Mimecast Limited (MIME) 2019 Q3 法說會逐字稿

Good evening, and welcome to Mimecast's earnings call for the fiscal third quarter of 2019, ended December 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.

On 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 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 10-Q.

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 11, 2019. 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.

Good evening, and thank you all for joining our Third Quarter 2019 Earnings Call.

I'll start today by reviewing our third quarter performance and then I'll discuss success we're seeing with newly introduced services and some industry validation. Next I'll give some examples of where we're winning in the market and the types of problems we're helping customers to solve. Finally, I'll cover in addition to our Board of Directors and growth in my leadership team. I'll hand over the call to Peter Campbell, our Chief Financial Officer, to then cover our results in more detail.

Third quarter results exceeded our guidance on both the top and bottom lines. Revenue of $87.6 million grew 30% year-over-year as reported and 33% in constant currency. This performance was the result of high customer retention, sales to our base of subscribers and the addition of 1,000 net new customers to our platform. We were successful across all market segments with notable strength in larger accounts.

Once again, we closed a record number of 6 figure transactions. And additionally, we closed a 7 figure deal that was the largest ever for the company. We delivered strong execution across geographies with half of our revenue being generated outside of North America. Our recent entry to the German market with the local services and data centers gave momentum, while our core regions continued to deliver strong results.

As we grow, Mimecast's threat research is monitoring an ever-growing volume and variety of e-mail and web traffic. Our deep and dynamic stack of proprietary and best-of-breed detection technology effectively interrogates this traffic and identifies threats, often far better than our competitors. And a web of micro-services running inside of Mime|OS creates a constantly evolving learning platform of security capability that means we quickly adapt to new attacks. We processed over 2 billion emails every working day during the third quarter. This gives Mimecast unprecedented access to the threat landscape and enables us to identify and block threats originating from bad actors around the globe, collectively benefiting all users on our platform.

We describe this to our customers as a community defense strategy leveraging shared threat intelligence and strengthening cyber resilience. Now new services introduced on the Mimecast platform in the last 18 months continue to be well-received by our customers and partners. Internal Email Protection or IEP is gaining traction. Our IEP enables customers to apply security and policy enforcements to internal e-mail traffic that would otherwise not pass through a gateway, protecting against careless users, compromised accounts or malicious actors operating from within an enterprise.

Customer adoption of Sync & Recover is also increasing. This service offers customers the ability to use their archive with us as a backup with granular recovery and rebuilding of mailboxes to a point in time determined by the administrator.

Mimecast is the only cloud archive vendor to offer this type of service for both on-premise Exchange and Office 365. Mimecast awareness training is preparing for the launch of season 3, adding new content and reinforcing best practices. Adversaries today have an arsenal of weapons that are constantly being refined and Mimecast awareness training goes beyond phishing simulation with practical and easy to consume training to reveal these scams and empower employees to make smart decisions.

Mimecast web security is also evolving nicely with adoption, especially among some of our small- and medium-size customers and larger customers with public WiFi networks, such as hospitals. This is a huge market opportunity and an exciting adjacency, sharing strong synergies with e-mail security.

Our V1.1 product goes live shortly as we learn more about customer needs and reactions to our proposition. We see this as a long game opportunity for us to add considerably more value to our customers through their Mimecast tenancy.

Onto some industry news now. Mimecast was named a 2018 Gartner Magic Quadrant leader for enterprise information archiving. Mimecast positioned highest on the Ability to Execute axis for the fourth year running, which reflects the significant scalability, reliability and performance that we offer over 10,000 organizations as the archiving partner today.

To further support our leadership in cloud archiving, in January, we acquired U.K.-based Simply Migrate. This technology enables customers to more rapidly get out of the legacy archiving business themselves, reducing on-premise cost and complexity their data more seamlessly to a comprehensively better Mimecast solution.

In the third quarter, Mimecast also received the Global Business Continuity Institute Award for continuity and resilience, highlighting our efforts to keep businesses safe and keep employees productive. Recently, while scanning for malware in an attached document, a previously unknown vulnerability was discovered by Mimecast research labs.

Subsequently, an important patch was released by Microsoft to remedy this vulnerability. This is a great example of Mimecast's leading threat research and response capability and our commitment to making e-mail safe for business. We continue to execute against our API strategy and recently joined IBM Security App Exchange Community. Joint customers are now able to deploy Mimecast for IBM QRadar and integrate e-mail security into IBM's security intelligence technology. Sharing threat telemetry via our API improves visibility of e-mail-borne attacks, enabling prioritized incident response at a better security posture.

Now we see customers of all sizes incorporating functionality enabled through our API calls. And in the third quarter, customers made millions of requests to Mime|OS via our APIs every day. Now let's consider some customer engagements from the third quarter to highlight where we're winning. I'll highlight some of the types of issues we're helping customers mitigate and the Mimecast services they deployed.

