Mimecast Limited (MIME) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2020 Mimecast Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I'd now like to hand the conference over to your host today, Mr. Robert Sanders, Director of Investor Relations.

Good evening. Welcome to Mimecast's earnings call for the fiscal fourth quarter of 2020 ended March 31, 2020. I'm Robert Sanders, Director of Investor Relations. With me on the call tonight are Peter Bauer, our Co-Founder, Chairman and CEO; and Rafe Brown, our CFO. Tonight'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. In particular, we will address the current and anticipated impact of the global COVID-19 pandemic on our business. 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 and are also discussed in today's press release.

Tonight's outlook is being provided under the protections of the safe harbor and in consideration of the Securities and Exchange Commission's request that companies provide a good faith effort to provide investors and other market participants with forward-looking information given the societal and economic uncertainties associated with the pandemic.

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, 2020. 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 the result of new information or future events.

Now I'd like to turn the call over to Peter Bauer.

Good evening and thank you all for joining our fourth quarter fiscal 2020 earnings call. I'll start tonight's call by highlighting accomplishments we have achieved in the fourth quarter and milestones we've crossed during fiscal 2020. Next, I'll discuss the company's response to the COVID-19 pandemic as we work to safeguard our employees and our customers, and then I'll discuss what we're seeing in the marketplace and how Mimecast is adapting to further our cyber resilience mission. Finally, I'll look ahead and share some of our vision for Mimecast in the coming year and beyond, before handing the call over to Rafe Brown, our CFO, to look back on 2020, review the quarter and the impacts of the COVID-19 pandemic in more detail.

Fiscal 2020 was a year that tested our merits as we faced new digital and of late biological enemies in our midst. Despite the challenges, our teams performed admirably, delivering revenue in the fourth quarter that exceeded the high end of our guidance. Additionally, we continued to operate efficiently and generated $24 million of adjusted EBITDA in the fourth quarter and USD 78.1 million of adjusted EBITDA for the full year fiscal 2020, representing an adjusted EBITDA margin of 18.3% or a 240 basis point improvement over the full year 2019, demonstrating the strength of our model as we scale.

We were pleased to see 1,200 net new customers join us in the fourth quarter. In total, 38,100 customers rely on Mimecast to make their environment safer for business. We continue our success in the larger enterprise segment with several notable engagements, including a U.K. pharmaceutical company that purchased our Email Security 3.0 suite for 75,000 employees; a U.S. state agency purchased protection across Zones 1 and 2 for 50,000 employees; and an Australia higher education customer that purchased Zone 1 and 2 protection for 140,000 seats.

Now the popularity of our multiservice offering continued with several of our larger engagements, purchasing our full suite of services that included web and awareness training, in addition to e-mail services. We continue to have success in the large enterprise space, and we believe that we have the services and teams in place to further penetrate this opportunity.

In spite of challenging business climates in some of our markets this year, we forged ahead with our expansion plans, opening new offices, hiring additional talent and deploying new data centers to capitalize on the large opportunities ahead. While investing for our future growth, we also delivered positive free cash flow throughout the year, including $12.1 million in the fourth quarter and totaling $37.3 million of free cash flow for the full year. As our facilities expansion is complete, we anticipate seeing a positive inflection in our free cash flow in fiscal 2021. This, we feel, is important to our resilience, as we face the public health and associated economic crisis that has been unfolding.

While achieving our financial targets, I'm also very pleased with our pace of innovation, and let me briefly share some of our achievements on our product rollout. We saw our threat research center and our open APIs used by approximately 800 customers in the quarter and launched a new integration with Microsoft Azure Sentinel to share Mimecast's threat intelligence across the entire e-mail estate, validating Email Security 3.0 on the front lines of our customers' cyber defenses.

Additionally, we gained traction with Mimecast Web Security and now count over 600 customers using this service as at the end of March, and that's up from the 400 customers we noted at our investor event in February, as organizations are looking to enhance security for remote workers.

Now speaking of working remotely, let's turn and look at some of the steps Mimecast is taking to ensure our employees and customers are fully supported in their current work-from-home situation. Now my priority has been to our staff and their safety as they represent our greatest asset. As a dynamic global business, our employees are used to working from home, and we have deployed tools to connect employees that are spread around the world, things like persistent chat and video conferencing and, of course, e-mail. As we have moved from a physical work space to a virtual one, we've leveraged these tools to support all employees working remotely.

To further support our staff at home, we've rolled out programs to address our physical and mental health. We have made direct payments to our lower wage earners to offset some work-from-home expenses as well as the impact the crisis may have on their family finances. The Executive Committee established an employee resilience fund that employees can contribute to or draw from in times of need. I've also felt a warm reception to my weekly work-from-home staff video messages, and I'm very thankful to all of the Mimecasters who are adapting to this new paradigm despite its challenges. In fact, our teams have been executing quite well while working from home and carrying the business forward. On the go-to-market side of the house, we've been busy engaging with prospects, conducting engineering demonstrations and are actively competing in proof-of-concept engagements, more common with larger organizations. Equally important to me is the support of our customers as we engage with them on this new footing, and I'm hugely proud of our customer success teams who have completed over 1,000 new customer and new product connections done entirely remotely with customer satisfaction scores consistently over 90%. Further evidence came in the form of a number of personal notes I've received from customers in the quarter, including 2 from our larger new customers expressing their satisfaction with the onboarding process.

