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Mimecast Limited (NASDAQ:MIME)
Q2 2019 Earnings Conference Call
Nov. 8, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Robert Sanders -- Director of Investor Relations

Welcome to Mimecast's earnings call for the fiscal second quarter of 2019 ended September 30, 2018. I'm Robert Sanders, Director of Investor Relations. With me on the call tonight are Peter Bauer, our Co-Founder, Chairman, and CEO; and Peter Campbell, our CFO. Tonight's conference call is being broadcast live via webcast. A replay of this call will be available on the company's website approximately one hour after the live call has ended.

On this call, we will make forward-looking statements regarding future events and the future financial performance of the company. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release and this conference call. These risk factors are further defined in Mimecast's most recent Form 10-K, filed with the Securities and Exchange Commission.

During this call, we will present both GAAP and non-GAAP financial measures. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results, 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 November 8, 2018. 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'd like to turn the call over to Peter Bauer. Peter.

Peter Bauer -- Co-Founder, Chairman, and CEO

Good evening, and thank you all for joining our second quarter fiscal 2019 earnings call. I'm deleted with the progress that we've made in the second quarter toward achieving our annual goals. We've executed against our plans, focusing on the needs of our customers and launching new services, and delivering strong financial results.

I'll start tonight's call by reviewing our second quarter performance, and then I'll discuss how our work is helping keep businesses safe and resilient. Then I'll cover current market trends to illustrate why organizations are choosing Mimecast solutions. And finally I'll touch on some new customer engagements and illustrate the success that we're having with our new product introductions. Then I'll hand over the call to Peter Campbell, our Chief Financial Officer, to cover our results in more detail.

So, second quarter results exceeded our guidance on both the top and bottom lines. Our revenue of $82.2 million grew 30% year-over-year, as reported, and 32% in constant currency. Now, this performance was the result of high customer retention, sales to our base of subscribers, and the addition of 900 net new customers to our platform. We continue to have success with organizations of all sizes and across all our geographies, and we completed more than 25 six-figure deals in the period.

Now, the relentless nature of email attacks affecting organizations continues unabated, from phishing, to advanced malware, to impersonation, and our solutions are found to be the most effective in the industry in helping organizations deal with this onslaught. Our relevance alongside and our tight integration with Microsoft Office 365 has once again contributed to our success. And beyond email security, we're providing customers with a broad suite of cyber resilience capabilities that give customers more confidence and less complexity as they increasingly leverage the cloud for core IT capabilities.

Our continuity and data recovery tools continue to be popular, as customers seek to implement best practice resilience alongside their security investments. Mimecast Web Security services went live in October, following a successful customers beta program, and it's now being introduced to Mimecast customers for sale across the board. This new service provides an extremely rapid time-to-value for our customers, as it's embedded within the same administration console as all of our other offerings, so customers can use familiar policy configuration tools, existing groups, and reporting to gain much broader protection within their Mimecast tenant. By leveraging the security engines and the threat intelligence that's gathered through our work in email and phishing protection, we deliver an extremely effective defense against multivector attacks that are employed by phishing campaigns.

October was Cybersecurity Awareness Month, and Mimecast participated in events in London, Nuremberg, Dubai, and New York to illustrate the importance of thinking about the human element of cybersecurity. We published a free awareness training kit with educational tools against phishing, wire transfer fraud, and inadvertent leaks. In August, we were very excited to introduce the Mimecast Awareness Training offering to a strong market reception from both existing and new customers. Our training content, combined with risk assessment tools, is market-leading, and our focus is on helping customers shift the culture of their organizations to be more security-savvy and to act as a viable augmentation of their security strategy, rather than the weakest link.

This quarter, we've also seen more customers turning to Mimecast's Internal Email Protection, or IEP, solution to provide security and policy control to east-west mail traffic originated and delivered inside an organization. The careless or malicious insider, or more frequently, a compromised account, is a real concern, especially for larger organizations, and it represents a threat surface that is often not being addressed by incumbent solutions. So, Mimecast's ability to not only detect but to remediate threats originating inside an organization is driving our IEP sales and our multiservice engagements. Looking broadly at market trends across the security landscape, we see the pace of innovation among attackers continue to be robust and dynamic. Many of the adversaries that organizations face today are well-resourced and ever-present. The modern IT and security team needs help as SaaS-centric environments bring new attack surfaces and often reduced visibility. Mimecast simplifies IT while empowering enterprises to defend against attacks, and keep communications active and data secure. Because of our work with over 32,000 customers, we not only have the platform and the skills, but also the data and the intelligence to protect customers better.

Now, let's take a look at some customer engagements from the second quarter to better illustrate the breadth of solutions that Mimecast is bringing to the market. First, a U.S. municipality employing about 6,500 people was experiencing phishing and impersonation attacks. Additionally, they needed a better encryption solution for email to meet their compliance requirements in communicating with citizens. Mimecast's tight integration with Office 365, a compelling user experience for both administrators and end users, and our powerful security tools were important factors in the vendor selection process. And this customer bought TDP, IEP, as well as Mimecast's large file send solution and secure messaging.