So firstly, a global financial services company with 55,000 employees operating across Africa and the Middle East was refreshing their IT stack, which included seeking out modern SaaS-based security solutions with local support across their regions. A rigorous testing and evaluation period commenced and Mimecast exceeded expectations across requirements, tight integration to Office 365 and our ability to comply with this organization's stringent security and compliance requirements were also contributing factors. Customer purchased our full TDP (sic) TTP suite as well as continuity and our large file sharing and Secure Messaging solution, achieving meaningful consolidation and control with our integrated suite.

Then a U.S. health care network with 15,000 employees embarked on a comprehensive records management project to which e-mail was naturally central. Locally stored data needed to be transferred and managed in the cloud and Mimecast was evaluated alongside other cloud archiving solutions. In selecting Mimecast, this customer had prioritized ease of use and administrative flexibility as well as granular data retention capabilities and faster search to provide better e-discovery support.

Then another U.S.-based healthcare network with 30,000 seats sought improved protection from e-mail-borne attacks after targeted phishing campaigns had successfully penetrated the organization. We were evaluated and selected to give them greater confidence in their Office 365 investments. Our ability to deliver a complete cyber resilience solution that was easy to deploy and manage led this organization to select our advanced security uptime assurance and archiving services.

Next, a leading Central European consumer products company with about 20,000 employees was targeted with phishing and malware attacks. After evaluating potential providers in live POC projects, our demonstrated ability to block more threats and protect this customer better led to Mimecast being selected to provide advanced e-mail protection. The breadth of services on the Mimecast platform, our ability to address future needs and our deep API library were also considerations for this customer when selecting us as a vendor.

Then a global consumer packaged goods company with operations across Europe and the United Kingdom operating with all their mailboxes on Office 365 had experienced challenges with 0-day and impersonation e-mails reaching mailboxes across the business. The problem gained particular visibility at the executive level of the company and Mimecast was the favored platform for cyber resilience. And we're excited to be providing what we think is probably the best e-mail security in the world to this well-known consumer brand.

Then an infrastructure services company with 5,000 employees operating in Australia and New Zealand was challenged by slow and inconsistent e-discovery results, plus search capability, put stress on the IT team and they sought a better solution.

During the evaluation process, it was learned that this customer was paying for licenses for employees that were no longer with the organization. By deploying the Mimecast cloud archive and Sync & Recover, this customer was able to reduce existing IT budget, and at the same time, greatly expand user functionality and free-up IT resources. Note across all of these engagements the pretty diverse mix of services purchases, and I believe this broad mix of services reflects the diversity of challenges organizations face and our commitment tailored to meet the individual needs of our customers while at the same time, simplifying IT with Mimecast's easy to use and deploy suite of services.

Now before I turn the call over to Peter Campbell, I want to share an update regarding some leadership changes. Firstly, in January, Robert Schechter joined our Board of Directors. And Bob is a deeply experienced technology executive having served as a CEO and CFO and Independent Director and he will be a terrific adviser to me and my executive team. He brings more than 30 years of knowledge in software and telecom and we welcome Bob to our Board. Secondly, Karen Anderson joined Mimecast as our Chief Human Resources Officer. Karen is an experienced HR Executive, who share the clear mission to make Mimecast the place where our employees do their best work and their best team work and achieve a greatest learning. Our people are our most valuable asset and we're delighted to have Karen with us on the team.

Finally, I'm very pleased to announce that after an extensive search, Rafe Brown has accepted the role of Mimecast's Chief Financial Officer. Rafe's deep industry knowledge accumulated during his 20-plus years of experience working in the enterprise software industry is an enormous asset to the company. I've enjoyed getting to know Rafe and believe in addition to being a dynamic leader, he possesses the drive and determination to help elevate our organization to new heights.

Most recently, Rafe served as CFO of SevOne and previously as the CFO of Pegasystems and prior to that, Rafe served as the SVP of Finance for salesforce.com, where he worked for 9 years. We welcome Rafe.

Now to ensure a smooth transition of leadership, Peter Campbell will continue on with Mimecast in a consulting role through the filing of our full year 2019 results. And we very much thank Peter for his role and his contribution for more than 12 years of building our company. He's been a much loved and iconic executive at Mimecast and he's built a world-class team. We wish him very well in his future. And with that, somewhat nostalgically, I turn the call over to Peter Campbell one final time to discuss our financial results in more detail.

Thank you, Peter. This quarter, we once again demonstrated strong performance in our top and bottom line results. In the third quarter, we exceeded the high end of our guidance for revenue and adjusted EBITDA. We generated revenue of $87.6 million, which represents growth of 30% as reported and 33% in constant currency over the third quarter of 2018. This is an improvement over the 32% constant currency growth we reported last quarter. This achievement includes $0.3 million related to the Solebit and Ataata acquisitions.

