Mimecast Limited (MIME) 2017 Q4 法說會逐字稿

Welcome to Mimecast's earnings call for the fiscal fourth quarter of 2017 ended March 31, 2017. I'm Robert Sanders, Director of Investor Relations. With me on the call tonight are Peter Bauer, our Co-Founder, Chairman, and CEO; and Peter Campbell, our CFO. Tonight's conference call is being broadcast live via webcast. A replay of this call will be available two hours after the live call has ended. During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the Company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release and this conference call.

These risk factors are further defined in Mimecast's most recent Form 20-F filed with the Securities and Exchange Commission. During this call, we will present both GAAP and non-GAAP financial measures. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results and we encourage you to consider all measures when analyzing Mimecast's performance. A reconciliation of certain GAAP to non-GAAP measures is included in today's press release which can be found in the Investor Relations section of our website. The date of this call is May 9, 2017. Any forward-looking statements we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. Now, I'd like to turn the call over to Peter Bauer. Peter?

Thank you, Robert, and welcome everybody. We're delighted to be sharing our results with you this evening. On tonight's call, (technical difficulty) to look back at what's been an amazing year for Mimecast and finally I'll share some of our sense of the growth for the Company as we look out to 2018 and beyond. So starting with the fourth quarter, we're very pleased with our results. Revenue of $52.4 million that exceeded the high-end of our guided range and represented a 42% year-over-year growth as reported and 45% year-over-year growth on a constant currency basis. So, this strong performance was aided by strong new customer adds in the mid and high end of the market as well as strong retention and upsell. Peter Campbell will talk more about our financial results shortly. In the fourth quarter at the RSA trade show, we introduced a new (technical difficulty) suite.

With the launch of this Internal Email Protect or IEP, we're now providing customers with the ability to analyze and remediate email traffic that originates and is delivered inside an organization protecting against threats that operate behind the corporate firewall. Mimecast is the only email security provider to offer the service for both on-premise Microsoft Exchange and Office 365 hosted exchange. Now initial interest in IEP has been strong. We're now approaching 100 customers using the service. Secondly, in the fourth quarter, we launched a new tool called the Email Security Risk Assessor or ESRA. Now this enables potential customers to identify threats that their current email security provider has missed. After running this tool in several live environments, we published a study sharing the details.

From a sample of 26 million emails that had already been filtered and allowed through these competing email security products; Mimecast uncovered almost 3.5 million pieces of spam, 6,681 dangerous file types, 1,207 known and 421 unknown malware attachments, and nearly 1,700 impersonation attacks. So with this tool, we are able to clearly illustrate the value that Mimecast adds to customers as well as the need for multiple layers of email security. Now in the quarter which ended on December 31, 2016 we saw a flood of smaller micro businesses especially former McAfee cloud customers migrating to our services and this resulted in 3,100 new customer adds in that third quarter and in fact record bookings for Mimecast. Now last quarter our go-to-market team focused on fewer larger opportunities and so along with the 1,500 new customers that we signed, we yet again set another new record for bookings in this last quarter.

We also (technical difficulty) and larger customers have a higher product attach rate than these micro businesses and have proven to be more profitable to us over time. So, let me describe some of our customer wins to help you understand both the value that we deliver for customers as well as some of our competitive success. A leading Boston based software company with over 4,000 employees was using an SME focused solution for email security and an enterprise grade on-premises archiving solution. Now they were also preparing to move to Office 365 and they chose Mimecast to provide better protection from targeted threats and to provide them with a Cloud archive that would work seamlessly with Office 365. Secondly, an international early education company with about 5,000 employees, which was using a leading competitor's enterprise grade email security offering and along with this, the vendor's separate archival offering.

