Mimecast Limited (MIME) 2021 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2021 Mimecast Limited Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker for today, Robert Sanders, Director of Investor Relations. You may begin.

Good morning, and welcome to Mimecast's earnings call for the fiscal fourth quarter and the full year 2021 ended March 31, 2021. 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 is 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, 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 May 11, 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, everybody, and thank you for joining us. I hope you and your families are doing well.

I'll start with some takeaways from the quarter and the full year as well as a view into our expectations for fiscal '22. I'd like to ground our discussion in our three-pronged strategy and growth drivers and the progress that we're making against them. Before I turn the call over to Rafe, I'll address some of the trends we're seeing in the changing threat landscape and why we believe Mimecast provides customers the best protection and is uniquely positioned to grow market share as threats continue to evolve. I'll also touch on the leadership transitions that we announced today.

In a year that was more challenging, given the macro uncertainties, we are pleased to report fourth quarter results that exceeded the high end of our guidance across all metrics. We generated $133.9 million in revenues in the fourth quarter. That's up 13% year-over-year in constant currency terms. We won 23 six-figure deals, an increase over Q4 last year and average order values rose to $13,900, up approximately 9% over the prior year in constant currency terms. And we delivered $24 million in free cash flow, representing an 18% free cash flow margin as we continue to drive bottom line expansion while investing in growth.

As I reflect on fiscal 2021, we saw slower project decision-making by larger organizations in the first half of the year, and in international markets where we derive almost 50% of our revenue, businesses are still being impacted economically. Through it all, we've stayed close to our customers, we strengthened our go-to-market teams and strategies, we broadened our capabilities and ran our business efficiently and profitably. We delivered profitable growth with double-digit revenue growth, increasingly strong free cash flow and meaningful margin expansion.

For the full year, revenues came in at $501.4 million. That's up 17% year-over-year in constant currency terms, and we drove $88.4 million in free cash flow, representing a 17.6% free cash flow margin. We continue to have industry-leading retention despite increased down-sell and churn as a result of the COVID pandemic. These results, in the face of significant headwinds, underscore the durability of our business model, our differentiated platform and our ability to be nimble and execute with discipline. We continue to expect a U-shaped recovery, yet maintaining low double-digit revenue growth through fiscal 2022.

Importantly, we achieved net revenue retention of 104% in the fourth quarter. That's flat sequentially, which is better than expected, and we view it as a sign of stabilization. We expect top line growth to reaccelerate over time, and we'll continue to drive bottom line expansion as we work towards a Rule of 40 balance between growth and profitability.

Over the year, we've advanced our three-pronged strategy: we're expanding our footprint in the enterprise market, we're selling our multiproduct platform to all of our customers, and we're automating to create even stronger and easier-to-use engagements with the SMB and channel markets.

So let me share some highlights. We took steps to further focus our resources consistent with our three-pronged strategy and growth drivers. This included adding key people to our leadership team and our Board and to our enterprise and go-to-market teams. We're continuing to strengthen our organization to build on our momentum in key growth geographies and markets. We made progress in our move-up market with significant wins in both private and public sector. This included our largest-ever win of 190,000 seats in the third quarter and 180,000-seat win in the first quarter. Notable enterprise wins this quarter include: a global professional services company who purchased our Zone 1 and Zone 2 services and added Secure Messaging for 100,000 users; a global retailer based in the APAC region, who purchased our Zone 1 security and our continuity service for 15,000 employees. And both of these underscore the popularity of our multi-service offerings with our largest customers.

We continue to grow our footprint in Canada. For example, a Canadian technology company purchased DMARC, one of our Zone 3 solutions for 73,000 users; and a Canadian manufacturing company purchased our security and Internal Email Protect solution for 10,000 users.

In the public sector, a government agency in one of our international markets purchased archiving for 39,000 seats. We also won a security engagement with an APAC public sector organization with 10,000 users. And based on our pipeline, we expect to continue to expand our footprint in the public sector in fiscal 2022.

We continue to innovate on and sell our multiproduct platform to new and existing customers, consistent with our Email Security 3.0 strategy. We drove AOV up to $13,900 this quarter and average services per customer to 3.5, up from 3.3 last year.

As a reminder, we now have 12 products in our solution framework. Our Zone 1 offerings include perimeter defenses and threat protection through our Secure Email Gateway and Targeted Threat Protection offerings. Zone 2 comprises Internal Email Protection and Awareness Training focused on strengthening the human factor in security. Zone 3, includes our DMARC Analyzer and our Brand Exploit Protection, which acts as an offensive countermeasure that can actively fight back against cyber threats.

We again saw great traction in Awareness Training and Internal Email Protect in the fourth quarter, adding 800 and 900 new customers, respectively. Our Web Security Solutions also performed well, matching our quarterly record of net new customers. This solution is proving popular with SMB organizations focused on keeping their remote workforces secure.

We continue to have success upselling to larger enterprises. For example, one of our global customers headquartered in the U.S. with over 40,000 users added new services this quarter for a total of 9 services across 3 zones, along with several of our cyber resilience extensions, including continuity, Sync & Recover and our Privacy Pack. We also signed a six-figure deal with a prominent U.K. footwear and clothing brand, which added archiving, continuity, Sync & Recover and Brand Exploit Protect from Zone 3 to their existing subscription.

