Mimecast Limited (MIME) 2022 Q1 法說會逐字稿

Good morning, and welcome to Mimecast's earnings call for the fiscal first quarter 2022. I'm Robert Sanders, Director of Investor Relations. With me on the call this morning are Peter Bauer, our Co-Founder, Chairman and CEO; and Rafe Brown, our CFO. Today's conference call is being broadcast live. A replay of this call will be available after the live call has ended.

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, including risks and uncertainties related to our recent security incident and the ongoing impact of the global COVID-19 pandemic. 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 on this conference call.

These risk factors are further defined in Mimecast's most recent Form 10-Q 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 or a substitute for or superior to our GAAP results. A reconciliation of GAAP to non-GAAP measures and the reasons for our representation of the non-GAAP information 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 August 3, 2021. 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 morning, everyone, and thank you for joining us. I hope that you and your families are doing well. I'll begin with some key takeaways from the quarter, which underscore our continued progress and highlight the improving macro environment in some of our markets. I'll also address the threat landscape and touch on the appointments of our new Chief Marketing Officer and our new Chief Technology and Product Officer. Both bring great new capabilities and talents to our organization to help us execute on our strategy. And then Rafe will take us through detailed financial results.

We are pleased to report results this quarter that exceed the high end of our guidance across all metrics. We generated $142.5 million in revenues, which is up 15% year-over-year in constant currency terms. We also drove an increase in average order value to $14,000, which is up approximately 9% over the prior year in constant currency. And we increased the number of services per customer to 3.6, which is up from 3.4 last year. And importantly, we delivered a sequential improvement in our retention rate with net revenue retention of 105% in the quarter.

As these results suggest, we had great success selling our multi-product portfolio to new and existing customers. We continue our growth across all segments, including the enterprise, where we have 19% of revenue coming from organizations with 5,000 seats or more. As a growing number of larger organizations place their trust in Mimecast, we continue to strengthen our brand reputation amongst this customer set, better positioning us to continue to win. In total, we brought 600 net new customers into the Mimecast family this quarter.

We achieved an important milestone. Mimecast now serves over 40,000 customers. We saw particular strength in North America and the U.K., our 2 largest markets, while in some of our international markets, recovery has lagged. Our growing customer base brings scale to our platform, and we generated $31.6 million in free cash flow, a 22% free cash flow margin, and we'll continue our bottom line expansion as we grow. We continue to advance our 3 pronged growth strategy as we expand our footprint in the enterprise market, we sell our multiproduct platform, and we automate to create even stronger and easier to use engagements for our SMB customers and our channel partners.

Let me share some highlights from the quarter. Now our U.K. business showed signs of recovery, and let me share some anecdotes of new enterprise wins here. A U.K.-based animal wellness organization purchased our Zone 1 products for their 6,000 employees and a U.K.-based professional services firm, also with 6,000 employees, selected our Zone 1 protection and 2 of our more recent offerings in DMARC Analyzer, Zone 3 and web security. A global medical technology provider based in the EU, purchased our Zone 1 product, added awareness training in Zone 2 and included secure messaging in their subscription for 11,000 employees.

As noted earlier, we have significant success upselling to existing customers too. We achieved our largest ever upsell this quarter, a 7-figure deal with a customer that's been with us for several years. Of this, financial services company based in the U.K., added seats following an acquisition and now relies on Mimecast to protect all 35,000 employees with services across all 3 zones of cyber defense and our data governance offering. Then a U.S. health care provider added services for their 75,000 employees, and they now use 5 Mimecast services across Zone 1 and 2 as well as our secure messaging service. Then a South African based financial services firm chose to consolidate vendors onto Mimecast multiservice platform for their 50,000 employees, and they now deploy security services across Zones 1, 2 and 3 as well as our continuity, large file sending and secure messaging services.

We also had success selling bundled services to new customers. For example, a U.S. manufacturer of medical products with 4,500 employees, purchased Zone 1 Internal Email Protect, Brand Exploit Protect, continuity and 2 of our newest offerings, browser isolation and CyberGraph, enabling us to provide comprehensive protection to this customer. We also had a few significant new customer wins in the U.S. public sector, including a U.S. municipal government, purchased nearly our entire product suite, 10 products for their 2,500 employees. Then the government of a large U.S. county purchased Zone 1 and Internal Email Protect for their 7,900 employees.

Additionally, we achieved Criminal Justice Information Services certification or CJIS in Missouri and led to a new customer win in Q1 with over 4,000 employees. Now we believe CJIS certification is an important milestone that could lead to additional public sector customers selecting Mimecast in the future. As these examples highlight, our expanding footprint in the public sector supports both our enterprise and our multi-product strategy.

In terms of products, our DMARC Analyzer service continues to be popular among our customers, contributing to new subscription revenue in the quarter. But we also saw particular strength in awareness training and Internal Email Protect, with 500 and 700 net new customers, respectively. Our underpinning all of our success is our continued focus on innovating and expanding our platform, consistent with our E-mail Security 3.0 and cyber resilience strategy for customers. In this quarter, we launched CyberGraph, a new product module, which uses AI and machine learning to mitigate human error and contract the most advanced e-mail based attacks. And we have seen strong early engagement with CyberGraph and believe this will support our market-leading position.