Now they moved to Mimecast to provide their end users with better access to the data as well as to deliver the benefit of our industry leading search performance to their e-discovery team. Now this tight integration between our security and archive offerings was seen as a real benefit to the ITT. Now consider a California based higher education system with three campuses, 5,000 staff, and 40,000 students. This organization was running a McAfee on- premise email gateway and was challenged by targeted attacks including impersonation and ransomware. Mimecast was selected for our superior ability to protect from these attacks and to provide a flexible configuration to meet the needs of both faculty and student user groups. Then another archiving win came from a recently public British company that looked to implement an email archive with tight integration into their Office 365 deployment.

After considering the capabilities of native Office 365 and another third-party vendor, Mimecast was selected. Our advanced functionality and our independent storage environment coupled with extremely fast search performance helped us to win the deal. Finally, a Florida based healthcare customer of ours with over 5,000 employees. They recently upgraded to Mimecast's targeted threat protection and our secure messaging product. Our ability to seamlessly provision a trial followed by the rapid live deployment of these two additional solutions made it easy for the customer to choose Mimecast to solve what are two major issues facing the healthcare industry. Firstly, securely transmitting sensitive data and secondly, protecting themselves from highly targeted attacks. Now let's look back at 2017 and highlight some of the key milestones that we've achieved.

For fiscal 2017 we reported revenue of $186.6 million representing 32% revenue growth over the prior year as reported and 39% growth in constant currency. We added 8,400 customers representing nearly a third of the 26,400 customers that we serve today. So, we are really experiencing the benefits of our multi-tenant and multi-product architecture as we scale our services to thousands of customers globally representing millions of end users. While faced with the challenges of rapid growth and a large number of new customers, we successfully balanced growth and profitability. Now we grew geographically in 2017 and saw early success in the United Arab Emirates as we expand out of our South African operations into the Middle East. Additionally, we added resources to our Mainland Europe presence as we prepare for Brexit and the coming requirements of GDPR.

Now looking ahead, we see our core email security, continuity, and information archiving markets. Collectively we consider these to be critical cyber resilience imperatives that all organizations must address. Our ability to deliver these all as one integrated cloud suite at a compelling price point really sets us apart in a market populated by complex point solutions and legacy architectures that are being retrofitted for the cloud. In addition, the threat landscape is evolving rapidly and email remains at the center of many breaches. Legacy vendors of email security services are still failing to deliver consistently, which is leaving Mimecast uniquely positioned to help. In the coming months we will continue to leverage our platform and Mime OS, our unique multi-tenant multi-product micro services architecture, to solve internal cyber resilience needs and helping our customers to protect their users, their data, and their operations within our target customer base.

We're excited about the large market opportunity ahead of us and over the last 12 months we demonstrated our ability to compete and win against the largest incumbent vendors and all of the leading solutions in the market today. We continue to believe that we have the right products, partners, and architecture to serve a very significant percentage of the world's corporate email users. And with that, I'd like to turn the call over to Peter Campbell, our CFO, to walk you through the numbers in greater detail. Peter?

Thank you, Peter. Revenue growth in Q4 once again exceeded the high-end of our guidance range and we achieved $3.6 million in adjusted EBITDA. Strong net new customer additions across all geographies, best-in-class renewal activity, and strong upsell into our existing customer base created another record quarter and a strong finish to the year. Fourth quarter revenue was $52.4 million, above our guided range of $48.6 million to $49.1 million. Revenue growth accelerated sequentially to 42% on an as reported basis and 45% in constant currency over the fourth quarter of 2016. The quarter benefited from strong customer retention and new sales during the period. We also benefited from high professional services revenue in Q4 compared to the prior year, which increased the growth rate by approximately 200 basis points. For the full-year of 2017, revenue was $186.6 million for 32% growth as reported and 39% in constant currency over the $141.8 million achieved in 2016.

We saw strength in all geographies and had particular success in mid-market and large businesses. The US was a particularly strong area of growth for us with our US growth rate increasing to 56% this quarter from 48% in the prior sequential quarter. As Pete mentioned, we added another 1,500 customers in the fourth quarter. New customer additions were lower as predicted due to the end of life of McAfee's hosted gateway product. With the focus of our sales and marketing efforts away from smaller micro customers, we signed on a greater number of large customers. This had the impact of raising our overall Company average order value to 8,500. Going forward, we will continue to focus our selling efforts away from micro customers and expect to see additional gains and average order value both from upselling and from the mix shift to larger customers in our new business each quarter.

