Mimecast Limited (MIME) 2017 Q3 法說會逐字稿

Welcome to Mimecast's earnings call for the fiscal third quarter of 2017 ended December 31st, 2016. 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 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 included in our press release and further defined in Mimecast's most recent Form 20-F 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 February 9th, 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?

Thank you, Rob. Good evening, everyone, and thank you, all, for joining the call today. As a team, we're very excited by the continued momentum of the business, and we're seeing increased awareness of Mimecast in the market and strong demands for our products.

We're signing record numbers of new clients, and our retention of existing customers expanded again this quarter. This growth has once again underlined the value of our long-term investment in an integrated multiproduct suite with high-quality enterprise-grade capabilities. And that's built on a natively multitenant architecture.

So, our ability to rapidly onboard, protect, and simplify IT for thousands of additional customers this last quarter once again showed our ability to scale. And we'll continue to make investments in our platform as we grow and seek to solve even more problems for our customers.

I'd like to provide the headline numbers and discuss in more detail some of the drivers of our momentum. A little later on the call, Peter Campbell will delve a bit deeper into the numbers and show how this momentum is translating into real value for our customers and shareholders.

We exceeded the high end of both our revenue and adjusted EBITDA guidance. Our revenue growth rate accelerated in the third quarter to 30% as reported and 39% adjusted for currency. Now, this acceleration in our revenue growth rate is the result of several successive quarters of strong customer additions.

In the third quarter, 3,100 new customers subscribed to one or more of the seven integrated products on our platform. This increases our expansion opportunity across our now 24,900 customers and gives us confidence our growth can continue into future periods.

In addition to being very successful at attracting new customers, our revenue retention rate again increased to 112%, reflecting both our high customer retention and the tendency of our customers to buy additional products over time. Now, we believe our high customer retention is a reflection of the investments we've made over many years in our platform and Mime OS. The long arc of development with a consistent goal and architectural philosophy has resulted in a platform that's both efficient and scalable to operate, powerful to innovate on, and a delight for our customers to use.

Today, we process over 246 million emails every day, and we store over 25 petabytes of email data for our customers, looking after millions of end users globally. Now, only a handful of email-related technology companies can operate at a similar scale. We're continuously storing more data while simultaneously showing a long trend towards even faster access speeds. We offer the industry's fastest archive search speeds at petabyte scale.

Now, recently, we introduced new features to our continuity offering. This is a service that keeps email flowing to users when their primary mail service, such as Microsoft Exchange, Office365, or the G Suite is offline.

Now, we announced Continuity Event Manager to provide our customers with better visibility of the availability and performance of these mission-critical email systems. Continuity event management provides an alert notification with the ability to use a single click to keep their staff productive during either planned or unplanned downtime.

And we recently published research that evaluated customers using Mimecast continuity services. Customers who'd had a continuity event in 2016, 11% of those users invoked the service for a period lasting longer than 24 hours. This represents 123 companies who would otherwise have had email downtime in 2016 that lasted more than 24 hours, really an eternity in today's just-in-time world, for those companies, a clear illustration of the value of the service.

Now, Mimecast for the first time acquired technology in the third quarter with the purchase of iSheriff. With this small acquisition, Mimecast added a team of skilled software engineers focused on cybersecurity. We're rapidly integrating this group's threat detection and threat intelligence capabilities into our platform to benefit all our customers and further enhance our Targeted Threat Protection, or TTP, offering.

This quarter, I'm also very pleased to say that Mimecast has been awarded certification to the ISO 22301:2012 standard. This is the international standard for business continuity management systems issued by Certification Europe. The ISO 22301 standard stipulates the requirements for a management system to protect against, reduce the likelihood of, and ensure a business recovers from disruptive incidents. This international standard is designed to keep businesses operational during the most challenging and unexpected circumstances, such as natural disasters, IT failures, supply chain disruptions, government interventions, or other threats.

Now, leading industry research recently recognized Mimecast's strength, too. Gartner named Mimecast a leader with both the greatest degree of completeness of vision and the highest ability to execute in their Magic Quadrant for enterprise information archiving. The Radicati Group named Mimecast a top player in their most recent Secure Email Gateway report.

