Mimecast Limited (MIME) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You joined the Q4 2018 Mimecast Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Director of Investor Relations, Mr. Robert Sanders. Sir, you may begin.

Welcome to Mimecast's earnings call for the fiscal fourth quarter 2018 ended March 31, 2018. 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. Today'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. On this call, we will be making 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 14, 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. Please note we're reporting fourth quarter and full year 2018 results in accordance with ASC 605. The company adopted ASC 606 on a modified retrospective basis on April 1, 2018, the start of our 2019 fiscal year.

And now I would like to turn the call over to Peter Bauer. Peter?

Good evening, and thank you all for joining our fourth quarter 2018 earnings call. First off tonight, I will start by highlighting milestones we achieved in 2018. Next, I'll review our results for the fourth quarter. Then I'll cover some exciting new enhancements to our platform, designed to improve effectiveness and deliver greater value to our customers. And I'll conclude with thoughts on 2019 and discuss where we see Mimecast winning in the future.

So looking back at 2018, I'm very proud of our accomplishments. We successfully fulfilled our mission to protect customers, we helped organizations simplify IT and become more cyber resilient as they move to the cloud. We bolstered our management team with high-quality individuals, including Christina Van Houten, our Chief Strategy Officer; we grew our stock by over 200 employees and are now 1,200 strong. We successfully launched new services, especially Sync & Recover and Internal Email Protect, both of which are ramping ahead of past new product introductions. Both products, of course, are both on top of Mime|OS, delivering the same integrated experience for customers, excellent value for money and giving us additional monetization opportunity on our platform.

The Mimecast platform is operating at global scale. In 2018, we safely processed over 132 billion e-mails, encompassing 17 petabytes of data, and we also processed tens of billions of URLs in these e-mails for over 30,000 organizations. This scale provides us with extremely broad security visibility. And we're now working with unprecedented volumes and varieties of security telemetry data, which helps drive our threat detection and immune system to benefit all of our customers. We finished 2018 strong with fourth quarter results that exceeded our expectations for both revenue and profitability.

Revenue of USD 73.4 million, grew 40% year-over-year as reported and 33% in constant currency. This better-than-expected performance was the result of strong customer trends, including industry leading retention rates, sales of additional services to our customer base, plus the addition of 1,200 new customers during this past quarter. We continue to have success in the larger accounts segment with a record number of 6-figure deals this quarter.

Later in the call, Peter Campbell will discuss our fourth quarter and full year financial results in more detail, but I'll share with you now some of the reasons why customers were compelled to Mimecast's platform in the fourth quarter.

Firstly, a U.K. software solutions firm was consolidating all of their users globally into a single exchange environment and they needed 100% uptime. Mimecast was selected to protect them with our M2A bundle of security, continuity and archiving services. Additionally, Internal Email Protect, our IEP, was deployed to apply daily protection between divisions of their organization. And our Sync & Recover service was also selected to give them flexible data recovery options.

Interestingly, this customer deployed nearly all of Mimecast’s services and is a 6-figure subscription despite having less than 1,500 employees. So that's a good illustration of Mimecast’s ability to solve multiple customer needs through our integrated suite and to efficiently monetize that opportunity.

Second customer win was a U.S. health care facility with 6,000 employees that struggled with their legacy archive performance. They called us in to discuss Folder Structure Replication, improved search results and also our e-discovery tools. But as our team delved in, e-mail security came up as a topic too. With Mimecast’s M2A bundle plus archive power tools and our secure messaging services, these were put together and selected to replace several underperforming or overly complex point solutions.

Third example, U.S.-based university with 26,000 employees being plagued by impersonation attacks and malware, not an uncommon situation today. Mimecast’s e-mail security was deployed for its ability to provide better protection against these advanced and evolving threats. And our tight integration with Office 365 was also a key factor in selecting Mimecast.

Now I'd like to share with you some of the new innovations we announced at the RSA Security Conference in April. Our Targeted Threat Protection service has been enhanced to include supply chain impersonation, enhanced protection against homoglyphic attacks and automated threat remediation. These product enhancements further Mimecast's ability to protect customers from today's evolving threats. In particular, threats, which our recent e-mail security risk assessment report show are commonly being missed by other vendors.

Now looking ahead to 2019, I'm excited about the people and the services we have in place to continue to grow our business and serve our customers. Our German data centers are coming online now in June and will power our expansion into the European Union. Our partner relationships are strong and will benefit from our recently enhanced global reseller program. And our new API development program, this will allow for deeper integration of Mimecast’s services into our customers and our partner's applications and security services. Additionally, our engineering team is hard at work, developing new capabilities for customers and partners as the market migrates to the cloud and the threat landscape continues to evolve.

But with that, I'll turn the call over to Peter Campbell, our CFO, and he'll discuss our results in more detail and guide you on our outlook for the first quarter and fiscal 2019. Peter?

Thank you, Peter. In the fourth quarter, revenue and adjusted EBITDA once again exceeded the high end of our guidance range. We generated revenue of $73.4 million, which represents growth of 40% as reported and 33% in constant currency over the fourth quarter of 2017. Revenue for the year was $261.9 million, an increase of 40% as reported and 38% in constant currency. Adjusted EBITDA was $7.2 million in the fourth quarter of 2018 compared to $3.6 million in the same quarter in the prior year.