Secondly, a UK-based financial marketplace with over 7,500 employees was preparing for an Office 365 migration, and they initially looked to replace legacy on-premise archive and backup equipment with a cloud-based solution. During the discovery phase of the engagement with us, security concerns were also identified with their existing cloud security vendor, and they asked to explore our offerings. We demonstrated superior efficacy, and we met their needs with a fully integrated offering that included advanced email security, policy enforcement, monitoring and reporting, daily prevention and uptime assurance, combined with archiving and data recovery capabilities. This opportunity really demonstrates the power of our platform to solve multiple complex customer problems extremely cost-effectively, while at the same time yielding an attractive subscription value to our business.

Thirdly, a U.S.-based retailer recently doubled the number of employees that they had through an acquisitions of a competitor, bringing their total employee count to over 30,000. The parent company had been a satisfied Mimecast customer for the past five years and sought to migrate the acquired business onto our platform. Due partly to security concerns, the acquired business had previously not allowed salespeople to email directly with customers. So, on deploying Mimecast, their sales associates gained the ability to directly communicate with their best customers, intensify their marketing efforts, and provide a more unified experience across the combined organization.

Then, a global specialty chemical company with 4,300 employees was operating in about 14 separate instances of Microsoft Exchange, each with a local on-premise security solution. We outlined a migration path to consolidate exchange instances on Office 365 and offered them a significantly better security and gateway capability, with centralized control.

Then, an existing customer, which is a retailer with about 3,500 employees, recognized the security threats the company faced within their larger distributed workforce, and they sought to harden their defenses through educating staff better. Now, they evaluated Mimecast alongside other security awareness training vendors, and we were selected due to the breadth and quality of our offering, but also the trusted vendor status that Mimecast had earned with this organization other the years, and the ease of deployment alongside other Mimecast services also helped us win this deal.

And then, a small Australian transport company with several hundred employees was using a competitor's phish-testing solution, and they were concerned with negative perceptions from their users over this emphasis on trying to scam employees relentlessly, and they sought a better solution. Mimecast's Awareness Training solution was selected for the quality of our content and our ability to genuinely and positively impact employee security behaviors.

Finally, a Fortune 500 real estate services company with over 90,000 employees had an extremely large volume of data stored on-premise with legacy hardware. The cost for this arrangement ran into millions of dollars a year, and beside this cost burden, the legacy archive performed very poorly for eDiscovery, with slow response times, and they struggled with frequent file and index corruption. They bought our archiving service to significantly improve their speed and efficiency. Additionally, by deploying Mimecast archiving, this organization is able to significantly reduce their costs and benefit from our massive scalability, and deliver a far better user experience.

So, in summary, I'm very pleased with our results and our strategic progress. We've grown our subscriber base nicely, and we've introduced important new products with Web Security and Awareness Training. We've also been brought into several exciting larger opportunities, and, most importantly, we've delivered a high quality cyber resilience experience to tens of thousands of important organizations around the world. I want to thank our staff and our partners for helping us to have yet another successful quarter.

Now, let me turn the call over to Peter Campbell, our CFO, to discuss our financial results in more detail. Peter.

Peter Campbell -- Chief Financial Officer

Thank you, Peter. This quarter, we once again demonstrated strong performance in our top and bottom-line results. We continued to benefit from solid execution, on top of an attractive business model. Every day, we add more customers to the Mimecast platform and provide them additional services. This rather simple formula underwrites our industry-leading retention rates, and is the basis for our success.

In the second quarter, we exceeded the high end of our guidance for revenue and adjusted EBITDA. We generated revenue of $82.2 million, which represents gross of 30%, as reported, and 32% in constant currency over the second quarter of 2018. This is in line with the 31% constant currency growth we reported last quarter. Note that this achievement was negatively impacted by $1 million in foreign exchange, based on the rates we used for our guidance last quarter, and also includes $0.2 million of revenue related to the Solebit and Ataata acquisitions.

Adjusted EBITDA was $12.3 million in the second quarter, representing an adjusted EBITDA margin of 15%, compared to $6.7 million, or 11%, in the same quarter in the prior year. Net customer additions were 900, consistent with the first quarter and the seasonality of our business. In total, 32,200 customers globally are now making their email safer for business with Mimecast. We continue to have success with customers of all sizes, and added a record number of six-figure customers this quarter, as email continues to be the number one threat vector for cyberattacks. We are proud of the success we are seeing as customers recognize the power of our products and the benefits of having these services on an integrated platform in the cloud.

We have invested consistently in the quality of our products and our go-to-market operations, leading to increased opportunities in the large customer segment. This, along with existing customers buying additional services from us, is increasing our average order value, or AOV. During the quarter, our AOV increased to 10,500. Foreign exchange rates at the end of October negatively impacted this by 300, bringing the October 31st AOV to 10,200. On a year-over-year basis, AOV improved by 1,100, or 12%, over the 9,100 in the second quarter of 2018. On a constant currency basis, AOV improved by 1,300, or 15%, from 8,900 a year ago, to 10,200 today.