Later on in this call, Rafe will cover the financial impact of the virus to Mimecast in greater detail. But first, I wanted to share some of the ways we're keeping customers safe while working remotely. Now attackers has responded quickly to the pandemic, as we saw a barrage of new e-mail-borne scams, including impersonations of the CDC, the World Health Organization, the U.K. National Health Service, to name a few. As noted in our recent 100 days of coronavirus report from Mimecast threat research, impersonation detections increased by 30%, while malware detections increased by 35%, highlighting the persistent and ever-changing tactics that attackers deploy against organizations. In addition to blocking e-mail scams, customers who deploy Mimecast Web Security are protected while working from home off a corporate LAN or VPN from web-based threats attempting to capitalize on pandemic fears. We believe this service is more relevant today as our threat research shows that malicious URLs blocked by Mimecast were up 56% over pre-corona levels. Our browser isolation technology demonstrated at the RSA Conference is one of many recent enhancements to Mimecast Web Security, further strengthening customers' cyber resilience.

Alongside the protection Mimecast services deliver, our customers also play a key role in keeping their organizations secure. To bolster our customers' defenses, Mimecast's Awareness Training solution also includes modules specifically targeted to remote workers and best practices for working from home. Now taken together, our integrated suite of services provides a comprehensive solution to address many of the cybersecurity challenges our customers face. Today, more than ever, we believe organizations need a cybersecurity partner who responds in real-time to attackers' shifting tactics and clever tricks. And our customers believe it, too, as we exit fiscal 2020 with net revenue retention of 107%, reflecting industry-leading customer retention and the desire for additional services from our base. These high retention rates are an illustration of the mission-critical nature of our services, as businesses of all sizes and across all verticals need protection from cyber criminals.

Our balance sheet is strong with approximately $174 million in cash and cash equivalents. We envision further operating leverage and free cash flow generation in fiscal 2021, and this gives us confidence in our ability to remain resilient and to keep innovating and investing in a disciplined way as we navigate the current crisis and remain focused on the considerable opportunities to serve even more customers with our expanded portfolio.

Now many of you on the call today would have attended our Analyst and Investor Day in February, where we discussed our vision and set new goals for the coming years. Little did we know at the time how we would all be impacted by this pandemic. And in spite of the disruption that we have witnessed, since then, we remain confident in the long-term outlook we presented and the opportunities ahead to expand to new markets and grow our subscribers.

We outlined our plans to further address state and local municipalities, federal customers and expand our geographic reach with dedicated resources. We discussed plans to further penetrate the large enterprise segment with services and support tailored to meet their needs. We also described how our integrated platform of services continues to expand and capture share from legacy players with dated technologies. We are reiterating our long-term goals presented at our Analyst Day, and we believe we remain on track to achieve these goals.

Before I wrap up my prepared remarks, I want to share one additional observation from the fourth quarter. In January, we completed the acquisition of Israeli-based Segasec and immediately launched services known as Mimecast's Brand Exploit Protect, the cornerstone of our Zone 3 defenses. This new service is meeting an unfilled need for many of our customers. In fact, we closed the largest ever deal in our SMB segment as the customer purchased a broad suite of services that included brand exploit protection. The ability to identify and quickly remove fake websites that attempt to defraud our customers' customers is a key new offering for Mimecast that further expands our ability to enhance cyber resilience.

So in summary, fiscal 2020 was a year of challenges that we met with agility and innovation. We added 3,700 net new customers to the Mimecast platform while delighting and retaining our base of subscribers. We exceeded our revenue and profitability targets, and we completed on time and on budget with a global expansion that sets us up well for future growth.

Before I conclude, I'd like to again say we are focused on achieving our targeted operating model offered at our recent Investor Day, which notes our commitment to drive towards the Rule of 40. Alongside that commitment, we're also focused on supporting our employees, our customers and our communities, as this is the foundation on which our business is built. We believe investments in our key stakeholders during these difficult times will act as a springboard for the growth of our company when we return to more familiar times.

Now I'll hand the call over to Rafe for our financial results and additional details regarding our adjusted FY '21 plan. Rafe?

Thank you, Peter. I'm pleased to report that for the fourth quarter of fiscal 2020, we exceeded the high end of our guidance for both revenue and adjusted EBITDA. This achievement was made despite both the impact of the COVID-19 crisis and significant foreign currency headwinds experienced during the quarter. To that point, I will review our Q4 results and then dive into the impact we are seeing and will likely continue to see as a result of the COVID-19 crisis and resulting economic slowdown.