We achieved $25.8 million in adjusted EBITDA for the year compared to $11.8 million in the prior year. We are pleased with the additional leverage we are seeing even as we hit record revenue and growth targets.

Net customer additions of 1,200 was an increase over the 1,100 customers added in the third quarter, bringing our total customer count to 30,400. At the same time, our average order value increased to 10,100, the result of signing larger customers and selling additional services to existing customers.

All geographies contributed to our growth this quarter as organizations globally are challenged by e-mail-borne threats. Regional growth was strong with each of our core markets contributing. Our new German subsidiary is now established and ready to begin taking on customers. We saw continued demand for our services across each segment. Our success selling to large customers continues with 15% of our revenue now coming from customers with more than 5,000 seats.

Our Targeted Threat Protection continues its strong pace of adoption. We had 1,800 new and existing customers buy this service in the fourth quarter. TTP is now deployed with 16,900 customers worldwide. In total, 56% of our customers are using Targeted Threat Protection, which indicates continued upsell opportunity for this product in our existing base. We believe the more significant opportunity for this product lies in the large market of organizations worldwide that currently do not have this protection.

Our 2 most recently introduced services are showing good adoption. We now have 800 customers using Internal Email Protect, introduced a year ago, and 600 customers using Sync & Recover, which was introduced in September. Our high availability and archiving services have also grown broadly across new and existing customers.

The breadth of our platform and the adoption of multiservice bundles can be seen in the number of customers adopting 4 or more services, which now stands at 33%. Our revenue retention at 110% remains high as customers consistently renew their subscriptions and purchase additional products from us year-over-year.

On average, customers have 2.9 services and pay $37 per user per year, up from 2.7 services per customer in the same period last year. Customers that take all 8 of our services, pay us $95 per user per year on average, representing a significant upsell opportunity. More products per customer also means more margin per customer due to shared resources and the power of our architecture.

When customers buy 7 or more services from us, the margin on those customers is over 90%. Our growth drivers remain in place, and we continue to invest to take advantage of the large market opportunity in front of us. The threat landscape continues to challenge organizations operating legacy e-mail defenses, driving demand for our advanced security capabilities. Our tight integration with Office 365 has proved to be popular as workloads continue to migrate to the cloud, causing organizations to reevaluate their cyber resilience strategy and adopting Mimecast’s services for uptime assurance and data availability.

31% of our customers are now using Mimecast in conjunction with Office 365, up from 29% last quarter and 21% in the fourth quarter of 2017. Office 365 customers on average have a higher number of services per customer, 3.2 compared to 2.8 services for customers not on Office 365.

Turning to gross margin for the fourth quarter. We recognized a 73% GAAP gross margin ahead of the 71% to 72% we indicated, but down as forecast from the 74% recognized last quarter and the fourth quarter of 2017. Investments in our German data center, along with the additional headcount to support our forecast customer additions, accounted for most of the decline.

Fourth quarter operating expenses were $59.1 million. R&D expense increased from 15% of revenue in Q3 to 17% of revenue in Q4, related mainly to an increase in engineering and product-related headcount, as we continue to innovate around our existing product set and look to expand our offering over time.

Sales and marketing expense was 44% of revenue compared to 46% of revenue for the previous quarter, but it increased in absolute dollar terms. While we expect to see some leverage in sales and marketing over time as a percent of revenue, we also expect to continue to invest more in absolute dollars.

As a percentage of revenue, there may be some seasonality in sales and marketing investments. G&A expense at 14% was consistent with the prior quarter, but down from 15% in the same quarter in the prior year. We expect G&A to be a source of leverage over time. Adjusted EBITDA in the period was $7.2 million or 9.8% of revenue, up from 6.8% in the same quarter in the prior year. Adjusted EBITDA margin for the year was 10% compared to 6% for the prior year. This demonstrates continued progress toward our goal of balancing growth and profitability and a significant step on the road to our long-term adjusted EBITDA goals of 20% to 22%.

Due to the application of build-to-suit accounting, we've recorded our Lexington facility as an asset and are amortizing it over its life. This results in both depreciation expense and interest expense recorded for the facility. Both of these items are excluded in our adjusted EBITDA calculation. We are, therefore, reducing our adjusted EBITDA in the fourth quarter by $0.8 million, which represents the cash paid in the quarter related to rent for this facility to enable an apples-to-apples comparison with prior periods.

Fourth quarter GAAP net loss was $8.3 million or $0.14 per basic and diluted shares, based on 58.3 million weighted average shares outstanding. Full year 2018 GAAP net loss was $14.1 million or $0.25 per basic and diluted share, based on 57.3 million weighted average shares outstanding.

Our GAAP net loss was impacted in the quarter by the exit of our Watertown facilities. With the move from Watertown to Lexington, Massachusetts in January, we wrote off assets in our old facilities in the amount of $1.7 million and incurred a restructuring charge related to the future rent of the facility in the amount of $2.5 million.