Our API and alliances program also continued to pioneer new integrations with security technology partners this quarter. These integrations allow organizations to incorporate Mimecast threat intelligence and automation capabilities into their broader security ecosystem, and they help us win new customers and deepen existing relationships. Among the partnerships we launched this quarter was with Humio, CrowdStrike company that orchestrates alerts and actions across an organization's IT estate. The CrowdStrike partnership is one of our fastest-growing API partnerships with over 300 joint customers already. And this integration is also supporting our enterprise growth strategy. Some of our largest customers using it, including a 160,000 person global beverage company.

Now turning to the threat landscape. You may have heard me say that cyber resilience is more important than ever, and we blocked nearly 790 million malicious files from January through June 2021, and that's more than a 15% increase over 2020. And in 2020, we saw more than a 65% increase from the year before as attack has capitalized on companies across the world moving to remote work. Emboldened attackers are targeting larger and more high-profile companies as we saw from the ransomware attacks that disrupted the U.S. food and energy supply, transportation networks and hospitals over the last several months. Importantly, more than 90% of all threats, including ransomware, originate via e-mail.

From April through June, approximately 35% of the tax were impersonation attacks, targeting employees with privileged access to systems and information, illustrating the targeted nature and high-stakes of these campaigns. Our E-mail Security 3.0 from Mimecast is helping companies protect against the most determined attackers, and our multi-product platform works together as an integrated system to provide companies with early detection and prevention to help them mitigate attacker's progress. And we believe organizations with all of our products have the strongest cybersecurity and resilience available on the market today and at the lowest total cost of ownership. We believe that recent attacks have made companies take cyber risks even more seriously and reevaluate their security budget and e-mail security systems.

Now we continue to expand and transform our platform, with our progress accelerated through the creation of an integrated product and engineering organization, now led by our new Chief Product and Technology Officer, David Raissipour. And we are confident that the actions we have taken over the last several quarters to strengthen our marketing teams, led by new Chief Marketing Officer, Bernd Leger, and our investments in go-to-market generally will help us to continue our momentum.

And with that, I'll turn it over to Rafe.

Thank you, Peter. I'm pleased to report that we exceeded the high end of our guidance for revenue, adjusted EBITDA and free cash flow for the first quarter of fiscal 2022. As I begin, I would like to note that we are now seeing signs of economic recovery in both of our largest markets. North America continued to see an improving selling environment, and we were particularly pleased to see U.K. performance bounce back as they turned in a strong Q1. While the impact of COVID-19 remains dynamic, particularly in some of our smaller geographies, the continued improvement in North America and the first signs of recovery in the U.K. are encouraging as these 2 regions comprise approximately 80% of our revenue.

Let's now turn to our results. In the first quarter, we generated revenue of $142.5 million, which represents a 24% improvement over the prior year in absolute dollar terms. Adjusting for $9.7 million of currency tailwind, our constant currency growth rate over the prior year was 15% for the quarter. Note that since providing guidance in May, foreign currency fluctuations positively impacted our first quarter revenue results by $800,000. Our top line results were helped by continued year-on-year increases in average order values, or AOV. Calculated at July 26 FX rates, AOV for all customers stands at $14,000, up approximately 9% over the prior year in constant currency terms, driven by the average number of services per customer across our customer base, rising to 3.6 services per customer compared to 3.4 services this time last year as well as seat expansion within our base customers as they added new employees.

We added 600 net new customers in the first quarter, bringing our total customer count to 40,600. The sequential net new customer improvement was seen in all segments, but in particular, we saw a noticeable improvement among our smaller customers with a sequentially higher count of new customers and decreased churn. Net revenue retention stood at 105% for the fourth quarter period ending June 30, building off stabilization of this metric that we noted last quarter. As a reminder, we calculate this metric on a trailing 4-quarter basis and feel it is particularly important as it is dollar-based as opposed to purely customer count base.

Looking at its components, upsell totaled 113%, where we saw strength in both product-based upsell as well as seat and price-based upsell. On the product side, the first quarter saw strong interest in our DMARC and awareness training solutions as well as good traction with our newly released CyberGraph solution. Down sell and churn totaled 9% for the 4-quarter period. We are seeing continued signs of stabilization on down-sell and churn rates and anticipate an improving macroeconomic environment will further this trend. It is worth noting that this is the first quarter since the pandemic began that we've seen an improvement in the net revenue retention metric, providing further evidence of the improving strength of our business.

We continue to drive improvements in gross margins. In the quarter, we recognized a 78.3% non-GAAP gross margin, up 120 basis points from the first quarter of the prior year, a good step towards our long-term goal of achieving an 80% non-GAAP gross margin. Adjusted EBITDA for the first quarter totaled $38.6 million, representing an adjusted EBITDA margin of 27.1% compared to 22.3% in the same quarter the prior year, a 480 basis point improvement.