In the fourth quarter, we generated revenue of $114.2 million, which represents growth of 23.9% over the prior year in absolute dollar terms. Adjusting for the $2.3 million of currency headwind we faced, our constant currency growth rate over the prior year stood at 26.4% for the quarter. Note that since providing guidance last quarter, foreign currency fluctuations negatively impacted our fourth quarter results by $1.5 million. This being a leap year, Q4 benefited by approximately $900,000 due to the additional day of amortization. For the full year, of course, any impact is minimal. Segasec, which we acquired in Q4, and DMARC, which we acquired in Q3, and together complete our Zone 3 offering, contributed acquired revenue of approximately $200,000 in the quarter. For all of fiscal 2020, revenue grew 25.4% in absolute dollar terms and 28.3% in constant currency, net of the $10 million of FX headwind, to a total of $427 million.

Adjusted EBITDA for the fourth quarter totaled $24 million, representing an adjusted EBITDA margin of 21% compared to $15.8 million or 17.1% in the same quarter the prior year. I would note that Q4 benefited approximately $1 million from onetime savings related to cancellation of a number of in-person marketing events, travel and other incidental expenditures. For the full year, our adjusted EBITDA margin was 18.3%, up 240 basis points over the prior year.

On a net customer basis, we added 1,200 customers in the quarter compared to 1,100 in the prior year. It is exciting to note that approximately 200 of these new customers joined Mimecast by purchasing one of our emerging products on a stand-alone basis. These emerging products, which include web, Brand Exploit Protect, DMARC or Awareness Training, are part of our strategy to create additional customer onboarding routes. Mimecast now serves 38,100 customers worldwide.

Our average order values continued to show improvement over the prior year. Currently, average order value for all customers stands at $11,900, up approximately 11% over the prior year in constant currency terms. Average services per customer across our customer base rose to 3.3 services per customer in the quarter, up from 3.1 services last year at this time. As of the end of the year, the proportion of customers using Mimecast in conjunction with Microsoft 365 remains above 50% across our entire customer base as well as among those new customers who joined Mimecast this quarter.

Down-sell and churn, measured on a trailing 4-quarter basis, held steady in the quarter at 7%. Upsell of additional services and seat expansion came in at 14%, giving us a revenue retention rate of 107%. As we recently discussed in our Analyst Day, our upsell numbers reflect the fact that 74% of our customers now use our TTP solution and that the vast majority of new customers buy TTP in their initial order. Over time, we anticipate that our emerging products in Zone 2 and Zone 3 as well as our web solution have the potential to reach a meaningful proportion of our customers' base, introducing a significant level of upsell opportunity.

Turning to gross margin for the fourth quarter. We've recognized a 75.9% non-GAAP gross margin, up 160 basis points from Q4 of the prior year driven by efficiencies in grid infrastructure. Our non-GAAP operating profit for the fourth quarter was $16 million or 14% of revenue, an improvement of 370 basis points from the prior year, which continues the trend of improved margin that we have seen throughout the year. In bottom line terms, our fourth quarter GAAP net income was $2.5 million or a profit of $0.04 per diluted share based on 64.4 million fully diluted weighted average shares outstanding. Our non-GAAP net income for the quarter was $9.7 million or $0.15 per diluted share based on 64.4 million fully diluted weighted average shares outstanding.

Turning to cash flows. Our fourth quarter operating cash flows totaled $25 million or 21.9% of revenue. Free cash flow totaled $12.1 million for the quarter. For the year, free cash flow came in at $37.3 million, in line with our prior guidance.

Turning to the balance sheet. As of March 31, Mimecast had $174 million of cash on the balance sheet after paying $27 million for the acquisition of Segasec early in the quarter. We continue to have an undrawn credit facility of approximately $48 million.

Now let me discuss the impact we are seeing related to the COVID-19 crisis. As we think about the impact on our business going forward, I'd like to begin by reminding you that Mimecast has highly diversified business operations across industries, customer segments and geographies. Perhaps most importantly, the portion of our customers in industries directly and adversely impacted by the current economic crisis comprise only a portion of our total diverse customer base. At present, we have 14% of our reoccurring revenue base in the hospitality, transportation, retail or oil and gas sectors. We have an additional 7.5% of our business in the medical sector, though it is less clear how the current crisis will impact their buying behavior over time. From a customer segment perspective, our enterprise business reflecting customers with more than 5,000 seats has risen to 18% of revenue. Our mid-market business constitutes 73%, and smaller customers reflecting customers with fewer than 100 seats stands at 9% of recurring revenue.

With respect to Q4, the primary impact of COVID-19 and the significant shift to a work-from-home basis occurred in the back half of March across our major markets. This shift did not significantly impact our Q4 revenue. In terms of bookings, however, we have calculated an impact to the quarter of approximately $4 million. Unfortunately, the challenges experienced in the last 2 weeks of March, which are the busiest 2 weeks of our fiscal year in terms of booking activity, will directly impact our FY '21 revenue outlook when we would otherwise expect to recognize these bookings as revenue.

One should note that in many cases, customers stated they were deferring the change to the e-mail security provider simply due to strains on the IT team's time and resources in the midst of the crisis. However, it remains to be seen how quickly these customers will be able to return to the initiative to change e-mail security providers.

