saket Kalia, Barclays.

Hey, guys. Thanks for taking my questions here. Nice quarter.

Hey, Saket. Thanks.

First let's start with the customer additions, because well stronger than any of us were expecting. A lot more than what you've done historically. So the question is, how many of those are maybe coming from targeted threat protection only customers, because it sounds like that was clearly stronger than what you are expecting, versus customers that are buying maybe the stable security and archiving packages? If there is a way to quantify that, or even anecdotally.

Sure. So as you said, we saw some great growth there as well. So 1800 new customers during the quarter. It was a very strong quarter for us. We saw that the TTP sales increased from 13% of our base to 19% of our base.

So we're seeing a lot of interest in that product, not only from existing customers but from new customers as well. It's often a point of entry for customers onto our service. So generally when they do buy that product, they often buy the base level security with us. So we see attachments often of not only the targeted threat protection but also security with it as well.

As we do, we often sell in bundles as well and when we are dealing with a customer, they will buy -- they may come on for one product, but they may want to buy other products along with that. They may come on for security and then they may want continuity and archiving as well. And we sell them as at the outset. So we're seeing a little bit of that, as well. But mostly that TTP comes along with security. And so we're seeing a lot of the -- we really that's the tailwind for us. We also are looking at our upsell opportunity down the road. There's a lot of additional opportunity there with respect to continuity and archiving and other products in the future.

Got it. Next question. Obviously, we're all talking about Office 365. And you dug into the reasons for customers adopting Mimecast as well on top of that. The question is, do you see any difference in what products those 365 customers attach versus those that have an on-premise exchange? In other words, is there any difference in the average order value for a 365 customer versus an exchange customer?

Saket, that's a great question. And obviously 365 is not new to us. So we have been working with customers with Office 365 now for a couple of years. And in the early runnings we were very curious about this. What is buying behavior, what is -- what are people going to lean towards and how are they going to think about price points.

And so we did some test marketing with different SKUs, with different price points. And what we found is that customers continue to purchase our standard SKUs, our standard products. And consistently over time have continued to pay exactly the same price points for our solution, whether they are using Office 365 or whether they are running their exchange infrastructures themselves. So it's been very smooth and very consistent from that point of view.

And just to add to that, Saket, we are seeing customers come on in 365, they may come on with security or security and TTP, or they may come on with archiving, and sometimes they come on with a full suite. So the way in which we see them onboarding is typical to the way we see our other non-Office 365 customers onboarding as well. So that maintains a fairly stable ALV with respect to that.

Got it. Very helpful. If I could just sneak one in, just housekeeping-wise. One other thing that I think is important. Could you just remind us, Peter Campbell, just remind us if you expense sales commissions upfront or if they are recognized ratably along with the revenue?

Yes, that's a good question. We expensed them upfront, which is why I gave a little bit of color on that in my comments earlier. So that $600,000, that relates to commission expense generated in the period. And we expense that in the period in which it incurs.

Got it. That's it for me, guys. Thanks.

Thanks, Saket.

Heather Bellini, Goldman Sachs.

This is Jack Kilgallen filling in for Heather. Thanks for taking the question. First, on the 1800 new customers that you added in the quarter. I guess, how did the average customer size compare to what you did last quarter?

That's a good question, Jack. So the 1800 customers were across all segments and fairly similar to what we talked about at the IPO and what we saw last quarter. So we are seeing a lot of customers in the zero to 500 band, but also a lot in the 500 and 7500, and also in the 7500 and above. So we're seeing them in a fairly similar breakdown across each of those segments.

Great. And then just a quick follow-up. I guess, I would expect given the strong customer adds number for the AOV to tick down compared to last quarter, or compared to past quarters. But that is obviously offset by the strong revenue retention in the attached products like TTP. So I guess am I thinking about that right? Would that be a sequential sort of tick-down sequentially, given the strength?

I think that's right. So I would add one thing, that in terms of looking at the AOV on a constant currency basis, I would maintain it to what we've said before. And I know we don't report AOV, but we did say that if we saw some changes we would tell you about it. So on a constant currency basis, we are seeing that maintain.

On an actual currency basis, we're seeing about $100 to $200, about $150 decrease in the AOV with respect to the currency movements. So when you look at it on an actual basis, that's coming down very little bit with respect to currencies. But with respect to what we're selling and the prices that we're seeing across those bands as well as the upsell that we are seeing on a constant currency basis, it is maintained.

That helps. Thank you.