Mimecast was also recognized as one of the highest rated public Cloud computing companies to work for in a new list released by Battery Ventures and Glassdoor. The list highlights 25 publicly traded B2B Cloud companies where employees report the highest levels of satisfaction at work. Mimecast company rating of 4.0 bested the broader average across Glassdoor of 3.3.

Employee satisfaction is an important part of our formula as a business. And we believe satisfied employees produce a better customer experience. High employee satisfaction also helps Mimecast to retain and attract new talent.

One of Mimecast's key differentiators is our seamless integration into the Microsoft stack, both Microsoft's on-premise as well as their Cloud offerings. Now, most of our customers use Microsoft Outlook. And through our product called Mimecast for Outlook, our Cloud services extend the capabilities of Outlook to enhance security, provide superior switch capabilities, and of course to keep users productive when Exchange or Office365 is unavailable.

Now, to this end, we launched Mimecast for Outlook version 7 in the quarter. And this upgrade offers improved end user experience by providing better search capabilities and enhanced security management.

Two quarters ago, we officially launched Mimecaster Central, a community for customers, partners, and technical professionals to share best practices. I'm excited to note that Mimecaster Central has now grown into a community of almost 25,000 registered members. In fact, in Q3, we added 2,000 new members. Now, while we initially envisioned the forum as a resource for customers, it's grown to be a great tool for us to better understand our customers' needs and to drive our product innovation.

As you know, our channel partnerships are a very important part of our go-to-market strategy globally. In this last quarter, we grew our channel business meaningfully, and we expanded our senior management team with the addition of Eli Kalil, who joined us as Senior Vice President of Global Channels.

Most recently, Eli was the Vice President of Enterprise Security Global Channel Partner Sales for Hewlett-Packard Enterprise. Now, in this newly created global position, Eli will be responsible for the strategy and implementation of all Mimecast channel programs. We're thrilled to have Eli's skills and experience on our team.

The growth of our channel relationships represents real opportunity for Mimecast to continue to build the momentum of our channel business. And we see that as an integral part of our opportunity to serve tens or even hundreds of thousands of organizations globally.

In addition to Eli, we have added talent in every department across the Company. As a result of this growth, we're now exceeding our current facility's capacity, especially in our North American operations. In the coming quarters, I look forward to sharing with you the results of our search for additional space to further our growth as we progress towards our 2020 goals.

Office365 adoption is in our view a long-term trend in the market and continues to be a catalyst for the adoption of Mimecast services. This quarter, customers choosing Mimecast to protect their Office365 investments has increased from 17% last quarter to 19% this quarter. By providing layers of security, an offsite data archive, and a solution for uptime assurance, Mimecast makes customers even more successful and secure with Office365.

TTP, Targeted Threat Protection. Now, this continues to be a big driver of demand for us, as organizations continue to be challenged by determined and innovative attackers. Business email compromise, ransomware, and spear phishing aimed at stealing employee credential have been real menaces for organizations over the past quarter.

Our ability to protect customers from these diverse and highly effective threats has been central to our success. We continue to innovate within our TTP product family and are excited about some of the upcoming security innovations that we will be sharing with customers. TTP is a powerful new customer acquisition tool as well as a large upsell opportunity. Adoption of our TTP offering grew to 33% of our customers, up from 28% in the second quarter.

Now, I'll share with you some more color around the reasons customers of all sizes across industries and around the globe are choosing Mimecast in greater numbers. Of our top 20 deals in Q3, two are government entities, three are universities, and four are large healthcare organizations. And all of these deals were over six figures as we again improved our success in this larger enterprise segment.

Firstly, a healthcare company deployed Mimecast Targeted Threat Protection for their 50,000 users on Office365. Concerned with a number of phishing attacks arriving on their network, they deployed a Mimecast proof of concept, a trial that highlighted the threats their current solution was not protecting them from. Mimecast's ability to provide better protection and our tight integration to complement Office365 were deciding factors in this engagement.

Then one of the world's largest California-based wineries was using on-premise equipment from McAfee and determined a need for better defenses against email-borne cyber-threats. Additionally, this customer was looking for a single Cloud-based repository from which it could run rapid e-discovery searches and manage legal holds. Mimecast's ability to do both, provide better secure email and provide a solution for long-term data management for their global workforce, this won the engagement.