As we model our business going forward, there are 4 distinct areas on which it is important to focus: First, the new customer business impact; second, our ability to upsell existing customers; third, customer retention and down-sell rates; and fourth, geographic-specific challenges. Taking these one at a time, let me share with you what we are seeing and how we are modeling our year.

First, from a new customer business perspective. In the last 2 weeks of March, new business pipeline generation slowed as potential customers rapidly shifted to a work-at-home environment. Throughout the course of April and the first week of May, pipeline build has begun to recover. For modeling purposes, we are assuming that business performance from new customers, which constitutes approximately half of our total bookings, remains below our targeted run rate through our first 2 quarters, which takes us through September 30 and then begins to gradually improve over the second half of our fiscal year.

Second, from an upsell business perspective. We again saw an impact in Q4 from both a push deal perspective and in pipeline build. While we have seen positive engagement on our emerging products, our overall upsell activity is facing similar challenges as our customers face tighter budgets and delay of significant projects. As we have discussed in the past, our upsell numbers have traditionally been split between product upsell and seat expansion. Given the slowing economy, seat expansion could be muted for the coming months, if not the entire year, as it often relates to businesses adding employees. Similar to new business bookings, we're modeling product upsell to be below our original expectations, particularly over the next few quarters. However, seat-driven upsell is likely to remain challenged until the broader economy begins to recover.

Third, down-sell and churn. As we discussed, we have made a significant investment in our customer success efforts, which we believe would ordinarily improve down-sell and churn rates from the current 7% to our historic norm of approximately 6%. However, the broader impact of the recession will most certainly be reflected in down-sell and churn through the majority of fiscal '21. We expect the broader economic challenges may offset the improvements we would have otherwise seen. We are working closely with our customers as they go through this crisis. There have been a number of requests for shorter billing terms or extended payment terms. These requests are evaluated on a case-by-case basis but, when granted, have a temporary impact on cash flow.

I would note that the changes relate to short-term relief related to billings, not changes to overall contract durations, which are typically 1 year. Overall, given the macroeconomic uncertainty, we are modeling a revenue retention rate, which is the net of upsell, down-sell and churn of between 106% to 107% for the duration of fiscal '21.

Fourth and finally, the geographic impact of the crisis has thus far been difficult to differentiate beyond the obvious dramatic impact on foreign exchange rates, where we have seen a significant strengthening of the U.S. dollar since our last earnings call. It is quite likely that the depth of the economic crisis and the time frame for recovery will differ significantly across our major geographies. It will be important to remember that the U.K., which comprises 29% of our revenues, will be recovering from the corona-induced recession at the same time as it negotiates the details of Brexit, which is likely to continue to produce its own economic headwinds in South Africa, from which we derive 11% of our revenues. The current crisis appears to be significantly impacting this already weakened economy, the clearest measure of which is the fact that the rand has devalued 21% in value against the dollar over the past year. In our model, we anticipate bookings and retention rates will be impacted by these economic challenges and note that we have a small number of larger accounts in South Africa currently going through severe economic challenges.

Let me now turn to guidance for fiscal '21. For the first quarter of 2021, revenues are expected to be in the range of $112.8 million to $113.8 million or 19% to 20% growth in constant currency terms. Our guidance is based on exchange rates as of April 30, 2020, and includes an estimated negative impact of $4.8 million resulting from the strengthening of the U.S. dollar compared to the prior year. Adjusted EBITDA for the first quarter is expected to be in the range of $23.5 to $24.5 million, which at the midpoint reflects an adjusted EBITDA margin of 21.1%, up 750 basis points from Q1 of last year.

Given that we are in the early stages of the COVID crisis, it is obviously difficult to forecast full year results with certainty. However, the recurring nature of our revenue stream and our disciplined approach to expense management gives us a baseline on which we can model our business. As such, we are updating our guidance to reflect the significant movement in foreign exchange rates, which have adversely impacted our FY '21 guide by $19 million since our initial guidance provided in February, the impact of the current crisis on our recently completed Q4 bookings and the high likelihood that our performance will be impacted by the dramatic changes in the broader economy and our specific selling environment. This said, full year 2021 revenue is expected to be in the range of $475 million to $485 million or 15% to 17% growth in constant currency terms. Foreign exchange rate fluctuations are negatively impacting this guidance by an estimated $15.5 million compared to the rates in effect in the prior year.

Knowing that you'll be trying to reconcile this guidance with figures we discussed a few months back, let me recap. Our revenue guidance currently stands at $480 million at the midpoint compared to $510 million in February. $19 million of this change is purely currency headwind-related. On a constant currency basis, the remaining change of approximately $11 million reflects the Q4 booking impact of the COVID-19 slowdown discussed above of approximately $4 million and a $7 million change relative to the ongoing economic challenges discussed earlier in this call.

