Mimecast Limited (MIME) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Mimecast Third Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) And as a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Robert Sanders. Sir, you may begin.

Welcome to Mimecast's earnings call for the fiscal third quarter 2018 ended December 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 2 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 February 12, 2018. 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?

Welcome, everybody. We're delighted to be sharing our third quarter results with you this evening.

First off, on tonight's call, I'll highlight some of our key business results and factors driving our business. Next, I'll discuss investments that we've made in talent, technology and facilities to underwrite our successful longer-term growth. And finally, I'll review some customer stories to illustrate how Mimecast is helping organizations to achieve greater cyber resilience.

So turning to third quarter performance. We're pleased, again, to deliver results that exceed our guidance. Revenue of $67.3 million, grew 39% year-over-year as reported and 36% in constant currency. This better-than-expected performance was aided by new customer additions with 1,100 new customers coming onto our platform this quarter.

We had success bundling multiple services for customers, which resulted in high average order values, and we concluded 20 engagements over 6 figures. Later in the call, Peter Campbell will discuss our financial results in more detail.

Recent investments we've made in organically developing and expanding the range of sellable modules on our platform are helping our growth and appeal with customers.

Our 2 newest services, both introduced earlier this fiscal year, Internal Email Protect, or IEP, and Sync & Recover, are both seeing good traction. Both products are also helping to drive adoption of Targeted Threat Protection and our multipurpose Cloud Archive, as these add-on modules expand the use cases covered by these core offerings.

For example, these products address new threats that our customers are facing through compromised insider accounts and also helping them to address new regulations such as GDPR. With regards to GDPR, which is a new European privacy law, we're seeing an increased number of customer inquiries. We're being proactive about educating the market and packaging solutions to help organizations comply with these pending regulations. Although not a requirement of the GDPR, data residency is also a concern for many organizations and it is being discussed in the same conversations. So our recently announced data centers in Germany, which are due to come online later this year, fit well into these conversations.

While Mimecast has clearly defined our capabilities to help organizations become compliant, many of these companies that we're speaking to have less defined sets of requirements, and this may be one of the reasons that we've yet to see any meaningful change in customer demand around GDPR.

Now let's look at some of the exciting new investments we've made in our company in the third quarter, the most important of which is our people. So we welcome Stephen Ward to our Board of Directors. Stephen brings to Mimecast more than 20 years of experience in cyber security and technology risk assessment acquired through his career in both the private sector with JPMorgan Chase and public Sector with the U.S. Secret Service.

Currently, he serves as Chief Information Security Officer at TIAA, a large financial institution.

Janet Levesque joined our team as Senior Vice President of Systems Risk and Security. She has tasked global oversight of our internal technology, security and infrastructure. And then Marc French joined us as Chief Trust Officer, responsible for driving global strategy to ensure customer confidence in Mimecast services.

In addition to people, we continue to invest in our technology. We recently acquired a technology called (inaudible) that brings us additional machine learning-based threat detection capabilities and several talented software engineers.

Our proprietary underlying architecture, Mime|OS is pluggable, allowing new technologies like (inaudible) to be quickly integrated into our platform. And the (inaudible) technology is currently being integrated into our TTP offering and will further enhance the protection we offer our customers.

Additionally, as we have done for over 15 years, we continue to invest in our organic R&D efforts to innovate and drive our success. I'm pleased to report that Mimecast was just granted a U.S. patent for associative search systems and method.

In simple terms, this technology helps our customers find information stored in their email, which can be useful when leveraging the archive as a knowledge repository or in performing e-discovery.

Now with so many new faces of Mimecast, we've outgrown our space in Watertown, Massachusetts, which has been the home of our U.S. operations for the past 53 months. I'm excited to announce that during January, we moved into our new North American headquarters in Lexington, Massachusetts.

We designed the facility from the ground up in a newly renovated building to meet our individual company needs and support our growth well into the future. The state-of-the-art office will enhance innovation and collaboration amongst our staff and support our inclusive culture. These and other investments we are making today will drive Mimecast's success into the future.

We're addressing a very large market opportunity and are positioning the company to continue to build our customer base for many years to come. We have a unique multi-tenant, multiproduct platform, relevant product modules that solve important customer issues and committed people to support tens of or even hundreds of thousands of customers using our platform. And we're constantly working to improve every aspect of what we do.

At the core of our business, of course, is our focus on customers. So I'd like to talk about a few customer wins from this past quarter.

Firstly, a provincial government with 39,000 employees had been a Mimecast customer for nearly 10 years, relying on Mimecast for basic mail hygiene. As this customer prepared to move to Office 365, they sought a more holistic approach to strengthen their cyber resilience and deployed Mimecast's M2A bundle. Now this solution includes the basic mail gateway services, protection from advanced threats, email service uptime assurance and our multipurpose cloud archive.