A large Australian university using a competitive email security solution faced a number of issues from both traditional spear phishing and whaling attacks across the staff network and university mailboxes. The customer was looking for a Cloud service that would provide more agility, functionality, and of course, better security. So, Mimecast solved the customer's problems by delivering locally based services, which also ensured compliance with their data sovereignty requirements.

Then an American university was being barraged by business email compromise attacks. And they looked for better protection for their 7,000 users. Prior to Mimecast, the university was using a competitive on-premises email security appliance. This university needed protection for mailboxes running on Microsoft Exchange on-premise hosted on Office365 and also some users on Google. Mimecast's ability to deliver a true Cloud solution for all users across all platforms in a single unified and easy-to-deploy managed Cloud solution won the day.

One of Africa's largest freight logistics companies required a better solution to combat malicious attachments and business email compromise attacks. Mimecast's Targeted Threat Protection was deployed as a proof of concept. And after analyzing the results of this POC, the customer was confident with the protection TTP offered and moved quickly to deploy the solution to over 29,000 employees.

So, in summary, we have made steady progress towards our goal of being the leading provider of integrated easy-to-use security and cyber-resilience capabilities for organizations large and small. Our brand awareness is growing globally, and our channel relationships are strengthening. We're increasing recognized as an industry leader by third-party research and certifications. And looking back at this quarter, we're exceptionally pleased that a record number of new customers chose Mimecast to protect their most valuable corporate communications and data.

Our customer base continued to be delighted with our solutions and continued this trend of adding additional services to their subscriptions. And of course, our financial metrics continue to trend upward ahead of plan, and our team is performing very well.

So, I'm pleased to be sharing this progress with you today and now would like to hand you over to Peter Campbell, our CFO, to take you through the numbers in more detail.

Thank you, Peter. Q3 was another great quarter for the Company. Revenue growth and adjusted EBITDA continued to exceed the high end of our guidance range. Strong net new customer additions across all geographies, best-in-class renewal activity, and another quarter of increased upsell into our existing customer base combined to create another record quarter for us.

Third quarter revenue was $48.3 million, above our guided range of $44.9 million to $45.4 million. I'm pleased to report that our revenue growth once again accelerated sequentially. Revenue grew 30% on an as-reported basis and 39% in constant currency over the third quarter of 2016.

Headwinds in the British pound negatively affected our growth, resulting in a foreign exchange impact on revenue of $3.3 million.

We saw strength in all geographies and across all customer segments. Our net new customer additions reached record highs this quarter as we added another 3,100 customers, up from the 1,900 customers we added last quarter. We now serve 24,900 customers worldwide. Customer additions increased across all segments this quarter. Additionally, we saw higher order values from new customers in each segment, as we had continued success selling multiple products to our customers at the outset.

We noted on our last call that we anticipated a decline in the number of total customers coming to us from McAfee as their Cloud product reached end of life. However, I may have spoken too soon as we again saw a large number of customers moving off McAfee solutions this quarter.

As Peter Bauer noted in his customers stories, we saw several large customer wins from on-premise McAfee migrations. Despite shifting of resources away from the microcustomer segment, we continue to see a large number of customers coming to Mimecast from McAfee's hosted solutions. As a result of these customers and the ones I noted last quarter, our average order value across our base declined to approximately 8,100.

The North American market continues to be very strong for Mimecast. North American revenue grew by 48% in Q3 as compared to the same period a year ago. The region now represents half of our global revenue. We are in the early stages of penetrating the US market and expect to see continued strong revenue growth for the foreseeable future.

The investments in sales and marketing we have made and continue to make are paying off. We are benefiting from more feet on the street and increased awareness of the strength of our product offering. In addition to these investments and strong US growth, three elements driving our growth in the quarter were sales of our Targeted Threat Protection products to new and existing customers, the movement of companies to the Cloud, specifically to Office365, and success selling our products to the McAfee customer base.

Sales of our leading-edge Targeted Threat Protection products continue to enjoy strong demand. During the quarter, over 2,100 customers bought this service, which is now deployed with over 8,100 customers.