This quarter we also saw higher order values from new customers in each segment as we had continued success selling multiple products to our customers at the outset. Across our customer base, our customers buy an average of 2.7 products from Mimecast and we believe there is significant opportunity to meet additional customer needs in the future as they adopt additional services. The introduction of our internal email protection module to our targeted threat protection suite has increased the total ARPU of our product set to $90. We announced this product in February and feel positive about our ability to serve many existing and new customers with this product going forward. We are continuing to invest in sales and marketing efforts to take advantage of the large market opportunity in front of us. Our growth drivers continue with the demand for our targeted threat protection suite of products, the shift of organizations moving their email to the cloud, and legacy vendors like McAfee not keeping up with emerging threats.

Our TTP service is now deployed with over 10,000 customers. Demand continued from both new and existing customers with 1,400 new and 600 existing customers adding the service in the fourth quarter. It continues to be a strong inbound demand generator as well as a substantial upsell opportunity for us as we offer the most advanced solutions to deal with customers email security issues. In total, 38% of our customers are using targeted threat protection. During the quarter, the number of customers using our services in conjunction with Office 365 continued to grow. 21% of our customers are now using Mimecast to enhance the resilience of their Office 365 deployments, up from 19% last quarter. As we noted previously, Office 365 customers have a higher number of services per customer compared to our customer base as a whole. When customers purchase multiple products, the margin on the incremental product sales is higher, the result of our multi-product, multi-tenant architecture.

Additionally, customers with multiple products tend to stay with us longer. We continued to see sales to customers of legacy competitors during the period including McAfee. The threat landscape continues to evolve and email is a prominent attack vector. In order to protect our customers from the most advanced threats, we evolve our product offering to meet these threats. We believe that we will continue to see movements from legacy vendors to Mimecast including McAfee and believe that the McAfee email gateway opportunity will continue to benefit Mimecast with additional sales in 2018. Our revenue retention at 111% remains high and is up from 109% at the end of FY16. Our strong revenue retention rate is based on the combination of industry leading retention and upsell to our existing customer base. Now let's turn to expenses and profitability. For the fourth quarter, we recognized a 74% GAAP gross margin, an improvement from the 73% recognized last quarter.

As I stated on past calls, gross margin fluctuates due to the addition of hardware, data center services, and employees needed to onboard and serve our growing customer base. Due to the rapid growth in customer additions in recent quarters, we plan to invest more to support our customer base. We anticipate our GAAP gross margin will be in the 70% to 72% range over the next several quarters as we build out our capacity. Fourth quarter operating expenses were $40.9 million. Sales and marketing expense of $26.5 million decreased as a percentage of revenue to 51%, but increased from $25.3 million in the third quarter. Additionally, our sales and marketing expense in the quarter was higher than originally anticipated by approximately $1 million due to additional commission expenses related to the outperformance of our revenue.

Adjusted EBITDA in the fourth quarter of $3.6 million was above the midpoint of our guidance of $3.4 million. Adjusted EBITDA margin was 6.8%. For 2017, adjusted EBITDA was $11.8 million or 6.3%. For the fourth quarter, GAAP net loss was $2.6 million or $0.05 per basic and diluted share based on 55.4 million weighted average shares outstanding. For 2017, GAAP net loss was $5.4 million or $0.10 per basic and diluted share based on 54.8 million weighted average shares outstanding. Our GAAP net loss for the quarter, which reflects our GAAP net loss exclusive of the effects of stock option expense, was $0.2 million or nil based on 55.4 million weighted average shares outstanding. For the year, our non-GAAP net income was $4.6 million or $0.08 per basic and diluted share based on 54.8 million and 59 million weighted average shares outstanding respectively.

