Mimecast Limited (NASDAQ:MIME) Q4 2016 Earnings Conference Call May 16, 2016 5:00 PM ET
Robert Sanders - IR
Peter Bauer - CEO
Peter Campbell - CFO
John DiFucci - Jefferies
Saket Kalia - Barclays
Jack Kilgallen - Goldman Sachs
Shaul Eyal - Oppenheimer
Matt Hedberg - RBC Capital Markets
Good evening. Welcome to Mimecast's Earnings Call for the Fiscal Fourth Quarter and Full Year ended March 31, 2016.
I'm Robert Sanders, Investor Relations Manager. With me on the call tonight are Peter Bauer, our Co-Founder and CEO and Peter Campbell, our CFO.
Tonight's conference call is also being broadcast live via webcast. A replay of this call will be available two hours after the live call has ended. During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the Company. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements.
We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release and this conference call. These risk factors are included in our press release and further defined in Mimecast's most recent Form F-1 and 6-K filed with the SEC.
During this call, we will present both GAAP and non-GAAP financial measures. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results, and we encourage you to consider all measures when analyzing Mimecast's performance. A reconciliation of certain GAAP to non-GAAP measures is included in today's press release, which can be found in the Investor Relations section of our website.
The date of this call is May 16th, 2016. 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. Peter?
Thank you Rob and good evening folks. The fourth quarter was a strong finish for a milestone year for Mimecast. We exceeded the high end of our fourth quarter revenue guidance by $1.1 million and saw a real acceleration in new customer adds with 4,200 for the year and 1,800 in the fourth quarter alone. We also experienced terrific customer loyalty combined with solid uptake of our newest technologies especially Targeted Threat Protection, which helped us grow and achieve revenue retention levels at a 109%. Now to recap for those who maybe newer to our business Mimecast delivers the industry's only large scale multitenant and fully integrated suite of services, for comprehensive email and data security, archiving and continuity. Our services protect thousands of customers using Office 365, Google Apps and Microsoft Exchange worldwide. We converge several solution categories typically purchased individually from competitors into one fully integrated service. Now all of our services are built on top of the same proprietary underlying software backlane or SaaS operating system that we call MimeOS.
MimeOS enables us to deliver services efficiently to 18,000 customers today, including some of the worlds very largest as well as the most privacy and security sensitive organizations. It also allows to scale efficiently to support potentially hundreds of thousands of organizations of all sizes with some other needs. MimeOS underpins our ability to provide robust security because of our vast network and integrated intelligence response capabilities enabling us to detect and block threats even faster and better as we continue to grow. Because the customer problems that we solve affect hundreds of thousands of organizations we built MimeOS to deliver efficient processing capacity and application performance at great scale. Now this competitive strength is demonstrated by our industry beating data search performance despite adding ever greater volumes of unstructured data to our service as our customer number grows, we've improved our data search performance over time.
Our MimeOS sits at the heart of our ability to deliver a high quality customer experience and rapid time to value. Our micro services architecture enables us to innovate rapidly in adjacent service areas as we've done recently with Targeted Threat Protection and Secure Messaging. This results in enviable customer loyalty, strong upsell potential and ultimately solid revenue retention rates. Our price to product design and service delivery is gaining in popularity in the market. As customers are now looking to move more IT to the cloud and simplify operations through integrated suites rather than accumulate more point solutions. Customers want to improve security and benefit from the network intelligence response benefits that we offer at our global scale.
Finally, customers want a platform with providers that can prove the quality of their post-sales experience. Worldwide organizations continue to battle with email as a significant track vector and according to wired magazine over 90% of a text start with email. Our own 2016 business email track report surveyed 600 IT security professionals and 64% of respondents said that regard email as a major cyber security threat to their business. Advanced persistence threats, spear fishing and business email compromise are outsmarting traditional defenses as well as many so called next generation technologies. Mimecast protects customers from these threats.
Organizations are also struggling with large and rapidly growing volumes of unstructured data much of it in email. They need to secure and reliably preserve information to meet a variety of use cases, including compliance e-discovery and to make it available to their employees to support productivity. In information intensive industries our platform tells us that each worker sends and received 470 emails per week, communicating with 67 unique people and handling 38 file attachments, it represents about 29 megabytes of data. An organization with just a thousand employees will amass a very significant volume and variety of important data and meta data through these interactions within just a few months. So the importance of preserving and managing this information reliably as a business asset cannot be underestimated and we help customers by making this job much easier.