Demand continued from both existing customers and new customers. More than three-quarters of our sales of TTP in the quarter were to new customers. It continues to be a strong inbound demand generator as well as a substantial upsell opportunity for us as we offer the most advanced solutions to deal with customers' email security issues. In total, 33% of our customers are using Targeted Threat Protection.

Customers are enhancing their cyber-resilience by deploying Mimecast's comprehensive Cloud-based solutions, creating multiple layers of security. During the quarter, the number of customers using our services in conjunction with Office365 increased to 19% from 17% last quarter.

Mimecast also benefits as customers adopt multiple services. We are seeing that our customers who use us in conjunction with Office365 are more likely to purchase not only our security product, but also our continuity and archiving products, as they adopt our broader strategy for protection of their assets in the Cloud.

80% of our Office365 customers have adopted continuity, and more than 60% have also purchased our archiving product. As you know, when customers purchase additional products with us, the margin on the incremental product is higher, and they stay with us longer.

Our revenue retention increased again this quarter, resulting from strong demand for additional products from our base of customers. This quarter, we experienced 112% revenue retention rate, ahead of the 111% we realized last quarter and the 109% for the same quarter in the prior year. This continued improvement in our revenue retention rate is the result of the combination of strong customer retention and increasing upsell into our customer base.

Now, let's turn to expenses and profitability. For the third quarter, we recognized a 73% gross margin, an improvement from the 71% recognized in the third quarter of 2016. Gross margin fluctuates due to the addition of hardware, datacenter services, and employees needed to onboard and serve our growing customer base. We anticipate our gross margin will be in the 70% to 72% range over the next several quarters as we build out our capacity to serve our growing customer base.

Third quarter was another quarter of investment for us, with operating expenses of $38.2 million as we continued to support our growth. Specifically, we are investing in our salesforce and marketing initiatives.

Sales and marketing expense as a percentage of revenue was consistent with last quarter at 52% of revenue, but increased to $25.3 million from $22.9 million. I should point out that we recognize commission expense in the period in which they are incurred rather than amortize them over the year. Consequently, our sales and marketing expense in the quarter was higher than originally anticipated due to the outperformance of our revenue.

As we see increased linearity and higher sales performance during the quarter, we may also increase our investment in sales and marketing in the same period. Even with these increased investments, adjusted EBITDA in the third quarter of $3.7 million exceeded the high end of our guided range of $2.6 million to $3.4 million.

Adjusted EBITDA margin was 7.6%, which reflects our balanced investments in R&D and sales and marketing, with an eye on the bottom line. We will continue to show progress toward our long-term adjusted EBITDA target of 20% to 22%, but we'll continue to also invest for growth as we progress in a measured way toward that goal.

For the third quarter, GAAP net loss was $3.4 million, or $0.06 per basic and diluted share, based on 54.9 million weighted average shares outstanding. Our non-GAAP net income, which reflects our GAAP net income exclusive of the effects of stock option expense, was $0.1 million, or nil per basic and diluted shares for the third quarter.

During the third quarter, we generated $2.2 million in free cash flow. We expect to continue to generate free cash flow in the fourth quarter. Recall free cash flow can fluctuate from quarter to quarter based on the timing and payment of capital equipment and other investments. We will be increasing our investments in capital equipment to support the large number of customers we have been adding as we build out our Mime OS platform to new levels of scale.

Reviewing the balance sheet, as of December 31st, Mimecast had $102.3 million in cash and short-term investments. As Pete mentioned earlier, in the third quarter of fiscal 2017, we completed the acquisition of iSheriff for a total purchase price of $6.2 million in cash, of which $5.6 million was paid in Q3. Total debt was $2.6 million at the close of the quarter, of which $2.5 million represents the current portion of debt.

Now, I would like to turn the focus to guidance for our fourth quarter and the full year. For the fourth quarter of 2017, 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 $48.6 million to $49.1 million.

Our guidance is based on exchange rates as of January 31st, 2017, and includes an estimated negative impact of $1.2 million resulting from the strengthening of the US dollar compared to the prior year.

This negative impact was due to the British pound but was offset by positive impacts from the South African rand and the Australian dollar. Note that the inclusion of revenue related to the acquisition of iSheriff is immaterial to this guidance.