On average, customers now purchase three of our 10 services. As we introduce new products, we continue to grow the total addressable market for our existing customers. This, combined with an extremely sticky service, creates a fantastic opportunity for our upsell teams to grow our business by solving additional customer needs. 38% of our customer are using Mimecast in conjunction with Office 365, up from 34% last quarter and 26% in the second quarter of 2018. Mimecast Office 365 customers purchase a higher number of services per customer, 3.3, compared to 2.9 services for customers not on Office 365.

In the second quarter, we launched Mimecast's Awareness Training service to the market, less than 60 days after closing the Ataata acquisition. Timely integration into the Mimecast platform led to more than 100 customer engagements in the second quarter. The product has been warmly received, and pipeline is building globally. We expect to see increased end user adoption of this product in the second half. Our revenue retention remains strong, at 110%, as customers renew their subscriptions and purchase additional services.

We continue to report revenue churn of 3%. We have experienced industry-leading churn at this level for the last six years. GAAP gross margin for the second quarter was 73%, consistent with the prior quarter, and ahead of our 71% to 72% forecast. We expect gross margin will continue at the 73% level for the rest of fiscal 2019 as we scale our data center investments in Germany. Second quarter operating expenses were $61.1 million, compared to $47 million for the same period in the prior year. R&D expense was 17% of revenue in the second quarter, compared to 13% for the same period in the prior year, related mainly to an increase in engineering and product-related headcount as we continue to fuel innovation. We expect R&D expense to continue at this level for the balance of the year.

Sales and marketing expense of $34.7 million was 42% of revenue, compared to $30.2 million, of 48% of revenue, for the same period in the prior year. Remember that our prior-year results were reported under ASC-605. Our current results are reported under ASC-606. Under ASC-606, we are required to defer and amortize commission expense over the life of the customer. On this basis, we deferred $2.6 million in commission expense in the quarter. Under ASC-605, our sales and marketing expense would have been $37.3 million, or 45% of revenue, on an apples-to-apples basis.

G&A expense of $12.4 million was 15% of revenue, compared to $8.6 million, or 14% of revenue, in the second quarter of 2018. The increase in G&A expense as a percentage of revenue is related to acquisition-related costs incurred in the quarter. Adjusted EBITDA for the second quarter was $12.3 million, or 15% of revenue, up from $10 million, or 13%, in the prior quarter, and $6.7 million, or 11%, in the same quarter in the prior year. Adjusted EBITDA was positively impacted by operating efficiencies and the timing of certain go-to-market investments. We expect these investments to occur in the third quarter of fiscal 2019.

Second quarter net loss was $2.1 million, or $0.03 per basic and diluted share, based on $59.8 million weighted average shares outstanding. Our non-GAAP net income for the quarter was $3.6 million, or $0.06 per basic and diluted share. We generated $4.2 million in free cash flow in the quarter, compared to $1.7 million in the year-ago period. Quarterly cash flows fluctuate depending on the timing of certain go-to-market investments and capital expenditures. Operating cash flow as a percentage of revenue was 15%, compared to 12% for the same period in the prior year.

We noted at the beginning of the year that our free cash flow would approximate adjusted EBITDA after removing the effects of ASC-606. We continue to expect that this will be the case, generating north of $30 million in free cash flow for the year, after taking into account the additional interest expense on the term loan we entered into in July. As of September 30th, Mimecast had $144.4 million in cash, cash equivalents, and short-term investments. We remain undrawn on our $50 million revolving credit line, which we entered into in July of this year.

In the prior quarter, I noted the effect on our deferred revenue related to foreign exchange and ASC-606. We operate in many different currencies. We also bill our customers monthly, quarterly, and annually, depending on the location of the customer and also their preference. As a result, deferred revenue does not always provide a good measure of our progress.

Turning to guidance, for the third quarter of 2019, we expect constant currency revenue growth to be in the range of 28% to 30%, and revenue to be in the range of $84.3 million to $85.2 million. Our guidance is based on exchange rates as of October 31, 2018, and includes an estimated negative impact of $2.1 million, resulting from the strengthening of the U.S. dollar compared to the prior year. Adjusted EBITDA for the third quarter is expected to be in the range of $13 million to $14 million. Full-year 2019 revenue is expected to be in the range of $330.8 million to $334.2 million, or 29% to 30%, growth in constant currency. Foreign exchange rate fluctuations are negatively impacting this guidance by an estimated $6.6 million compared to the rates in effect in the prior year.

The guidance for fiscal 2019 provided in August was $323.5 million at the midpoint. Since then, foreign exchange has negatively impacted this guidance by an estimated $5.4 million. However, our overachievement in Q2 of $2.3 million, coupled with the strength we have seen in our business, is leading us to raise our full-year guidance by $3.1 million, exactly offsetting the effects of foreign exchange. Said another way, we are reaffirming our full-year guidance, despite a $5.4 million headwind from FX. Full-year 2019 adjusted EBITDA is expected to be in the range of $49.1 million to $50.6 million. We are increasing our guidance by $1.1 million at the midpoint on adjusted EBITDA.