From a bottom line perspective, we are maintaining our estimated adjusted EBITDA margins. As such, full year 2021 adjusted EBITDA is expected to be in the range of $94 million to $96 million, which at the midpoint would reflect an adjusted EBITDA margin of 19.8%, up 150 basis points from the prior year. Free cash flow margins for the full year of fiscal '21 are expected to be approximately 16% at the midpoint of our guidance range of $76 million to $78 million for the year. CapEx for the year is expected to be approximately 7% of revenue. Capital expenditures will be slightly skewed to Q1, estimated to be $10.5 million, due to the front-loading of equipment orders to ensure capacity throughout the year. As a result, we expect Q1 free cash flow to be approximately $9 million.

Our GAAP tax expense for fiscal '21 is expected to be approximately $4 million. Our non-GAAP tax rate is expected to be approximately 30%. Finally, stock-based compensation is projected to be approximately 12.5% of revenue for fiscal '21.

While these are unprecedented times, we are confident that by focusing on our customers and our team, we will emerge from them stronger than ever. The challenges our customers are facing underscore the value Mimecast delivers in product offerings that build organizational resiliency through a flexible, single-tenant, cloud-based offering. And our business model, with approximately 98% recurring revenue, likewise, gives us the ability and the visibility to maintain our strength as an organization even in these uncertain times. These factors allow us to remain confident that we will achieve our long-term goals despite near-term challenges.

With that, operator, let us please open the line to questions.

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

Rafe, in particular, your guidance was super helpful for us to kind of think about the mechanics of the model. I guess, I'm wondering, you noted down-sell and churn could get a little bit worse this year relative to the plan of improving a little bit. When you think about those 2 variables, I'm wondering if you can distinguish between them. Have you seen -- and to what extent you've seen customers reducing their -- active customers reducing their seat count because of layoffs and things of that nature.

Yes. Thank you for the question. I think we're in very early days in terms of the overall monitoring down-sell and churn. Principally, what we've had from customers thus far are some that have come back and requested things like quarterly billing for a short period of time instead of annual, things of that nature. I'm sure -- well, I know there's been a couple of corner cases where people are going through reductions and talking about what their contract might look like going forward. But I would say, to be honest, right now, we're still very much in the early days of anything. So there's no real data points on the board that are meaningful as of yet.

Got it. That's helpful. And then maybe on the Symantec replacement cycle or just the broader legacy provider replacement cycle. Can you talk about the cadence of that, how you think that might impact this year? Is it more of a this-year thing or sort of a next-year thing, just sort of the willingness for customers to move off a legacy solution in times of economic stress like that? That would be helpful, too.

Yes. Matt, thanks. I'll take that one. I think we think about that in 2 ways. The one is there's many legacy implementations that they kind of have to get off because they no longer serve customers well in a work-from-home scenario. So appliances for things like e-mail security and web and so on really require replacement at this time. And so we're seeing an opportunity around that. Looking at Symantec specifically, obviously, that is a hot area of opportunity for us. And we've been monitoring that closely to see what the impact of customers' willingness to make changes on it. The picture that's forming is that customers are interested in moving. It was delayed slightly. But in the quarter that we just reported, we had one of our stronger quarters ever on displacement with Symantec, and we were able to do some -- I think some pretty large Symantec migrations on e-mail security despite the fact that a lot of the work had to be done under the current work-from-home regime.

Our next question comes from Shaul Eyal with Oppenheimer.

Rafe and Peter, thank you for this transparency. Let me echo Matt's views as well. I have 2 questions. When we think about some of the challenges you're seeing and putting that versus the breakdown rate you provided us with small customers, 9% of recurring revenue, middle customer -- middle-market customers, 73%, large enterprise, if I'm not mistaken, 18%. Where did you see the majority of impact to fiscal '21 coming from? Is it just one segment or is it all of them?

Yes. Thanks for that. Well, I would say, in the first few weeks, that this happened, in late March, we really did see it kind of across the board. I will tell you as the April has ticked by and this first week of May, we are seeing the enterprise come back stronger in terms of pipeline build. And by pipeline build, that's that day-to-day activity where we're focused on, how we're adding to pipeline. So perhaps not surprising, some of the bigger organizations are a little bit more able to get back to work even in a work-from-home environment. One thing I would add, you were spot on in your customer segment breakdowns. But if you just look at how much of our recurring revenue comes from customers over 1,000 seats, which speaks to some pretty good-sized organizations, we now have 47% of our recurring revenue coming from that over 1,000 segment. And I think that -- we talk a lot about the broad customer base that we have of many different segments and industries, and I think that speaks to it. So we're encouraged by what we're seeing in some of these bigger accounts. Overall, as I touched on, on the call, we did see things improve from that first couple of weeks of highly disruptive time as we look kind of to that day-to-day activity. And so we're hoping that the enterprise, the larger accounts, lead the way on that.

Understood. And thank you for that, Rafe, again. Peter, on the Office 365, it would appear as if trends for the most part are largely intact. But have you seen any change in demand? And are customers becoming slightly more reluctant to leave their current provider and switch to a new one, probably just playing it say for maybe a quarter or so?

Yes. Great question, Shaul. So yes, I think the Office 365 trend continues, and that's been a tailwind for our business for some time. The percentage of our customer base using Office 365 -- using Mimecast to protect Office 365 continues to climb. So that's good. And I think customers using Office 365 are having a better time of it because of the way that it suits a remote worker scenario better. So we think that's good.