In total, these impairments represent a $4.2 million onetime charge or $0.07 per share that will not recur in future periods. We incurred $1.5 million in foreign exchange expense in the quarter and $3.5 million for the year that relates predominantly to the consolidation of intercompany balances in subsidiaries with different functional currencies. As we continue to grow globally, we monitor these intercompany balances and develop methods to eliminate these charges. As part of our efforts in place to consolidate these balances in the prior quarter, we believe that foreign exchange impact will be reduced in fiscal 2019.

Our non-GAAP net loss for the quarter, which reflects our GAAP net loss exclusive of the effects of stock option expense and onetime charges, was a loss of $3.1 million or $0.05 per basic and diluted shares based on $58.3 million weighted shares outstanding. We generated $1.9 million in free cash flow in the fourth quarter and $11.9 million for the fiscal year. In Q4, our operating cash flows were $14.8 million, which is an increase of 49% over the same period in the prior year.

Capital expenditures were higher than normal at $12.9 million last quarter, the result of the buildout of our Lexington facilities and our German data centers. We do not expect these expenses to recur in 2019.

We expect to continue to generate positive free cash flow next year. There have been a number of timing differences in the current year that have resulted in a more significant difference between our free cash flow number and our adjusted EBITDA balance. As we progress through 2019, we believe that our free cash flow will more closely align with our adjusted EBITDA. Please note that this excludes the adjustment to EBITDA related to ASC 606, which I will explain in more detail shortly.

Turning to the balance sheet. As of March 31, Mimecast had $137.2 million in cash and short-term investments and no debt. I should point out that as at March 31, 2018, we had approximately $124 million in property and equipment. This increase from $32 million at March 31, 2017, is substantially the result of build-to-suit accounting and represents an addition of $70 million to buildings related to our Lexington, Massachusetts and London facilities. There is a commensurate liability in the amount of $69.6 million related to the accompanying construction financing lease obligation.

Before I focus on guidance for the quarter, I would like to discuss the new accounting standard ASC 606, which we are adopting at the start of our new fiscal year beginning April 1, 2018. The guidance on today's call and all future calls will take into account the effects of the application of this new accounting standard using the modified retrospective approach.

The adoption of this standard will result in the acceleration of some revenue into earlier periods for the provision of certain services, such as customer setup and intelligent data migration. Intelligent data migration involves the extraction of data from a customer's legacy archive prior to the ingestion of this data into the Mimecast grid.

Under historical accounting rules ASC 605, we would previously defer and amortize these revenues over the customer life, which we estimate to be 6 years. Under the new ASC 606 standard, we will recognize revenue related to these services on a percentage of completion basis as the initial services is performed.

While we are still in the final stages of assessing the impact of this standard, our current analysis indicates that for the full year fiscal 2019 the effect of this change in revenue recognition related to these services will have a minimal impact on our revenues due to the fact that the majority of our revenues are subscription-based. While there are certain components of deferred revenue at March 2018, which will no longer be recognized in 2019, the overall effect of the adoption of ASC 606 will have a minimally negative effect on our fiscal 2019 revenue.

The adoption of ASC 606 will also affect our sales and marketing expense. The new standard dictates that cost related to the completion of a contract be deferred and amortized over the life of the customer, which we estimate to be 6 years.

Currently, we expense commissions and related bonus amounts in the period in which they are incurred, which is typically the month that the contract is signed. The result of this change will be a significant near-term reduction in sales and marketing expense as we shift these expenses into future periods. Over time, the effects will reduce as each year we will see an additional year's amortization included in the balance.

As a result, we estimate that we will incur a favorable impact to commission expense in the current year in the amount of approximately $15 million.

Please note that our guidance we'll be providing in today's call is in accordance with the new ASC 606 accounting standard and we will measure our actual results in 2019 against these figures.

Now turning to guidance for the first quarter and the full year 2019. For the first quarter of 2019, constant currency revenue growth is expected to be in the range of 26% to 28%, and revenue is expected to be in the range of $76.3 million to $77.1 million. Our guidance is based on exchange rates as of April 30, 2018, and includes an estimated positive impact of $2.8 million resulting from the weakening of the U.S. dollar compared to the prior year.

Adjusted EBITDA for the quarter is expected to be in the range of $9 million to $10 million. From a full year 2019 perspective, revenue is expected to be in the range of $327 million to $338 million or 23% to 27% growth in constant currency.

Foreign exchange rate fluctuations are positively impacting this guidance by an estimated $6.3 million. Adjusted EBITDA is expected to be in the range of $49 million to $51 million, which includes the $15 million commission benefit from the application of 606 that we mentioned earlier.

We continue to 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, we grew the business to new levels in 2018, achieving record revenue and adjusted EBITDA. We continue to provide a world-class service protecting our customers from the most advanced threats, resulting in industry-leading retention rates. We are proud of our accomplishments to date and are excited about the coming year.

So with that, I'd like to thank you for your time and open the line to your questions.

Operator, can you please poll for our first question.

(Operator Instructions) Our first question comes from the line of Sterling Auty of JPMorgan.