In February, our API and alliances program reached a new milestone, now offering 60 out-of-the-box and custom integrations with security technology partners such as CrowdStrike, IBM Security, Netskope, Palo Alto Networks, Rapid7, ServiceNow and Splunk. These integrations allow organizations to incorporate Mimecast Threat Intelligence and automation capabilities into their broader security ecosystem. And these partnerships have helped us win new customers and deepen existing relationships.

For instance, in the fourth quarter, our partnership with CrowdStrike supported our acquisition of a new customer, a large U.K. university. And our largest deal of the year, the 190,000-seat win I mentioned earlier, was aided by our partnership with Netskope, an incumbent vendor at that organization. We were pleased to see bookings continue to accelerate in North America and Australia during the fourth quarter as the economic environments improved in these markets. We expect to see similar trends in our other geographies as vaccinations ramp up and stay-at-home orders come to an end.

I'm pleased to share that in Gartner's 2021 Peer Insights Voice of the Customer program, Mimecast was named a Customer's Choice for both Email Security and Enterprise Information Archiving solutions. Forrester also recognized Mimecast as a leader in the Q2 Wave for enterprise email security. Mimecast's client references highlighted our efficacy, ease of use and pricing as strengths. Additionally, Mimecast was selected as the winner of the 2021 SC Awards for Best Regulatory Compliance Solution.

As cyber resilience is more important than ever, we saw a significant rise in cyber activity over the course of the pandemic and in email-borne attacks in particular, as noted in our 2020 State of Email Security Report, email threats rose by more than 64% during 2020. All signs point to this activity increasing going forward. In the most recent quarter, we blocked 23% more attacks year-over-year.

So let me highlight a few trends that we're seeing here. Global malware activity rose by 35% in March across most verticals, demonstrating that no organization is immune. The most attacked vertical was professional services, which saw 147% volume increase in February 2021. Manufacturing, retail and wholesale followed closely behind. Together, these industries represent approximately 40% of our revenues.

Ransomware remains a significant threat. Our State of Email Security survey found that more than 6 in 10 companies suffered a ransomware attack in 2020. It's proven to be lucrative for criminals and is under continuous active development by a number of threat actor groups and is being sold as a service. Mimecast's comprehensive suite of solutions helps customers prevent successful ransomware attacks, maintain operations during an attack and recover data after an attack.

Another important trend we're seeing is impersonation attacks targeting employees with privileged access to systems and information. 34% of malicious file-based attacks blocked in March 2021 and 23.6% in 2020 were targeted at these types of employees. Our Targeted Threat Protection remains the leading solution on the market for blocking these highly targeted attacks. We continue to see a rise in the coordinated multi-vector attacks that involve email as well as social engineering, fraudulent web properties and phishing sites, malware and ransomware hosted on trusted cloud infrastructures and non-email messaging systems being used as part of the attack chain. What is becoming increasingly clear is that the concentration of data and computing into hyper-centralized homogenous environments such as Microsoft 365 and Azure provides an extremely compelling target and when compromised, significant scale advantages to an attacker.

In a world with increasingly standardized software stacks and software supply chain vulnerabilities, layered security remains an imperative. The recent Exchange zero-day attacks and SolarWinds' compromise, which impacted companies across our industry, including Mimecast, really highlight this point. Our conversations with customers and prospects, along with third-party surveys, indicate the recent threat environment has led organizations to increase their security budgets and explore adding best-in-class services like Mimecast to secure their environments. Our holistic Email Security 3.0 strategy, an integrated suite of offerings, gives customers an advantage in defending against these multi-vector coordinated attacks.

Now we're continuing to expand and transform our platform to anticipate the evolving threat landscape through internal innovation and acquisitions and as we do, we believe we are positioned to drive faster growth and gain market share, while achieving continued strong bottom line expansion.

Now before I turn it over to Rafe, I want to briefly discuss the leadership transitions we announced earlier, the appointment of our new CMO and our decision to combine product development and engineering under a Chief Technology and Product Officer. These are important steps in positioning Mimecast to achieve our potential.

Bernd Leger, our incoming Chief Marketing Officer, is an innovator with a proven track record in planning and executing go-to-market strategies and building high-performing teams. He has significant cybersecurity and marketing experience, and has helped to successfully develop and launch a number of category-defining companies, and he'll be a great asset to our team.

Building an integrated product organization overseen by a Chief Technology and Product Officer, will enable us to drive agility and velocity in our innovation as we scale. While our search is underway, I look forward to overseeing the group on an interim basis with the support of great leaders like Christina and John, who will transition to advisory roles at the end of the month. They've made great contributions to Mimecast, and I look forward to their ongoing support as we make this transition.

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 fourth quarter of fiscal 2021. Our results demonstrate our ability to deliver both top line growth and bottom line margin expansion.

Before I turn to our results, I'd like to touch on some trends we're seeing as some of our core markets begin to emerge from the macro overhang brought on by COVID-19. The pandemic has had varying impact on our core geographies. Let me quickly touch on some of the patterns we are seeing.