Secondly, a Texas-based financial institution with over 6,000 employees was running on Office 365 and had experienced some spear phishing attacks and downtime and sought ways to enhance their security and resilience. We were evaluated alongside other vendors, and were selected due to our ability to defend against advanced threats and our Continuity services, which keeps employees productive even in the event of an Office 365 email outage. So they selected our M2 bundle.

Thirdly, a global hospitality company with 17,000 employees, also on Office 365, experienced whaling attacks. They also struggled with message track and trace and looked for a DLP solution to more easily protect sensitive data. This organization with multiple IT teams across all 7 continents looked for advanced technology that could simplify their IT, and so they selected our S2 bundle to better protect their organization.

And finally, an international law firm headquartered out of the U.K. with more than 10,000 employees, was hit with a ransomware attack that caused significant disruption across their organization. Access to email and other business systems went offline. Now this firm looked to replace the overly complicated mix of on-premise and hosted appliance gateways with a more effective solution that could protect users. And in order to better protect their data, they also decided to migrate from a legacy on-premise archive onto Mimecast's Multipurpose Cloud Archive.

So this firm has subscribed to our M2A bundle. As our organization continues to grow and mature, I'm very pleased with the way we're operating globally. All our regional teams are growing our customer base and delivering good results.

We know the success we're experiencing today was built on top of the investments we've made over many years. For this reason, we continue to invest to capitalize on the larger opportunity in front of us and to facilitate our growth into the future.

Now I'd like to turn the call over to Peter Campbell to take us through the financials in more detail. Peter?

Thank you, Peter. In the third quarter, revenue once again exceeded our guidance, and adjusted EBITDA was at the high end of our range. We continue to balance growth and profit even as we capitalize on the large opportunity in front of us. We generated revenue of $67.3 million, which represents growth of 39% as reported and 36% in constant currency over the third quarter of 2017.

Adjusted EBITDA was $6.7 million, representing an adjusted EBITDA margin of 10% compared to 7.6% in the third quarter of 2017. We continue to experience very strong customer retention and upsell as well as new sales during the period.

Keeping our customers happy and selling them additional products is a core skill of our business and the foundation we build on that drives our growth.

Net customer additions of 1,100, was an increase over the 900 customers added in the second quarter, bringing our total customer count to 29,200. We showed strong execution in our core mid-market, while also closing a number of deals in the large enterprise segment.

This, combined with strong upsell to our existing customer base, positively impacted our average order value, which increased to $9,900, up from $9,100 in the second quarter.

Note that foreign exchange accounted for just over half of the $800 increase. Our Targeted Threat Protection continued its strong pace of adoption. We had 1,700 new and existing customers buy this service in the third quarter. Over 90% of our new customers bought TTP and almost 700 existing customers also purchased it.

TTP is now deployed with 15,100 customers worldwide. In total, 52% of our customers are using Targeted Threat Protection. We believe there is considerable runway in the market for customers that currently do not have this protection.

We now have 500 customers using Internal Email Protect and 300 customers using Sync & Recover. Sync & Recover also helped to drive increased adoption of our archiving service this quarter. Customers continue to buy multiple products from us.

This occurs at the initial deal when we sign them as a customer as well as over their journey with us. This has led to an increase in the average number of services per customer, which now stands at 2.9, an increase from the 2.8 services reported last quarter.

Currently, 32% of our customers now buy 4 or more services from us. When customers purchase multiple services, the margin on the incremental sale is higher, the result of our multiproduct, multi-tenant architecture. Additionally, as customers use more of our services, they stay with us longer.

Our gross revenue retention at 111% remains strong and is consistent with last quarter. Our exceedingly strong customer retention numbers underpin this result. This together with the upsell of our products and especially TTP continue to drive a high level of gross revenue retention.

Turning to expenses and profitability. The [Audio Gap] 73% reported in the third quarter of 2017. In Q4, we will be rolling out our German data centers, which will negatively impact our margin. We will also be investing in additional customer service resources as we staff up for the new year. These items will result in a nominal reduction in our gross margin, while the German operation gets to scale.

We anticipate gross margins to be in the 71% to 72% range over the next several quarters.

Third quarter GAAP operating expenses were $50.7 million, up from $38.2 million last year. R&D expense was 15% of revenue compared to 12% for the same quarter in the prior year. A small portion of the increase in R&D expenditure relates to foreign exchange as many of these hires are in the U.K. and the British pound has strengthened over the U.S. dollar during the period.