Now turning to the bottom line. Our non-GAAP operating profit for the first quarter was $29.9 million or 20.9% of revenue, an improvement of 560 basis points from the prior year. We reported GAAP net income of $10.1 million for the first quarter or a profit of $0.15 per diluted share based on 66.9 million fully diluted weighted average shares outstanding. Our GAAP tax expenses totaled $400,000 in the first quarter, which included a discrete stock windfall benefit of $1.3 million. Given recent windfall tax benefits, we expect our full year GAAP tax expense to be approximately $6.3 million. Our non-GAAP net income for the first quarter was $21.7 million or $0.32 per diluted share.

Consistent with the methodology followed by a number of other successful technology businesses, I would like to note a change we are making in calculating our non-GAAP tax rate. To provide better consistency across interim reporting periods, starting this quarter, we have adopted a long-term projected non-GAAP tax rate of 25%. This non-GAAP tax rate excludes the income tax effects of our non-GAAP adjustments. This change was made in accordance with the SEC's non-GAAP financial measures, compliance and disclosure interpretations, 102.11.

Under this methodology, we calculated an effective non-GAAP tax expense commensurate with our level of non-GAAP profitability using an estimated long-term tax rate applied to our non-GAAP pretax earnings. It is important to note that this approach is solely for purposes of applying a notional tax rate to non-GAAP pretax income. And as such, these figures have no impact on our GAAP consolidated financial statements or the cash taxes we pay. We've included a table in today's press release, which presents a reconciliation of net income to non-GAAP net income as well as the summary, non-GAAP tax recast for the prior fiscal year. I would also note that our projected 25% non-GAAP tax rate is consistent with the guidance we provided last quarter.

Turning to cash flow. First quarter operating cash flows totaled $40.7 million or 28.6% of revenue. Free cash flow totaled $31.6 million for the quarter or 22.2% of revenue. As of June 30, Mimecast had $338 million of cash on the balance sheet. Net of debt, our current cash balance stands at $236 million.

Let me now turn to guidance. For the second quarter of fiscal 2022, revenue is expected to be between $141.8 million and $143.3 million or 12% to 13% growth in constant currency terms. Our guidance is based on exchange rates as of July 26, 2021, and includes an estimated positive impact of $4.6 million resulting from the weakening of the U.S. dollar compared to the prior year. Adjusted EBITDA for the second quarter is expected to be between $39.8 million and $40.8 million, which at the midpoint reflects an adjusted EBITDA margin of 28.2%, up 80 basis points from Q2 of last year. Free cash flow for the second quarter is expected to be between $24.5 million and $25.5 million, which at the midpoint reflects a free cash flow margin of 17.6%.

Turning to the full fiscal year. Fiscal 2022 revenue is expected to be between $576.7 million and $583.4 million or 12% to 13% growth in constant currency terms. Adding the details, foreign exchange rate fluctuations are positively impacting this guidance by an estimated $16.2 million compared to the rates in effect in the prior year. The prior guidance for fiscal 2022 provided in May was $574.7 million at the midpoint. Our overachievement in Q1, coupled with the strength we've seen in our business, is leading us to raise the midpoint of our full year guidance by $8 million in constant currency terms. This increase of $8 million is being negatively impacted by $2.6 million of foreign exchange headwind that has arisen since the rates used in our May call, resulting in the midpoint of our full year guidance moving up by a net $5.4 million in absolute dollar terms from a midpoint of $574.7 million to a midpoint of $580.1 million.

We are raising full year 2022 adjusted EBITDA guidance to be between $152 million and $154 million, which at the midpoint of our guidance would reflect an adjusted EBITDA margin of 26%, up 100 basis points from the prior year, despite our anticipating a return of costs associated with travel and in-person events for the remainder of the fiscal year. At the midpoint, this represents a $3.5 million improvement over our prior guidance. We are also raising full year 2022 free cash flow expectations to a range of $126.8 to $128.8 million, reflecting a free cash flow margin of 22% at the midpoint of our revenue guidance. This is a 440 basis point improvement over the prior year. At the midpoint, this represents a $4.1 million of improvement over our prior guidance.

To conclude, the Mimecast business is demonstrating its resilience. The strength we noted in North America and the U.K. is giving us confidence as we look forward to the full fiscal year. As our teams continue to focus on keeping our customers safe and growing our business, we are pleased with our execution and our strong start to fiscal 2022.

With that, I'll turn it back to Peter for some closing remarks.

Thanks, Rafe. We have a differentiated platform and a durable business model with 98% recurring revenue, industry-leading retention and high gross margin. Our results this quarter demonstrate our success in staying close to our customers, innovating on and expanding our capabilities to best protect customers against an advancing threat landscape and running our business efficiently and profitably. I want to thank all of our employees for your hard work, your resilience, innovative thinking and strong execution.

Now operator, if you would please open the line for questions.