Finally email is mission critical and keeping it working all the time is vital, but even after significant investments in business continuity infrastructure we're signing up to the SLAs offered by leading cloud email providers, organizations continue to suffer down time with their primary mailbox services. Now in the last six months alone our customers have experienced nearly 400 incidents of primary email server downtime. Over 60% of these lasted more than an hour, 38% lasted more than four hours and 27% lasted more than eight hours. With our continuity protection these customers are able to avoid the serious business disruption and reputational risk that downtime causes. Despite these downtime events that impacted the whole organization, we’re also seeing many instances of partial downtime, where portions of the customers email infrastructure are disrupted.
Since January this year Mimecast has saved nearly 5,000 hours of employee email downtime, by keeping indusial users online, were customer email outages did not affect the whole organization. All most content coutively despite the challenges growing and the treats worsening, there has been a lack of commitment, investment and innovation from the number of the legacy incumbents, serving each of these needs. So the pressuring issues, rapidly evolving security threats, massive volumes of unstructured data to protect and manage, business disruption caused by downtime, the IT shift to the cloud and the lack of competitive innovation, all drive customer demand for our services. And Mimecast is proud to have completely developed our Mimecast platform as a more efficient and effective delivery architecture for serving thousands of customers in the cloud. We’re also proud of our best agreed services that are the result of our relentless multi-year commitment to solving these customer problems.
So to the numbers. The first quarter was a strong finish to very strong year for Mimecast, in 2016 our revenue grew 30% on a constant currency basis to $141.8 million, excluding our guidance. Mimecast’s growth is global and strong in each region and in particular the US, which is our biggest opportunity and our fastest growing region. Since our founding we’ve built our Company to deliver a high level of service, whilst maintaining an eye to the bottom line. So in 2016 we generated $15.8 million in positive adjusted EBITDA, whilst continuing to invest for growth. We’re still in the very early stages of penetrating, what is a large and growing market opportunity for Mimecast, which we estimate to be over $10 billion today and at a confidence that with responsible investments that we’re making now, we can sustain our growth for a very long time. I’m especially proud of the Company’s performance in the last quarter of the year as we saw a profound acceleration in our new customer editions, Mimecast added 1,800 new customers in the fourth quarter alone and we now protect our 18,000 customers globally.
Our Mimecast’s ability to deliver, services to 1,800 new customers, several of them pretty significant in size in the three months is testament to not just our growing sales and marketing capacity, but also to the strength of our technology. Our cloud multitenant architecture and single integrated code base, enables Mimecast to scale efficiently and provision services quickly, delivering an excellent customer experience even as we grow. As I mentioned our architecture give us an innovation advantage and we’re able to quickly respond to the rapidly evolving threat landscape our customers are facing. In the fourth quarter Mimecast announced, Impersonation Protect, a new component to our Target Thread Protection service. Impersonation Protect to the first service available to tackle the growing threat from business email compromise attacks also called [indiscernible] or vailing. This type of attack bypasses competitive traditional security gateways, as there is no malware to detect.
Protecting employees in today’s threat landscape requires technology based on modern architecture that goes beyond traditional email security and without the right protection, organization are losing millions of dollars and exposing their data to fraudsters, so demand for security solutions, that can identify and block advanced threats of this nature continues to grow. So throughout 2016 Mimecast benefited from strong demand for advanced thread solutions. However like our customer growth, growth of our Targeted Threat Protection, accelerated in the fourth quarter as over a thousand customers began using the service. Around 19% of our customer base is using Targeted Threat Protection and that’s up sharply from the 13% that we reported in the third quarter. This acceleration is a clear indicator of the significant demand for the service from both new and existing customers. In total of a 3,000 customers, have purchased Targeted Threat Protection.
Sales of our archiving services have benefited from our positioning in Gartners 2015 magic quadrant for enterprise information archiving. Garter placed Mimecast highest in the leader’s quadrant for our ability to execute, we believe based on our technical expertise, customer support, search and discovery performance, use abuse and our administrative and compliance experience. And while we continue to grow our customer base, we also take great care to provide all of our customers with best in class service. This is key to our customer retention rate and customer retention is key to our growth. During the last quarter we reported 109% revenue retention rate, the increase in our retention rate from 107% in the prior year was driven by sales of a broad range of services, with Targeted Threat Protection being especially robust.
We have a long history of strong customer retention and the fourth quarter results show that both new and existing customers are increasingly turning to Mimecast. In the fourth quarter I am pleased to announce that 68% of our new customers were signed through the channel. This is an increase over the 62% we reported in the prior year, reflecting the impact of our channel expansion strategy. Mimecast’s strong committed and growing network of partners and distributors globally continues to enhance our go to market strategy.