We are seeing a favorable relationship between our business and the overall economic recovery of the region. Building on our observations of last quarter, we saw continued improvements in our North American business in the fourth quarter. Likewise, our Australian operations benefited from a local economy that is moving well past COVID-19 restrictions. While the impact of COVID-19 restrictions in the U.K., Europe and South Africa remain more problematic, we anticipate that with the lifting of COVID restrictions and expanded immunizations, we will see improvements in the overall selling environment as the year progresses.

Let me now turn to our results. In the fourth quarter, we generated revenue of $133.9 million, which represents a 17% improvement over the prior year in absolute dollar terms. Adjusting for $4.8 million of currency tailwind, our constant currency growth rate over the prior year was 13% for the quarter. Note that since providing guidance in February, foreign currency fluctuations positively impacted our fourth quarter revenue results by $700,000.

For the full year, we've crossed the $0.5 billion revenue threshold, generating revenue of $501.4 million, which represents 17% constant currency growth over the prior year after adjusting for the $1.3 million of currency tailwind. Bolstering our top line results were continued year-on-year increases in average order values, or AOV. Calculated at May 3 FX rates, AOV for all customers stands at $13,900, up approximately 9% over the prior year in constant currency terms. This trend is attributable to a favorable shift in the average number of services per customer across our customer base, currently at 3.5 services per customer compared to 3.3 services this time last year as well as our increasing success with larger organizations. In fact, customers with 5,000 seats or more now constitute 19% of our recurring revenue base versus 18% at the close of fiscal '20. We added 300 net new customers in the fourth quarter, bringing our total customer count to 39,900.

There are 2 important trends one should consider in this respect. First, our focus on selling to larger customers is naturally going to increase the focus on expanding AOVs versus a raw customer count metric. When we look at the year-on-year change in the net new customer metric, the majority of that change is in the small customer segment. Second, the sluggish economic environment, principally in EMEA, is weighing on the net new customer count metric. We do expect to see some improvements here as the macro environment improves in EMEA.

Net revenue retention stood at 104% for the 4-quarter period ending March 31, consistent with the prior quarter but better than our expectations shared during our last earnings call. This metric is particularly important as it is dollar-based as opposed to purely customer account-based.

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 fourth quarter saw strong interest in our Zone 2 solutions of Internal Email Protection and Awareness Training as well as our Web Security solution. Down-sell and churn totaled 9% for the 4-quarter period. We are seeing early signs of stabilization on down-sell and churn and anticipate an improving macroeconomic environment will continue this trend. As Peter noted, we were pleased to see net revenue retention begin to stabilize this quarter, which we believe is an early indication of a broader recovery in certain of our core markets.

We continue to drive improvements in gross margins. In the quarter, we recognized a 77.8% non-GAAP gross margin, up 190 basis points from the fourth quarter of the prior year, a good step toward our long-term goal of achieving an 80% non-GAAP gross margin. Adjusted EBITDA for the fourth quarter totaled $33.3 million, representing an adjusted EBITDA margin of 24.9% compared to 21% in the same quarter of the prior year.

On a net basis, the quarter derived approximately $3 million of discrete year-on-year bottom line benefit as a result of COVID-19-driven cost reductions, consisting primarily of travel savings. Even excluding these cost savings, our adjusted EBITDA margin would have been approximately 22.6%. We achieved this margin expansion through operational efficiencies driven by gross margin improvements and resource prioritization throughout our organization.

Our full year adjusted EBITDA totaled $127.2 million, representing an adjusted EBITDA margin of 25.4% compared to 18.3% in the prior year. In line with the commentary we've given on quarterly calls throughout the year, $16.4 million or 330 basis points of this 710 basis point improvement came from discrete bottom line cost savings during the year, driven by COVID-19 such as savings on travel and facilities operational costs.

Now turning to the bottom line. Our non-GAAP operating profit for the fourth quarter was $24.6 million or 18.4% of revenue, an improvement of 440 basis points from the prior year. We reported GAAP net income of $5.8 million for the fourth quarter, or a profit of $0.09 per diluted share based on 66.3 million fully diluted weighted average shares outstanding. Our GAAP tax benefits totaled approximately $700,000 in the fourth quarter. Our full year GAAP tax expense was $1.7 million. Our non-GAAP net income for the quarter was $18.5 million or $0.28 per diluted share based on 66.3 million fully diluted weighted average shares outstanding. Our non-GAAP tax rate was 16% for the quarter. Our full year non-GAAP tax rate was 20%.

Turning to cash flow. Fourth quarter operating cash flows totaled $31.7 million or 23.7% of revenue. For the full year, operating cash flow totaled $127 million or 25.3% of revenue. Free cash flow totaled $24 million for the quarter or 18% of revenue, driven by higher profitability and better-than-expected collections late in the quarter. For the full year, free cash flow totaled $88.4 million or 17.6% of revenue, which is an 890 basis point improvement over the prior year and notably well above our beginning of the year pre-COVID free cash flow guidance provided in February of 2020. As of March 31, Mimecast had $293 million of cash on the balance sheet, up $119 million from the beginning of the year. Net of debt, our current cash balance stands at $189 million.