We generated $4.8 million in free cash flow in the fourth quarter and $14 million for the fiscal year. We expect to continue to generate positive free cash flow next year. Recall free cash flow can fluctuate from quarter-to-quarter based on the timing and payment of capital equipment and other investments. Turning to the balance sheet. As of March 31, Mimecast had $111.7 million in cash and short-term investments and long-term debt was $1.7 million. Now I would like to turn the focus to guidance for the first quarter and the full-year of 2018. For the first quarter of 2018, constant currency revenue growth is expected to be in the range of 35% to 36% and revenue is expected to be in the range of $54.7 million to $55.3 million. Our guidance is based on exchange rates as of April 30, 2017 and includes an estimated negative impact of $1 million resulting from the strengthening of the US dollar compared to the prior year.

This resulted from a negative impact related to the British pound of $2 million, but was offset by a positive impact from the South African rand of $1 million. Adjusted EBITDA for the first quarter is expected to be in the range of $3.3 million to $4.3 million. From a full-year 2018 perspective, revenue is expected to be in the range of $239.4 million to $247.6 million or 28% to 32% growth in constant currency. Foreign exchange rate fluctuations are positively impacting this guidance by an estimated $0.9 million. Adjusted EBITDA is expected to be in the range of $18.7 million to $20.7 million demonstrating continued progress toward our long-term adjusted EBITDA goals of 20% to 22%. We will continue to invest for growth as we progress in a measured way towards that goal. In summary, 2017 was our first full year as a public company and we are very proud of what we have accomplished.

We hit record revenue and retention rates, we saw our annual growth rate increased to 39%, and added 8,400 new customers, almost one-third of our total customer base. With our ability to introduce industry leading products, a threat landscape that continues to see email as the prominent attack vector, and a continued movement of email services to the cloud; we think we are well positioned to build on the success we have enjoyed to date and are excited about the opportunity in front of us. So with that, I would like to thank you for your time and open the line to your questions. Operator, can you please poll for our first question?

(Operator Instructions) John DiFucci, Jefferies.

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

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

Okay. Maybe one follow-up probably for Peter Campbell. I think you said professional services in the quarter added about 2 points to revenue growth. Can you maybe just talk about what was the driver there and what happened in the quarter and I would assume that was sort of one-time and shouldn't be assumed to continue going forward? Would that be an accurate sort of assumption?

Yes, that would be accurate. As you know, we're a very high subscription revenue business typically about 99%. The timing of our professional services mainly related to ingestions on archiving customers and large volumes of data than the customers are looking to bring on to our grid and on to our network so that they can access it and make that data usable again going forward. I think that was an anomaly this quarter so I just wanted to point that out and that really has to do with the timing of availability of the data from the customers as it gets ingested and gets put on to the grid. So, I wanted to make sure that was noted.

Thanks again and congrats on a strong quarter.

Saket Kalia, Barclays.

Firstly, maybe for you, Pete Campbell. Can you just talk about the average order value or maybe even subscription fee for IEP ? And realizing you only have 100 customers so it's still very early, are you seeing those customers adopt IEP for all of their inboxes or is this something that that may be only a subset of subscribers within a customer would use? Maybe just help us size how big that business could potentially be?

When I mentioned the increase in our average revenue per user in the script, I talked about that increasing to about $90. It's very early days obviously, but what we're seeing is about $12 per user per year net to us from sales of that product. Obviously it's a little early to tell and to see exactly what an AOV would be around that. Those types of deals will be dependent on the size of customers that we bring on board. That mix of customers we've seen at the end of Q4, there were customers of all sizes that were looking at that product and then didn't buy that product. Just to note to your point, a company would buy it for all of its mailboxes not just a subset and that's what we've been seeing in terms of the purchases that have been made to date. And so with that, we look at the size of the market we have to address in our fully loaded user of $90 per user per customer per year and how that's increased with the advent of this product. So just a couple of months in with that number of customers adopting it, we're feeling pretty good about that opportunity and we expect to see more of that in the coming year.