In the fourth quarter, Mimecast enhanced our leadership team with the addition of two senior executives Alex Bender joined to lead our global marketing team and Mark Basler oversees our product management function. Alex’s deep domain expertise in information security marketing and advertising will be pivotal in driving product demand and showcasing the value of Mimecast’s cyber resilience information governance and advanced security services. Mark Basler’s strong commitment to a customer driven roadmap aligns him perfectly with Mimecast as we innovate to meet the needs of our 18,000 customers worldwide. We see the acceleration in customer growth observed in the fourth quarter as evidence that our increased investment in sales and marketing resource is reaching the market at the right time with the right products and services.
Now also in the fourth quarter, Mimecast completed an independent Health Insurance Portability and Accountability Act or HIPAA security compliance assessment. We believe this independent security compliance assessment will enable Mimecast to meet the industry specific needs of a greater audience of customers, especially in healthcare in North America. Mimecast also continues to benefit from the overall transition of enterprise IT to the cloud, in particular, Microsoft Office 365. As customers move their mailboxes to hosted providers they’re looking for additional capabilities to complement the base level solutions provided by Microsoft or Google for example, as well as seeking ways to mitigate the risk that the single vendor [ph] dependency creates.
Many specifically seek a continuity service to ensure email continues to flow in the event of downtime and this is particularly important for customers of Office 365. As Office 365 adoption grows, the accumulating risk from downtime also grows, increasingly more of customers supply chain and business ecosystem is dependent on the same primary email provider. Downtime to the customer is likely to mean downtime to their broadest supply chain too with potentially unpredictable and much more disruptive consequences than if they’d experienced downtime and isolation with the on-premises system. So Mimecast protects customers’ move to Officer 365 here.
Many organizations also seek additional layers of advanced security to enhance what’s available from Office 365, because no matter how effective Microsoft’s offerings are on any given day, Office 365 Security is unavoidably a single and consistent attacked surface in front of an asset that is highly alluring to a broad range of skilled and well-resourced advisories. The risk is that a successful attack from one tenant means a potentially successful attack on many others too. Being protected in exactly the same way as everyone else as on Office 365 is exposure that many risk averse organizations do not wish for. So adding a third party best of breed email security partner like Mimecast is proving popular with Office 365 customers. Today we protect thousands of organizations in this way.
When it comes to archiving and data protection Mimecast provides support for a broad number of used cases in the e-discovery and compliance arena, safety preserving data for the long-term however is the key requirement that underpins all of these use cases. Many customers are required to keep data for over seven years and many simply chose to keep it in perpetuity. While Microsoft Exchange database files may expand to accommodate large volumes of data either on the customer’s own networks or at Office 365 in an archived configuration. This is not in our view the ideal exclusive strategy for long-term data retention.
Several things to conspire to damage or destroy important data especially when the data is stored in large multi-terabyte database files, human error, technical failure, and malicious intent can irreparably damage data. Also we have seen recently arborizing CryptoLocker and other ransomware attacks has increased. The importance of having independent and viable copies of data as a defense. So customers are adding Mimecast as a long term data preservation and data resilience partner to Office 365. So the move to Office 365 continues to be a positive for Mimecast. It's active as a catalyst for customers to purchase our integrated suite as they seek a cloud only solution that work seamlessly with Office 365 to give them the critical additional protection that they need and at a price that is affordable.
In the third quarter, 12% of our customers were using Mimecast services in conjunction with Office 365 now in the fourth quarter we saw approximately 14% of our customers using our services to protect Office 365, representing more than 600 customers choosing Mimecast to protect their Office 365 investment in the fourth quarter alone. We're often asked by investors about competition in the market and our success in winning over competitors. I'll discuss with you some of the reasons why Mimecast has won deals and provide some color around competitive situations.
First let's have a look at the reasons a consumer packaged goods company with about 3,000 employees chose to replace a competing technology with Mimecast. It came down to our ability to better protect against targeted threats with our Targeted Threat Protection solution. The quick and easy implementation process supported by Mimecast engineers and the easier management with rich dashboards providing real time visibility of threats and a better overall value and lower total cost of ownership. Next there is an international entertainment company with 5,500 employees moving to a hosted email solution, and Mimecast won this engagement over a leading competitor.