Adjusted EBITDA was $16 million in the third quarter, representing an adjusted EBITDA margin of 18% compared to $6.7 million or 10% in the same quarter in the prior year. Adjusted EBITDA was higher-than-expected due to the upside in revenue as well as leverage we have generated in the business.

Net customer additions were strong at 1,000. In total, 33,300 customers globally make their e-mails safer for business with Mimecast. We were successful winning business in each region, once again showing strong performance with large enterprises. While we added a similar number of large deals as we did in the prior quarter, the average size of these customers increased.

Average order values or AOVs in this segment increased by more than 50%. A mix shift to larger enterprises, combined with our existing customers purchasing additional services drove our total AOV higher. Total AOV increased to 10,900 compared to 10,500 in the prior quarter.

On a year-over-year basis, AOV improved by 1,400 or 15%, over 9,500 in the third quarter of 2018. This quarter, we saw an increase in the number of products customers purchased. We sold 1,600 instances of TTP, increasing the percentage of customers who have this product to 64%. At the same time, we had 500 customers purchase IEP with another 400 purchasing Secure Messaging and 300 purchasing Sync & Recover. Newer products also saw traction with 200 new instances of [AET] sold. We also saw some of our first customers purchasing our web product, which is encouraging, although it is very early days for this product. On average, customers now purchase 3.1 of our 10 services. As we introduce new products, we continue to grow the total addressable market for our existing customers.

Our revenue retention continued at 110% as customers renew their subscriptions and purchase additional services. This is underscored by strong upsell in the quarter and industry-leading revenue retention. 41% of our customers are using Mimecast in conjunction with Office 365, up from 38% last quarter and 29% in the third quarter of 2018.

Mimecast Office 365 customers purchase a higher number of services per customer, 3.3 compared to 2.9 services for customers not on Office 365.

GAAP gross margin for the third quarter was 73%, consistent with the prior quarter and in line with our guidance. Gross margin was 75% after adjusting for stock option expense and the amortization of acquired intangibles, an increase over the 74% achieved in the prior year.

Third quarter operating expenses were $62.8 million compared to $50.7 million for the same period in the prior year. R&D expense was 17% of revenue in the third quarter compared to 15% for the same period in the prior year related mainly to an increase in engineering and product headcount as we continue to fuel innovation. We expect R&D expenditures to continue at this level for the balance of the year.

Sales and marketing expense of $34.5 million was 39% of revenue compared to $31.2 million or 46% of revenue for the same period in the prior year. Remember that our prior year results were reported under ASC 605. Our current results are reported under ASC 606. Under ASC 606, we are required to defer and amortize commission expense over the life of the customer. On this basis, we deferred $4 million in commission expense in the quarter.

Under ASC 605, our sales and marketing expense would have been $38.5 million or 44% of revenue, on an apples-to-apples basis. G&A expense of $13.6 million or 16% of revenue compared to $9.5 million, or 14% of revenue, in the third quarter of 2018. This increase is predominantly related to share-based compensation expense, which includes modification charges of $1.2 million.

In the absence of these charges, G&A expense was 12% of revenue compared to 13% of revenue in the prior year.

Adjusted EBITDA for the third quarter was $16 million or 18% of revenue, up from $12.3 million or 15% of revenue, in the prior quarter and $6.7 million or 10% of revenue, in the same period in the prior year.

Third quarter GAAP operating income was $1.6 million compared to an operating loss of $1.1 million for the same period in the prior year. GAAP net income was $0.5 million or $0.01 per basic and diluted share compared to a GAAP net loss of $2.6 million or $0.05 per basic and diluted share in the prior year. We expect that our GAAP net income will fluctuate between net income and net loss in the coming quarters. However, we have consistently focused on a balance between both top and bottom line results throughout our history and believe that this shows not only the strength of our model, but the discipline that we have put into scaling this business as we grow.

Our non-GAAP net income for the quarter was $5.9 million or $0.09 per diluted share compared to $1.6 million or $0.03 per diluted share for the same period in the prior year. Our non-GAAP net income was negatively impacted by $2.6 million or $0.05 per diluted share related to non-GAAP tax adjustments resulting from higher profit in the U.S. Note that the non-GAAP tax adjustments our noncash due to the offsetting tax deductions through the application of excess benefits from the exercise of stock options.

We generated $10. million in free cash flow in the quarter compared to $4.5 million in the same period in the prior year.

Operating cash flow in the quarter as a percentage of revenue was 21% compared to 19% for the same period in the prior year. Free cash flow percentage was 12% this quarter compared to 7% for the same quarter in the prior year. We expect free cash flow for Q4 to approximate the free cash flow we experienced in Q3.