Let me now turn to guidance. For the first quarter of fiscal 2022, revenue is expected to be between $137.2 million and $138.6 million or 12% to 13% growth in constant currency terms. Our guidance is based on exchange rates as of May 3, 2021, and includes an estimated positive impact of $8.6 million, resulting from the weakening of the U.S. dollar compared to the prior year. Adjusted EBITDA for the first quarter is expected to be between $35.8 million and $36.8 million which, at the midpoint, reflects an adjusted EBITDA margin of 26.3%, up 400 basis points from Q1 of last year. Free cash flow for the first quarter is expected to be between $27 million and $28 million which, at the midpoint, reflects a free cash flow margin of 20%, up 390 basis points from Q1 of last year.

Turning to the full fiscal year. Fiscal 2022 revenue is expected to be between $569.7 million and $579.7 million or 10% to 12% growth in constant currency terms. Adding the detail, foreign exchange rate fluctuations are positively impacting this guidance by an estimated $18.6 million compared to the rates in effect in the prior year. The prior guidance for fiscal 2022 provided in early February was $563 million at the midpoint.

The strength we have seen in our business is leading us to raise the midpoint of our full year guidance by $6.5 million in constant currency terms. This increase of $6.5 million is being further positively impacted by $5.2 million of foreign exchange tailwind that has arisen since the rates used in our February call, resulting in the midpoint of our full year guidance moving up by a total of $11.7 million in absolute dollar terms from a midpoint of $563 million to a midpoint of $574.7 million. We are raising full year 2022 adjusted EBITDA guidance to be between $148.5 million and $150.5 million, which at the midpoint of our guidance would reflect an adjusted EBITDA margin of 26%, up 60 basis points from the prior year. At the midpoint, this represents a $3.4 million improvement over our prior guidance.

We are also raising full year 2022 free cash flow expectation to a range of $122.7 million to $124.7 million, reflecting a free cash flow margin of 22% at the midpoint of our revenue guidance. This is a 390 basis point improvement over the prior year. At the midpoint, this represents a $2.7 million improvement over our prior guidance. For modeling purposes, I would note that on a preliminary basis, we expect CapEx for the year to be approximately 6.5% of revenue, which will be somewhat front-loaded in the fiscal year. Full year FY '22 GAAP taxes to total approximately $7 million and a non-GAAP FY '22 tax rate of approximately 25%. Finally, stock-based compensation is projected to be approximately 12% of revenue for fiscal '22.

To conclude, the Mimecast business is demonstrating its resilience. We are seeing new and upsell business recover as the economies of key geographies begin to bounce back, which is helping our net revenue retention rate to stabilize following a year challenged by the COVID-19 economic fallout. As our fourth quarter results show, the team is working hard to meet and exceed expectations. As we move into FY '22, we are investing to protect our customers from the ever-increasing threats they are facing. Our go-to-market teams are driving new and upsell business, our product and engineering teams are driving innovation, and we are investing in our core initiatives to drive growth while making significant progress to deliver on our long-term free cash flow targets.

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

Well, thanks, Rafe. We have a differentiated platform and a durable business model with 98% recurring revenue, industry-leading retention and high gross margins, we have the talent and passion at every level of our organization to build from our strong foundation and achieve new levels of growth and profitability. Thank you to all our employees for your hard work, your resilience, creative and innovative thinking and your strong execution.

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

(Operator Instructions) Our first question comes from the line of Matt Hedberg with RBC Capital Markets.

It's great to see the stabilization here. It really seems like the year is shaping up to be this U-shaped recovery. I want to ask about the success in the large account wins. Obviously, it's been a focus for you guys for the last several years but with new senior leadership, including a CMO, are you going to take a more profound pivot towards sort of addressing these large account opportunities? Just sort of curious from an incremental basis, how you're approaching this year on that side.

Yes, Matt, Peter here. Thanks for the question. Yes. So as you rightly say, we've been pulled into some really interesting enterprise opportunities steadily over the last few years but as we entered this fiscal year, we made a deliberate plan to really invest behind that enterprise opportunity in both from a sales perspective and also from a post-sales experience perspective, some of the things that we needed to have in place to more consistently and successfully win and deliver to enterprise customers. And so that's been really exciting for us. And we've seen that coming through in our numbers now with our 5,000-plus seat category now growing from 18% to 19% of our overall revenue.

So absolutely, I think we're being recognized as a brand that can deliver for large enterprise customers. They certainly have a complex and a very clear need for the types of services that we offer, and so it's absolutely part of our strategy as we go into this fiscal year, too.

That's great. And then on the Microsoft Exchange hack early this year, I mean, it's just another reminder, I think, of the opportunity that you guys have in that base. Are you seeing any change in customer behavior there? Or maybe customers reevaluating E5 SKU or kind of thinking about redundant security like Mimecast a little bit differently?

Yes. I think what we learned again with the zero-day attacks on Microsoft Exchange is that there is risk in relying solely on your application provider to be your security provider, too, and there's a real need to have layered defense and depth and to have an independent cybersecurity and resilience provider, and that's exactly where Mimecast comes into it, layering additional unique security technologies around these mission-critical applications like Exchange and Office 365. So painful as it was for many organizations, I think an important reminder of the importance of cybersecurity and certainly, the vulnerability that you can face with email.

Our next question comes from the line of Brian Essex with Goldman Sachs.

I was wondering if we could maybe unpack some of the customer adds and churn data, and if we look at 19% of your 5000 seat customers as a percentage of your total, I mean, that implies that actually most of the customer adds were large enterprise. What's -- maybe if you could help us understand within large, mid and small enterprise, some of the dynamics there? And is that math kind of directionally correct?