The remainder of the increase is a function of headcount additions in both the U.K. and the U.S. We expect that this increased level of R&D expenditure will continue through FY '19.

Sales and marketing expenses reduced to 46% of revenue from 52% in the third quarter of 2017, driving the gains we have seen in adjusted EBITDA. While we expect to see consistent long-term leverage in our sales and marketing expenditure, we will see some seasonality in the timing of these investments. We expect to increase our investment in sales and marketing in absolute value terms and as a percentage of revenue for the fourth quarter.

This is a function of accelerated hiring in advance of our new fiscal year on April 1, as well as additional expenditure related to increased sales commissions that typically occur in the fourth quarter of the year.

G&A expense was 14%, which is consistent with the prior year. Adjusted EBITDA in the third quarter of $6.7 million, was at the high end of our guided range of $5.8 million to $6.8 million.

Our adjusted EBITDA margin was 10% versus 7.6% in the third quarter of 2017.

For the fourth quarter, we expect our adjusted EBITDA to go down slightly from the third quarter, but to increase over the prior year. While there is some seasonality in our quarterly results, we expect to see 200 to 300 basis point gains in adjusted EBITDA each year.

We reiterate our long-term adjusted EBITDA goal of 20% to 22%. We will continue to and always have balanced growth with efficiency as we scale this business. Third quarter GAAP net loss was $2.6 million or $0.05 per basic and diluted share based on 57.5 million weighted average shares outstanding.

Non-GAAP net income for the quarter, which reflects our GAAP net loss exclusive of stock option expense and related tax effects, was $1.6 million or $0.03 per share based on 61.2 million diluted shares outstanding.

With the new tax legislation that came into effect in December of 2017, we have depreciated certain assets on an accelerated basis reducing the amount of taxable income in the U.S. With this change, the taxable income is now fully covered by our available NOLs.

As a result, we have an adjustment to non-GAAP income tax expense in the third quarter in the amount of $1.1 million, which positively impacts our non-GAAP EPS by $0.02.

In the fourth quarter, we could see an additional reduction in non-GAAP income tax expense of $0.4 million related to the impact of this new legislation.

In the fourth quarter of fiscal 2018, we expect to incur onetime expenses of approximately $3 million related to the exit of our Watertown, Massachusetts facility, which will negatively impact EPS.

These expenses are not expected to repeat in fiscal 2019. We generated $4.5 million in free cash flow in the third quarter compared to $2.2 million for the same period in the prior year.

Operating cash flow was $12.7 million, up from $5.8 million last year.

Purchases of PP&E in the quarter were $8.2 million, of which approximately $1.5 million related to the build-out of our new facilities in Lexington.

As we look at the fourth quarter, we will see onetime outlays in capital expenditure of approximately $3.5 million related to additional expenses on the build-out of our Lexington facility, along with approximately $3 million related to the purchase of equipment for the establishment of fully paired German data centers. The facility and German data center expenses are consistent with the $8 million identified in our Q2 call and are onetime additions to our normal level of capital expenditure.

We still expect our fourth quarter cash flows to be positive. However, they will be nominal. As of December 31, Mimecast had $128.9 million in cash and short-term investments. Our cash balances have increased by $17.2 million year-to-date, driven by free cash flow generation and $9.5 million in proceeds from the exercise of stock options.

Turning to guidance for the fourth quarter. For the fourth quarter of 2018, constant currency revenue growth is expected to be in the range of 28% to 29%, and revenue is expected to be in the range of $71.1 million to $71.8 million.

Our guidance is based on exchange rates as of January 31, 2018, and includes a positive impact of $3.9 million related to the weakening of the U.S. dollar compared to the prior year.

Adjusted EBITDA for the fourth quarter is expected to be in the range of $5.4 million to $6.4 million. Adjusted EBITDA margins are seasonally lower in the fourth quarter, as we make investments for the following fiscal year.

For the full year 2018, revenue is expected to be in the range of $259.6 million to $260.3 million or 36% growth in constant currency.

Foreign exchange rate fluctuations are positively impacting this guidance and by an estimated $4.9 million related to the weakening of the U.S. dollar relative to the pound and the rand versus the prior year.

Relative to the prior annual guidance we gave in November, foreign exchange rate fluctuations are positively impacting this guidance by an estimated $3.5 million.

2018 adjusted EBITDA is expected to be in the range of $23.9 million to $24.9 million, demonstrating continued progress toward our long-term adjusted EBITDA goals of 20% to 22%.

In summary, I'm pleased to be delivering solid results for our third quarter on both the top and bottom line. Our strong performance is the result of consistent global execution in customer retention, sales execution and the development of industry leading products. We will continue to focus on balanced growth and profitability as we execute through the rest of this fiscal year and beyond.