Because of the completeness and effectiveness of our email security solution for Office 365. So initially this customer was just looking to add a layer of security to Office 365, but after reviewing Mimecast's full suite and in particular our archiving solutions that recognized how our unified suite could help them solve a range of additional problems and that was strategic. Mimecast's comprehensive solution enables this customer to enhance their overall cyber resilience strategy and that was difficult for our competitor to match. Finally we a have healthcare provider with over 6,700 employees and offices in 31 U.S. states. This customer was using Intel McAfee's MX logic solution and was looking to replace this aged technology. Now the customer was suffering from attacks with weaponised and needed a solution to stop nested zip files from entering the organization. Mimecast's targeted threat protection attachment protect service was evaluated alongside a competitor sandboxing only technology.
Mimecast's ability to convert attachments and deliver safe copies in real time without the delay of traditional sandboxing was a very important contributor to the customer's decision to use Mimecast. For some time we've had success in winning customers from Intel McAfee security solutions and this trend continued in the fourth quarter, we're seeing an opportunity as the install base of McAfee users reevaluate their email security needs. And also considering how continuity and archive play into the competiveness of their required solutions.
So in summary our fourth quarter results topped a record year for Mimecast. In 2016 thousands of organizations adopted Mimecast's industry leading security, continuity and archiving services, all developed in house by Mimecast engineers and built on MimeOS our proprietary single code based multitenant pure cloud architecture.
I would like to take this opportunity to thank all of our customers who've entrusted Mimecast to protect their employees, their data and their business operations, thank you. And likewise I'd like to thank our staff globally who remain so committed to our customer experience and to our own success throughout this year, thank you too.
Looking forward to 2017 Mimecast will continue to focus on our customers and delivering services that protect them from advanced and emerging threats. In addition, investments we're making in research and development will allow Mimecast to deliver new services that protect customer information and enhance the value of it using the power of our architecture. The investments we're making in sales and marketing will allow Mimecast to continue to expand our customer base as we reach the market with industry leading solutions and service. This sets the stage for what we believe will be another great year for Mimecast. Now with that let me turn it over to CFO, Peter Campbell.
Thank you Peter. Q4 was a great finish to a record year for the company. Revenue growth exceeded the high end of our guidance range and we continue to generate significant adjusted EBITDA while successfully investing for growth. Mimecast better than expected revenue was driven by strong renewal activity, increased upsell into our existing customer base and the addition of 1,800 new customers across all geographies. Customer growth accelerated across all regions and was especially strong in North America our largest region. Fourth quarter revenue grew 29% on a constant currency basis year over year to 36.9 million above our guided range of 35.2 million to 35.8 million. Full year 2016 revenue grew 30% on a constant currency basis to a 141.8 million beating the top end of the range we guided to last quarter by just over 1 million.
During the fourth quarter revenue grew 20% on as reported basis over the fourth quarter of 2015, headwinds in the South African rand and the British pound negatively impacted our growth by 1.8 million and 0.8 million respectively. In total foreign exchange impacted revenue by 2.7 million. Our total customer account is now over 18,000. The investments we have made in sales and marketing have created an increased awareness in the market for our leading edge technology and contributed to the sharp acceleration in customer additions in the fourth quarter. We have not yet seen the full benefit of revenue recognition from these customers the fact that we recognized revenue ratably means strong customer additions this quarter were start to fairly contribute to revenue next quarter.
With continued customer growth the North American market remained our strongest, achieving revenue growth of 40% for the year. Our U.S. region now represents 43% of our global revenue up from 38% for the same quarter in the prior year. This quarter we experienced a 109% revenue retention rate, ahead of a 107% realize in the fourth quarter of 2015. This improvement was a combination of maintaining our exceptionally strong customer retention and continues growth in upsell, driven by sales of our Target Threat Protection product. It is a significant gain representing very strong renewals in our existing base and sales of additional products into that base. We ended the fourth quarter with 19% of our customer have been purchased Target Treat Protection, an increase from the 13% in the prior quarter, as Pete mentioned over 1000 new customers spot less service and we now have more than 3000 customers who purchased it.
We still have significant room to up sell into our existing base with this and other products and expect to see our customers invest in these advance technologies in the coming year. In fact we could double our revenue by just selling our current products into our existing customer base. You may recall from our IPO road show, that once we acquire our customer, we keep them for a very long time. Our unit economics are very compiling, as customers buy additional services the margin profile of that customer increases as does the lightly had of renewal. As of March 31, 2016 we now have close to 25% of customers buying four or more products from us, on average our customers have 2.6 products, up from the 2.5 products on an average we spoke about it on our F1 in November.