Brian, thanks for the question. Of course, with the large enterprise, because they're larger ticket items, they are driving an appreciable part of the business. Now keep in mind, the whole base grew quite nicely during the year. It's just that, that enterprise group is growing a bit faster. And I think that's one of the things that's encouraging for us as we really focus the strategy, and we're doing it on the back of a lot of great success we've had out market. We, I mean, essentially have roughly $100 million of enterprise business. It's growing faster than the other regions when you look across it, and you're seeing that tweak up there. So the customer -- when you drill into the customer count elements of it, it's skewed a bit because one big enterprise customer makes a really big difference in the dollar value measures that you're highlighting.

Got it. Got it. That's super helpful. And then just, I guess, if we could maybe unpack the churn a little bit. What's the primary driver? And where are you primarily seeing some of the churn come from? Is it still maybe kind of going out of business as opposed to competitive displacement? Or maybe just highlight some of the dynamics there and why we might look towards a stabilization in that number?

Sure. And the one thing I would just remind everyone is that that's a trailing 4-quarter metric. We're really looking at customers a year ago and what's transpired. So we pick up all the renewals. And so it is covering this full COVID period and influenced by that. I think what you're hearing from us is we are seeing signs of stabilization, which I think both on the upsell and the down-sell side, to take the down-sell and churn side first, there's serious economic impact that's hit a lot of our customers over the course of the year.

We've talked a lot about how we saw quite a bit of down-sell going through the COVID environment, but one of the conscious decisions we made is to make sure we're supporting our customers through a tough time where we would choose down-sell over churning a customer. And we think that sets us up for a nice recovery coming out of the economic fallout.

And I think we're seeing the first elements of it even in the current quarter, where you started to see upsell move up, not just in buying products, which we're always excited about that, but you're seeing additional seat adds coming back in. And I think that speaks to both the broader economic recovery, but also our investment in our customers' success.

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

Peter, maybe for you, just to make sure the question is asked. Now that the SolarWinds breach and the related impact to Mimecast is a little further in the rearview mirror, can you just talk about any customer feedback or observations on whether you feel that incident at Mimecast impacted demand at all? Based on the numbers, it would seem like no. But again, just to make sure the question is asked.

Yes. Thanks, Saket. So look, nobody wants to have a security incident like that occur, and there is some inevitable impact that this will have to our customer base and prospect opportunities. But I think as you point out, our numbers remain really strong through this process and I was really proud of the way our teams handled their interaction with customers and navigated us through this.

I think on the positive side, it gave us an opportunity to get even closer to some of the security teams within our customer organizations that we work with as we handle this. And I think that it allowed us to look at a variety of ways that I think coming out of the situation, leave Mimecast an even better, even more robust organization as you'd expect from some of the learnings that we were able to take from our experience here. So all in all, I think the numbers sort of speak for -- absorbed any of that impact, and we're moving forward out the other side of it.

Absolutely. Rafe, for my follow-up, maybe for you. Great to see the EBITDA guide go up for next year. Can you just remind us how you've kind of thought about return to office expenses sort of layering in and if your assumptions there have sort of changed at all?

Yes. Thank you. So we're expecting to try and get back to business more in the usual sentiment as quickly as we can. So certainly, in our numbers, we do have those travel costs coming up a bit in Q1, but certainly by Q2, with travel returning to a more normal pace, people getting back to work. We're aware that -- we've all learned about new ways of doing business remotely, but we're also very anxious to get back together. And I'm pleased to say that we have pilots going on where the Australians are back in the offices, (inaudible) are back in the office. We'll be back in just a couple of months here much more regularly in the Lexington office, although a small group of us are here today doing our duties.

So I think that's just really important just for the team morale and also being able to work together as teams and take advantage of the recoveries we're seeing more broadly. And then, of course, the cost side of that will also kind of, again, buffer in a little bit in Q1, but really picking up steam to a more normalized rate through the rest of the year.

Our next question comes from Catharine Trebnick with Colliers.

And excellent print in tough times, guys. One question, I guess, I have is on last year, at the Investor Day, before the entire world closed down, you talked about free cash flow inflection. Can you dig into that a little bit more, looks like you are headed on that trajectory this year? Can we talk about that some more?

Yes, Catharine, thank you for the question. And just as a reminder, everyone, when we talked about free cash flow going into a range between 23% and 25% in our long-range plan. We've just completed our first year and with just 1 year behind us, and as you noted in our free cash flow guidance, we're targeting 22% free cash flow for the year. So I think that inflection has very much come to us. And I think what we're showing it's not just the COVID travel savings, we're taking that forward and building that into how we're thinking about the business. So we're feeling good about the free cash flow side of it, perhaps even ahead of schedule.

Our next question comes from the line of Steve Koenig with SMBC Nikko.

I'll ask two questions in one here. And by the way, congrats on the results this quarter and the outlook. Looking promising here. Wanted to ask you for comments on changes in the competitive landscape with consolidation and change of ownership. Are you expecting anything that changed really competitively?

And also, might as well toss this out upfront. Maybe just update us on what you're seeing in the field with your partnerships, specialty tech partnerships including players like Netskope.