We will now open up the line for Q&A. Operator, can you please poll for our first question?

(Operator Instructions) And our first question comes from the line of Saket Kalia with Barclays Capital Markets.

First, maybe for you, Peter Bauer. You had a nice uptake in TTP adoption. Obviously, a lot of other new products to offer as well. But maybe just zeroing in on Internal Email Protect a little bit or IEP, could you just talk a little bit about how the IEP trajectory will be different, I guess, perhaps compared to TTP? I guess, I'm just curious about how you would compare and contrast the 2 in terms of customer feedback or uptick anything -- anything that you kind of look at when comparing the 2?

Great, Saket. So we introduced IEP, which is Internal Email Protect, in about April last year. And as you know, the use case there is dealing with east-west traffic adding the technologies that we use to scan in and outbound e-mail to that internal traffic stream and particularly, delivering that as a cloud service to Office 365 customers who are unable to deploy what they may have been able to in the past to do this particular job on their on-premises exchange service. So as Pete mentioned in his prepared remarks, so far we have about 500 customers that have adopted the product. I think when we look at the sort of the linearity of the adoption there, it is encouraging. It's early days though. The sample set is relatively small. I would say it's a little bit ahead of TTP, but I'm not sure whether that is an indication of what the long-term trajectory of it is. But certainly, I would say that when we introduced TTP, we had a much smaller customer base to sell into. So I think, with a new product, now we have a meaningfully larger customer base to take that into. I think that also is one of the reasons behind the popularity of this product today.

Just to add to that, I mean, I think what we said in the past before as well is that TTP with over 50% of our customers now having that has been a runaway success. There are multiple modules in TTP. There are 3 modules: URL protect; Attachment Protect; and Impersonation Protect. And while we expect that the IEP, which is another kind of derivation of that in east-west traffic, will continue to incrementally affect our revenues. We wouldn't expect that it would be the same runaway amount of revenues that we saw from TTP. But that with some of our other new products will be good incremental revenues that we expect to kind of build on top of quarter-over-quarter.

Got it. That's really helpful. And then maybe for my follow-up. Obviously, nice success on some of the larger deals, I think what you said was 20 deals that were at least 6 digits. I guess, the question is, can you, Pete Campbell or Pete Bauer, just talk a little bit about how the length of the sales cycles on some of those larger deals has trended over the last few quarters? And how should we think -- be thinking about the impact of larger deals in 2019?

Sure. Good question, Saket. I think -- I mean, the first thing is, I think we called out -- as Pete called out 20 deals and this is a new record, I believe, of deals over $100,000 for us in the quarter. We've called out this number kind of intermittently in the past. I think we've also spoken to the fact that while a certain percentage of our revenue, approximately 40% of our revenue is related to customers that are above 1,000 seats. So it's not new to us, but certainly, we're very pleased with the incremental growth that we're seeing in larger customers. I think we've talked in the past that when -- while our grid scale is from the very smallest to the very largest customers, we're still very much focused on that, that very large mid-market. As we look at that and the deals of that size, I think, naturally, as they continue to grow and continue to grow our base, we will see more deals like that. We've seen them in the past, and we're certainly happy about the 20 that we saw this quarter. And I think we'll continue to see deals of that nature going forward. And as far as FY '19 is concerned, I think that will certainly be a meaningful part of our growth. It has been in the past and will continue to be in the future. But at this point in time, we're not looking to call out any specific numbers on that.

And our next question comes from the line of Matt Hedberg with RBC Capital Markets.

I guess, within the Office 365 customer base, can you comment on how cross-selling is doing there with some of your multiple projects. I know historically, you've got a higher cross-sell rate within that base. And then, maybe how pricing is holding up on an ARPU perspective?

Sure. We've talked about that in the past and we continue to see that, that customers that moved to Office 365 and that number has gone up, again, this quarter. And we're now looking at approximately 29% of our customers that buy us for 365. We're continuing to see customers that move to 365 wanting the same ability to have a layered approach to security. They want to have a continuity solution in case 365 goes down, and they want to have another copy of their archive. They want to make sure that they're able to get at that data when they had it when it was in-house. And as they move to 365, we're seeing that continue with an increased take-up in each of those products across our 365 base. And I think I've mentioned that in the past as well, when we see customers take multiple products with us, they tend to be much stickier, although our retention rates at 111%, 110% are still very high, but much stickier when they have multiple products and the margins are also higher.