Now let’s turn to expenses and profitability. For the fourth quarter and fiscal 2016, we’ve recognized a 70% gross profit percentage consistent with the 70% recognize in the same quarter in the prior year and an improvement over the 68% reported in fiscal 2015. Gross margin gains came from investments in our unique peer cloud architecture and efficiencies and our ability to service our customer base. These margin improvements occurred during year which added a record 4,200 customers. Gross margin can fluctuate due to the addition of hardware and employees to serve our growing customer base. We anticipate our gross margin will remain in the 69% to 71% range over the next several quarters. Fourth quarter operating expenses of 29.8 million are consistent with the third quarter levels, but remained elevated as a percentage of revenue as we invest in our direct sales force, marketing initiatives and R&D aimed at the creation of the new services to drive future growth. I should note that the large volume of customers we signed in the fourth quarter and the significant additional sales for existing customers resulting in commissioning expense for the period, being 0.6 million higher than expected.
Our investments in sales and marketing are paying off, we’re in a market with right services at the right time and these investments are increasing variants of Mimecast and enabling us to capture more the very large market opportunity in front of us. While we recognize the enormous opportunity to grow our business, we’ve been mindful to extend our resources in a sustainable way. These measured investment approach should enable us to grow in our large market for a very long time. As a percentage of revenue, we expect to maintain this level of investment for the first half of fiscal 2017 and anticipate seeing gradual improvements sequentially. Adjusted EBITDA in the fourth quarter was 0.5 million and in middle of the 0.1 to 1 million guided range. This includes the impact of the higher commission expense mentioned earlier. Adjusted EBITDA margin was 1.3% which reflects our investments in R&D and sales and marketing.
For fiscal 2016 adjusted EBITDA was 15.8 million, I anticipate adjusted EBITDA will remain positive in each quarter of fiscal 2017, even as we continue to invest behind our go to market expansion. Our three to five year target for adjusted EBITDA margins is unchanged and remains in the range of 20% to 22%. For the fourth quarter GAAP net loss was 1.9 million or $0.04 per basic and diluted share, based on 54.2 million weighted average share is outstanding. For fiscal 2016 GAAP net loss was 3.2 million or $0.08 per share based on 40.8 million weighted average shares outstanding. The difference in weighted share calculations in the quarter and year is a result of the conversion of preferred shares to common share and the assurance of new share both associated with our IPO on November 18.
A non-GAAP net loss which reflects our GAAP net loss exclusive of the effects of stock auction expense was nil or zero per basic share for the fourth quarter. For fiscal 2016 our non-GAAP net income was 4.6 million or $0.11 per share. Looking to cash flow, during the fourth quarter, we generated 1.9 million in free cash flow and for fiscal 2016 free cash flow was 10.4 million. Reviewing the balance sheet, as of March 31, Mimecast had a 106 million in cash and cash equivalents, total debt was 6.9 million at the close of the year of which 4.9 million represents the current portion of debt. Now I’d like to turn the focus to guidance for our first quarter of fiscal 2017 and our outlook for the full year.
Regarding revenue for the first quarter of 2017, we expect revenue to grow 24% to 26% year-over-year in constant currency or to be in the range of $39.5 million to $39.9 million. Our first quarter revenue guidance is based on exchange rates as of April 30th and includes a negative $1.8 million impact from the strengthening of the U.S. dollar compared to the comparable period in the prior year, as our international customers renews their subscriptions at generally consistent pricing, but translated into dollars at a more favorable exchange rate. Approximately $1 million of this impact is related to the South African rand and $0.8 million is related to the British pound.
Regarding adjusted EBITDA, we expect this to be in the range of $0.3 million to $1.4 million for the first quarter. This is consistent with our continued strategy of investing in R&D and the build out of our sales and marketing organization globally in the current quarter. Now from a full year perspective, we expect revenue to grow between 22% and 26% year-over-year in constant currency and to be in the range of $170.2 million to $175.9 million. At current exchange rates we are seeing a $3.2 million impact in our revenue forecast for the full year, approximately $1 million of this impact relates to the South African rand and $2.2 million is related to the British pound.
In summary, we had a very strong close to a great year. Our revenue retention of 109% shows the confidence customers have in our ability to protect them and their data from the most advanced threats. I am especially proud of our retention rate which is an indication we are delivering a high value service. The addition of 1,800 new customers in the quarter and 4,200 during the year is evidence of the momentum we have seen where customers of all sizes across the globe are choosing Mimecast to be the protectors of their most important assets. We are in the early stages of penetrating a very large market opportunity.