This is actually Ugam Kamat on for Sterling. So just on the 606 impact, you said that the sales and marketing is expected to have like $15 million positive impact. That translates to about 4.5% of positive impact on operating margins. And in terms of the long-term guidance, you are guiding to 20% to 22%, but -- I mean, this was the kind of the target that you had given us last time. And if I -- like in case like you are continuing to grow, the 606 should continue to have a positive impact on the margins. So shouldn't the guidance for long-term EBITDA margin go to like 26% instead of 20% to 22%?

Yes. That's a good comment. Long-term guidance was $350 million to $450 million in revenue, 72% to 75% in gross margin and 20% to 22% in adjusted EBITDA. And we think we made some pretty good progress on both the top and bottom line over the last 2-and-a-bit years. I think in terms of looking at the bottom line or the EBITDA goal as we look at that, we haven't recalibrated our long-term guidance to take into effect a positive impact from that. And you're right. The $15 million will have a positive effect on that. It will diminish over time, so it will start to reduce as we get closer out. So as we get closer to our 6-year customer life, it will start to get quite a bit smaller. And we haven't recalibrated exactly what that effect is going to be over the next couple of years, but I think it would be reasonable to take into account that our adjusted EBITDA will be higher than expected off the back of that change in 606 currently.

Okay. That's helpful. And secondly, related to your data center buildout in Germany. So can you remind us which locations you have your data center? And the current data center buildout in Germany, does that allow you to have, like, ingest data from all the regions across Europe? Or are there any regulatory hurdles around some regions or some pockets in Europe that you might not be able to do with it?

Sure. Sure. So we have data centers in 6 separate locations now. They're geographically distinct in each location, and they are dual configurations in each of our core markets, being the U.S., the U.K., South Africa and Africa, Australia, offshore, the Channel Islands and now in Germany. So with respect to the different European countries and the ingestion of data, one of the reasons we selected Germany as the next place to install a set of data centers had to do with: One, the size of the market and the rigor with which the data protection laws are enforced in Germany. So it's our belief that currently we sell to a number of different European countries and they are running on our U.K. grid. And we believe that if you are in compliance with the German Data Protection Regulations and GDPR in general, but data protection in Germany than most of the surrounding countries or a number of them will also be able to ingest and service the data in that grid.

Our next question comes from the line of John DiFucci of Jefferies.

Peter Campbell, I think you said that there was a record number of 6-figure deals in the quarter, which I think is what you've been working to, what Mimecast have been working to. But as you know, there is -- as I know, at least within the investment committee and I think somewhat in the customer community, there's been somewhat of a market perception that your solution is better fitted for the mid-market. I mean, I don't believe there is anything in your solution that really makes it better fitted, maybe it makes -- that doesn't make it well fitted for our bigger customers too, but I guess, with that data point you just gave, is this perception changing? Is that what we're seeing out there? Or is there something else happening there?

John, Peter Bauer here. I'll take that one. So I think, yes, we are seeing that, obviously, there is a huge market opportunity in the mid-market. We're extremely focused on that opportunity. Everything about our technology, our multi-tenant model, the simplicity of our solutions, everything in an integrated suite has a tremendous amount of appeal for the mid-market. So we remain very focused on that. What's happened, I think, is a function of time and the growth of our profile as an organization and the maturing of capabilities within our platform is we have been pulled into more larger deals and more larger opportunities. And we've certainly been winning some of those. So that's good affirmation for us. It's nice and additive to our market share from a seat count point of view. But we really are focused on that mid-market space, and we are kind of selling to a pretty broad type of customer across all segments. So that's really where the focus continues to be.

I mean, just to add to that, John, I mean, we have millions and millions of users on our grid. There is nothing in the service that we have that would prevent us from serving the absolute largest customers. And I think, as Pete says, over time and particularly in the 2.5 years since we've been public, there is a bit of a perception change and a kind of brand awareness of just how powerful our service is and that applies to all organizations, and we're certainly seeing the effects of some of that as that shifts.

Okay. Great. And that shows in that kind of data. I guess, I -- just a quick follow on, I think, a quick one. I guess, can you talk a bit of how Christina Van Houten is going to contribute here as the new Chief Strategy Officer? Obviously, Peter Bauer, you have also had contribution to product and Neil in the U.K. is obviously doing that too, but I'm just trying to understand how she sort of fits in here.

Yes, absolutely. So John, when we say Chief Strategy Officer, this is really about helping develop the strategy on one hand, but it's much more about implementing and operationalizing the strategy, particularly as the range of products that we offer has grown and will continue to grow, particularly as we look at different opportunities to expand the portfolio, many of them organic within the platform, some of them looking at potential M&A opportunities as ways of extending our capabilities. So Christina's role is really about bridging the space between the go-to-market organization and the product and engineering organization and making sure that we are very well aligned and executing well to give our product and innovation investments the greatest possible impact that they can have from a go-to-market point of view.

Our next question comes from the line of Keith Bachman of Bank of Montréal.