(Operator Instructions) Our first question comes from Saket Kalia with Barclays.

Peter, maybe just to start with you. A lot of great stuff to kind of touch on in the quarter. Maybe just zooming out a little bit. I'd love to talk a little bit about the competitive environment, just to level set. And particularly, whether you've seen anything change competitively as a result of Proofpoint's recent changes as well as any commentary you would offer on Microsoft competitively? Does that make sense?

Absolutely, Saket. So I think to begin with, we've made -- continue to make really good progress upmarket. And obviously, that's an area where Proofpoint has built a strong franchise. I think with respect to their M&A, they've take private deal with Thoma Bravo. Look, I think M&A in our space typically always represents an opportunity, kind of minimum creating opportunities for us to have further conversations with prospective customers. And over time, as we've looked back at M&A and ownership structure changes in our space, they've almost always yielded additional opportunity for Mimecast. So I think it will take some time to see how that will pans out.

Thing with respect to Microsoft, what we've seen out there is an intensifying of the cyber threat landscape. I'm sure you're familiar with the anecdotes and the new stories of how the Microsoft platform has been very heavily targeted lately, both obviously, end users, the human layer being targeted, but also Microsoft vulnerabilities being identified and exploited. And so this is really driving an appetite for defensive depth and layered independent, best-of-breed security brought on top of Microsoft, so that we get away from a marginous attack surface in a single flavor of security approach. And organizations are really able to mitigate against some of these fast spreading, highly scalable threats that we've seen of there. So our share of Office 365 customers that are benefiting from the cybersecurity and resilience platform that we layer on top of Office 365 is certainly continuing to grow nicely.

Got it. That's really helpful. Rafe, maybe for -- my follow-up for you. It was great to see the net revenue retention start to increase again. Can you just maybe just talk about which area is driving sort of that sequential improvement, meaning is churn perhaps getting a little bit better? Or is it more upsell, cross-sell? Just any color sort of on kind of what's driving that sequential improvement?

Yes. Thanks, Saket. We were obviously very pleased with our result because it's just incredibly important to the company, and it speaks to the good work we're doing with our customers. The great news here for us is we actually saw it on both sides of the equation. The upsell came in stronger this quarter as a rate, down sell and churn improved. And so that improvement from 104 of last quarter up to 105, it's almost evenly split along those lines. And I think there's some great things in there. There's -- the new products we're taking to our customers, and they're seeing value in and buying. But you're also seeing some of the companies that decreased seat count last year, coming back and adding seats, which is really encouraging.

And then obviously, on the downside insurance side, I think we've been extremely focused on getting out in front renewals with our customers. I think we're seeing signs of paying off there. And obviously, that's helped by an improving macro environment, at least in our biggest markets.

Our next question comes from Steve Koenig with SMBC Nikko.

Things are recovering well. I was curious, a little a bit of tangential here. I was wondering on the -- as you're seeing more customers move to cloud and not beyond just the migration to Office 365, as they look at Zero Trust Network architectures, et cetera, how does that changing security landscape affect you guys in terms of selling motions or how you're going to be integrated with the broader security architectures and the -- and also with the other threat vectors? Just curious your view on the private landscape that is changing and moving to cloud?

Yes, it's a great question. So I think about it in 2 ways. Firstly, how does my cost fit in with the broader security architecture that a customer is putting together. And this has been a huge area of investment for us with our platform and our API integrations. So today, we have over 60 out-of-the-box integrations with a variety of security products, industry-leading security products that our customers uses as well as certain other tools that they use perhaps for compliance and e-discovery. And these really help our organizations build a stronger security architecture by connecting threat intelligence that we gather as well as threat intelligence that these other products gather and integrating them bidirectionally with our technology.

They also improve incident response capabilities with automation and workflow capabilities with things like [slim and slow] environments. So we're increasingly seeing our customers connecting us up to build a robust security architecture in conjunction with the rest of their product. And in fact, just today at Black Hat, we're announcing our new integration and partnership with Exabeam and the formulation of a -- of the XDR Alliance in conjunction with them. So that's really exciting. I think the second thing, what's really interesting in a sort of a Zero Trust Architecture is that e-mail and messaging sort of cuts all the way through that. So while you can secure access to systems and use Zero Trust Network approaches to reduce the attack surface, by definition, e-mail and messaging must remain open so that you can communicate with the outside world.

And so the layers of technology that we bring to interrogate messaging and e-mail traffic to make sure that it is -- it's keen and safe and then tracking how those messages are used inside an organization and looking for threats that might be moving laterally inside the organization, essentially not trusting internal e-mail, if you like, the way one might have historically is really important for organizations today. So there's no simple networking solution to the e-mail and messaging security problem simply because it must be an open port to communicate with the outside world.

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

This is Anusha for Matt Hedberg. Congratulations on the strong start to the fiscal year with accelerating growth. Peter, can you start by talking about the overall demand environment coming out of the pandemic? And specifically for those customers or verticals that were heavily impacted by COVID, how are you seeing buying trends from this group as we emerge from the pandemic? Are those customers adopting more modules on an initial deal versus what you've seen historically?