So with that, I would like to thank you for your time and open the line for your questions. Operator, can you please poll for our first question?
[Operator Instructions]. Our first question comes from the line of John DiFucci from Jefferies.
I have a question for Peter Campbell first and then follow up for Peter Bauer. So Peter the top line this quarter is really strong, nice uptick and we look at -- if we try to calculate your business and retention rates really unseen, especially given your customer base. And even in this quarter your bottom line was really impressive regardless of how you measure it. But your guidance for adjusted EBITDA for the first quarter was a bit below what we’re looking for. And I know you say you’re going to build out R&D and the marketing. Should we be expecting to see more product releases like Impersonation Protector or -- can you help us out a little bit more with that? And how we should think about this throughout the year?
So, as we said, a great year for us and another good quarter, strong growth, strong adjusted EBITDA. I know you’re saying into Q1 it's a little bit lower than you expected, but it is higher than we guided to this quarter. And as you know, we are impacted by 600,000 related to commission expense from higher than expected sales in this quarter. And so then we have upticked that into Q1. I would expect that we are going to continue to invest in R&D. We are going to continue to invest in sales and marketing. This is in line with what I said last quarter and at the IPO. And you’ll expect to see that increase for adjusted EBITDA will start to increase in the second quarter and even more in the third and fourth quarter of the year.
With respect to new product additions, I mean I think we’ll start to see more investment in that area. As you know investments in one quarter can start to deliver benefits further on, but I’ll leave it off to Pete and let him answer the rest of that question.
John that’s the question you intended for me to cover just on the prior roadmap piece?
No I actually had another follow up for you Peter.
No problem, I mean we can just touch on that very quickly. But as Pete said those investments in R&D go into improvement of our current product sets, improvement of engineering efficiencies to give us a better yield, a better return on CapEx over time, as well as exploring some interesting adjacent opportunities to the current work that we’re doing. And we see particularly as customers are moving more and more of their IT to the cloud and getting into what we talked about as post infrastructure era, a number of new types of problems start to emerge. So we’re really interested in those and our R&D team and our product team has got things that they’re looking at specifically that would yield additional product margins over time, but we’ll talk more to that in the future as we ready.
So we should expect adjusted EBITDA to ramp throughout the year, and we’ll wait on the products. But the follow up I had for you Peter, appreciate you going through a lot of information on Office 365 and we hear you on that. And you mentioned you had an uptick, 14% of your customers are on it versus 12% last quarter, which only 2%, but that’s quarter-to-quarter which is sounds pretty -- that’s meaningful and over 600 of the -- and to make sure I understand that, over 600 of the 1,800 new customers. So over a third of your new customers are on Office 365, is that a -- I think that's what you're saying. I guess when you talk about --.
Just let me clarify there, the increase is on the existing customer base, so at the end of the third quarter we talked about 12%, that was of the 16,200 and we're looking at the 14% of that on the total 18,000. So the 600 new customers are both new and existing customers, but we're certainly seeing a lot of interest you know both on the new and the existing customers for that.
Okay, okay, thank you for that clarification. But when you talk about Office 365 as an opportunity but listen -- and I know you guys hear it, because we hear it too, I mean the biggest pushback we hear from Mimecast is Office 365 is also a threat, and it's thought of a risk especially in the midmarket and below. So can you talk to us a little bit about why there shouldn't be more of a risk here especially again in the midmarket and below. And I don't know if you have an data points that you can quote that indicates smaller customers are just not settling for just Microsoft's only solution if they migrate or even if you don't have it maybe you could think about in the future providing it, if you can gravitate customers that, existing customers that perhaps do migrate to Office 365 and even especially on the lower end what they actually do with Mimecast after they migrate. Is there anything you can talk about?
Yes, that's great so what we find really interesting is that, if that's really customers across all segments that are leveraging us with Office 365. So that 14% is pretty consistent across very small customers, medium sized and then larger customers as well. In fact for us more than 2,000 customers less than 500 seats are using us to protect Office 365 so I think the solution has universal appeal. I think for all the reasons that I mentioned in the script itself, that's what's driving demand, it’s the security issues, it's the data diversity and data protection issues, it's uptime assurance that they're seeking, it's that combination and I think because we deliver this in such a simplified form factor, as a fully integrated suite and at a price point that's really affordable and compelling I think that drives that appeal at the low end of the market and that stickiness at the low end of the market, but that also scales up and meets the needs of medium sized and larger organizations too with their Office 365 accounts.