I'm going to ask 2 in succession. And the first one relates to what John D was just asking a bit. To take it on a different perspective. You gave what your average order size as a little over $10,000. As you think about the guidance that you just gave for the next fiscal year, how would you expect the trend lines on the average order size? And I would assume that's influenced by the size of customer and the purchases per customer, but is there some dimension on how you think that's going to grow during the course of the year? Just some rough percentages. And then the second is, question I have relates to Office 365. Microsoft as of late has certainly made more marketing noise about the depth of their E5 bundle highlighting security and Satya's made a few reference to -- very public references that security is a key driver of their 365 sales, including their E5 bundles. Are you guys seeing any more inherent conflict or customer interest that may prejudice your ability to continue to grow your share in that 365 environment? That's it from me.

So let me take that first part on the AOVs of trend line. We certainly have seen that increasing throughout this year from 8.8 to 9.1 and 9.9 to 10.1 this most recent quarter. I mean, that's the function of a couple of things. One of them is the sales to larger customers and the second one is the continued sale of additional products to our existing customers. We've seen our products per customer increase to 2.9 products per customer and our average ARPU has also gone up $37 in the most recent quarter. So it's difficult to predict that. We certainly don't try and kind of guide to it. As we're looking at our guidance over the year and we're looking at the expectation of customers and growth in customers, I do expect that, that number could continue to tick up, but it's very difficult to pinpoint exactly to what. As I look at guiding out for the year, I do look at number of customers and we look at segments by customer. So you've seen and I've reported in our results that the number of customers above 5,000 seats now represent 15% of our revenue. So that was a slight uptick from what it was before. The way in which we -- the way in which we kind of look at that is we don't expect it to be a tectonic shift, but it is more of a glide path as we sell to more larger customers, I expect that we're going to continue to buck that trend. We are going to continue to do that. But as Pete just said, we do focus in on that large mid-market. A lot of our sales and marketing resources is focused on that. So we're going to continue to do that, with maybe a little bit more in larger customer segments and we'll see and hopefully continue to see more deals like that come in and see that number kind of trend out slightly. But again, this is something that happens over time, not a dramatic shift. Not in the same way, I'd expect that AOV to trend kind of gradually kind of move in that direction, but I don't expect any massive shift at any one quarter.

Okay, understood. And then, Microsoft?

Yes, I'll take one. So I think, look, our position is that for companies to be effectively secure, it really requires teamwork between the customer, Microsoft and the independent security industry, like ourselves. It's very important that each one of those constituents does their job well. And in fact, it's very important that Microsoft continues to raise the bar in terms of the security of its own platform. But we don't see a day when that stool stands up on 1 or even 2 legs. We feel that it's very important that there is an independent defense in depth strategy in place. I think just this last week with the latest vulnerability that came out on Office 365, the baseStriker e-mail security flaw in Office 365. That point really hit home, I think, for a lot of security professionals and organizations on the platform that as much as Microsoft may innovate, there are attackers out there that are looking to exploit those innovations and are well resourced and are well organized and very determined. And that this is a situation that's been going on for many years, probably decades. I think the other thing is that, obviously, different tierings of security capabilities on different SKUs from within Microsoft space. And certainly, when customers are on a lower tier than E5, there's an even greater need to apply third-party security technologies. So we continue to see this as a very big market opportunity, and I think our numbers are continuing to rise. We now have up to 31% of our customers that are using us to protect their investments in Office 365. So we're very committed to being a really strong companion to the Office 365 suite going forward.

Our next question comes from the line of Catharine Trebnick of Dougherty.

Two questions. One is on how has pricing held up? And then the other one is, you announced your LogRhythm relationship right at the end of the quarter here and what is that going to do in terms of helping facilitate upsell, cross-sell and more color behind that?

Catharine, so first on the pricing. The pricing has remained relatively stable. We haven't seen any real changes that, of course, kind of shifts up and down by segment and by region in terms of currencies and in particular engagements. But looking at the kind of in terms of when you try and map those out, we haven't seen any shift. It's been pretty much the same. What we've seen is that it has -- as our products per customers increase so has our ARPU per customer. So we're not really seeing any movement up or down on kind of ARPU by product, by segment or in region.

All right. And then just some color around the LogRhythm relationship?

Catharine, we're obviously excited to have another important integration in the security ecosystem. This obviously follows on from our Splunk integration, and is also part of our ongoing API strategy on the platform. I think from a go-to-market perspective, it definitely represents an opportunity for our channel partners that specialize in delivering LogRhythm as a solution to customers. It's a popular platform amongst mid-market companies, in particular. So we're working -- we're working on that proposition and identifying which mutual customers we have that could benefit from that. So we expect it to be -- make a contribution that's not necessarily as a transformative go-to-market event, but another nice add-on to the capabilities that customers can enjoy with us.

Our next question comes from the line of Alex Henderson of Needham.

Great. Just one quick data point. Can you tell us what the share count would have been at the end of the quarter if you had been profitable in the quarter, so fully diluted and profitable? And then while you're looking that one up, I was hoping you had some geographic information. I don't see a slide deck up with that in it. And I was hoping you could talk a little bit about your hedging strategy around that. And then, finally, if I could throw one last data question related to international. Now that you've got your facilities up in Germany, how do you see non-U. K. kind of Europe contribution growth over the course of FY '19?