Yes. Great question. So we've had a really strong quarter from an upsell perspective with customers purchasing more products, and you can see that in our increase of average number of products per customer from 3.4 up to 3.6 as well as the growth in our average order value, which reflects a couple of factors, but very much customers, existing customers buying additional modules. I think we are seeing, particularly in the U.K. and the U.S., some economic recovery across -- confidence across all sectors, particularly those that have been impacted by COVID during the pandemic. And so we're seeing a little bit of a rebound there. Obviously, we're not off the other side of the pandemic entirely, and in some of our markets, the recovery is lagging.

We feel good that our customers are coming back in aggregate and continuing to buy and demand more products from us. And now with 40,600 customers, it represents a really strong base as they hire more staff and continue to adopt additional modules from us.

Our next question comes from Jonathan Ruykhaver with Baird.

So I'm wondering if you could talk a little bit more about CyberGraph. Just what exactly that brings to the Mimecast platform? And how should we be thinking about monetization and anything else worth noting?

Yes. Great. Thanks, Jonathan. So CyberGraph, the way in which CyberGraph works is it leverages graph database technology and machine learning. And essentially, it builds baselines of what normal good communication traffic looks like. In quite a rich sense using many, many different variables of that communication, looking deep inside the messages as well as metadata, and it goes as normal baseline. And then as deviations occur to that, as we see sort of abnormalities in the -- in those patterns, we leverage that to make security decisions. One of the cool things about it is it can share those insights. It can share some of those contextual pieces of information dynamically with the end user inside the message across mobile and across desktop mail clients and help them make informed decisions.

Let them know for example that they've never communicated with this person before, even if that person may be using the same display name as someone they feel they're familiar with. So you can imagine how -- as an example, if they're involved in the communication chain around making a particular payment and some e-mail appears with a change to -- change of bank details, we would flag that and let them know we may have blocked that in the first place, but we may flag that as well and let them know this is a potential problem with this message. And so it really provides that additional depth for some of these highly targeted and very advanced attacks that may not contain malware or a particular payload, but maybe looking at business e-mail compromise or some kind of a phishing attack.

From a monetization point of view, this is a brand-new module, and we've introduced it to our customers. We're seeing a lot of interest in it. The monetization strategy is still under development. It is a billable module. Today, customers are paying additionally for it. And it really has been initially one of the contributors to our growth in AOV, which I think you can see has gone up 9% year-over-year, up to $14,000 today. And so modules like CyberGraph contribute towards that motion, and we'll continue to see what the potential is overall with CyberGraph as we penetrate our customer base more deeply with it in the coming quarters.

But Peter, it sounds like it has broad applicability across the different offerings you provide. Is this something that could potentially drive a premium version of your current offerings? Or will it just be one module, which I think is what you just suggested?

So yes, that's a great question. It's early with the product. So the way we've typically approached the introduction of new modules is to initially offer it as a discrete module, again, a sense of customer value and sort of price points around it. And then over time, we may look to incorporate that into a premium edition of our product. And that's a reasonably sort of common motion that we've followed over time with the introduction of sort of highly adjacent premium capabilities that we've released. So yes, that's exactly the right question, and that's how we think about it and how we look at how these things travel through time and drive a greater adoption.

Our next question comes from Terry Tillman with Truist.

This is Joe Meares on for Terry. You had mentioned in the press release as well as the prepared remarks about strengthening the marketing team as well as building on integrated product organization. Could you delve a little bit into this more from the vantage point of the benefits from both efforts? And are there still more benefits in the coming quarters from these areas?

Yes, absolutely. That's right. So these are brand new changes and evolutions inside our organization. So we're looking to the benefits going forward. So the thinking behind the changes and some of the benefits that we're starting to see, if you look at who Mimecast is from a market positioning, a market perception perspective, we've built a really strong franchise in the SMB and mid-market. And we have an emerging strength in the enterprise space, now with 19% of our revenues from organizations about 5,000 seats. And we've started to build a really strong referenceable base in the higher end of the enterprise.

And that represents, I think, a real opportunity for our marketing organization to capitalize on that and build that brand upmarket as a leading cybersecurity and resilience provider in the enterprise. So I think there's real upside there for us, and the marketing team is focused on that as well as all of the usual dimensions of improving our impact at scale from a digital marketing perspective, channel marketing perspective and building out our organization, looking at our global operations to and how we can support their growth through the marketing organization.

And from a product team perspective, we've spoken quite a bit about the thinking behind this integrated product and engineering organization. And we're super excited about some of those synergies and new capabilities as we brought those groups closer together. And obviously, David has just joined. He is a handful of weeks into the -- into his new role. And really looking at how we shape that organization to continue to accelerate innovation and bring out even more industry-leading cybersecurity capabilities for our customers and capitalizing on this terrific platform that we've built that is a true multi-tenant, multi-product architecture and how we leverage that to create an even better experience and better defenses for our customers into the future.