Sorry, Shaul, just repeat the second part of your question, willingness to change provider. Sorry, I...

Exactly. Exactly.

Yes. We've seen -- obviously, we saw a slowdown at the end of Q4 in terms of decision-making. We're not certain that, that was necessarily based on a reticence to change providers. I think it was more the disruption and the uncertainty around the pandemic and how it was going to impact and a lot of distraction with IT and security teams focused on work-from-home situations. What we have seen is that those customers that did continue with these migrations is that we've been able to very successfully and on a cost-neutral basis move them to a better, stronger e-mail security platform. And in fact, in many cases, we expect that IT organizations will start to get back some time and some productivity as they settle into this and quite possibly have scope to do these projects more successfully with us as we settle down.

Our next question comes from Brian Essex with Goldman Sachs.

Rafe, maybe one quick one for you, just on the guidance and the margin expansion. As we've kind of brought down the top line guide from February, maybe just some thoughts on how you're thinking about spending for fiscal '21. And where any kind of, I guess, expense control came from to maintain some better margin expansion, I think like 250 basis points at this point in the mid-range?

Yes. No, thank you for that. As you can imagine, as you're going through this crisis, we're monitoring head count very closely. We've recast our plan, and we've really set in a tightly controlled system where we'll look at a number of indicators and then release head count as the year progresses, just to make sure we're really working in concert with the business as it develops because I think as everybody knows, this has proved hard to predict. So I think that's the first element where we've been able to really focus on, is along the head count side. Obviously, right now, we're traveling a lot less than normal. So there is a couple of million of savings in Q1 that is coming from travel reductions and event reductions. That said, in our plan, we are anticipating that we'll get back to work as the year goes on, and there's very likely some pent-up demand certainly for some in-person events and things like that. We've shifted everything we can to virtual. But as the year goes on, that has a lot to do with our general approach to pipeline generation. So there's some savings, I would say, early on related to travel, but then there's some planned investment later on in the year, goes on for travel and events, really.

Got it. That's helpful. And maybe one quick follow-up on -- I think maybe to Matt's question where -- but I wanted to kind of get your thoughts in terms of your outlook and assumptions embedded in your outlook with regard to seat count reduction. I guess what are your assumptions? Do you kind of assign it to one of the -- any particular cohort of customers? And then if we were to see kind of unemployment or seat count reductions meaningfully impact your installed base, how would that manifest itself? Would it come in through on renewals? Or would you have interim conversations with your customers on a quarterly basis to adjust on that front?

Yes. No, thank you. I think when we talk about that revenue retention rate, which as I mentioned, we're modeling between 106% and 107%, and we kind of bring together a number of scenarios here as we're working through that, that is obviously net of a few numbers of the upsell, the down-sell and the churn. As we think about it, we're kind of -- we're solving for this in numbers. So we have gone through a number of scenarios. Frankly, the -- it's hard to say until it actually happens, I guess. The lower end of the market, you can see some of those companies struggling as we go through tough times like this. They're generally smaller dollars in terms of recurring revenue from any one of them, but I think that's the running hypothesis that a lot of people are using, that there could be some elements there. And we're excited about the activity that's going on upmarket. I think it's also important to think about, and we touched on it briefly, just our exposure in certain verticals. We tried to put together a group of those verticals which we think are most likely to be impacted by this, and that's that retail, hospitality, transportation and then even oil and gas. And together, it's 14% of our total recurring revenue base. It really does speak to that great diversity that we have and that we rely on. So it gives you some bearing of where kind of the hot spots could be.

Your last question on when do these changes happen. As a general rule, that any kind of changes like that usually happen at the contract renewal time. They're in dire circumstances, in very unique situations, perhaps there could be an exception to that. But the general rule is that any kind of down-sell, if you will, reduce seat counts or things like that, happens at renewal time.

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

I wanted to ask my first question around customer adds. Just despite the backdrop, the customer adds in this quarter were actually reasonable. How are you thinking about customer adds fueling the model over the next couple of quarters? And I wanted to add one particular dimensions of that. One of the previous questions was around switching vendors. That's not the way I was thinking about it from a competitive dynamic standpoint for this situation but in particular, consolidation. And what I mean by that is if Office 365 continues to get rolled out, particularly at the low end, does that create a higher propensity to go with Microsoft's solution in this case, given the weak backdrop of the economy? So really, new customer adds with a competitive twist. And then I have a follow-up.

Sure. I'll start off on the new customer adds. As we're looking forward to the year, remember the number we quoted is a net customer add number. So small and -- larger number of small companies, if they struggle during this period, that could obviously impact that statistic, even if it's a relative small number of dollars. But let me tell you. We think about it as either it's very important for us to be out bringing on new customers onto our platform, right? It sets us up for initial sales and kind of our long-standing proven ability to upsell those customers. So it is absolutely a focus of the organization. That's why we're very well pleased to see the activity we had of that 200 customers coming on what we think about as new on-ramps onto the Mimecast platform. Now those are coming from some very brand-new solutions, but there are things that now stand alone, apart from our typical and traditional security approach, Email Security products, whether it's our web solution, which had a nice quarter. DMARC -- products that came out of the DMARC acquisition and the Segasec acquisition, those set us up, we think, over the long term to keep bringing customers onto the platform. And then obviously, our hope is that we can sell those customers more over time. So I think that's probably the right way to think about that.