So there's quite a few there. But I'm going to start with the geo, and I'll kind of come back on the fully diluted. But the share count for basic and diluted was 58.3 million as you've kind of seen in the deck. But the presentation that we normally put together should be out in the next day or so. And that has, as you know, on it, the revenue base. That revenue base will show 49% in U.S., 32% U.K. and Europe, 15% Africa and 4% for the rest of the world. One of the ways in which we hedge ourselves there is that we have bases of operations in each of the kind of core regions in which we operate in. Here we have service delivery teams, we have sales and marketing teams, we have go-to-market teams. So we said in the past our gross margin and our constant currency gross margin is relatively the same and that's because of the services that we offer are in country. We also have our cost of acquiring country and a certain amount of G&A in country. So we have a natural hedge there with respect to the provision of our services in any particular region. There is certain kind of cash flow exposures that you're looking at, but we haven't done any specific contracted hedges that at this point in order to kind of adjust for that and that's because we have those natural hedges in place. Now you talked about kind of European growth and German growth. We have solid European growth for the last decade. More recently, we're looking at kind of in the 30% plus area in terms of our growth in that region. We're expecting that to continue down the road. We don't necessarily break out the amounts from Germany at this point in time. I think Germany being such a nascent operation and a subscription revenue basis, it will take some time before you see the revenue from that because the revenue is recognized on a daily basis as we deliver to our customers. And in the first couple of years of that operation, when you compare it with our European operation and our global operation, it will be quite a bit smaller. But we do expect to see some good healthy wins in our first full year of operations there over the next few quarters. (inaudible) can I circle back to our first question, the diluted count would have been 61.9 million.

Great. And just going back to the European ex U.K. I show rest of world outside of U.S., U.K. and South Africa at only 4%. So your non-U. K., European business relatively small at this point. When do u think you might be able to get that towards the 10% number on Continental Europe, excluding U.K.?

Well, if you look at, excluding the U.K., I think it's going to take a little bit of time because we're growing in our other regions at the same time. And our U.S. region, in particular, has been a steady grower in a very big market. So getting up to 10% of revenue, if you look at our current guidance, if we're going to get to 10% of that revenue, you'll be looking at $33 million. $33 million takes time to build the base of business. So it would take a number of years to get there. And actually, if you have a look at -- I look at it as a nascent SaaS business. So each new region you go into is almost like a news estimate since obviously the weight and the power of the other business behind it helps you to accelerate there. But with a subscription model like ours, the [79%] subscription revenue, it takes some time to build up that base of ours and to be able to recognize that revenue from it. So 10% of revenue is going to take a number of years before we get there.

Do you think it's reasonable to think 5 years? Or is that too aggressive?

I don't think that's unreasonable.

Our next question comes from the line of Tim Klasell of Northland Securities.

First, a quick housekeeping question. CapEx for fiscal '19, what should we be modeling at? Did I miss that?

Well, no, we didn't say what it was going to be, specifically, so you didn't technically miss it. I think if you're looking out what I would do is if you're looking at '18, I would exclude the $8-or-so million of CapEx that we called out as being one-off related to our Lexington facility and the buildout of our German operations. Now that certainly excludes that as you're looking at a percentage of revenue in the current year. And then, I would factor in a certain amount of growth year-over-year.

Okay. And then a question on your go-to-market strategy for fiscal '19. Obviously, you've -- I'm sure you've laid that out to your -- internally, but who's going to get a disproportionate share of the new dollars? Is it going to be certain geos? Is it going to be around certain products or channels? Where are we going to see increased focus for fiscal '19?

Sure. Sure. I think as we invest into our regions and as we look out in fiscal '19 -- I'd answered a question earlier about the percentage of revenue in the different regions. As I look at my sales and marketing expenditure into the coming year, it doesn't exactly mirror that, but it's not that far off. Particularly, when you look at the market as big as the U.S. is and the number of customers, we have 30,000 customers now but we're still scratching the surface there. So I don't think it's unreasonable to look at that and think that approximately 50% of our go-to-market effort will be focused on the U.S. with proportional allocation to the regions and size of the market that we have there and how we're growing. I mean, obviously, somewhere like Germany is a little bit disproportional because the revenue base we have there is quite small, so it wouldn't necessarily match the percentage of revenue that we have there. But aside from something like that, I would look at it as a kind of a more regionally focused, maybe a little bit less in South Africa, but moving into areas more like Africa. But other than that, I would take a look at our percentages of revenue and allocate it on that basis.

Okay. And then just a quick sort of extra detail on that. How about on the product lines, are there any particular products that you're encouraging your sales force or your channel to focus on this year compared to last year?

Well, the product per se it's all delivered off the same platform. So it's an integrated suite that can be purchased on a modular basis. I think what we've been very successful with is leading with security, particularly around the security use cases. Naturally, as customers buy more modules on the platform, it's very beneficial to us and very margin accretive on a per customer basis. So we do look at focusing on either landing more modules in the initial sale or on the upsell with archiving being quite a strategic land for us and many opportunities that drive stickiness. It has higher ARPUs. But some of the newer products as well, obviously, we're looking to prime the pump on some of the newer innovations that we've delivered, Sync & Recover and internal e-mail protect. Between the 2 of those, we're approaching 1,500 new customers so far and those are brand-new products with those 2 models. So really it's a pretty broad-based, go-to-market effort from a product point of view. We really do sell the religion of an integrated suite, a cyber resilient outcome. But I would say that after security, the archiving land is strategically valuable to us.