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

So across our full base now, the product adoption is 2.7, I think that's up from 2.6 previously. But as you say within the Office 365 user base, penetration of two products in particular is meaningfully higher than in the base. The business continuity, which about two-thirds of our broad average customer base adopt with the Office 365 base that's at 80%. With archiving, we have 45% of our broad base using archiving whereas the Office 365 base is 60% of the base. So, you can see how we have greater penetration within Office 365. TTP is also an interesting one, 38%. We've just updated that in terms of penetration in the broader base. It's actually just under 50%, about 49% in the Office 365 base. So, we've seen really strong traction with that product in Office 365 too.

Congrats again. Thanks very much, guys.

Sterling Auty, JP Morgan.

One, I think you gave a percentage of customers or users were protecting against Office 365. I'm kind of curious about the rest of the users. In other words, how would you break down the deployment of email in the rest of what you're protecting so how much is cloud-based email that's not Office 365 and how much is on prem?

I think we would say less than 5% is other, which would be a combination of Google Apps and third-party hosted exchange environments, independent cloud email hosts, and then the rest would likely be on-premise or would entirely on on-premise exchange of various different versions.

And then a follow-up, I often get this question. So, McAfee is the one that we talk about most. When you look at the installed base of on-premise solutions on the email side and even archiving, where are the other big chunks of installed base to go after? In other words, how much is the Cisco or Trend Micro or others? Where are the bigger other opportunities in terms of vendors to try to disclose?

So, Cisco with the IronPort installed base would be a meaningful on-premise email security incumbent. Symantec also has some on-premise technology from the BrightMail acquisition. So, those would be big ones on the security side. Barracuda has got a lot of appliances out there in the SME sector that also need to be moved to a cloud-based service in time. When one looks at archiving, Veritas their enterprise vaults on-premise archive is pretty significantly the market leader and we see a great deal of that with customers showing a strong interest in having cloud archiving delivered. We also see a little bit of Autonomy, we see a little bit of the EMC SourceOne product as well.

Shaul Eyal, Oppenheimer & Company.

Congrats on ongoing great execution and improved outlook. Starting with Peter Bauer, I want to go back to the point on the enterprise level or in other words company with greater than 5,000 employees, definitely nice acceleration on that front. Is it mostly displacements or is it mostly Greenfield opportunities you guys are seeing on that end?

So, I think it depends by product offering. Security is typically at a base level always a displacement, but the target of threat protection piece is typically always new, it's new Greenfields opportunity. So often these customers are moving perhaps from a Symantec MessageLabs or from a Cisco IronPort over to our cloud solution displacing the basic email [hygiene] solution capabilities with us and they're buying targeted threat protection on top of that. When it comes to archiving, it's a mix. So many of those larger organizations will have an archive in place already, but there are still some that perhaps PSD files or a much more sort of democratic better retention regime is in place and there will be a Greenfields archiving opportunity there.

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

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

Congrats, good job.

Matt Hedberg, RBC Capital Markets.

It was nice to see the acceleration in this quarter that was impressive. I wanted to ask a little bit more on the competitive side as well. It's been well documented as you move up to the mid and larger enterprises, there's a whole host of legacy peers there. But I'm curious in your thoughts on the competitive positioning versus Proofpoint whether or not you're seeing them more so these days as you sort of move up into the larger enterprise space?

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

Matt, Peter Campbell here, just to add to that. I think it's important to note that in particular with the increase in the AOV that we saw and the customer adds that we've had this period coupled with that larger deal side increasing the AOV topping the number that we've had last quarter in terms of new business adds, it doesn't necessarily mean that we are changing our focus. We are keeping our focus on that mid and the lower end of the large. There's still a very underpenetrated opportunity out there not only in the US, but globally and we're still at very early innings of penetrating that opportunity.

And then I think about a third of your revenue is from the UK and as you think about addressing European customers' desire to position themselves really in front of the GDPR go live, what are some of the best opportunities for growth in Continental Europe and what sort of investments would be required there?