We continue to execute well against our goals of sustainable long-term growth and operating leverage. Our business model is simple. We add new customers, sell them additional products, and keep them for a very long time. We continue to add customers to our platform and to grow each cohort. In the second quarter, we launched another new service to the market that was well-received, and exposes Mimecast to an even larger term. We are focused on long-term sustainable growth and increasing leverage. We are pleased by the fact that we've been able to exceed on both top and bottom-line guidance consistently each quarter, showing strong growth while generating inherent leverage in EBITDA and free cash flow.

So, with that, I would like to thank you for your time and open the line to your questions. Operator, can you please poll for our first question?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, if you do have a question, please press the * and number 1 key on your touchtone telephone. And if your question has been answered or you wish to remove yourself from the queue, please press the # key.

Our first question is from the line of Shaul Eyal of Oppenheimer. Your line is open.

Shaul Eyal -- Oppenheimer -- Analyst

Thank you. Hi, good afternoon, guys. Congrats on another set of solid results. Peter Campbell or Peter Bauer, as you look at your hiring plans into this year, do you feel you guys are running in line, slightly behind, or a little ahead? How would you characterize the hiring environment right now?

Peter Campbell -- Chief Financial Officer

Hey, Shaul. This is Peter Campbell. Sure. Hiring good people is always hard. It always takes a certain amount of effort. And we've continued to grow and build out our business. We have almost 1,400 people now. Last quarter, we added almost 100 new people to the Mimecast team, so a pretty significant number of people that we're adding as we continue to grow and build this business. We're not seeing any real change in the hiring environment that wasn't there before. Certainly, it's always -- it's an art and a science to get good people in the right places to the right positions with the right skills at the right times. And in terms of where we are and against our plan, we're pretty much in line with where we were last quarter and where we are usually at this time of year. But certainly, it's always something that we look at, because it's core to building up this business.

Shaul Eyal -- Oppenheimer -- Analyst

Got it, got it. And maybe my follow-up, for Peter Bauer. Another very solid performance as we think about the Office 365 platform. When we think about maybe the compare/contrast, or maybe I should say contrast with the E5 platform out of Microsoft, can you also help us again kind of think about why is it that you guys are seeing so much success on that front?

Peter Bauer -- Co-Founder, Chairman, and CEO

Yeah, thanks, Shaul. So, I think we see our offering as being equally applicable to Microsoft customers on all of their SKUs, from E1 all the way up to E5. Obviously, the majority of our customers are sitting on the E3 SKU today, and I think that reflects Microsoft's base. E5 customers benefit from some additional security capabilities that are native to Microsoft's platform. And we think that customers that are wanting even more of nuts and braces solution will sometimes adopt technologies. And we're certainly in favor of customers using the full extent of what they have available to them on the native platform. But we very much believe that the success of an organization in the cloud relies on the cloud vendor themselves natively providing as good a security capability as they are able. The customer implementing best practice themselves is an important second part of that. And then very much, the third component being the customer able to bring independent third party specialist security and risk mitigation technology along with the core underlying cloud platforms that they're choosing. So, we're seeing that really playing out in adoption, and we feel that we help customers on all the Microsoft SKUs to be confident and successful in their use of those platforms.

Shaul Eyal -- Oppenheimer -- Analyst

Got it. Thank for you the color. Good luck.

Peter Campbell -- Chief Financial Officer

Thank you.

Peter Bauer -- Co-Founder, Chairman, and CEO

Thanks, Shaul.

Operator

Thank you. Our next question is from the line of Gabriela Borges of Goldman Sachs. Your line is open.

Gabriela Borges -- Goldman Sachs -- Analyst

Good afternoon. Thank you. Maybe for Peter Bauer to start. The six-figure deals that you mentioned in the prepared remarks, when you look across them, are there commonalities, either in terms of what's catalyzed the initial email upgrade cycle or in terms of why those customers chose Mimecast? And do you still feel like you have to educate some of your large customers as to the pros and cons of a multitenant architecture, or is that pretty well understood at this point? Thanks.

Peter Bauer -- Co-Founder, Chairman, and CEO

That's great, Gabriela. So, two questions there. I think on the first part, there's a great amount of diversity across those deals. So, I suppose, to put it in perspective, in some of the much larger deals that I referred to in the prepared remarks, you had very high seed counts there, and those immediately lend themselves toward larger deal values. But it doesn't take a particularly large organization for us to enjoy a six-figure deal. So, the range of organization sizes that we can work with then could be anywhere down from sub-2,000 all the way up to over 90,000. So, there's diversity in that sense. There's also diversity in terms of those deals being sourced across all of the geographies that we work in, and a combination of existing customers upgrading, as well as new customers joining the platform.

From a product perspective, again, it's a mix. So, some of the larger customers may have been purchasing an initial product. It could be archiving. Quite frequently, it's advanced email security that is causing them to start the conversation with us. And then, as the deals -- or perhaps lower in seed count, it may be more of a broad platform purchase from us, where they're buying into the broader resilient strategy. And again, these deals are both Office 365-connected deals as well as on-premise. So, really, we're seeing a nice adoption across a diverse range of customer types, geographies, and use cases.