Yes. Thanks, Steve. Let me tackle the partnership side first. I think that's such an important area for our customers as they leverage our API integrations, along with some of the other leading cybersecurity products in the market, CrowdStrike Palo Alto Networks, Netskope and others, Splunk. And so we're really pleased with those partnerships and some of the joint customer value propositions that we're able to present, both with our channel reseller partners and also joint marketing and sales engagements with some of those vendors. So I think really important for cybersecurity and obviously positive for our business, too.

Just on consolidation, and I assume you're referring to Proofpoint and the deal that's recently announced with them and Thoma Bravo. Look, I think it's really a powerful validation of the space to see something like that happening. Clearly, a lot of interest in the potential and a recognition of the significant threats that email and messaging poses to organizations and the importance of solutions that can resolve that.

From a competitive standpoint, I think it's too early for us to call the Board, but we have obviously seen M&A activity in the past with competitors and consolidation in the space. And generally, it's known to have some distraction for staff and partners and so on at these organizations, and that can present opportunity potentially to Mimecast. I think increasingly, we're being seen as the credible, perhaps sometimes preferred alternative for larger organizations. And so this may indeed present a clearer shot on goal for us in some of those selling situations. So again, I guess, that's -- some of that, we have to see how that plays out in the market, but we have a positive perspective on it going in.

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

You have Mike Cikos here for Alex Henderson. On the EMEA, South Africa and some of these international markets that have been weaker to rebound versus what we're seeing in North America and Australia, can you comment on what gives you the confidence for these improvements or how the pipeline looks?

And I just did want to harken back to an earlier comment. It sounds like part of the seat increases you're seeing is based on the -- Mime's ability to support its customers through the year. So we should expect that these customers will be coming back to you based on those efforts that you had previously put in place. Is that fair?

So yes, happy to take that on. What gives us confidence is we're seeing such a strong relationship, frankly, with these other economies, as people have gotten back to work, hiring has picked it up, we see people that had -- or companies that have reduced workforces, bringing those employees back, all of that it is translating into a better selling environment for us in those stronger markets.

And so we do believe that the U.K., which has now lifted their very heavy lockdown, people are getting vaccinated, we're seeing more vaccinations across the EMEA pickup, we expect that same behavior to continue. There's just such a dramatic impact on the overall economy of people being able to get out from under lockdown and get back to work. And we're very much seeing a world that's frankly asking to get back in the office and return to some state of normalcy, if you will. That's really what pushes us there, and I think that's exactly right.

On the second part of your question, when we talk about supporting customers, you're spot on. I think we do sell on a per seat basis. So certainly, if a customer had to vastly reduce headcount and they ended up having to down-sell, if you will, last year, as those numbers come back, we're going to see an upsell on our renewals. And I just think that the strengthening of our relationships, the fact that we invested with our customers through a tough time, helps people realize that there's more to the story that is certainly about greater product efficacy, but there's great service and there's an investment in each other in a long-term relationship.

That's great. And then if I could just one more on the combination of the product management and engineering organization into a single team. Curious if you could just lay out details as far what's already underway at this point, what's involved from the communications to the team, getting them on board. Is there any change in headcount from removing duplicative positions? What can we expect there?

Yes. Great question. Thanks. So from a communications point of view, I think it's been clearly communicated inside the organization. Everybody understands what we're trying to achieve strategically, excited about how we can be more agile as an integrated team under a single leader. I think as we're starting to get folks back into the office, it's a good time to bring people together into a new structure and really to use this -- the shift as a base to continue to invest strongly in our R&D and product development initiatives, and to propel us forward as a growth company to achieve our vision and our long-term objective. So yes, I think it's a very positive move.

We have a very talented team of leaders in our product management and engineering organizations. And I'm certainly looking forward to working even more closely with them as we move forward with this change.

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

I actually wanted to ask about the guidance first. I want to make sure that I'm looking at this properly. It looks like the guidance for the June quarter has growth near 20% but the full year near 15%, which would suggest the slowdown at some point or through the year, what's kind of factoring into that pattern?

Yes. Sterling, thank you for calling that out. And just to keep everyone aligned, the growth rates you're talking about [are on] actual rates I quoted constant currency in my script.

We've talked about a U-shaped recovery that we'll see throughout the year. And I would just remind everyone because we recognize such a high percentage of our revenue on a deferred basis being amortized across the year, even drastic improvements still bleed into the revenue line on a fairly gradual basis. So what you're seeing is, as we get into this U-shaped recovery, we are seeing strength, as we've talked about in a number of areas on the quarter as well as on the net revenue retention. We still need to -- we need to see those trends continue certainly before you're going to really start seeing us being able to uptick out of the bottom of the U, if you will.

I would call out that with a constant currency raise on the full year of $6.5 million, I think that does speak to us feeling better about the year as it -- certainly based on the way we finished Q4 and based on our current outlook there, but it is going to take a few quarters to work through the bottom of that yield.

Understood. And then, Peter, you had commented about survey work that you've done talking to increased security spend. When do you think those increases will begin to manifest themselves, both in results and outlook? You think we'll start to see it in the June quarter? Or is it more of a back half of the year?