That's helpful. And then, you guys are seeing billing success and obviously, some margin expansion as well, which is great. You called out GDPR as a driver here. And as you think about investments into fiscal '19, are there additional data centers on an international basis? Kind of thinking beyond the German market and the U.K. market, how do you kind of think about the rest of the continent in terms of some additional coloration there?

Sure, sure. That's a good question. I think we've talked about the German data center that we're rolling out this year. And as we're kind looking to this year and FY '19, I wouldn't be looking at rolling out another data center pair, but we are looking at rolling out that data center pair in Germany in calendar '18, in the first quarter of our fiscal '19. I think GDPR is an opportunity for us. We've talked about that being an opportunity in the second half of this year. We're certainly seeing pipeline continue there. And we expect that we will benefit from Q4, but we think the GDPR -- the GDPR benefit will continue past May deadline and into our fiscal '19. And I think, as we look at the European opportunity and we look at the global opportunity, we've always done this on a fairly measured basis. Data center investment is a significant investment for us. It's about $5 million total to set up a data center pair. So what we're going to be looking at as we come into the new year is looking at building out that data center, building out the growth in Germany and in Europe proper and continuing to focus on that. We don't expect to see heavy incremental revenues from that in FY '19, because it is a long-term investment, and we're going to be capitalizing on that over time.

And our next question comes from the line of Shaul Eyal with Oppenheimer.

I want to maybe start and stick on the GDPR point. So Mimecast is probably part of the handful of companies within the cybersecurity arena that are seeing GDPR as creating some sort of a tailwind or as you've indicated, a driver for the company, but why is that? Is it the geographic distribution. It is something specific to email archiving continuity? Because some of your even head-to-head competitors, not to talk about some of the bigger players within the arena, are not actually seeing similar trends. So just want to try and maybe do the compare and contrast in that respect?

Sure, sure. So I think there are a few things. I think the -- certainly, the archiving product, the ability to get at the information about your base and to be able to surface that back quite rapidly is very compelling when you've got a number of companies that are looking to deal with their unstructured data and looking to surface back in a fairly systematic and methodical way in fairly short time frames. And the penalties that are being talked about in Europe for GDPR are quite large, as you know. So I think it's a compelling event for companies to ensure that they're able to get at that data and surface it back to their constituents rapidly and accurately. And I think our archive can help them with that. I think also the breach notification rules, which have been present in the U.S. for some time and now coming into Europe, I mean, companies, certainly, don't want to get breach period and would want to make sure that they have the best possible solutions to cover that off and ensure that doesn't happen. I think it's created an impetus for a number of companies to be reevaluating what they have and making sure that they have a company that can protect them quite thoroughly as any issue that they would experience and that milieu would be very public. But I also think as we look at GDPR as a growth mechanism for us going forward, we have talked about benefiting from it in the second half. We've seen some benefit in Q3. We do think that we will benefit in Q4. But as I said, I do think it's going to make its way. And I think what companies are experiencing is that most companies don't expect to be ready by the May 2018 deadline. And I think the company's decisions are around how they're going to cope with those rules, will extend past that deadline and beyond. So while I do expect some benefit in Q4, I don't expect it to be a massive bump. I think it's going to be a more gradual incremental trend that we're going to see past May 2018 and beyond.

Got it. And then maybe as a follow-up from a competitive landscape and then for a change, actually not asking about the bigger competitor but actually about a recent public competitor going public, I'm sorry, going private, excuse me for that. Any early signs of disruption that might assist you with some near-term displacement opportunities?

Yes, I think, Shaul -- Peter Bauer here. So in our long history of what we would describe as consolidating this market ourselves, consolidating it onto an integrated platform, a cloud platform, a multi-tenant platform and delivering it back to customers in a simpler and more cost-effective form factor, we played in multiple categories for many years. And throughout that time, there's been numerous M&A events. There's been many situations where the ownership structures and the form of our competitors has changed. It has consistently over time, always turned out to be a very positive thing for us in terms of the distractions, the defocusing, the impact to staff, the impact from a customer service and channel management perspective. So there has always been an assortment of issues that have resulted from these. And so, while we don't know everything that's going on in each situation, we're pretty sure that it's generally a net positive for us when something like this happens with a competitor.

And our next question comes from the line of Sterling Auty with JPMorgan.

I apologize if you said it and I missed it, having phone connection issues. But I thought in the press release in terms of guidance, there was talk of giving a preliminary range for fiscal '19. I missed that range, if you said it.

Sterling, we haven't said that yet. We did give guidance for 2018, but we didn't give any preliminary outlook on '19.

Okay. So that was a misprint in the press release?

I need to go back and look at that, but it shouldn't be.