That makes sense Peter, I just want to make sure I get what you said, because I think the concern is more at a lower end of the market they might be just satisfied with what Microsoft could provide, but you said over 2,000 customers with how many seats, less than how many?
Less than 500 seats.
Okay great, okay great thanks, nice job guys, thanks.
Thank you and our next question comes from the line of Saket Kalia from Barclays.
Hey so first let's start with the customer additions, because it’s well stronger than I think any of us were expecting and a lot more than what you've done historically. So the question is how many of those are maybe coming from Targeted Threat Protection only customers, because it sounds like that was clearly stronger than what you were expecting versus customers that are buying maybe you know the staple security and archiving packages, if there's a way to quantify that or even anecdotally.
Sure, sure, yes so as you said, yes we saw some great growth there as well. So 1,800 new customers during the quarter, was a very strong quarter for us, we saw that the TTP sales increased from a 13% of our base to 19% of our base. So we're seeing a lot of interest in that product, not only from existing customers but from new customers as well. It’s often a point of entry for customers onto our service, so generally when they do buy that product they often buy as a base level security with us so we see attachments, often if not only the Targeted Threat Protection, but also security with it as well.
You know as we do we often sell in bundles as well and when we are in dealing with the customer they will buy, they may come on for one product but they may want to buy other products along with that so they may come on for security then they may want continuity and archiving as well, and we sell them as a bundle at the outset. So we're seeing a little bit of that as well but mostly that TTP comes along with security, so we're seeing a lot of, you know we really see that's a tailwind for us. We also looking at our upsell opportunity down the road there's a lot of additional opportunity there with respect to continuity and archiving and other products in the future.
Got it, got it. The next question, obviously we're all talking about Office 365 and you dug in the reasons for customers adopting Mimecast as well on top of that. You know the question is do you see any difference in what products those 365 customers attach versus those that have an on premise exchange, so in other words is there any difference in the average order value for a 365 customer versus an extinguish customer.
Yes, thank you. That’s a great question and obviously 365 isn’t new to us, so we been working with customers a lot of 365 now for, for a couple of years in nearly running, we were very curious about this, what if buying the head deal, what is, what are people going to lean towards them and how they are going to think price points and so we did some test marketing with different SKUs with different price points and what we thought is that customers continued to purchase our standard SKUs, our standard product and consistently over time have continued to pay exactly the same price points for our solution, whether they using Office 365 or they are running there exchange infrastructure themselves. So it’s been very smooth and very consistence from that point of view.
And just to just to add to that segment, we’re seeing, customers come on 365, they may come on with security or security NTCP, or they may come on with our driving and sometimes they come up with the full suite. So the way in which we see them on boarding, typical to the way we see that other non-Office 365 customers on boarding as well, so that, that maintains a very stable AOV with respect to that.
Got it very helpful, Thank you just one in just housekeeping on but one of the things that is important, could you just remind us Peter Campbell, just want to, if you expense sales commissions upfront or if they’re recognized ratably along with the revenue?
That’s a good question. we expense them up front, which is the while I gave a little bit color on that in my comments earlier, so that 600,000 that relates to commissioning expense generated in the period and we expenses that in the period and any we expense in the period and wish it incurs.
Got it, that’s up for me guys, thanks.
Thank you and our next question comes from the line of Heather Bellini from Goldman Sachs.
Hey this is Jack Kilgallen filling in for Heather, thank for taking the question. First on the 1800 new customers that you added in the quarter, I guess how the average customer side compare to what you did last quarter?
Well that a good question Jack. So the 1,800 customers, were across all segment and fairly similar to, we talked about at the IPO and what we saw last quarter and so, we’re seeing a lot of customer to the 0 to 500 band, but also a lot in the 5,750 [ph] and also in the 7,500 and above, so we’re seeing that in a fairly similar break down across each of those segments.
Great and then just a quick follow up is the, I guess I would expect even the strong customized number of the AVO that like to tick down, compared to last quarter or compared to past quarters, but that, it’s going to be pretty offset by the strong revenue retention and that attached products like TTP so, I guess am I taking about that right, would that be a sequential for the tick down sequentially given the strength?
I think that’s right, so I would add one think, that in terms of looking at the AVO on a constant currency basis I would maintain it, deliver it that before and we don’t report AVO but we did say that if we saw some changes than we indelicate better. So on a constant currency basis we’re seeing that, we seeing that maintain, on an actual currency basis, we’re seeing, about a $100 to $200, but $150 decrease in the AVO with respect to the currency movements. So when you look at it on an actual basis that coming down, very little bit with respect to currencies but with respect to what we’re selling and the prices that we’re seeing across these ends as well as the up sell that we’re seeing, on constant currency basis it is maintain.