As of December 31, Mimecast had $156.6 million in cash, cash equivalents and short-term investments. We remain undrawn on our $50 million revolving credit line, which we entered into in July of 2018.

A quick note on our deferred revenue. We operate in many different currencies. We also bill our customers monthly, quarterly and annually depending on the location of the customer and also their preference. As a result, deferred revenue does not always provide a good measure of our progress.

Turning to guidance. For the fourth quarter of 2019, we expect constant currency revenue growth to be in the range of 29% to 30% and revenue to be in the range of $90.6 million to $91.5 million.

Our guidance is based on exchange rates as of January 31, 2019 and includes an estimated negative impact of $33.9 million resulting from the strengthening of the U.S. dollar compared to the prior year. Adjusted EBITDA for the fourth quarter is expected to be in the range of $14.7 million to $15.7 million.

Full year 2019 revenue is expected to be in the range of $338.7 million to $339.7 million, or 31% to 32% growth in constant currency.

Foreign exchange rate fluctuations are negatively impacting this guidance by an estimated $4.5 million compared to the rates in effect in the prior year. The guidance for fiscal 2019 provided in November was $332.5 million at the midpoint. Since then, foreign exchange has positively impacted this guidance by an estimated $1.8 million. This amount, combined with our overachievement in Q3 of $2.9 million, coupled with the strength we have seen in our business is leading us to raise our full year guidance by $6.7 million to $339.2 million at the midpoint.

Full year 2019 adjusted EBITDA is expected to be in the range of $52.9 million to $53.9 million. We are increasing our guidance by $3.6 million at the midpoint on adjusted EBITDA.

As you know, our fiscal year end is March 31, 2019. We have established an initial expectation for our revenue achievement with respect to the fiscal year ended March 31, 2020.

Full year 2020 revenue is expected to be in the range of $413 million to $427 million or 21% to 25% gross in constant currency. This is an early estimate of our expected results. We plan to further define our 2020 forecast as we complete our planning process. This is a good starting point. This is my 50th quarter with the company. When I started at Mimecast, I never would've thought we would have achieved the things that we have achieved. Each quarter, we produced results that surpassed those of in the prior ones. This quarter, we have once again achieved record results. I'm proud of what we've achieved this quarter in both top and bottom line, showing increased net income and cash flow. I'm proud of the team we've built and their ability to continue to build and grow the organization to new heights. I'm excited for the future and the potential of this organization. Thanks to everyone that has made and will continue to make Mimecast such a phenomenal success. So with that, I would like to thank you one last time and open the line to your questions.

Operator, can you please poll for our first question?

(Operator Instructions) Our first question comes from John DiFucci with Jefferies.

My first question is for Peter Bauer. Then I just have a follow-up, I guess, is more of a comment than a question. But -- so Peter, your subscription revenue accelerated this quarter and you talked a little bit about strength in larger accounts, which is contrary to what we've heard from others in the space. And I'm just curious, are you seeing any differences at the high end of the market here? And one reason you've had less exposure there than some in this market is your contiguous architecture and logical or maybe even necessary reluctance to bend to customization demands that sometimes come from large enterprises. But are you seeing any sort of relaxation of those demands? Are larger enterprises just saying, hey listen, we're not going to force customization, we're just going to -- we're going to let you do what you do and you specialize in this. Is that sort of happening? Is that why you're seeing more, I guess, traction upmarket?

John, thanks for the question. So you're actually right. I mean, our contiguous suite is something that's a key strength of the company and really been in a massive advantage for us in the mid-market where customers are looking for simplicity and easy of use and being able to kill as many birds with one stone as possible with a one-stop shop solution. I think we have seen, as our product has matured and ask the capabilities have grown in the platform and our brand has become better known, particularly since we became public that we've been pulled into more larger opportunities. And so, you've seen some of those numbers shift, in particular, the percentage of our revenue done with organizations with more than 5,000 seats is now 17%, which is up a fair amount since IPO and actually up from 16% just last quarter.

I think what we're seeing is less that we're focusing on the mega enterprise. So we're still focused on this large mid-market and SMB opportunity, but we're also getting pulled into opportunities with considerably higher seat counts in organizations that we would characterize as lean IT and security organizations. So perhaps large hospital groups or manufacturing concerns, education organizations, professional services outfits that may not have the considerable security teams and capability of perhaps a large bank. And they are far more willing to work with a default best practice configuration that we can offer them with considerable amounts of configurability but without requiring us to perform our natural acts to integrate with highly customized workflows and situation that they are in. Having said that, I think, the maturity of our API strategy is also starting to provide a lot of these larger organizations with more flexibility to be able to do their own customizations and work with our system in a way that meets perhaps some of their unique situation, working with the programmatic interfaces that we're making available on our platform. So I think, those things are all coming together and coming through in the numbers with more 100k deals and then more deals in that 5,000-plus seat category.