Adjusted EBITDA is expected to be in the range of $3 million to $3.8 million. This is consistent with our continued strategy of investing in R&D and the build-out of our sales and marketing organization globally.

Now, from a full-year 2017 perspective, revenue is expected to be in the range of $182.7 million to $183.2 million, or 36% in constant currency. We are raising the midpoint of our revenue guidance by $4.5 million for the year. Foreign exchange rate fluctuations are negatively impacting this guidance by an estimated $9.9 million.

Adjusted EBITDA is expected to be in the range of $11.2 million to $12 million as we continue to invest for growth, especially in sales and marketing, but consistent with our strategy of sustainable investment. We expect to show continued progress toward our long-term adjusted EBITDA goals.

In summary, I'm pleased with the progress the Company made through the third quarter of the year. We have consistently raised and then exceeded our financial expectations. The Company is growing rapidly and in exciting ways. The acquisition of iSheriff enhanced our threat detection capabilities and added a strong engineering team.

We're also adhering to our financial principles with regards to expenditures and profitability. Our revenue growth accelerated this quarter to 30% on an as-reported basis and 39% in constant currency. Our retention rate increased to 112%. Q3 was a great quarter and evidence of the products we have and our ability to execute.

So, with that, I'd 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). [Ugam Gomit], JPMorgan.

Hi, this is Ugam Gomit on for Sterling Auty. So, regarding to your guidance for the fourth quarter, it calls for a margin compression from the quarter you just reported. Could you just provide a bit of more clarity on the nature of investments that you're trying to do? And how should we think about these investments as we head into FY 2018?

Sure. Hi there. This is Peter Campbell. So, I'm assuming you're talking a about the adjusted EBITDA margin and the adjusted EBITDA guidance that we gave for Q4. So, one thing I'd like to highlight about that is, throughout this year, we exceeded our top line. And as a result of that, our commission expense has been higher. And we do expect that our commission expense will also be higher in the fourth quarter as we get into the end of the year and people are hitting their accelerators.

So, we do expect that that's going to impact us a little bit in Q4. And that's why we maintained the year guidance at the top end of that $11.2 million to $12 million range and with that $10 million to $12 million in Q3. So, we kept the range, but we kept it at the top part of that range.

So, as we go and as we continue through next year, we're going to expect that that will move, but we're going to continue to capitalize on that opportunity. And as we've always said before, we'll have a balance of that top-line growth and that bottom-line adjusted EBITDA, but really, the effect on this quarter is the impact of commissions, which as you know we recognize upfront rather than amortize over the year, as many other SaaS companies do.

Yes, that was helpful color. Secondly, the customer additions in the quarter were pretty spectacular. Could you provide a factor in which the contribution from the microcustomers from the MSBs from the McAfee transition you talked about last quarter?

So, sure. So, we continue to benefit from the McAfee end of life. And we saw some -- obviously, some pretty significant growth through Q3 with the addition of 3,100 customers.

With respect to the percentage of our new business and our new revenue in that period, it was approximately 20% of new business in that period, so not massive, but still a significant benefactor of our growth in that period.

So, going forward, we continue --we expect to continue to benefit from McAfee. But, we think that it's going to be a smaller number of small customers and a larger number of large customers as it switches from the Cloud to the on-premise offering. Additionally, I'd like to highlight that we have not yet had a chance to sell into the base of all of these customers that we've been bringing onboard. And we think there's an additional significant upsell opportunity there for us as well.

All right. Perfect. Thank you so much.

No problem.

Matt Hedberg, RBC Capital Markets.

Hey, guys. Thanks for taking my questions. Congrats on the quarter, guys. Well done. I have a high-level question maybe for Peter Bauer. The cross-sell's certainly impressive, and TTP looks like, to me, it should see darn near 100% attach rate. Could you refresh our memory in terms of, if I'm a customer and I take sort of the full suite of Mimecast, what does that look like on an annual basis today?

Great. So, thanks, Matt. We have seven products that we count in the portfolio. And on average, if a customer purchases all seven of those, the sort of fully loaded user ARPU is around about $75.

Okay. That's helpful. And obviously, you're seeing some high contribution from the Office365 in terms of cross-selling, but $75 is kind of an all-in price point.