Peter Campbell -- Chief Financial Officer

I think some of the benefits of the platform and kind of the products architected across that base come out in the sales process, where we're able to showcase exactly how it works and the benefits that we'll receive. But I also think a lot of it comes out after they're running on the platform, and they're fully utilizing the service. So, you can certainly run a POC for them and run them through it, and they could start to realize some of those benefits. But the benefits also accrue over time, and I think that as they're using the service, not only from a platform point of view, but from our legendary customer success program with our CX and our SV people. And I think that plays out over time, and it speaks to our retention rates.

Gabriela Borges -- Goldman Sachs -- Analyst

That's helpful.

Peter Bauer -- Co-Founder, Chairman, and CEO

Gabriela, the second part of your question, really about larger organizations being willing to adopt a multitenanted platform, I think we really are seeing adoption of that. And I would say that there's two benefits that come to mind. Firstly, the integrated nature of the security immune system that we've built. So, really, customers understanding that they are able to be part of a much more responsive community defense strategy because of the way in which our technology is architected. So, as we detect things for customers around the world, very, very quickly, that's part of the fabric of defense that customers benefit from. And so, larger organizations are looking for that type of capability.

And then the second thing is just the elasticity and the scalability that our infrastructure represents for customers. And a good example, obviously, was that very large archiving deal, where -- and one that has the same in terms of gateway and processing technologies for email, where as these larger companies perhaps grow or transform through M&A, they can have fairly big changes in load requirements, or they can accumulate very big data volumes and archives. And having a partner like ours, which is a platform that differs vastly from a sort of hosted appliance or a single-tenant model, has just so much more elasticity to accommodate their growth, to deal with peak load requirements without excessive over-provisioning. So, I think it's a positive for large companies.

Gabriela Borges -- Goldman Sachs -- Analyst

Very good. Thank you for the detail.

Peter Bauer -- Co-Founder, Chairman, and CEO

Thanks, Gabriela.

Peter Campbell -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Gray Powell of Deutsche Bank. Your line is open.

Gray Powell -- Deutsche Bank -- Analyst

Oh, great. Thanks for taking me -- the questions. Just a couple, if I may. So, the TTP, Targeted Treat Protection product, I think penetration there is around 60%. Where do you think that can go over the next couple years, and just, how should we think of the growth profile of that product?

Peter Campbell -- Chief Financial Officer

So, sure. At the end of the second quarter, 61% of our customers have TTP. And I think as we're looking at our total adjustable market within our existing customers, there's still a fair amount of room there for that product to keep growing. I think it will slow down a little bit over time, but I think you can go to 80%, 90%, because I think it represents -- the protection that it gives to our customers represents a much-needed protection that many customers still don't have. And that shows up in our new customer numbers, because our new customers -- our new customer adds have 94% of our customers buying this product. So, as we look at it, we think there's still a large opportunity within our existing base for that and numerous other products, some of the new products that we've also launched. But the much bigger opportunity is out there in the market as we continue to grow our base. There's many, many, many customers out there who do not have this much-needed protection.

Gray Powell -- Deutsche Bank -- Analyst

Got it. Thank you. And then maybe just another question. Can you give us any insights on the early ramp in Germany, and when should we think that -- when should that market become a more material contribution to new business, or just how should we think of the revenue ramp there?

Peter Bauer -- Co-Founder, Chairman, and CEO

Great. So, Gray, in fact, it was exciting. I was there. The beginning of this week, we had the ribbon cutting for our new Munich office. The team is ramping. We had a number of partners as well come and join us for that opening. I'm very satisfied with the progress that they're making over there. We've been signing up several new accounts onto the platform. The market reception, it's a market that is being slower to adopt cloud technologies, but increasingly open and willing to take them on. I think Microsoft is building the case quite strongly in the German market for 365 adoption, and there's certainly a lot of enthusiasm around that. So, we think of it as a very big market opportunity with a very significant midmarket constituent in that region.

I think from a revenue perspective, Peter can talk a little bit to that, but the nature of the subscription business dictates that it'll take a while before that shows up as a meaningful component in our revenue.

Peter Campbell -- Chief Financial Officer

Yeah, I think that's right. I mean, a $332 million for the year -- we recognize our revenue on a subscription basis every day. So, as soon as we sign a customer up on the service, we start to recognize revenue daily for that customer. And so, we may sign up a customer for a larger deal, but we'll start to recognize that revenue over time. And when you're comparing it against such a large base, as Pete says, it'll take some time before it is more meaningful. Although we are encouraged by some of the early wins there, and we're gonna continue to focus on that. But it is really our first year of launch in that region, and it's gonna take a little time to get some legs. I think it'll be a couple of years before you see what you said was a meaningful contribution to our total revenue, because the rest of the business will be growing at the same time.

Gray Powell -- Deutsche Bank -- Analyst

Understood. Okay. Thank you very much.

Peter Campbell -- Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from the line of John DiFucci of Jefferies. Your line is open.