Yes. I mean, just to echo that and I'll do it quickly, but I think, it's not, John, that they're reluctant to reduce the requirements, I think, firms are more and more looking to actually increase those requirements because security is not something that you settle on. And I think it's more of an increased awareness that those requirements are met in our existing architecture and the products that we have and then some.

That all makes a lot of sense guys. It sounds like it's sort of happening from both directions from you but also from them some. I guess, my second question is just a statement and just to congratulate Rafe joining a great team, but you really have a tough act to follow. So we'll miss you a lot, Peter. Thank you very much.

Thanks, John.

Our next question comes from Sterling Auty with JPMorgan.

I'll actually do that in reverse order. So Peter Campbell, congratulations on one hell of a run and good luck with all your future endeavors.

Thank you, Sterling.

Onto a question. I'm just kind of curious, we've seen some very strong results across a number of vendors in different spaces, including cybersecurity. Was there any, what you would consider, traditional fourth quarter budget plus spending where you had customers saying, geez, you know what, I do have a little bit of extra budget here so yes, let me add that extra product, as you mentioned, kind of the purchase statistics of some of those new products. So any year-end special budget plus spend that aided some of the spend?

No, I think -- and I'll let Peter talk about what he's seeing from a numbers point of view, but given that our results are really spread across a very large number of individual customers, many of them in the mid-markets, they don't necessarily have the same budget flesh dynamics that you might get in, in larger organizations, particularly in public sector type situations. So we don't really see a lot of that type of behavior. I think in the North American business, there is an IT buying sort of rhythm that can build up towards the end of December, considering that only 50% of our business is done out of North America. I think, we have very low exposure to that dynamic right now.

Yes. I mean, I just -- if there is a budget flesh, they're not telling us about it, but I think, what we're seeing is more -- I mean, we had a great quarter. It was a strong quarter, it was a clean quarter and I'm very happy with it. I think, there is a comment in the script where I talked about the size of the large deals, and I think those are really a function of the size of customer that we were seeing rather than dumping a whole bunch of products from some individual customers. So we did see an uptick in AOV in the large event that came from the average size of those customers being kind of 10,000, 15,000 seats and above and that's why we're seeing some increase in those AOVs. But yes, if you're aware of any of those budget flesh, send them our way, we're happy to take them.

Our next question comes from Gabriela Borges with Goldman Sachs.

My question is the forward-looking version of Sterling's question, which is just for either Peter Campbell or Peter Bauer. Maybe some commentary on what you're seeing in the pipeline? What is the demand environment look like? Anything, in particular, around your European customers, your British customers around Brexit? Anything to call out in terms of medium-size business spending in the U.S., all of that color would be helpful to us.

Great. So Gabriela, thanks. I think we're seeing a very consistent demand environment across all of our segments and across all of our geographies at that matter. I think we called out that we've seen nice momentum building in our new central European business, which is a new environment for us. So great to see that the drivers of demand and the opportunity there has started to become sort of really validated in some of the teams' sales results. The U.K. business continues to be strong. Australia, South Africa continuing to grow, no change in the demand environment there. Brexit is something that we watch closely, but we've not seen any change in buying behavior there. And then, likewise, our U.S. business continues to be very strong and none of the environmental factors around government shutdowns and so on have played into that at all. So we feel really good this quarter and the pipeline is continue to build and we see a good opportunity to finish off Q4 well.

Yes. I think, our European business grew well. Germany had a great quarter. It's still very small when you're looking at it in terms of our overall, but a very encouraging in terms of that business, well done to Michael and the team there, really starting to produce some results and that will grow over time. We're seeing very good constant currency growth in the U.K. and Europe. All of our agents are doing well. I mean, we've been in this a long time and there's a lot of environmental factors that can affect businesses, but I think, that kind of over the longer term, there is a ubiquitous need for our kind of ever-present threat. And so, we are nicely abstracted from that to a certain degree and we just continue to kind of build and grow the business.

Very good. And a follow-up, if I may, on the archiving business. Maybe just explain for us with Simply Migrate, how does that change your ability to close sale cycles and again share and archiving? How hard was it before? And how easy would it be now that you have Simply Migrate as part of the Mimecast ecosystem?

Thanks, Gabriela. That's a key point. I mean, we've been extremely successful in growing our archiving business and bringing on some pretty large customers and doing a fair amount of legacy migration historically. The change with Simply Migrate is that, in the past, if we have to do a large legacy data extraction and migration into Mimecast, it would usually have been a considerable cost associated with using a third-party sort of compared to ETL, extraction, transformation and loading in the data warehousing sense. Getting the data out of a legacy on-premise archive and migrating it or porting it into our system.