Our next question comes from the line of Gray Powell of Deutsche Bank.

Just a couple, if I may. Can you talk about your new channel partner program? What kind of impact do you expect it to have on bookings this year? And does it have any impact on your margin structure at all?

Great. So we've been in the market with channel partners for a very long time. We have a very mature program in the U.K., South Africa, Australia. North America has had a channel program. It has produced some pretty good results for us. What we did in the past few months is hired some new talent and skills and some strong experience into our channel organization. We also look to create some more alignment from a programmatic point of view on a global basis. Increasingly, we're dealing with partners that are operating across different regions and so some consistency there was desirable for us. And we so put the new programs together and obviously, part of that is some new tools and enablement for channel partners and new incentives and so on. We've obviously looked at the business model. We think that it's going to be successful in helping us to continue to grow strongly as a company. We don't think it's going to have any particular impact on margins. We think that the business that we've been doing historically, we'll just continue to do more the same kind of business, but just with stronger management and enablement of our channel partners and more consistency around the globe.

And the next question comes from the line of Gabriela Borges of Goldman Sachs.

This is Dan on for Gabriela Borges. I guess, first as you continue to move up market, how do the economics of larger customers compare to existing base? And are you seeing any changes in the selling motion or changes to the sales cycle?

Sure. Sure. So couple of things on that. In terms of the unit economics, clearly -- generally larger customers, the per user price is a little bit less. You expect to see some volume discounts there. Commensurately though, large customers have a lower per user throughput. In terms of the mail they sent or the mail they store on average is much less than smaller customers. Smaller customers are heavier e-mail users. And on top of that, the number of service calls proportionately by a user is lower. So when you look at it even though the price per user is often lower because of the volume discounts, the margin per user isn't necessarily. So kind of with that and in terms of the selling motion towards that, the sales cycles for large deals are longer than a small deal and that is something that we've been aware of. We have been selling into the market for some time. We've always kind of sold across all segments, so we had our focus on the mid-market and the bulk of our reps or larger number would be more in the mid-market. But -- and also I've said before that, over 40% of our revenues are from customers greater than 1,000 seats. So while the sales cycles are longer, we are aware that we're taking that into account as we kind of look at that market. But again, it's something that's something that's kind of part of our natural progression and as we continue to kind of build and grow, we take that into account.

Helpful. And then one last question. In terms of -- how penetrated is the SaaS e-mail security today and for people that are already using SaaS e-mail security, what catalyzes the switchover to Mimecast? And can you talk a little bit about maybe the ROI that some customers are seeing by consolidating point products onto the Mimecast platform?

Yes, absolutely. I mean, I think you touched on some of the key points there. Obviously, moving to SaaS e-mail security has -- with Mimecast in particular has some significant benefits. The network effects have been part of a security platform like ours with the enormous volume of telemetry and threat intelligence data that we're exposed to across that attack surfaces that 30,000 customers represent. It gives us some real advantages over perhaps a customer running an appliance or some on-premise technology that's isolated from that scale of capability or certainly is quite hamstrung in terms of the ability to have real-time updates and the ability of [thwart] attacks in such a responsive way. So I think one of the key benefits is security efficacy. Also, the considerable defense in depth that we can deploy within our platform because of our micro services architecture, the vast gauntlets, if you like, of interrogation and detection technologies that is put together in our platform is far beyond what could be accommodated within an appliance or a virtual appliance that might be hosted by a provider. We literally have thousands of machines that are working in concert to interrogate content for customers through the platform. So it's very difficult for a customer to get anywhere near the kind of efficacy. From a return on investment point of view, I think a lot of this comes through displacement of other point solutions. So perhaps by secure messaging from us, which is an encrypted mail service, having daily prevention really built into the platform, being able to leverage Mimecast for large file -- secure large file transfers, having Mimecast emulate your exchange environment to the Office 365 tenant in the event of an outage and obviously, the archiving compliance, the discovery capabilities and the data recovery capabilities that we offer. Having all of those as an integrated suite, it's really not to be underestimated just the price point comparison between adding up the bill of materials you get for an equivalent scope of solution with point solutions. That would be part of it comparing our price points, which are considerably lower probably more than half the price in savings. But the time and the expertise that the time savings from a management point of view, but also many of the organizations that we sell to simply can't attract and retain the skills and the expertise within their organizations to be able to manage all these solutions. So I think the ROI is quite multifaceted from a cost and from a program strength -- security program strength point of view of these companies.

Our next question comes from the line of Matt Hedberg of RBC Capital Markets.

This is actually Matt Swanson on for Matt. I got couple of quick ones on GDPR. Could you talk about how a regulation like this kind of raises the bar for data security globally? I mean, not just multinational corporations, but in other regions? And then also, just how those conversations are going? Do people come in looking for a product? Or is it just a strategic conversation about data security?