John DiFucci -- Jefferies -- Analyst

Thank you. I just have one question. Peter Bauer, the results -- your results continue to look strong here. And Peter Campbell, thank you very much for the detailed discussion around the annual guidance, because you do, as you and we know, you have so many foreign exchange impacts. My question has to do -- I know you're not gonna give guidance for next year yet. At the same time, as you know, one of your competitors recently was talking in the market, and the market itself, the stock market's been pretty volatile. But in your space especially, there's a lot of questions we're getting around the sustainability of your market, of what you addressed, email security, marketing, continuity, and all the other things around it. And I guess I just had sort of a general question. Is there anything you're seeing today in the market that would make you think you're gonna see moderation next year?

Peter Bauer -- Co-Founder, Chairman, and CEO

So, I think when -- John, when we look at our business and the midmarket opportunity, the vast midmarket opportunity that we address, we feel very good that there's a sizable number of accounts for us to go after and add to the platform. We see that not only in North America, but as you know, more than -- well, about 50% of our go-to-market capacity is deployed in international markets, like the UK, Europe, Australia, South Africa, Middle East. And so, we feel, in terms of ability to access end customers, and the channel infrastructure that we've built up, we have a good means of continuing to grow into this market opportunity. At the same time, we have a nice broad portfolio of products that we can not only use to land accounts, but expand within those accounts to continue to grow as an organization. And we're continuing to add additional products to that portfolio, like web security on a more organic basis, and the Awareness Training through the Ataata acquisition. So, we feel pretty excited by all of that. And then the cherry on the top for us is being invited into some of the larger opportunities as well as we progress in each of those markets.

Peter Campbell -- Chief Financial Officer

I think that's right. And I know it's one question, one answer. But I mean, I think, certainly been watching the market react, and the market react the way that it does. And we kind of ignore that and continue to execute as a business. And we often have -- we remember what it was like when we first went out. And you're right, we do have foreign exchange effects, because we are a global business, and that gives us a large market, so you get the good with the bad. Because we've got a large market there we can go after, and we're still quite small in this market. And that's why we talk to constant currency, and you can see that's been fairly steady. But I think we've always talked about our ability to kind of grow steadily like that for a very long time. And we're gonna continue to do that and execute against it.

I haven't seen anything that's changing that. I think, coming back to the base of getting new customers, keeping them forever, and selling them more products is a fairly simple model. But our core base of customers that we continue to retain, and each cohort we continue to sell more products is the foundation for that growth. And that, combined with a subscription model, does eliminate a lot of volatility and kind of, to some degree, makes that easier. But that's always been a core focus of ours, and we're gonna continue to do that.

John DiFucci -- Jefferies -- Analyst

That's really helpful. I realize you guys don't have a crystal ball, but your crystal ball is better than ours, and really appreciate the perspective. Thanks.

Peter Campbell -- Chief Financial Officer

Thanks, John.

Peter Bauer -- Co-Founder, Chairman, and CEO

Thanks, John.

Operator

Thank you. Our next question is from the line of Harry Tillman of SunTrust. Your line is open.

Harry Tillman -- SunTrust -- Analyst

Hey, good afternoon, gentlemen. Can you hear me OK?

Peter Campbell -- Chief Financial Officer

Loud and clear.

Peter Bauer -- Co-Founder, Chairman, and CEO

Yes, sir.

Harry Tillman -- SunTrust -- Analyst

Okay, great. Well, congrats on the nice job on the quarter. I guess my question relates to, in your prepared remarks, talking about being brought into larger opportunities more often. Has anything changed over the last six to 12 months in terms of the first or secondary drivers of you being brought into these larger opportunities, and how do you feel about your sales capacity, and is it adequate, or do you need to add more in the enterprise part of your business?

Peter Bauer -- Co-Founder, Chairman, and CEO

Great, Harry. Good question. So, we see this as an incremental evolution. The mix of our segments is very consistent and has been consistent for a long time. I think right now, we're at about sort of 74% of our business is done between 100 and 5,000 employees. And that's sort of three-quarters of our business. That's been very stable. Below 100 employees, about 10% of our revenue, and above 5,000, about 16% of our revenue. And what we've seen incrementally over time is just a gentle movement from less at the bottom and more at the top, but with that core in the middle continuing to grow and remain at a stable proportion of our base revenue. That has been -- that shift up top, I think, has been a function of us continuing to improve how we engage with large accounts.

We have put some engagement strategies together around the way we do proofs of concepts. We built out our email security risk assessment tool that helps larger companies understand where their incumbent solutions may be exposing them to more risk than they'd like. And we've obviously built up some partner relationships that help us access those opportunities. We have not many any sort of disproportionate investments from a quarter-bearing rent perspective into that market space. But we have continued to grow the teams in each of those segments, with a slight bias toward some of the higher end of the midmarket accounts. So, we expect to continue that as we taste a little bit more success upmarket each quarter.