Okay. And then, separately, the average order value, even ex the foreign exchange benefit, was still up nicely. When you look at the contributing parts to that, is that a level that you believe is sustainable? Or how much of that is seasonality? So in other words, how should we think about the trend in average order value from here?

Yes, good question. So it was $9,900, up from $9,100. And we talked about half of that was related to foreign exchange because, as you know, we guide in kind of value at the January 31 ForEx date. So if you look at half of that being from ForEx, the remaining half comes from both upsell and it comes from new and larger customers. So in Pete's remarks, he talked about 20 customers being over $100,000 in the quarter and that certainly, having an effect. But also, retaining our base and upselling it and keeping that base is the core competency of the firm. So our cohorts grow year over year over year. I do think that you will continue to see that trend as we continue to sell more products into that base. It's difficult to predict even absent the foreign exchange how and to what extent that will trend each quarter. It is a function of customer size and upsell. Our upsell has been historically fairly solid as has been our retention of that base and that's certainly a contributing factor. I wouldn't be able to hazard a guess as to how that's going to move, but I would expect it to trend northwards over time.

Sterling, just to circle back on your question, we checked the press release. It refers to 2018 full year guidance. Our fiscal 2018 ends 31st of March. So apologies for the confusion on that. It's our fiscal '18.

And our next question comes from the line of Keith Bachman with Bank of Montréal.

I had 2 related questions and so I'll just ask them concurrently. On the Mimecast opportunities within 365, the Office 365 environment, I understand that you're calling out 29%, excuse me, your customers are involved in the Office 365. How do you see that runway playing out? In other words, what's opportunity set if you had to characterize the TAM? And within that, what do you think your share is in the Office 365 environment against that backdrop? And the related question is, you're currently -- you moved up to where your average customer has 2.8 products and 32% are at 4 or more. How high can that go? What are the natural boundaries or barriers against the opportunity to keep the upsell motion continuing over the next number of quarters or even years? And that's it from me.

Great. Thanks. So just to talk about Office 365 first. I think one would talk about it in the context of the broader Microsoft exchange ecosystem. So we estimate it somewhere between 300 million and 350 million corporate email users using a Microsoft type solution for email. We think that, -- in fact, our customer base is a pretty good proxy, we think, for Office 365 adoption in the marketplace. So if we're at about 29% now, we think that that's probably a good reflection of the folks that have actually moved over to Microsoft's Exchange Online service. So where will that -- sorry?

Yes. So you grow at the same rate of conversion than you think as Microsoft converts its installed base to 365, you'll grow at kind of that same rate of conversion you think then?

We think that our base, the proportion of our base that is on Office 365 will -- roughly tracks the movement of Microsoft's base from on-premise exchange to Office 365.

Understood.

And so we see that migration, certainly, as a tailwind. It's a catalyzing event for a customer to look at cloud-based suite that provide the resilience and layered-security capabilities that they need as they make that migration. So it certainly has been really helpful to us in building our market share. We also think that, that transition will continue for a while. I don't know what the sort of saturation level is in terms of Microsoft's customers moving over. But if one assumes that 75% of the market is ultimately on 365 and if we are sort of 1/3 of the way there after 5-plus years of migration, it's probably at least another 5, maybe more years of migration that goes on in the market. So we're pretty excited about that. And then, I think, in terms of your broader question around the number of SKUs that customers are buying from us, yes, certainly, you can see in our revenue retention numbers that we have a very good practice of not only retaining our customers, but cross-selling them onto new products. And that's given us 110%, 111% revenue recapture rate consistently over several quarters. And then, of course, the move from 2.8 products per customer up to 2.9 products per customer, obviously, across a base of now north of 29,000 customers, that is -- seems like a small number, but it's across that average base. We're really happy with the broader adoption and so called out the percentage of customers with more than 4 products on top of that.

And our next question comes from the line of Catharine Trebnick with Dougherty.

My question has to do with the channel. Of your revenue this quarter, how much was through the channel? And then what really is your channel strategy going forward? And the reason I'm asking that is, there was -- guy had excellent feedback among all the value-added resource, if there's a lot more focus from the marketing organization on them. So I just wondered if there were any changes afoot that we were unaware of.

Great. Thanks, Catharine. So I think we said in the past that the range of business coming in from channel, we like to see that in the 2/3 to 3/4 percentage of our new business coming in, in any quarter. And I think that's been consistently on the high end and maybe even slightly over the high end of that in this last quarter. So we're very happy with that. We have made several investments into channel over the last year and recently. So we really think there is a big opportunity in the North American channel, in particular. We've done very well in the U.K. channel. We've done extremely well in the South African channel marketplace. So North America and Continental Europe are 2 real focus areas for us in building out our channel practice even further over the next year.