Sterling, thanks for the question. Look, I think the outlook and what we've seen there are certainly factors into the guidance that Rafe has shared. And so that's part of our perspective on what we can achieve during this year.

I think it is sort of really interesting to see how the kind of current news cycle is also impacting desire to spend on solutions. Ransomware clearly posing significant threats to organizations, obviously, here in the U.S. with the Colonial Pipeline shutdown, organizations understanding that there are significant financial costs associated with ransomware. I believe that the average payment for a ransomware release is now over $300,000 and includes average downtime of about 21 days on average.

So the impact that these incidents can have on organizations, I think, is really part of the story driving an appetite to make sure that one has both preventative as well as recovery capabilities in place, which is clearly a key component of the Mimecast suite and our sales motion.

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

Congratulations on a solid set of results. Peter, I wanted to direct this to you, and it's really a two-part question, if I could. As you think broader, longer term to the next, call it, 3 years, you have, on average, right now, customers using 3.5 solutions. You have a total of 12. What does that look like longer term if you look out 3.5 years? And is there anything that you think could provide some step function change associated with a greater impact or a greater distribution?

And part b, the question is, if you look at your AOV, it was actually up nicely, 9% year-over-year constant currency. As we think about the next 12 to 18 months, as you look at the current portfolio, is that kind of a steady cadence that we should be thinking about in terms of the economic model?

Yes. So maybe I'll let Rafe talk about the economic model and how he sees that building up. But from a cross-sell and upsell perspective and a broad suite adoption perspective, that steady growth seen in additional product adds is something that we expect to continue.

We have, as you may know, about 12 products in the overall portfolio. So there's plenty of headroom for us to increase adoption and in fact, we're seeing that playing out across some of the newer modules that we've introduced. So a strong quarter for products like IEP and Zone 2, along with Awareness Training, 900 and 800 additional customers purchasing that there. So encouraging signs.

And then, of course, some of the other Zone 3, DMARC, 200 additional customers; Web Security, 300 additional customers. So as those products are maturing and becoming part of the story in customers' minds, we're seeing continued adoption of that and we'll continue to layer additional capabilities in. Obviously, CyberGraph is something that we've recently introduced and has been available initially in North America and rolling out globally. So we expect to see some positive results from that.

So overall, I think the suite is a really strong model with multiple kind of monetizable category place there that we continue to benefit from.

Yes. And just on the economic model. I mean you're spot on. I think that a key part of the strategy is making sure that we're driving those AOVs up over time. And that's really going to be driven by, of course, the emphasis on larger customers as we've been talking about, but also on the upsell elements.

As we've taken these 12 products -- and you talked about step change, at least, the strategy is, on the one hand, making sure we're continuing to expand the platform in ways that work together, such that customers get more when they buy 1 plus 1 equals more than 2 kind of approach. So if we can continue to build that platform and then we combine that through good bundling, good pricing and packages to help customers be successful, that's going to drive AOVs.

And I think another really important element to understand there is we see much better retention rates with customers who have more products because they get more value out of Mimecast, right? And I think that's a key part of the story as well. So we're at that point in our trajectory where we realize that while new customers are really, really important, also how we take care of our basic customers and keep bringing them new offerings, incredibly important to our long-term success and of course, the economic model.

Our next question comes from the line of Terry Tillman with Truist.

I'll echo the solid job on the resilient results. I guess, Peter, the first question is on Web Security. I've asked about in the past. I know you just talked about it. But has that product reached an inflection point?

And also, it sounds like it's been more successful at this point in the SMB market. Could it actually help you strengthen your small business or SMB sales?

Yes, Terry, good question. Yes, I think definitely, Web Security, we've seen it increase in popularity. I think particularly, as you point out, within the SMB segment in that kind of sub 500 seat category and the sub-1,000 seat category, especially as smaller organizations have been continuing to look at ways to keep their remote workforces secure and of course, even at the end of COVID, we go into kind of a hybrid working arrangement, which organizations are expecting and preparing for. So the capabilities that we've delivered around Web Security that include some interesting advanced functionality like browser isolation, application control, shadow IT detection, selective proxy capabilities, using the same kind of malware interrogation stack as our email platform, it's a really interesting solution, particularly for customers that have already selected Mimecast to be their security partner for email as part of our suite. So yes, I think we're quite bullish on what we can achieve with Web Security in the SMB market over time.

That's great. And I just had one follow-up, Rafe. In terms of the enterprise business, you characterized it well. It's $100 million kind of run rate revenue business. Can you remind us what the profitability on this 5,000-plus seat enterprise business is like? And are you in more of a getting leverage out of it mode or investing for growth?

It's a great question. I think one of the encouraging things with enterprise customers is they come with a real handsome lifetime -- customer lifetime value. And I think that's -- when we approach a market, and we really like to look at it in those terms that we think on the long-term investment of them, those customers present great opportunity for us and strength for the customer -- or strength for the company, if you will. And I think that's part of the overall formulation as we're looking at this is we feel like that can be a driver to help us achieve those long-term goals, both on the top line as well as on the bottom line as we've discussed.

Our next question comes from the line of Nehal Chokshi with Northland Capital.

So looks like a really strong billings quarter with year-over-year growth accelerating relative to the December quarter. Can you talk about what was the linearity in the quarter?