Now the downside in the past has been the cost and that can cause some sticker shock for customers when they realize that a migration project could equal 1x or even greater the annual subscription to the archive service itself and that can create a real barrier to getting a deal done. And then secondly, there's the time and effort involved in that, quite often is all putting to customers. So what Simply Migrate has really refined and developed great expertise and tuning around is making that probably about as simple as it can be to do this sort of fairly complex technical piece of work. And so, the opportunity that we see in front of us is to be able to own that on an end-to-end basis for customers and really give them an assurance of that one-stop shop solution and of the quality of the data movement, the speed of data movement because of some API integration work that we've done with Simply Migrate to put data directly into the Mimecast system and that's been proven after several migrations. But importantly, they have a lot more pricing flexibility when it comes to doing those migrations because this will be people, directly employed by Mimecast and intellectual property directly owned by Mimecast that will be able to these projects with. So we think that it can be meaningful for us, particularly with the larger archiving opportunities where there is important data sitting in underperforming legacy archive systems.

Our next question comes from Terry Tillman with SunTrust.

This is Eric Lemus on for Terry. I really appreciate the out-year guidance and it was very impressive and above where The Street numbers are. But if we extrapolate that bit, can you talk about what your thoughts are in the 3 markets that you serve in relation to this guidance looking at the pyramid of the small, midsize and enterprise and what the contribution of each is?

Sure. We don't -- Well, I think the initiative -- let me just reiterate the guidance there for people that may not be aware. 21% to 25% next year, which 23% is the midpoint, which we think is a good starting point. For the coming year, about $420 million. It's a highly recurring revenue model. A lot of that is going to come from our base and then from sales of our core products to new customers. With respect to those customers and the segments that they're in, it's difficult to predict exactly where that's going to land. We have been seeing more success upmarket. This has been a steady sort of progression over the last couple of years. If you looked within the percentage of our revenue above 5,000 seats over the last few quarters, we've been seeing that increase. So the only way you can get as an early predictor of what that's going to look like is looking at potentially your sales force and seeing what you're going after. And I would say that, we do increment in areas where we are successful. So we are continuing to sell in the small. We are continuing to sell in the mid. We are continuing to sell in the large. And we will increment where we are successful, but it is a gradual process and not -- there is no tectonic shifts that are going to come over time. So if you're going to try and predict it out by segment into 2020, I would look at this year as a starting point and then make some subtle changes on it as we grow.

I appreciate the color. And then, you guys touched on it briefly that the web security opportunity that you guys have in the market and some early new customers there. But can you talk a little bit deeper on your product stand -- where the product stands for market readiness at this point?

Yes. We introduced late last calendar year our version 1 of our web security product. Really a good comparison probably to the product that Cisco has in the market called Cisco Umbrella. And it offers a DNS-based capability as well as an endpoint agent that will do selective proxy work. Really to enhance the customer's defenses against Web-based attacks or phishing-type attacks that may not come through e-mail, they may come through social media, or they may come through some other mechanisms that -- or SaaS environments where customers are interacting. So we'll continue to invest in that product. We think that's a very large market opportunity. There are some strong competitors in that space. But our interest in being in that market really stems from the significant synergy that we see both from a back-end technology point of view with our core e-mail business as well as the advantages for customers in terms of being able to simplify the security configurations by having web and e-mail security embedded in the same suite or the same solution. So the additional -- there are additional features coming through over the next few months on that product. We'll continue to do partner enablement and sales enablement, having our sales team learn how to sell web security effectively. And we're very excited about that opportunity, but that is a longer game.

Our next question comes from Tim Klasell with Northland Securities.

My first question has to do -- or my question has to do with the larger deals. Is there any particular product that seems to be attracting the attention or anything is different in that product profile and the larger customers and sort of a corollary there? Are these bigger customers demanding maybe extra discounting from what you would normally see? Or is your pricing able to remain firm with those larger deals?

Sure, sure. Just first off on the product mix in those deals. We're seeing archives being sold into those larger deals. We're seeing basic Gateway. We're seeing TTP and IEP being sold into those and some of our newer products as well. So we're not seeing a difference in terms of our product mix in those larger deals. It's across our product set. So we're continuing to be successful there. I would say in terms of the pricing, if you have more users, you end up paying a little bit less. Our pricing is graded, fewer users, you pay more. If you have more users, you pay less. So the ARPU for those customers is a little bit lower. I would also highlight that margins are -- the cost of serving them is also a little bit lower. So you're looking at margins that are sometimes higher even though those ARPUs are lower. But I would expect there to be some discounting as you get into 10,000, 15,000, 20,000 seat customers compared to 100, 200 seat customers, and that's -- that is normal and we've had that throughout our history. So we haven't really seen any change in that over the last few quarters, as we've been more successful in that area.