Matt, I just want to add to that. So, that is an all-in price point of the current seven products we have. But, just wanting to add to that, we've seen a significant number of new adds of TTP this quarter. And 1,600 of those 2,100 adds we saw came from new customers. So, not only is it a great cross-sell/upsell opportunity for us, it's been a really significant inbound demand generator for us as well. And we now see about 38% of our customers that have it.

That's great. And I guess, dovetailing off the last question on the customer adds, which was clearly -- I think it grew north of 60% sequentially. If McAfee contributed about 20% of that, is it fair to assume that Office365 is the biggest driver of that at this point, with TTP maybe being the second biggest driver of net new customers?

So, I would -- when I spoke to -- just to highlight there, when I spoke to you about 20% of new revenue and new business, it was based on the revenue rather than a specific customer number. So, we don't break out the amount of revenue that we get by customer in those bins. I would highlight that TTP was a significant contributor of revenue for us in that period and even more than we were seeing from McAfee end-of-life customers that were coming over to us.

Got it. Thanks a lot, guys. Congrats on the quarter.

Yes, thanks, Matt. I think you mentioned Office365. I think the growth that we saw in Office365 in this quarter was very strong as well, moving from 17% of our customers up to 19%. So, that is the other component there.

Thanks, guys.

[AJ Lubich], Jefferies.

Hey, guys. This is AJ Lubich on for John. I just had a follow up on the customer additions, again, very strong adds in the quarter and probably driven from some microcustomers. And I know you had talked last quarter about reducing resources for gaining -- winning those types of customers. But, you've been able to get very strong adds while also having pretty phenomenal retention rates. Does this success with those types of customers make you rethink that strategy and the resources that you're allocating toward those wins?

Yes, sure. Hi, AJ. I would say no, it doesn't make us rethink it. I think implementing a strategy like that takes a little bit of time. And certainly, you're correct. The large number of customers that we saw, there were a fair number of microcustomers that came onboard. There's approximately 800 additional McAfee customers over our historical norms there that came on in the period.

So, that continued through the quarter. But, our strategy of not focusing on the microcustomers and continuing to focus on the midmarket still stands. And that's something we'll be focusing on and continuing to build out this quarter and next quarter. I think, when we spoke about it last quarter, we were commencing the implementation of that strategy. Obviously, there was a huge number of customers that came on during that period. But, we would expect that to slow going forward as we see more larger customers come on and less smaller customers.

Yes, I think that's right. AJ, to add to that, as we got to the close of December with the end of life in January, there were a lot of customers or there were a bunch of customers that had perhaps postponed or held off on their migration and a little bit of an end-of-year rush over onto our system. So, that gave us an uptick in those customer numbers that we were happy with. But, we haven't sort of gone after that specifically ourselves.

Great. That's helpful. Thanks. And then maybe just one quick follow up on the -- congrats on the acquisition of iSheriff. Just wondering if, as you look forward, now that you've completed your first acquisition, if this potentially opens you up to do more M&A, and if you think of doing tuck-in deals, if there's any technology as you look at the sort of current product portfolio that you have that you'd like to enter into that might be easier to buy rather than build.

Yes, it's a key point there. We're very proud of the fact that we've built everything to date on an organic basis. We've built an amazing platform. We've built a very broad product portfolio entirely organically. Our revenue growth has all been done on an organic basis.

The technology tuck-in, we really liked what the skills and the capabilities of the team and some of the componentry that we have been able to acquire through the iSheriff deal. And that's additive to TTP. It's additive to our daily prevention offering as well.

We continue to scout for opportunities like that. Our core orientation is to leverage the platform, but where there are opportunities to complement that and to improve or accelerate capabilities in the core platform with the right type of acquisition, we keep our eyes open for that kind of thing.

Great. Thank you.

Gabriela Borges, Goldman Sachs.

Great. Good afternoon. Thank you for taking the question. I was hoping you could talk a little bit about the land-and-expand opportunity at some of the new customers that you're signing today. Maybe one way to look at it would be, if you think about the number of products that customers are buying today, how could that ramp over time? And if you compare those customers to maybe a customer that's been with Mimecast for a number of years, maybe some statistics to help us think about how the customers you're seeing today can grow over time.