Linearity in the quarter, it was very much in line with prior quarters. There was nothing really to call out exceptional on linearity in the quarter. I think it just would be around the edges, that cycle of strengthening and certainly in some of the activity in the company came on later in the quarter, but that's really going to have a bigger impact on future quarters and the way that translates into strength in our business. And I mean that by kind of the geographic breakout that we talked about earlier, where we're seeing those economies get stronger as they're emerging from the COVID hangover.

Okay. And what are the metrics you can point to, to say that the utilization of automation in the mid-market is working, given the further slowing in customer adds and what seems to be an improving SMB sentiment here?

Yes. No, so we have several projects going on in that respect. Some of them are going to take a few quarters to fully implement. What we're really focusing is, first of all, I would say making sure we continue to leverage our channel relationships and maybe take those to the next level. And I think that's a key piece of the strategy. And part of it is just if you look at some of the trends we're seeing out there with smaller customers relying on MSPs more, we want to improve that working relationship, and as you know, we made an important hire last year for a channel leader. He's implementing a lot of his work and laying the groundwork for continuing improvements in that respect.

I think more broadly, we have some good IT projects that are going to go along and really approach the whole quote-to-cash cycle, helping people, in a digital way, transact with us much more efficiently. And then, Bernd's going to be coming in and really taking it to the next level and as a big part of his focus about how we help these customers find Mimecast services and offerings and really, again, transact with us more efficiently. So it's going to be a multi-quarter track, but I think that's really the focus of it.

Our next question comes from the line of Brent Thill with Jefferies.

This is Joe on for Brent. Appreciate the question. Congrats on passing the $500 million revenue threshold. Lots to be proud of there. Were there -- following up on the billings, were there any outsized FX or other dynamics impacting billings? I'm just trying to bridge the current billing strength we've seen the past few quarters. Obviously, you're lapping some pandemic-impacted numbers, but just trying to bridge that to your constant currency rev guide going forward. Or is there just a...

Yes. No, I think that's key. And this was -- we got a lot of currency tailwind in this quarter. We certainly called it out both, again, the prepared remarks around Q4 as well as the guidance. And so I think you need to adjust in any of your calculations, take that into account. We're, of course, pleased after -- when COVID came on, the currencies worked against us for a bit. So now, as things are kind of normalizing, we're seeing that strength. And obviously, it does flow through not just the revenue line items, but if you're trying to calculate a billings number, you'd want to adjust for that as well.

Okay. That's helpful. And then, being that 4Q is the most important quarter of the following year. I think you've touched on it a little bit, but just any sense of how the pipeline is looking? I believe last quarter, you said generation was lacking slightly due to increased focus on the security breach. Just kind of curious how you view the pipeline.

Yes. No, and look, I think ultimately, the best indicator of our confidence is the fact that we're able to have a nice raise on the full year revenue number, that $6.5 million constant currency raise plus some FX tailwind behind that. I think that's your best indicator.

As we've touched about it on the last call, yes, there was a period of time where we were making sure we were taking care of all of our customers, and we're all very focused on that. The sales team quickly got back to their day jobs and going out and building pipeline and closing deals, and I think that's encouraging. That -- we're very focused on that currently. And I'd say there's no distractions right now. So it's all about building a good year.

Our next question comes from the line of Brian Colley with Stephens.

So I'm curious, just on the guidance, kind of what you're assuming from a macro perspective in terms of the recovery in some of these more challenged international markets.

And then, secondly, I'm curious if the guidance raise that you made this quarter, if that -- what you're seeing that drove that guidance change has changed your -- the time line for a reacceleration of revenue or if you're kind of just raising the base of the U?

Sure. Great questions. So first, in terms of our kind of macro recovery, we're expecting to start to see -- certainly, there are bigger markets in EMEA start to bounce back. I would expect it's going to be likely a Q1, Q2 kind of recovery as they get their engines rolling. And I'm basing that entirely on just a bit of what we've seen certainly in North America and Australia and markets that have just gotten a bit of a head start in that respect. So I would, again, start to hopefully see strengthening throughout Q1, Q2 in those markets. Now of course, I would caution, COVID has shown me more twists, if you will, over the last year than I would have ever bargained for. So one has to always take that into consideration.

I think in terms of the overall recovery, I think it's key to remember that North America is half of our revenue base, and that's really -- or roughly half of our revenue base, and so that's key. The U-shaped recovery, as I mentioned a bit earlier, just because of the way we recognize revenue that the timings of the bookings really matter a lot. Somebody said that Q4 is the most important quarter of the next year, absolutely true. So there is a little bit of a timing element to judging when revenue will start to build up.

I think the important thing here is strength like we were able to show with a nice raise, really solid on the free cash flow side shows you that we're executing and as we take advantage of, hopefully, the better selling environment, we're going to be able to build that and make sure that we get to the other side of the U as quickly as we can.

Got it. And then, just following up, going back to the security breach from earlier this year. I mean do you guys think the worst of that impact is behind you now? Or do you think that the impact from that incident is going to bleed into '22 some?

We believe the worst is behind us.

Thank you. I'm not showing any further questions in the queue. I would now like to turn the call back over to Peter for closing comments.

Thanks for joining us this morning for our full year and our Q4 FY '21 results. We look forward to presenting our results again to you in about 3 months' time. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.