Our next question comes from Gray Powell with Deutsche Bank.

So maybe just to start off, at least one of your peers in the security space talked about factoring in some level of conservatism in their outlook because of the-- so just because of broader macro issues. Is that something you tried to account for within your guidance? Or is your outlook purely based on the pace of the business you see today and your pipeline?

I think there's a few things. I mean, I mentioned the macro effects on our business before and I try and abstract those to some kind of broader degree. I think, as we're looking at our guidance for the coming year, at first, a bulk of it comes from our existing customers, and then, the existing customers, the products they have and the products that we're going to sell to them in terms of our upsell of those customers in the coming year and then, next from sales of our products to newer customers and that's based on history. That's based on pipeline. That's based on success rate to date. That's based on geographic split and where our reps exist. So a number of different factors come together in terms of looking at that, but they are mainly about broader Mimecast execution, rather than any external factors. We take into account that things don't always go as planned, but we've had many years where things don't always go as planned and then also do go as planned. So we're able to predict that a little more accurately over time. And remember, it is a highly predictive model. I mean, this is a very high subscription-based, very high recurring revenue model, so it is quite a predictive model. So -- but we take all that together when we put our guidance out.

All right. That's helpful. And then just a quick follow. I think in the prepared comments you mentioned something about some larger enterprise statistics and you cited like a 50% growth number. What was that referring to again? I just missed that.

I was referring to the average order value of those customers. So we talk about our AOV for our customers as a whole, our 33,300 customers being 10,700. But I wanted to call out that something that we saw over the last quarter was and the customers that have 5,000 seats and above, the average order of those customers increased substantially. And we talked before, it wasn't about those customers taking multiple products, it was more the size of average customer in that band that we were seeing an increase there. And so we wanted to call that out because it was unusual and also something to brag about a little bit.

Got it. And that's up 50% year-over-year?

Yes, over the prior quarter.

Over the prior quarter? Okay.

It is also over the prior year, but it was also sequential.

Our next question comes from Keith Bachman with BMO.

I actually wanted to ask about the comments that you made, the 50% number. You indicated that was, it sounds like primarily seats that was growing that. But within the context of the 5,000 customer base, how are you seeing mix help drive revenues? In other words, how was adoption of greater range of applications also driving that growth?

That's a good question. I mean, something I would highlight is that as we kind of -- quarter-over-quarter, we have seen our AOVs in each of our segments grow, but obviously, the 5,000 seats and above, it increased more substantially, which is why we called it out. In terms of the product mix kind of affecting that, there's nothing really that kind of stands out. I mean, I do think the -- if the average size of customer increases from 10,000 to 15,000 and they are buying the same products at the same price as we would have seen the -- we would have seen that increase. And I think it happened more like that, that your average size of our customer going up, rather than us benefiting from a cross-section of multiproduct purchases from these customers. I mean, we did see them buy archives. We did see them buy [SCG] and TTP and IEP together, but we had seen those last quarter. We had seen those last year, so it really is a customer-side issue. And again, look, we're not coordinating all of our efforts to 15,000 seat and above customers, but to John's comment earlier about the platform, it is suitable to tens of thousands of customers and to the absolute largest customers And I think they are starting to see the effects and the power of the product that we have and the way in which we serve it.

Appreciate that. It just seem like that might be future hunting ground as well as they are expanding those seats so meaningfully, that you can go back and resell them perhaps some of the other products.

That certainly is an upsell opportunity for us, yes.

Let me just ask about competition for a second and it really has 2 prongs to it. One is, as one of your competitors is not demonstrating the same consistency as you are, are you seeing them come down market at all and try to get say, the 3,000 to 5,000 seat engagements? And the second part of that is are you seeing any difference in behavior with your customer segments on Office 365 and the E5 bundle, specifically perhaps not being as a target-rich area for Mimecast? And that's it for me.

Great. So yes, in terms of the competitive landscape, we're seeing that a very consistent quarter-over-quarter, not much change to that at all. So yes, I think we have seen some of the competitors who've come out of the public markets and gone private and they've had some changes in pricing strategy and things like that, which I believe has benefited us probably more in the lower end of the market than on the higher end of the market. I think from an Office 365 and a Microsoft point of view, we continue to see great good attach rates of our solution with Office 365. I think we're now at 41% of our customers using us with Office 365, that's over 13,000 organizations to date. And I think that they -- Microsoft with their different bundling, line bundling marketing strategies, we haven't seen that play up in any way in terms of demand for our solutions. I think the independent offering that we bring with advanced, diverse layered security on top of 365 continues to demonstrate an advantage to Office 365 customers, whether they are E3 or E5 or have any of the additional security capability switched on with Microsoft. We're still adding a lot of value alongside that. I think the broader suite capabilities with uptime assurance and continuity, particularly relevant. Recently many organizations affected by some reliability challenges that Office 365 has manifested in the past few weeks. Our data recovery capabilities also popular Sync & Recover for Office 365, the search and independent archive functionality and DOP capability for compliance requirements that customers have. So it's a broad range of use cases that are driving attacks to Office 365. And I think that's been really robust, no matter what the packaging or bundling offerings are that Microsoft is putting together.