Harry Tillman -- SunTrust -- Analyst

Thanks for the answer. And my follow-up question just relates to -- I liked hearing the color earlier about -- and I know it's still early days, but Security Awareness Training, I think about 100 customers. Maybe you could just talk about kind of, as you've been able to look at those customers, does it tend to be green field? Are you replacing something? And are you getting the kind of value you thought you would get per employee? Because I think you talked a little bit about that expectation before. Thank you.

Peter Bauer -- Co-Founder, Chairman, and CEO

Great. So, our sample size is quite small so far. It's less than 200 customers. And so -- and the customer side is actually quite variable. So, we got some customers with several thousand employees, all the way down to sort of sub-100 seed customers. So, the price points on a per-employee basis are quite varied right now. So, we're not necessarily calling out an average just yet. We're really seeing a combination of new and replacement. It's probably more new than replacement. A lot of organizations have been interested in introducing a capability like this, but have not yet made a selection. And so, ushering it particularly into our own customer base is being very well-received. And then we do have organizations which have tried one or two earlier solutions in the marketplace and have had either mixed results with those or have fatigued their organization with an over-reliance on the idea of sending out self-generated scans into their bases, and are ready for a fresh approach that's perhaps a little bit more considerate to shifting the culture of organization as opposed to just providing the security team with metrics and dashboards and serving their purposes. So, I think our fresh approach is giving us a different story, and certainly our reps and our partners are having fun taking the content out to market that we have as part of this platform.

Harry Tillman -- SunTrust -- Analyst

Thanks.

Operator

Thank you. Our next question is from the line of Alex Henderson of Needham & Company. Your line is open.

Dan Park -- Needham & Company -- Analyst

Hey, guys. Good afternoon. This is Dan Park on for Alex today. Thanks for taking my questions. So, I just want to ask you about the relatively new German data center that came online a few quarters ago. I know you mentioned in the prepare remarks that you continue to expect to see investments there. How is that progressing, and are you starting to see some incremental benefits as a result?

Peter Bauer -- Co-Founder, Chairman, and CEO

Yes. I think in order to grow in Germany, having those data centers is a fundamental requirement. So, I think it's a very important part of our presence in that market. And obviously, we've been loading new customers onto that platform. It will take some time for that platform to reach the scale of efficiency that we have in some of our bigger regions where we have large user bases deployed onto the platform. So, we'll work that through, and that's -- with a subscription business like ours, that's just really a function of time progressing in the market and building that base up. But so far, we're very happy with that development.

Dan Park -- Needham & Company -- Analyst

Okay, great. And just as a follow-up, you guys have done a really great job balancing organic and inorganic growth to broaden your product portfolio. I guess my question is, what's the next step from here? I think your TEM includes Security Awareness Training, DLP, Security Email Gateway, eDiscovery, Backup Recovery. What adjacent category do you see yourself expanding into moving forward?

Peter Bauer -- Co-Founder, Chairman, and CEO

Yeah, thanks. We feel really fortunate that we started out right from the beginning building an architecture that would lend itself to solving multiple use cases under an integrated solution, and having stuck to that design ideology for many, many years, and continued to refine that architecture, that microservices backend combined with a multitenancy frontend, and the diversity of capabilities that we've been able to launch from that. And so, as we continue to build out more sort of monetizable frontend applications, we've naturally built out more backend capabilities to support and enable those. And so, as we look across the cybersecurity market and some of the IT management requirements that our customers have, we really can see many things at the intersections of what we do today and what could be enabled by those underlying microservices to help make more of a contribution to our customers -- perhaps help them avoid having to buy additional point solutions to solve certain problems, and give them a simplified, more joined up, and more effective experience across their IT estate. And we think that's really valuable, particularly because our target customer is what we think of as a lean IT and security type of organization. And while some of those might look like large organizations, they don't have the kind of resources or skills that the very large, perhaps, banks might have.

Peter Campbell -- Chief Financial Officer

I think, just to Pete's point in terms of the platform and the ways in which we can take that platform, I would also kind of add that right now, with only 32,000 customers and growing, an average of three products per customer and 10 products available, we have a massive, massive TEM right now, not only in our existing base, but the hundreds of thousands of customers that we haven't got on the platform yet.

Dan Park -- Needham & Company -- Analyst

Okay, great. Thanks so much for the color.

Operator

Thank you. Our next question is from the line of Saket Kalia of Barclays Capital. Your line is open.

Saket Kalia -- Barclays Capital -- Analyst

Hey, guys. Saket Kalia from Barclays. How you doing?

Peter Campbell -- Chief Financial Officer

Hey, Saket.

Peter Bauer -- Co-Founder, Chairman, and CEO

Good, Saket.

Saket Kalia -- Barclays Capital -- Analyst

Hey. Hey, maybe starting with you, Pete Campbell. We're narrowing the full-year revenue guide, despite more FX headwinds. Actually, we're maintaining the full-year revenue guide, despite more FX headwinds. And the question is, how much of that organic upside is coming from the good reception that you've had with the Security Awareness Training that we've talked about versus the better trends with underlying security, archiving, and continuity, if there's a way to think about that?