Our next question comes from Nehal Chokshi with Northland Capital.

And thank you for the explanation on the constant currency effective guidance raise. That being said, big (inaudible) on constant currency is that you did put up a 15% year-over-year growth in the June quarter here, and you're guiding to 12% to 13% for the next quarter. What's the largest sort of step down in that year-over-year growth rate here?

Yes. Thank you for the question. So one of the things we talked about, I think, over the last couple of quarters is that largely because of the way our revenue is recognized. Remember, 98% of our revenue is deferred. So even when we have a great quarter, that revenue is going to be recognized over the contract life, typically around a year. And so you get this delay. So we talked about that U shape recovery. And we see that really come into play. I would point out, this is the first quarter over the last few where our next quarter guidance is perfectly aligned with our full year guidance, again, both at 12% to 13%. So I think really establishing that U-shaped recovery we're talking about and positioning us as we continue to execute for reacceleration. Now so all of that, I think, is one part of your question.

Another part of it is just -- as we look forward -- or excuse me, as we look into this next quarter, there was a couple of really good things that happened in Q1. The linearity of Q1 actually came in quite strong earlier on in the quarter. And I mentioned in my prepared remarks about how we saw strengthen in the U.K. That was helpful, and it happened early enough in the quarter. It actually helped quite a bit. And we also -- Q1 is a quarter where we're doing a lot of the implementations and importing data to our archiving solution, those kind of things from the prior quarter. And so we had perhaps a little bit higher than you'd normally expect of kind of some of that one-off income. Even though it's only 2% of the full year, a few hundred thousand dollars of that makes a difference.

So we had, I think, a number of really good things coming for us in the Q1 revenue recognition. But the real important thing here is our bookings performance set us up for a strong rest of the year. That's where we got that $8 million constant currency raise. And recall, that came on the back of a $6.5 million constant currency raise last quarter. So it's like -- it's 2 quarters in the row where you're seeing the business strengthen. And I think that's -- it's playing out just as we had hoped.

Great. Just a follow-up here. Does that mean that strengthen the business in the current fiscal Q2 has trended similarly to what you saw in Q1?

Yes. So we're -- for the 1-month that we're into it, we did feel good about the strong start to Q2. Obviously, that's something we've taken close account as we're doing our guidance. But yes, we're seeing again that strength, particularly in North America and the U.K., off to a strong start for the quarter. So that also helped with that confidence for that $8 million constant currency raise.

Our next question comes from Catharine Trebnick with Colliers.

Could you just reiterate if I missed it, I was -- I had to get off for a client call. But last couple of -- the last quarter, you talked about how you're restaffing. And you're talking about bringing in a higher level of sales expertise and looking to replace staff that we're more focused on the SMB. So it's a 2-part question. How is the staffing going or how are you doing in your staffing and getting new guys to come in or go? And then what type of automation have you put in place or plan to put in place to do a better job to go after the SMB market? Even though you're looking at moving upmarket, I do believe you are still trying to maintain part of it through automation.

Yes. Thanks, Catharine. You're spot on and just making sure everyone's alive, we did talk about a restructuring for that shift that you called out, where we're trying to make sure we're deploying resources in line with our strategic initiatives. And if people are to go to our website, you'll see we have a number of job openings out there that has actually increased. We're very much focused on investing in line with the strategic initiatives that we've shared. We're also really focused on, as we're seeing strength in the economy, investing in that growth opportunity.

So I think both the things are happening. I would say we're making good progress on that front. I think like many of peer companies out there, the job market is certainly competitive right now. Definitely, in North America, that's the case. But we're getting some really talented people joining us, and I think they're excited about what Mimecast does and how it protects customers, but also excited about being part of the Mimecast story. So great progress there. We do have those openings, though. So we welcome any referrals that people might have.

Now the second part of your question is, of course, near and dear to the finance guys heart about where we can automate and drive efficiency. And we have a number of projects underway, and some of them are starting to produce benefit already. But one of the first areas we're really focused on is how we can improve our automation vis-a-vis the channel and particularly the MSPs. I think that's a great opportunity to reach a lot of the customers and enable the ecosystem around Mimecast, which will further drive growth.

So making it easier for them to transact with us, make it more automated, all of those are really primary efforts as we launch into that. We kind of have a long detailed list in the, if you will, in the quote-to-cash cycle, where we start in the top end of it, not just with the channel, but where we think we can go in and frankly, modernize our systems and upgrade them to reflect the much larger organization we are now. And we're looking at everything about how do we make this easier to drive that growth to $1 billion.

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

Great. I wanted to go back to the architectural question that was raised earlier, I think because it's really critical. You've spent a lot of time building out a truly microservices-based cloud-native architecture. It is -- in my opinion, the defining characteristic of your strategy from the get-go. It seems like as we move to this platform world, what we've been calling for 3 years, the Lumen Platform was that you become strategically more important. And the integration of your APIs become much more resilient than any of your competitors. Can you talk about the differentiation of your platform against your competitive -- the competitive landscape in that context?