Great. This is something we're really excited about with the multiproduct platform, the seamless ability to add services to customers within the platform without it being a big provisioning requirement, the proximity of a customer to be able to adopt archiving, for example, when they've got our security offering, the ability to add on continuity.

The upgrade part is just extremely easy and simple. And it's a consistent administrative environment. It's a consistent policy engine, all integrates really nicely with their -- particularly with their Microsoft investments.

So, we're very happy about that. The levels of penetration that we have in the product today, within the customer base today, certainly give us an opportunity to pretty much double the revenue within the base by selling the full portfolio to the full customer base.

And we continue to work on that with the increase of revenue retention up to 112% this quarter. I think that's something that we're very proud of, both from a retention point of view, but also in terms of the adoption of some of the new products and services, like TTP. So, it's definitely a key part of our strategy is to land and expand and to see the development of those customer relationships.

I think one of the other key trends is, as customers are moving to Office365, again, moving in this latest quarter 19% of our customers in Office365, as Peter mentioned in prepared remarks, they have a natural propensity to buy more products from us.

So, whereas perhaps 50% of our on-premise type customers have got archiving, we see penetration levels more like 60% of archiving within the Office365 base. Likewise, with continuity, perhaps about two-thirds within the average base having continuity, within the Office365 group, that's more like 80%. So, we're very excited about how that drives more of the upsell opportunity for us as well.

Just to add to that, Gabriela, the numbers that Pete quoted on 365, we talked about those last quarter. And those continued through this quarter, even with the significant customer additions that we had in the quarter. And the more products that a customer buys, the incremental margin on each product is higher. And they ended up staying with us for much longer, the more products that they deploy.

That's helpful color. And my second question was a high-level question on macro and the budgeting environment. And specifically, if you look in the US macro, we're seeing a lot of data points around small-medium business optimism and email still being a priority for companies. So, if you could just give us a sense how your conversations with customers are tracking, is there more willingness to spend this year, calendar 2017, versus last year?

In terms of the conversations with customers in the area in which -- and services that we provide, we haven't -- we've seen a fairly consistent steady kind of trend in demand for our services. Email is one of the biggest threat vectors and attack vectors for the bad guys. And the products that we provide are core products that are -- that every company needs.

And additionally, the services that we provide within that particular threat vector are leading edge. And the way in which we provide those services is unique to us. So, as far as kind of spending in our area in terms of email and email security, I think email has been underinvested by a number of companies as a kind of threat vector for a number of years.

And we're I think currently benefiting from that as companies move to 365 and are realizing their vulnerabilities. And as new threats like whaling and business email compromise come out, we're one of the few companies that has fairly unique ways of dealing with that.

I appreciate the color. Thank you.

Thank you.

Jack Rohkohl, Dougherty & Co.

Hi, good afternoon. One quick question. Outside of the usual suspects, a few newer competitors in the Cloud email security markets, such as FireEye and Barracuda, made comments indicating strong performance in certain of their solutions during the quarter. Can you provide some color on the broad competitive market and how you're seeing competitive win rates evolve in bakeoffs?

Great. So, we've seen no change in the competitive landscape in terms of our win rates and our success. I think there's an important distinction between security offerings that are largely there to deal with the detection of advanced threats in email and a full-scale secure email gateway offering with Targeted Threat Protection capability.

So, we speak quite a bit about the fact that, when you talk about a comprehensive email security proposition, it's really comprised of a very important infrastructure component where all inbound emails are delivered to a Cloud provider who receives those messages, is capable of queuing and spooling those messages, handling large volumes of data potentially for extended periods if the destinations are not available, the MTA function, if you like, sophisticated routing potentially across hybrid environments, providing visibility of that routing, providing advanced policy capabilities to deal with things like daily prevention, content compliance capabilities, encryption capabilities.

There's a lot of infrastructure -- there are a lot of infrastructure -- sophisticated infrastructure workloads that customers need. And then on top of that, there's advanced threat protection and Targeted Threat Protection that's dealing with spear phishing, dealing with weaponized attachments, sandbox evasive malware, business email compromise, impersonation attacks, the kind of very security-specific components.

Customers need the full gamut of that. There are specialist security organizations that are making offerings that they feel can make a contribution to the email security situation for customers, but they're really additional pieces of product that a customer could choose as opposed to looking after the infrastructure component and really being a viable alternative to something like Mimecast delivered from the Cloud for a customer.