Thanks, Jack.

Shaul Eyal, Oppenheimer.

Thank you. Hi. Good afternoon, guys. Congrats on very solid set of results and guidance. First question for Peter Bauer, and Peter Campbell can assist here as well, to further beat the impressive customer addition points, again really very nice progress on that, and that 1800 new customers this quarter. If we had to break this 1800 number into the SMBs, mid-level, with anywhere between 500 and 7500 employees, and I think you might have mentioned that during the prior question. Then the next enterprise tier, large organizations, is it still the 40/50/10 kind of breakdown? I don't know if you can quantify how many high-end, enterprise-level you had this quarter.

Hi, Shaul. Yes, this is Peter Campbell. I just thought I would take the first part of that. So when we went out on the road in November we talked about 10% and customers north of 7500 seats, 48%, let's say, in 500 to 7500, and 42% below of revenue in each of those bands. And we are seeing, with respect to the customer adds that we've seen, we're seeing a very similar mix, 10, 48, and 42. It's not noticeably changing. So we expect that to continue.

And when you look at the number of customers we added, we added a lot of customers in the quarter. We added 1800, which is very significant new customer additions for us. You're seeing a revenue split fairly similar across each of those bands related to those customers.

Got it. You've mentioned 68% were signed through the channel. Good work on that front. Can you talk to us a little bit about your evolving relations with [Avenia], HP, Data Dimensions? How is that coming along?

Absolutely. Those progress well. We continue to work with those partners. I don't think we have anything significant right now to report on in terms of changes in those relationships.

But we continue to work with those and with our other partners in the larger account opportunity space. And we continue to build out our [breadth] channel partnership network on a global basis at the same time. So we're happy with progress. We haven't made channel a specific theme of this particular set of announcements. But you can expect to hear more from us in time on our broader channel strategy and progress.

That is super. Thank you so much, and good luck. Congrats.

Thank you.

Matt Hedberg, RBC Capital Markets.

Thanks for taking my questions. Peter B, has there been -- I think there's been talk of additional European breach notification going into effect maybe 2017. Assuming something like that goes through, can you talk about how additional regulation could potentially help you in that geo?

Yes. Matt, that's a fair point. I think we've historically experienced a slight difference in tonality around the perception of these threats between the two different geographies. A greater sense of urgency in the North American market. And I think that's because the breach notification rules, the knock-on effect of the ripple effect of those is pretty strong media coverage of these incidences. And we see less of that, or we've seen less of that in Europe.

So I think that we absolutely expect that as more publicity around these breaches happen in the European marketplace, so people wanting to be extra proactive about having solutions in place and having dotted the i's and crossed the t's on solutions that can prevent these attacks from starting. And with email having been the Achilles heel in more than 98% of these attacks, we think that we are very well positioned as a partner to be able to help these customers.

So, yes. We are not excited that these attacks are happening. But I think that the disclosure of them in Europe is a good thing because it means that there is less places to hide when data has been breached or lost. And that in turn means that customers have to be a lot more responsible about making these investments. And clearly we are right here to be able to help them with preventing these attacks.

That's very helpful. And in your prepared remarks you talk about [MX's] end-of-life as a potential opportunity. Is there a way for you to size that opportunity, maybe relative to some of the other share shifts from some of the legacy email security vendors out there today?

Matt, that is also something that we do look at quite closely. I think we would agree with our peers in the marketplace. Size it in the $70 million, $80 million, to $100 million space. I think that's maybe a little bit smaller than what the broader Postini opportunity was back in the day. But I think that the really interesting thing for us is that on a -- that is the value on pretty much a kind of direct security swap-out basis.

I think that the pile is growing substantially with advanced threat protection products, like our TDP solution. So there's an opportunity to get expansion within that. And then also, as you know, we have a broader portfolio of solutions with our continuity and our archiving offering that are really easy for customers to adopt and to purchase in bundles. So we feel that with our track record of driving adoption of these products with our customers that we can do very well dollar for dollar on any McAfee conversions that we are achieving.

Great. Thanks a lot, guys.

Thanks, Matt.

(Operator Instructions)

That concludes our question-and-answer session for today. I would like to turn the conference back over to Peter Bauer for any closing comments.

Folks, thank you very much for joining us again today, our second ever earnings call and our first earnings call with a full year of financials. We've enjoyed interacting with you. And thanks once again for your interest. And we look forward to speaking again at the end of Q1. Thanks folks.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.