Yes. It's a key point. So -- and obviously, this is really where architecture does provide us with advantages because across all of our products, we're able to deliver a consistent, easy to use integration experience where features and functions of the products can be called quite easy by developers, our own developers, developers that are at partners and other vendors to build these integrations, and that's really helped us to accelerate the breadth of integrations that we do have. I think without that, from a competitive standpoint, other competitors can find themselves having to either build or acquire additional solutions that they have to provide to customers, so sort of limit customers' choice down to the products that they have as opposed to our strategy, which is expand the choice, work and interoperate with the other products and platforms that customers are choosing or already get much less value out of the e-mail and messaging security threat landscape.

So if you think about e-mail, it's such an interesting and intense attack surface. And the opportunity to extract value and telemetry out of what is going on in that attack surface and translate that into threat intelligence that can be consumed by other products or other parts of the environment really starts to enable customers to think about e-mail and messaging security, not just as a way of sort of plugging a gap or plugging a hole or putting an additional sort of fence up over that aspect, but really as something that can be a strategic contributor to their overall architecture and can strengthen several other parts of their security architecture.

And so that's really the strategy. And that being able to do that technically at scale really does require an architecture. So this kind of approach can be available to 40,000 customers instantly as opposed to having to perhaps bring in expensive consultancy and handcraft integrations, which really is out of reach for the majority of organizations today. So providing this out of the box and making it really quick and easy is what the architecture provides and what we really designed for here.

If I could slide in the second question? You mentioned that you're starting to see a rebound over the course of the quarter and the demand as customers rehire and so forth. Has that accelerated over the course of the quarter? In other words, is it not that -- I assume it's not a linear thing that it actually has improved month-to-month to month and that the highest rate of transition is actually in the headlights as opposed to the rear-view mirror?

Yes. I think that -- like I think as things are improving, that is absolutely the case. That's -- it's picking up as it goes along. I think the one thing we should just caution is, like, unfortunately, every software company out there, we tend to do the bulk of our business in the third month of the quarter. So that tends to be where you have big renewals and opportunities for that. So that might skew my data to say that it's improving across the quarter. But I mean, certainly, we're seeing a lot of companies out there hiring, right? And that drives additional seats, and that's going to help us out. And especially as we see that moving beyond North America and hopefully picking up steam around the world, that will continue to be a big part of the story on that net revenue retention rate metric.

Our next question comes from Brian Essex with Goldman Sachs.

Peter, I just wanted to follow up on -- you had some commentary around Humio and Exabeam. Maybe if you could dig into that a little bit in terms of how you're partnering with XDR platforms, the nature of those relationships? Is this something more complex than providing raw data for better ingestion into those platforms? And maybe a little background there to understand how those relationships are evolving and technically how much work does that require on your end?

Yes. That's a great question. So there is a data exchange component to it. And then there are also hooks in terms of automation that are part of the solution. And so -- and these things evolve and develop over time. So we've got our first integration out right now. And obviously, Humio owned by CrowdStrike. This is another integration in the CrowdStrike family. So it's a little bit more broad-based with CrowdStrike too. How it was -- how we really capitalize on this with our customers and our channel partners is quite interesting too.

So, from a go-to-market perspective, we're able to take these integrations and really talk to customers with our channel partners that sell each one of these different solutions in many cases and have quite interesting joint go-to-market activities, have collaborations between our sales organizations and the sales organizations of these vendors, and then work with our channel partners in the field to do educational events and other promotional activity that I think helps customers see the stronger solutions that we're building together and that are available to them.

So we're very bullish on these partnerships and the value that they bring to customers. And we'll continue to evolve and develop the technology that brings them together as these different use cases that we support initially get deployed into the field.

Got it. That's helpful. And maybe just a quick follow-up for Rafe. Just noticed the spike in R&D, I think you talked a little bit about initiatives on the development side, but maybe a little bit more detail in terms of spending there and expectations for the remainder of the year?

Yes. No, that's a good call out. So one of the things to just to begin with, we have throughout the pandemic, continue to be prioritizing investment around our product side. So you're seeing some of that, in some of the hiring that's going on there, that's part of it. But also, there is a onetime item in this quarter that's worth calling out. And particularly on the GAAP side, you'll see it. With the executive transition that we announced back a quarter ago, as you know, they're retained for till almost, I think, April of next year in terms -- in an advisory capacity.

But with David joining and really taking over the primary responsibility there, the accounting has us, frankly, conservatively accelerate that cost all into this quarter. And that would be for the 2 executives that are both transitioning into that advisory capacity. And so you see of that piece of it. It's about $1.9 million of stock-based compensation that would otherwise been spread out of the year accelerated into Q1. And then on the OpEx side, which hits non-GAAP, it's about $900,000 that accelerates there. So you're seeing that bump up in Q1. It will normalize -- or well, it will drop down without those costs. But if you look at it on a full year basis, it's quite normalized.