Got it. Thanks for taking my question. And congrats on the strong results.

Thank you.

Hugh Cunningham, Oppenheimer.

Hi, guys. Thanks for taking my question. You talked a little bit about CapEx spending going forward. And we talked about increased space and about scaling the Mime OS. Is there anymore color you can give in terms of expected spending in those areas?

So, I think -- sure. I think we've been growing well this year. We've certainly grown past our own expectations, looking at 39% constant currency in the most recent quarter. And so, some of the investments in order to kind of serve that customer base and that growing customer base trail the addition of those customers into -- onto our service.

So, we will have to continue to spend on CapEx in order to serve that base. And if you're looking at the 39-or-so percent growth that we've seen in the quarter, you could expect a similar amount of spend in order to serve that base in terms of hardware and DC costs in order to serve that existing base and to build out for the future opportunity.

So, looking forward, we don't guide specifically on CapEx, but it wouldn't be unreasonable to assume that growth in CapEx should align fairly similarly with how our growth has been as we build out the first kind of layers of that great infrastructure to serve kind of multi-tens of thousands of customers into the future.

Okay. Okay. Thanks. And you had some larger deals that you won. And earlier, you asked about a focus on micro-deals and how it's going the other way. Is there anything special you did to win those larger deals? Does it reflect a slight tweaking of your focus? Are you still hard and fast on that SMB, and those were just a result of greater name recognition? What happened there?

So, we've always done business across multiple segments. The bulk of our revenue and the sort of 70, mid-70s percentage points has been in the 100- to 5,000-seat range with an almost equal amount, slightly more above 5,000 and slightly less below 100. And that ratio has remained pretty consistent across the last few quarters, including this quarter.

We have, of course, seen growth across all these segments as we've progressed through the year, and this quarter was no different. We did an even larger number of six-figure deals this quarter than we've done previously. And so, I guess it's more of a continuous application on those -- on each of those segments when one looks at it from a revenue point of view. But, obviously, when one looks at it from a logo point of view, microcustomers have the ability to add a lot more logos a lot faster.

I think what is pulling us into some of these larger opportunities is, A, that we have developed a lot more brand presence in the marketplace. We've received strong recognition from the likes of Gartner for our offerings. And we've got a technology platform that can scale and I think make a unique contribution to the needs of some of these larger complex organizations, particularly multinationals which have really sophisticated requirements and needs for federated administration capabilities. And we're just really well positioned as a Cloud infrastructure to be able to solve some of their problems.

Okay. Okay. Thank you. And one last question. The -- you're doing really well in the US. What are your thoughts on Continental Europe?

Sure. So, I guess the first thing is our growth in the US has been very strong. It's a huge market and a big area of focus for us and where we put a lot of the wood behind the arrow to kind of take advantage of that opportunity.

But, we have been selling into not only the UK, but Continental Europe for many years. And we have significant growth in those markets as well. As we look and kind of branch out and continue to grow, we're going to be continuing to invest in all of our markets. And we will be continuing to invest in not only the UK, but Continental Europe going forward. And I think the focus will remain in terms of the kind of the lion's share of the investment being in the US and the US market. But, certainly, we won't ignore our kind of the core markets of the UK and Continental Europe as well.

I think there's also an opportunity that we're looking at closely with Continental Europe with the GDPR regulations coming through and data breach notifications as well as privacy laws and the burdens that those place on organizations. And we think we're really well positioned with our offerings to help customers to comply with those laws and deal with some of those demands in a much more cost effective and elegant way. So, we're excited about that opportunity in Europe.

Thank you very much for taking my questions. Congratulations on a strong quarter.

Thank you.

Thank you.

Thank you. We have no other questioners in the queue at this time. So, I'd like to turn the call back over to management for any closing comments.

Folks, thank you very much for joining the call and for your interest in what we're doing here at Mimecast. We're thrilled with the results that we've been able to share with you today. And we look forward to talking to you again in the next months. Thank you.

Ladies and gentlemen, thank you, again, for your participation in today's conference. This now concludes the program. And you may now disconnect at this time. Everyone have a great day.