And our next question comes from the line of Gray Powell with Deutsche Bank.

Just a couple, if I may. So maybe on the broader macro, just how do you feel about the overall spending environment in calendar 2018 versus 2017? And do you see tax reform in the U.S. as something that could be maybe a potential catalyst to help spending just on broader security improve?

Great. So Pete, you talked to the tax thing, but in terms of general levels of demand, look, I think it's encouraging to see good growth numbers coming out on a macro basis. We certainly think that, that is more helpful to CIOs and to CSOs that are looking to expand their budgets and make investments in important areas of resilience and security. I think the biggest driver though is the threat environment and the realization that it can be very damaging to an organization to have a breach, to have an outage, to have data compromised. So we think that, that is a pretty perennial driver of demand, and we've certainly experienced that consistently both through good times in the economy and even thinking back to 2008, where times were very bad. We grew strongly and consistently through that time. So it's nice to be in good economic times. And it makes it easier for our customers to free up the budgets, but we think, particularly, e-mail security is such an Achilles heel for so many organizations that -- that's the primary driver along with the move to the cloud generally that is driving adoption for us.

And our next question comes from the line of John DiFucci with Jefferies.

This is AJ Lubich on for John. I was wondering in light of some of the larger customer wins, how much of that has to do with the conversation around the cloud? Because some of our own proprietary survey work has shown substantial demand for cloud deployed security, which, obviously, should benefit Mimecast. But I'm curious, how much do you see -- do you see increasingly cloud-only RPs or competitive bake-offs? And do you see any improvement in sales cycles for some of those larger deals given perhaps increasing comfort around cloud deployed security solutions?

Yes, great, AJ. So I think the important thing to point out is that for us to do $100,000 deal or north of that, it doesn't necessarily require it to be an extraordinarily large organization. So there is a huge mid-market opportunity where customers can be spending hundreds of thousands of dollars with us. And we have a product portfolio that has got the breadth of value to be able to capture that type of revenue opportunity in these accounts. Having said that, yes, I think as time goes on and as cloud matures, so larger and larger organizations are not only more comfortable with adopting solutions like ours as a cloud service, they're also starting to realize that there are considerable network benefits, scalability benefits and reliability benefits that accrue to them when they participate in a network that is designed like ours. So a grid style network that's underpinned with highly distributed microservices has got pools of computing resources that are able to apply very diverse forms of detection technology and interrogation to e-mail and benefit instantaneously from detection that may be picked up across a very diverse customer base. So the benefits that they receive by being part of our network that would be much slower in coming forward to them if they were on their own, running their own appliances and managing the networks themselves. So I think both of those factors are really driving interest with the higher end of the mid-market in our solutions.

Great. And then just one more. If we look at the quarter, it was definitely strong in terms of customer adds and the growth of AOV. And if you look at the top line growth, still very strong, but is there slight deceleration and sort of dipping below that 40% growth that we had before, which is reasonable just given law of large numbers, but curious, especially, as we have with us line of sight end of fiscal '19 at this point, how do you guys think about sort of an intermediate term sustainable growth rate and some of the puts and takes that might be embedded there?

Sure, sure. I think as we kind of come in and through the year we've been very specific about our growth rate both from a constant currency perspective as well as a actual perspective. We have talked about the tougher compares that we expected to see in the second half of this year, so our third quarter and our fourth quarter. Kind of that said, our growth for FY '18 is strong looking at the guidance of about 36% for the year. We do have a large opportunity in front of us in terms of the selling of existing products to our existing base, selling kind of new products to the existing base and new and existing products to a very large kind of global market opportunity that we've only begun to capitalize on. So we do realize there's a big opportunity in front of us as we kind of look forward for Q4 and into fiscal '19, but we're comfortable with the guidance that we've given in the context of that opportunity.

And our next question comes from the line of Tim Klasell with Northland Securities.

Two quick questions. One sort of related to the products and the migration to Office 365. When you look at your customer base, the ones that are coming in from a are moving over to Office 365, what's different around what they take, let's say, from a non-Office 365 customer? Is it larger and are there specific products that maybe they're more likely to take than the traditional or the non-Office 365 customer?

Sure, thanks, Tim. We have talked to this before, and we are continuing to see it. So while most of our customers take our security, our gateway product, there's a slightly higher percentage that take our gateway products. So we've just under 100% that take our gateway product that are on 365. As we're looking at our Continuity product, for those of our customers who are on Office 365, a higher percentage it is or was 60% to about 2/3 of our customers with Continuity, and we're approaching a higher number north of 70%, 75% that have Continuity who are on 365. And similarly for archiving, we're seeing more of our customers who are on 365 take our archiving product with Continuity and with security. And lastly, we're seeing them take more TTP as well. It's slightly higher for our customers that are on 365. And I should point out and I think it also is tied into kind of a question previously is that, the price points that we see are fairly similar whether on 365 or not on 365. So the incremental kind of ARPUs for a customer on 365 is generally higher than one who is not, as they're taking kind of more products with us. But that's the start of the trend that we are seeing. They are more likely to take 3 and 4 products than those customers who have not yet moved to 365.