Our next question comes from Brent Thill with Jefferies.

You have Joe on for Brent. Rafe, starting off with you, how should we think about AOV going forward? Is high single digits the proxy? Or can we get to double digits? And then maybe if you could talk about the levers, is it driven more by seats as you move upmarket or cross-sell?

Yes. No, the very good question. I think you're nailing it. This is a big part of our story as we look out. So AOV benefits from a multitude of components that move upmarket where we have bigger deals is a key piece of it. But also just the fact that we have now 12 products with a lot of maturity and then that we're taking out to our customers, which is showing up both on new customer sales as well as upsell opportunities, right? All of that adds up to build that bigger AOV. And I think that's really quite exciting. At $14,000, as you note, it's a 9% constant currency increase since last year. We're obviously pushing for a bigger number there. And yes, and we're knocking on the door of double digits. So we're pleased with where it is, but I will tell you internally. I think our -- easy to say our biggest corporate initiatives are both design about driving that number up.

That's great to hear. And then, Peter, maybe for you. You've talked a lot more about internal messaging today, kind of that east-west traffic in New York. Does that open up the opportunity for defending products like Teams and Slack? And would we ever see Mimecast move into that category? Does anything that you kind of acquired in the last year help in that capacity?

Yes. We do see that as an emerging opportunity. Obviously, we've got a lot of the technology under the covers that can interrogate threats. And using API connections as we do with e-mail can interrogate those environments and help -- and remediate threats from within those systems. I think there's also a compliance and archiving opportunity in that space that we've spoken about. So yes, I would look out for some of the things in the coming months and quarters that we'll be doing there.

Our next question comes from Keith Bachman with Bank of Montreal.

Two questions. First, Rafe, for you is, could you talk a little bit about what you think the trends on that retention will be? So you did a 105, do you think it gets back to kind of a 107 level by end of year? And just in the interest of time, I'm going to ask my follow-up to Peter. You talked about 12 products now. You're expanding your technology leadership. You're moving to a new architecture. I'm trying to understand what you think the outcomes may be of that. And so I tend to think it could be a few different things. But if you think about the number of services, does it materially increase the number of services? And in particular, if you thought about the number of services used per customer, it's been growing at a fairly steady clip. I think you said 3.6 this quarter, which is up 0.2%. Does it change the rate of growth of adoption of those number of services? Or how do you think all these technology changes will manifest itself and how will investors view it? That's it for me.

Yes. Thanks, Keith. So on the net revenue retention side, we're really pleased to see that number stabilize and now reaccelerate there -- to start building back, it's probably the best way to say it. Remembering it as a trailing 4-quarter metric, it does tend to move slowly. So we're doing everything we can to build that arc back in the right direction. I -- we don't give guidance on this number. And I think in some part, it's because COVID has taught us one thing. It's hard to predict exactly how the global economies will recover and win based on all the variables in that number. But that building back -- going from 104 to 105 is really key. And believe us, we are really focused on continuing to drive that number back towards the historic numbers we used to put up there.

And I think the situation is right for us to be successful in improving economy, more products and a sales team that has really been focused on providing the upsell opportunities to us. So we're really proud of the work the team is doing. And I think all of that coming together, taking care of our customers and continuing to have more value to offer is the right recipe for building that number up.

Yes. Keith, just to touch on your question. So obviously, we've built this architecture. We built this foundation from the get-go as a multi-product, multi-tenanted platform. And that obviously has some considerable operational benefits for us, but also creating a simpler, easier to use, greater than some of the parts value equation for customers. Now we talk about 12 products in the portfolio, and that's expanded steadily. I think, when we came public 5 and a bit years ago, it was about 7 products. So we've added those products during that time.

I think one thing to note is that as we've introduced some of the additional modules and additional capabilities that may be monetizable, those don't always increment up and say, okay, now it's 13, now it's 14. But the additional products tend to be sort of specific things, whereas some of these modules will contribute towards an increase in average order value. So the 9% year-over-year constant currency growth in AOV to $14,000, that is supported by additional monetization opportunity within the base that you may not necessarily see in that 3.4 to 3.6 year-over-year shift.

I think the other really interesting thing is, as customers have more products that they're consuming, -- and today, we have, I think it's 46% of our customers using more than 4 of our products. As we have customers using more products, so they actually become stickier. And we've seen -- you asked a second ago about retention rates. [You're right], customers with more products tend to stay longer with us. But also because of the nature of the platform, they're also margin accretive. And so you've seen that effect as our gross margins have climbed over time as well, with customers adopting more products because the underlying platform cost of delivering 2, 3 or 5 or 6 products is very marginally different. And so that is a key part of the economic engine of the business and our strategy, and we've seen that scale and play out nicely as we built this customer base out.

And there are no further questions at this time. I'd like to turn the call back to Peter Bauer for closing remarks.

Well, look, thanks for joining us for our Q1 earnings call. We hope you have a terrific rest of the day, and we look forward to presenting our results to you again in around about 3 months' time. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.