Yes. Keith, just to answer your question around sort of the economic pressure and smaller customers on Office 365. It was interesting. I was looking at it, at what our -- how the company grew during the financial crisis of '08 and '09? And just looking back at those numbers, we grew incredibly strongly during that time, and we were selling to a lot of smaller organizations during that period. And I think the formula that we had then is really similar to the formula that we have now, albeit that the product portfolio is considerably richer. So we're able to say to a smaller company on Office 365, "Here is a very economically compelling suite, a combination of capabilities that is kind of unmatched in a single integrated suite in the industry that combines e-mail security, web security, user awareness training and data protection, all in one very affordable, very easy to manage package." Given the increased cyber risks that we're seeing around this pandemic and given the dynamics of the work-from-home situation, these are really important things that companies of all sizes but certainly smaller companies cannot simply ignore. So we think we have a very strong opportunity to compete for that business, given the economics and the form factor that we can deliver to them in.

Okay. Great. All right, gentlemen. I think I will cede the floor there, but I appreciate the feedback, and best of luck.

Our next question comes from Brent Thill with Jefferies.

Just on the guidance. Obviously, 26% growth to 19% to 20% this quarter and then down to mid-teens is a pretty sharp falloff. And I guess many are asking, is this just you being a little more conservative based on assumptions? Or are you actually seeing this impact already in the close rates? You mentioned the pipeline is up. That would, I guess, imply that your close rates are down. So just curious if you could just put a little more color around the decel that you're applying for the rest of the year?

Yes. And the first thing I would just -- on the pipeline, just to be abundantly clear, I was speaking to the pipeline build, which is really looking to the daily activity of the pipeline, the day-to-day generation that we track quite closely. That's that where we saw that falloff, the day-to-day build, in late March, early April. Now we've seen that activity climbing back up, so just to be really clear on that point.

But your broader question about the guidance. The guidance, as we tried to lay out, reflects a number of things we're seeing in the business across the board as well as the activity we already saw in -- late in the quarter. So for example, that first one, where we called out in Q4, we can identify right around $4 million of business that we felt was on track to close that really got pushed hard by the COVID crisis and everybody shifting to home, right? Obviously, that translates straight into revenue for the very next year. Things like that have an impact on FY '21. Also, in our assumptions, as we've tried to lay out, we -- obviously, the crisis is hitting us hard now in this first quarter of the year. And in a model where we have approximately 98% of our revenue recognized on a ratable basis because it's recurring, that's the quarter that impacts us very significantly. What happens in Q1, Q2 hits revenue a lot harder than the same booking that happens later in the year. So even in our assumptions that the business starts to return to a more normalized place later in the year, a lot of those bookings might come along late enough that it doesn't really have a chance to directly translate into FY '21 revenue.

Our next question comes from Saket Kalia with Barclays.

Peter, maybe first for you. I'd love to touch on the web security part of the business. Realizing that, that's still a developing offering, clearly, it sounds like you benefited from that since as early as February back to Analyst Day. Can you just talk a little bit about why that is and why you feel like you're maybe differentiating here?

Yes. Thanks, Saket. So yes, I agree with you. I think web security is a big opportunity for us. It's a very big market. We introduced the version 1 of our product, I think it was about 18 months ago. And we've continued to incrementally innovate in that product to make it more and more competitive and to attract more customers as we go. And remember, our position on this is that we want to be the most compelling web security alternative to Mimecast customers, so customers that have already chosen us as their e-mail security partner to give us a very serious look as being their web security partner. And if we just look at it in the context of that, it's a significant opportunity. What we've started to see at the same time and perhaps capitalized by the COVID situation is, as Rafe mentioned, we've seen customers joining the platform with non-e-mail security products as their first on-ramp onto Mimecast. So that's pretty exciting. I mean we'll have to see a few more data points before we call it a trend, but I think it's good validation of the increasing maturity of our web offering. So 600 customers now, and I think, as you mentioned at the Analyst Day, we called out, I think, about 400 customers back in February. So in a fairly short space of time, we've onboarded several more, about 200 more customers onto Mimecast Web Security. We did also, at the start of the crisis, launch a free 90-day production service of Web Security for customers, and we saw really good interest in that. Obviously, none of those are counted in the 600. Those are all paying customers. And that has allowed us to expose more of the web security capabilities to more of our customer base that we're excited about. And I think, frankly, on-premise web security and appliances don't serve customers particularly well in a work-from-home situation. So the power of our integrated suite and our ability to very quickly onboard customers on Web Security, I think, has paid off nicely. And we'll continue to grow that piece of the business.