Okay, great. Great. And then, of the 2 new products that you sort of mentioned on the call, which ones do you think will have the greatest impact? Don't look -- I'm not looking for quantitative, but qualitatively, which one will have the greatest impact, do you think, in calendar year '18, maybe calendar year '19?

So I think as I kind of said a little bit earlier, we do expect them to have an incremental benefit. I think as you look at our existing base and the retention and upsell of that base as well as the new customers we add, we'll certainly see some incremental revenue from those products. But I think, the core of our revenue and our revenue growth will come from our kind of base products, the security, continuity, archiving and TTP.

(Operator Instructions) And our next question comes from the line of Gabriela Borges with Goldman Sachs.

For Peter Bauer. The conversations that you're having today on Office 365 with customers that are debating between going with Microsoft inbuilt security tools for e-mail and Mimecast security tools. I'm just curious if you could compare and contrast the conversations you're having today on why Mimecast versus maybe a year ago, because I know that your product portfolio has evolved. I imagine Microsoft has too. I would imagine that the messaging is the same, but any specifics you can share with us would be helpful.

Yes, great. Gabriela, so I think, without sort of banding it specifically as a year, I think what happened is the early adopters on Office 365 were pretty gung-ho that Office 365 was going to be able to cover all of their use cases, all of their needs that they could rely 100% on any security offering that Microsoft had that the promise of an archive that was built in would be fit for all of their use cases and that there may never ever be any downtime or interruptions or risk of performance issues on Office 365. And so the early adopter class was -- took a lot more, I guess, convincing just because of the inherent belief and their desire to believe that, that might be the case. What we've seen is that cohort has experienced additional needs beyond what Office 365 delivers and has started to return to us and adopt our technology and inquire about our technology. What we found though is that the next wave of Office 365 adopters, more of the sort of pragmatist cohort, have gone in understanding or accepting that they would need to bring additional capabilities with them into their Office 365 deployment. And so frequently, we're having conversations with those types of customers ahead of the migration or during the planning phase of the migration and forming part of it. So I think we're seeing that it's not so much a case of, is Microsoft developing and evolving themselves? I think that there are certain things that they're perhaps architecturally less well set up to address. We also have a very dynamic and determined community of adversaries out there. And so, frankly, the security required teamwork, teamwork between Microsoft, the customer and the industry like ourselves, the security industry, to really provide an effective framework for defense and resilience for these customers.

That's really interesting. Follow-up is for Peter Campbell, which is on the seasonality that we should be expecting in the net new customer-add number. I remember last year there was a little more volatility because of the timing of the SaaS transitions over for McAfee and the micro-customers that you had in the model. Could you just help level set as if you look through the March quarter and then maybe, in general, for the quarters after that, what type of seasonality should we expect in customer-adds based on the headcount that you have internally and the pipeline that you see today?

Sure, sure. So I think, last year, we saw, it was maybe a little bit of an anomaly, particularly, in our third quarter of last year as there was a kind of last-minute rush of very, very tiny micro-sub-10c customers looking to move off the McAfee cloud solution and that continued a little bit. That continued through the year, but it was certainly, a kind of a mad rush at the end of our Q3 and a little bit into our Q4. As we kind of looked at this year, it's kind of back to a more normalized 900 and 900 in the first 2 quarters of this year. We've also talked about -- and we've seen with that lower customer numbers, certainly, increases in AOV as the AOV of the new customers we're adding is higher. And we're not seeing the kind of onrush of those micro customers anymore. But 900 and 900 in the first 2 quarters of this fiscal, seeing an increase of 1,100 into the third quarter, I mean, I think that's more in line with what we would expect going forward. Obviously, difficult to predict the exact size and number of each customer that's going to come on. But I think -- I don't think you'd go far wrong to go forward on that basis.

And I'm showing no further questions. I'd like to return the call to Mr. Robert Sanders for any closing remarks.

I'd like to point out we did have a misprint in our press release today. It says that we're introducing guidance for 2019 revenue growth. We are not introducing guidance for '19 revenue growth at this time. We'll give guidance for '19 when we have our fourth quarter earnings call. That will conclude the call for tonight. Thank you all for joining us.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.