So, I think there's a big opportunity for growth in Continental Europe. We are a UK company. We've been selling into UK and Europe for years and we're going to continue to do that. I think GDPR is something that's come up that is going to be an issue for companies particularly in the back half of this year. They kind of wrap their arms of getting compliant with the May 2018 deadline and I think as an organization, we're very well positioned with our product to not only support UK and European businesses, but also US businesses that are in Europe that have to follow the same guidelines and the same rules that are coming out in the EU.

So I think that is going to be an opportunity for us in the back half of the year. I think we'll be looking at investing in all of our markets in the coming year. We're certainly going to be investing a little bit more into the European market this year and off the back of our investments in the UK, we'll be looking at Europe a little more closely as we look to capitalize on that, but given the growth rates that we've seen in the US and the size of the US markets, we will still have a kind of laser focus on growing that business.

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

Sure. I mean, I think I talked in the past about -- we have generated free cash flow this year and we expect to generate free cash flow next year and we will (technical difficulty). I'm not sure if we're cutting out on the line again since we had that earlier on the call.

We hear you now. I think I missed the answer of the question. This is Matt again.

Matt, what part did you catch?

Not a lot of the answer.

Okay, sorry. So, let me go through the whole thing. Not sure what happened there. I think we're having some technical difficulties, but, if it was email, it wouldn't be a problem. I'll send it you on email. Sorry, so just in terms of the CapEx spend for the coming year, what I did highlight was, I talked about how we had substantial growth in FY17, certain investments in order to support that growth lagged behind the growth and we'll be seeing some additional capital investment in the -- we saw at the end of Q4 into this fiscal year in order to support not only the growth of customers that we've added, but the expectations of our future growth. I'd expect to see a similar percentage of revenue in terms of our CapEx in the current year to support that growth that we saw in 2017. I'd also add that there's going to be some additional CapEx with respect to office expansion that we're looking at in the latter half of the year, a little bit in the beginning of the year as we grow out our UK and European business, but some in the latter half of the year as we expand the office space for the US business.

Jack Rohkohl, Dougherty.

One quick one on the timing of the remaining McAfee opportunity (technical difficulty).

(Operator Instructions).

Yes, just one quick question on the remaining McAfee opportunity. You talked about one large customer that came over, they had an on-premise version. Where are we really in the timing of people evaluating the move from their on-prem towards another solution. Are people moving over actively evaluating? Are we seeing more preference just [with their] assets longer towards official end of life date?

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

Srini Nanduri, Summit Redstone Partners.

Can you talk about the GDPR regulation that is coming in EU and what are your expectations for growth in EU and I have a follow up please.

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

We are reconnected. You may want to give your answer again sir. I apologize.

Okay, so two sides to the GDPR opportunity. One is the breach notification requirements which drives demand for security. As the press and the media pick up on that and raise the temperature and the tone of the security conversation in Europe, a little bit more in line with what happens in the US, where we've had breach notifications and a lot of publicity around these events. So nobody wants to be the next headline. They will be shopping to make sure that they have the right security solutions in place, I think a lot more aggressively and we're there to service that.

The second piece is really about how they manage and store data about citizens and a big part of the problem is all the unstructured data that they have and how they manage retention and how they can discover and expose that data to meet requests from citizens. There are significant penalties for non-compliance and so that is a real driver for demand of archiving solutions like ours, which help customers to have a much tighter control over their [unstructured data to state] and be able to answer these queries and really know where they stand.

Okay. I got one more follow-up if I can. If you look at the -- there are many companies which are domiciled in the US, but they also operate in the EU. So do they also come under the rubric of GDPR and how does that work?

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

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

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

Gabriela Borges, Goldman Sachs.

Maybe just for Peter Bauer, maybe you could give us an update on the go-to-market at larger customers. Is there anything that surprised you that's different as you focus the sales force on that larger opportunity, anything in terms of the competitive environment, on the sales cycles, how involved the RFPs are, feature sets that resonate more perhaps with larger customers versus small customers. Any detail, that would be appreciated. Thank you.