Got it. That makes sense. Maybe for my follow-up for you, Rafe, and somewhat related. Can you just give some broad brush on sort of how you're thinking about new product contribution in fiscal '21, specifically sort of that Zone 2 and Zone 3 portfolio? I know you talked about some of the puts and takes for that 106% to 107%. Clearly, new products are going to be a part of that. But can you just go one level deeper in terms of how you plan for some of those Zone 2 and Zone 3 products?

Yes. Happy to. At the Analyst Day, we put up a chart that showed our emerging products Zone 2 and Zone 3, and then you would add web to that to kind of get the full group of the emerging products. I think at the Analyst Day, it was 8% of our recurring revenue. It still remains below 10%. So for a lot of these products, they're in their earlier days as we roll into the year. We obviously see that starting to build as we move through the year, but it's still going to be a relative minority. I think the key for us is opening up those avenues, both for upsell to our existing customer base and as these products have gotten stronger and stronger. And the team is getting ramped up on being able to push that out, to hit that upsell number that we talked about as well as the onboarding activity to let that be the lead product in a lot of cases. And then we come back around on them and try and sell them the broader portfolio. So I think there's a very nice energy around those emerging products that can be helpful as it plays out over the longer term. It's clearly -- those emerging products are clearly very much part of our long-term strategy.

Our next question comes from Daniel Bartus with Bank of America.

I'm curious, first for you, Peter, if you can talk about how the current environment might change demand per product? And are there certain products that you see are feeling the pain much more right now because maybe they're not as mission-critical or maybe they're a little bit more complex?

Yes. Great question. So I think what we're finding is that there's demand -- there's strong demand for each of the aspects of what we do. The #1 attack vector continues to be e-mail, followed by web and then, of course, the human factor, which spans both of those, as users of e-mail and web. And so this trifecta of capabilities that we offer in that regard is compelling in all cases. It's also -- it's a mission-critical capability. So you have to have an e-mail gateway type solution. You've got to have a web DNS resolver and web proxy environment, and those capabilities tend to be pretty sticky and required. There is -- it's more on the continuum of sort of oxygen or jewelry. It's much more on the oxygen end of the spectrum as a requirement. I think there are aspects of cybersecurity that are more emerging themes that are -- perhaps people are less inclined to adopt during this time, but our focus has really been on taking things that have really established use cases and drivers of demand, doing them better, doing them as an integrated suite and giving customers the greater than the sum of the parts value of having an integrated cloud suite that solves a collection of mission-critical problems. So we feel pretty good about that.

That's helpful, Peter. And then quickly for Rafe, just a clarification. On your revenue retention assumption for fiscal '21, are you assuming that the down-sell and churn stays at roughly 7% each quarter through the year?

So I didn't break that out in large part because as we've gone through that number of scenarios, whether it hits upsell, down-sell or churn, you get back to the same point, right? And so we haven't broken that out because in our own scenarios, we've modeled it out in many different ways. And so that's why I think that net number, where you net all of that off, is probably the best measure of exactly how we're modeling it, the 106% to 107% net revenue retention.

Our next question comes from Sterling Auty with JPMorgan.

This is Jackson Ader on for Sterling tonight. Just a quick one on maybe the initial deal size of what you're seeing during this -- during kind of the slowdown of the number of services per deal either in March or here in April. Have you seen any material change on the initial win?

I'm not sure we have. We haven't broken that out specifically. I think we did note that our -- it's kind of too early to tell, I think, as well. What we did note was an increase in the number of products per customer across our base, up to 3.3, which I believe is up from 3.1 a year ago. So we're continuing to drive an increase in the number of products within our base.

Our next question comes from Catharine Trebnick with Dougherty.

Can you describe how the go-to-market sales motion has changed before the pandemic and now into the pandemic? Because I think that would really give some good color into your guide and how you're actually approaching it. So that's what I'm really looking at.

Sure. I'll start it off, and then Pete can jump in. So Catharine, to a great extent, we are fortunate in that a very large portion of our business has traditionally always been done remotely to a lot of our customers. The way there's -- they're marketed to, the way they're sold to, all of that has been remote, if you will. Clearly, as you move up the stack towards the enterprise side, as you get bigger and bigger customers, there is this expectation of customer visits and what have you. So I think the real change, certainly on the enterprise side, which obviously, everything is remote now versus kind of the traditional way where there would be a lot more client visits, that piece has changed. But even if you go one step further on what about after a customer joins, that has always been remote. So there's subtle shifts within the bigger customers. But beyond that, we're well trained and well practiced at doing this remotely. So I think that piece is going quite well. I think there is one shift further up the pipeline build, which is around events. We've -- obviously, a number of events have been canceled everywhere around the world that used to be in-person. So we're going very hard at making virtual events. Pipeline generation is obviously very important because that pipeline we generate right now is impacting Q2 and Q3. And so we're hustling as hard as we can on that, even though the way those are being conducted has changed dramatically. Pete, anything to add there?

Yes. I would say our -- across the stack, our promotional marketing mix, we just -- we're shifting more towards the digital-type opportunities. There are a number of new products and digital marketing opportunities that are literally coming to life every day from creative providers. So we're looking at -- we've also

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