Thank you and our next question comes from line of Shaul Eyal from Oppenheimer.
Thank you, hi good afternoon guys that congrats on very, solid set of we love them in guidance. First question for Peter Bauer and Peter Campbell can assist here as well, so to further beat the impressive customer addition points again really very nice progress on that end that 1,800 customer this quarter. If we have to break this 1,800 number into and do you know the SMB mid-level, with anywhere between 500 to 7,500 employees and I think you might have mentioned that, during the prior question, then the next central price tier with [indiscernible], is it still the 40, 50, 10 kind of break down and I don’t know if you think quantify, how may high end enterprise level you have this quarter?
Hi Shaul, this is Campbell, I just thought I can take the first part of that, so when we by then on the road in November, we talked to a 10% and customer not to 7,500 seats, 48% let’s say in 500, 7,500 and 42% below of the revenue and need to events and we’re seeing with respect to the customer as we’ve seeing, we’re seeing as very similar mix, 10, 48 and 42, it’s not noticeably changing, so we expect that to continue. And when you know at the number of customers we added, we added a lot of customers in quarter we had 1,800 is very significant new customer additions for us, just being a kind of revenues splits, fairly similar across each of those bands related to those customers.
Got it. You’ve mentioned 68% was signed through the channel, good work on that front. Can you talk to us a little bit about your evolving relations waiting Aviana [ph], HP, Data Dimension, how is that coming along?
Those progressed well, we continue to work with those partners. I don’t think we have anything significant right now to report on in terms of changes in those relationships. But we continue to work with those and with our other partners in the larger account opportunity space. And we continue to build out a breadth channel partnership network on a global basis at the same time. So we’re happy with progress we have been making in channel, specifically most obvious set of announcements. But you can expect to hear more from us in time on our broader channel strategy and progress.
And our next question comes from the line of Matt Hedberg from RBC Capital Markets.
Peter B., has there been -- I think there is the talk of additional European reach notification going to spec [ph] maybe 2017. Assuming something like that goes through. Can you talk about how additional regulations could potentially help you in that geo?
Matt, that’s fair point. I think we historically experienced a slight difference internality around the section of these threats between the two different geographies, a greater sense of urgency in the North American markets, and I think that’s because the breach notification rules, the knock-on effect or the ripple effect of those is pretty strong media coverage of these incidences and we see less of that and we’ve seen less of that in Europe. So, I think that’s -- we absolutely expect that as more publicity around these breaches happen in the European marketplace. So, if you are wanting to be extra proactive about having some issues in place and having dotted the I’s and crossed the T’s on solutions that can prevent these attacks from starting.
And with email, having been the Achilles Heel in more than 90% of these attacks, we think that we’re very well positioned as a partner to be able to help these customers. So, yes, we’re not -- we’re excited that these attacks are happening but I think that the disclosure of them in Europe is a good thing because it means that there is less places to hide when data has been breached or lost and that in turn means that customers have to be a lot more responsible about making these investments and clearly we’re right, to be able to help them with preventing these attacks.
And then in your prepared remarks you talked about McAfee end-of-life as a potential opportunity. Is there a way for you to size that opportunity maybe relative to some of the other share shifts from some of the legacy email security vendors out there today?
Matt that’s also something that we do look at quite closely, so I think we would agreement with our peers in the marketplace who size it in the $70-$80 million to $100 million space. I think that’s maybe a little bit smaller than what the broader [indiscernible] opportunity was back in the date, but I think that the really interesting thing for us is that that’s the value on pretty much direct security swap out basis. I think that the pie is growing substantially with advanced threat protection products like our TTP solution. So there is an opportunity to get expansion with that.
And then also as you know we have a broader portfolio of solutions with continuity and our archiving offering that are very easy for customers adopt and to purchase in bundle. So, we feel that with our track record of driving adoption of these products with our customers that we can do very well dollar per dollar on any McAfee conversions that we’re achieving.
Thank you [Operator Instructions]. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Peter Bauer for any closing comments.
Well, first, thank you very much for joining us again today our second ever earnings call and our first earnings call with a full year of financials. We’ve enjoyed interacting with you and thanks once again for your interest and we look forward to speaking again at the end of Q1. Thanks folks.
Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.
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