Yes, thanks Gabriela. So I mean we've been winning business with larger customers for quite some time. I think we've spoken through our sort of mix from a revenue point of view with -- about [three-quarters of our revenue being in that 105,000 feet space and about 14%, 15%] being above and the balance below 100 users. So we have many accounts and we've been winning more accounts to keep that mix as the business has grown to keep that mix the same. We've been adding more and more accounts in all segments.

Now, naturally there are some slight different requirements in that north of 5,000 feet space and again, I think it's important as Peter mentioned, this isn't about selling to mega enterprises necessarily, it's about selling to the sort of upper end of the mid-market that perhaps organizations with [10 or 15 or 25,000 employees]. We see with them some of the things that we do that really appeal to those larger organizations are things like more complex administrative capabilities for conglomerate type organizations. So companies that have got the need to have a federated administration, have lots of different brands, different companies that they hold, perhaps a lot of M&A activity and what that implies is a much more complex underlying email setup with Office 365 tenants and Google Apps and on-premise exchange environment. So the level of sophistication that they need and the ability to administer that much more complex a state, that's something that we're extremely good at and they like. The other thing that we found is really appealing to them is as we share more of our architectural story with them and show them what the scalability advantages that they get from our service.

So when they are comparing what we do perhaps with another vendor that might be hosting an appliance as the strategy and we show them that the services delivered by us, they are really getting the benefit of a platform that's running on thousands of devices with a very scalable elastic backend or long-term data retention, high speed processing of mail and all of the rich security services that plug into that messaging pipeline. The sophistication of that backend is really appealing to the more discerning buyer that rolled on and pay more attention to that.

And then of course, I think longer term as that story plays off and as we start exposing more of the API strategy, that becomes much more relevant to a larger enterprise organizations who are thinking about how they leverage this as a platform, how can they integrate their other applications into the platform using a consistent API across the entire suite of services that they purchase from us.

Hi Gabriela, I just want to add -- Pete kind of kicked that off and just make sure that, that was picked up as well. We've always had a proportion of large deals. We've always had a certain amount of investment in large deals and we're certainly seeing more of these large deals come in kind of quarter over quarter over quarter, but we haven't changed our focus or our investment and I think part of the shift, I just want to make sure people are aware of it, part of the shift is seeing more of those large deals and part of shift is the fact that we moved away from those micro customers. So I just wanted to make sure that, that you had that point.

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

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

Makes a lot of sense. Thank you.

Thank you.

Tim Klasell, Northland Securities.

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

Sure. I think there's many attractive geos. It is about focus and about looking at where we get the best bang and the best return on our dollar spend and I think as we look in each of our core markets, we'll be investing in each of those and I mentioned on the call that our US business grew 56% last quarter which is the new high for us. So the US approaching about 50% of our revenue is obviously a very large market and still very early days, [about 49% approaching about $90 million] of revenue in the US. So that's certainly an area of investment there we're going to focus on. That said, where we started the UK and Europe and looking at the opportunity that's there, we're still in the very early days of penetrating that opportunity as well. As we look at kind of Continental Europe and things like GDPR, we're certainly going to be continuing to invest in that area. I think if you're trying to look at it proportionately to the revenue that we have in the kind of buckets revenue that we have, it's more or less symmetrical in terms of how we're going to be investing our dollar spent based on the proportion of revenue that we've seen and expect to see in each of those core regions.

Yun Kim, Benchmark.

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

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

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

I think that's a good question. So in Q3 we saw 3,100, so obviously a large number of micro businesses were part of that base. This quarter we saw 1,500 new customers. With those 1,500 customers, we saw more new business in Q4 than we saw in Q3. So obviously, the micro customer shift is -- kind of we're moving away a little bit from that as we specifically geared our sales and marketing efforts away from that customer base.

While I think on a customer level we will see potentially higher churn from those micro tiny customers, I fully expect to see a higher number of those customers churn. I don't expect that to impact our overall churn rate because our churn rate is based on dollars of revenue and those micro customers are a very small proportion of revenue dollars.

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

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

Thanks, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.