Great. So I think GDPR has global impact. We're seeing this more and more with U.S. and Australian companies, a little bit less in South Africa except for the larger multinationals that we deal with there. Really anybody who is doing business with Europe or is providing services that are used by people that are EU citizens, if you like. So the awareness is pretty broad. And I think it's providing quite a healthy stimulus and forcing companies to look at their security arrangements, how they're managing unstructured data, how they would be able to respond to subject matter requests from individuals or from other organizations. So there is -- there is definitely a lot of interest looking at solutions, looking at things like data leak prevention to be able to govern how personal information leaves the organization maliciously or inadvertently. When it comes to, is there a product that solves the GDP issue? I would say, no. I think there are a number of solutions and technologies that can help facilitate a company being compliant. Look, it's very new legislation and compliance levels haven't necessarily been tested. We're about a week away or 8 days away from the deadline, but I think there's still a lot that will get led to the market and certainly, we've been very committed to helping provide education to customers and partners, both in terms of how do they improve their compliance postures and also provide solutions from Mimecast that can help.

Our next question comes from the line of Saket Kalia of Barclays.

Apologies, I jumped on late. So apologies if these questions were asked. Maybe first for you, Pete Bauer. Pete, can you just give us a little bit of an update on how the German data center rollout is going? And more importantly, how do you think about the potential business up for grabs in year 1, year 2 and then maybe just long term out of that market, just from a revenue perspective?

Yes, great. Thanks, Saket. Thanks for making it on to the call. So the data center rollout is going very well. We expect -- we expect it to be up within the next few weeks actually. Our buildout went very smoothly. We're just completing our testing and deploying final few pieces of equipment. So the team there is particularly excited about the availability of local services, because I think particularly for markets like Germany if not Continental Europe nowadays, it's really important to have strong local services as well as the strong local go-to-market presence. We went into this market because, I mean, there are couple of interesting characteristics. One is a massive mid-market, over 20,000 organizations that sit right within our sweet spot of 50 to 5,000 employees, based on data that we'd shared when we initially announced the launch. And when we look at that as an opportunity to sustain significant growth over time, it's a bigger market than some of the other markets where we've built extremely successful businesses. It's bigger than South Africa, it's bigger than Australia. Depends on how you look at. It's bigger than the U.K. market as well and, of course, it gives us access to that broader Central European opportunity as well, all the way up into the Nordics. So we're pretty excited that this is a long-term investment that's very important and strategic to us. That said, I think, Pete Campbell, explained a bit earlier, because of the nature of our business and it's a subscription business, it will take a while to surface as a revenue -- recognized revenue in our numbers. The previous question was also about sort of when will it be 10% of our revenue. Again, all of our regions are growing very successfully. We have go-to-market scale and efficiency and brand recognition in many other markets. So we're really looking in the next couple of years for the majority of our growth to come out of established regions that we're in. But we're very excited to be incubating this German opportunity, because we think it's very big over the 3, 5, 10-year horizon.

Understood. And if I could squeeze one in for you, Pete Campbell. So obviously, this quarter, just a few moving items kind of below the operating line. As we kind of go forward into fiscal '19, taking EBITDA guidance that you were nice enough to give. How should we just calibrate our taxes and below the operating line, other expense line, just to make sure we're also kind of within range on EPS as well?

Okay. Sure. So the other operating -- the other items below the line -- certain amount of interest income, certain amount of interest expense. I don't expect those to be massive and fixed income will continue to contribute. Our debt was paid off this year. There's a couple of small leases there, so I'd expect there to be some interest expense, but interest income will kind of overshadow that. I think the bigger one that you're going to see there is the ForEx, but the ForEx is very difficult to predict. And it's really a function of the consolidation of intercompany balances. I would say that at the end of the current year, we did capitalize somewhere in the area GBP 17 million of those balances, that's between subsidiaries. There's no cash flow effect on that, but it can have a foreign exchange effect when you're consolidating subsidiaries of different functional currencies. So that GBP 17 million that was creating a big whack of that ForEx isn't there anymore. So you shouldn't be seeing that effect. And I can't speak for how the foreign exchange rates are going to move going forward for the year, but I would expect that to be a much diminished effect in the current year. I think the other piece you kind of look at is taxes. From a GAAP tax point of view, I expect that to increase marginally in the coming year, but not a large amount. That's mainly with respect to our South African entity. But from a non-GAAP a point of view, we are seeing a little bit of movement there and that's a function of the fact that my U.S. entity is also profitable. But I have so many -- I have the use of a large number of excess tax benefits, which will absorb any cash tax payable. So I think kind of the provision for income taxes on a GAAP point of view is fairly predictable. I expect a small increase in uptick there with respect to increased profitability of our South African subsidiary. From a non-GAAP point of view, I think we're going to see some continued increase in the provision based on the profitability of the U.S. and the application of those excess tax benefit, although those will not be cash affecting.

At this time, I'd like to turn the call back over to Peter Bauer for any closing remarks. Sir?

Great. Thanks for joining our call. We've enjoyed sharing our results with you, and we look forward to presenting our next set in a few months' time. Have a good night.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.