Our next question comes from Catharine Trebnick with Dougherty.

So when we did the headquarter's tour, you talked a little bit with us about your Email Security Risk Assessment. And I'm curious because again, this quarter, you had large deals. And how much does this really play into your ability to pull a really competitive bake-off off?

Absolutely. So I think, with larger organizations, there is a proof of value project that we work with these customers to perform and it's really running the Azure, the Email Security Risk Assessment behind or alongside their current security arrangements and then demonstrating to them the additional efficacy that they will benefit from working with us. Frequently customers, our large customers when they're doing a bake-off, we'll run that or pass one of our other POC options and compares with other providers in the marketplace. And I think we're really very satisfied with the way which we're performing in those tests. And I think some of these win rates are really starting to speak to the, particularly to the efficacy of the solution. Customers, of course, love the ease of use and they love the broader suite. But at the end of the day, we are being chosen very frequently because of our superior ability to identify threats inside e-mails, very obscure evasive threats inside e-mails and show customers quite a deep forensic level exactly what attackers are trying to do and that's helping us win.

Our next question comes from Alex Henderson with Needham & Company.

This is Daniel Park on for Alex. So I know early in January, you had mentioned the acquisition of Simply Migrate. Just wondering if you could maybe provide some color for us on sort of how this sort of make sure archiving segment more robust? And how you expect to sort of roll these new features into your future solutions?

Great. So our archiving business is fairly sizable. Within our base, we have more than 40% of our customers who purchased archiving. And so there is still great opportunity to upsell customers as well as win new customers in the market. What we've seen is there's a certain barrier to adoption of archiving technology when a customer has a lot of data in a legacy archive, archive-archive. Some of the formats are complex to extract reliably. And so, what Simply Migrate has been a company that we partnered with very successfully over the past year or so to do some of those migrations. So by being part of Mimecast, it gives us control of the road map, the ability to do a greater level of integration between their toolsets and our technology but also change some of the economics and the ergonomics for customers that are looking to get out of the legacy e-mail archiving business. So it's going to be a competitive advantage for us in targeting some of those legacy archive environments migrations to the cloud.

Our next question comes from Matt Hedberg with RBC Capital Markets.

It's Dan Bergstrom for Matt Hedberg. Just curious, any more color around the 7 figure deal? What vertical was the replacement deal? Any products to highlight from it?

Sure. Without giving too much detail, financial services customer, working across Middle East and Africa, about 55,000 employees. They were using a SaaS-based e-mail security product that we would consider to be from one of our more legacy competitors in the marketplace and really looking at a next-generation solution that could provide them with greater levels of control and consolidation of some of the other services, but in particular, in order to meet their stringent compliance requirements, being able to show that they had a really strong level of e-mail security to combat things like business e-mail compromise and e-mail fraud, and so on. So a great win for us and we look forward to doing some more deals like that as we bed them down into a strong referenceable customer.

Our next question comes from Steven Koenig with Wedbush Securities.

Wanted to just ask 2 quick ones. First one is how often is the breach the catalyst for a deal, and are you seeing this change, like the percentage, the uptime, this is the catalyst? Is that -- is this evolving? And is it different for Office 365 customers? And then just real quickly, if you could just comment on the e-mail threat landscape that you're seeing evolve in 2019? What are the hot topics right now for your customers in terms of what they're worrying about more this year?

Great. So I would say, so less than -- so breaches always catalysts. It doesn't have to be the company themselves experiencing a breach, it can be somebody in the ecosystem or them becoming aware of a breach. What I would say is a big driver to what we classify as close shaves, so where customers are seeing particularly dangerous e-mails landing up within the boxes, perhaps having employees almost fall for something or even fall for something without there being a considerable damage, but it being something that really alarms the organization, perhaps it's purchasing iTunes gift cards or something like that where the financial implications aren't particularly big, but it makes them realize quite how vulnerable they are and how much more impactful an attack like that could become. So things like that really drive the need for products like our awareness training product as well as our more advanced e-mail security offerings. So that's an important driver of demand.

With that, I'm showing no further questions. So I would like to turn it back over to Mr. Bauer for closing remarks.

Great. Folks, thanks very much for joining our call and we hope you enjoyed your very last call with Peter Campbell. I want to say thank you once again to him for everything he has done to help us build the company. And we look forward to our next call with you in a few months time with our new CFO, Rafe Brown. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Everyone, have a wonderful day.