Peter Campbell -- Chief Financial Officer

Sure, sure. So, yeah, as you say, we maintained a $332.5 million guidance, despite a $5.4 million hit to foreign exchange for the second half of the year. And so, we think that's a strong indicator of our growth and how we're looking at it going forward. Looking at our Security Awareness product, we're very excited about that. We've got some early wins in that. But as you know, it's a subscription model, so there will be some small benefit for the Security Awareness sales in the current year, but very small. I think as we go forward, we're gonna see more of a benefit in that as we add more customers and more arc. But the core success really is related to our kind of key products -- that's email security with TTP, continuity archiving -- the ongoing sales and upsales of those products to new and existing customers.

Saket Kalia -- Barclays Capital -- Analyst

Got it. Got it. Maybe for my follow-up for you, Pete Bauer. Just sort of staying on the topic of new products, both web security and security awareness, the security awareness offerings are out there in the market. The question that I've got is, can you just talk about any changes you've made organizationally or from a channel perspective to drive adoption of both those products?

Peter Bauer -- Co-Founder, Chairman, and CEO

Yeah, that's great. So, I think that as the way in which -- let's take each of those products separately. So, the web security product, first of all, that's a version one product. It's our first foray into that space. The beauty of it is, it's fully integrated into Mimecast on day one. It was designed as both -- to be a Mime OS onset application from the beginning. So, the beginning the demonstrate and implement and support that product is frictionless from a Mimecast organizational point of view. And so, the changes there really are more around go-to-market sales team enablement and developing the sales narrative and the value proposition with customers. And again, our focus with that product is more around upsell and taking that to our existing customer base in the initial run and with this initial version of the product.

With the Ataata or the awareness training product, that was really interesting, because when we brought that in, initially a separate application, separate organization, and a separate demo and implementation model. And we've been working on bringing that all together, and training and enabling our sales organization, and taking our enablement programs out to the channel and putting those forward. But I think it really -- the beauty of it is that with both of these new products, we were really able to mount on top of the existing organization, do the enablement, provide consistency across compensation plans, have it consistently across channel partner incentive models, and roll it out as if it was all part of the core organization. So, it really hasn't taken any particularly transformative moves organizationally for us to bring those products to market.

Saket Kalia -- Barclays Capital -- Analyst

Got it. Very helpful. Thank you.

Peter Campbell -- Chief Financial Officer

Thanks, Saket.

Operator

Thank you. Our next question is from the line of Catharine Trebnick of Dowry. Your line is open.

Catharine Trebnick -- Dougherty & Company -- Analyst

-- for taking my question. Peter Bauer, I always ask you about channels, so here we go. How much of the revenue this quarter was touched by the channel? And then with the newer products that you just discussed, at what point will you be training the channel to leverage those products, and how long do you think that will take? Thank you.

Peter Bauer -- Co-Founder, Chairman, and CEO

Right. So, I think, yeah, you do always ask about channel, and we come ready, Catharine. So, each quarter, we look for between two-thirds and three-quarters of our business to be touched by the channel. And I think consistently, we've been at the high end or even above that range. This quarter's no exception. We've had really good pull-through from the channel, and another great period of collaboration with our channel partners, and also signing up and extending our channel partner base quite nicely too, particularly in regions like Central Europe.

With the new offerings, I think it's a balance. We have a terrific core value proposition and a great opportunity around the core email proposition. That is still our lead entry point for generating new logos, which is a big part of what our channel partnership program is all about. And so, the awareness training proposition is extremely adjacent to that, because the phishing problem is something that awareness training is seen as an integral part of solving, alongside our technology solutions for blocking and preventing those attacks from landing. Whereas the web security offering has a slightly further adjacency from that. And so, we focused our effort with our channel partners more around driving the core value propositions that we have today and bringing the awareness training product along with that, and then being a little bit more passive in the channel around our web security offering, and showcasing that more to existing customers as we mature and extend that product and build some muscle around it.

Catharine Trebnick -- Dougherty & Company -- Analyst

All right. Thanks much.

Operator

Thank you. And our next question comes from the line of Tim Klasell of Northland Securities. Your line is open.

Tim Klasell -- Northland Securities -- Analyst

Yeah. Hey, guys. Congrats on the nice quarter. My question is sort of a follow on the awareness training. What sort of sales cycles do you see there, given that it maybe touches a little bit different part of the security department, and maybe a broader audience? Thanks.

Peter Campbell -- Chief Financial Officer

Sure, sure. So, I mean, we added over 100 customers last quarter, but we really only had about a month of selling that product, so obviously, the sales cycles for those products were very short -- some 30 days, in most cases, and sometimes very, very quickly -- within a week or a couple of days. We're gonna track that. And some of those, those were customers of all sizes, so it wasn't segment-dependent. I think it's a very compelling product, and I think we're gonna see some fairly rapid sales cycles for adoption of that product over the next six months and next year. But certainly, we'll be tracking that and see how that plays out going forward.

Tim Klasell -- Northland Securities -- Analyst

Great, thank you. That's all I have.

Operator

Thank you. Our next question comes from the line of Matt Hedberg of RBC Capital Markets. Your line is open.

Matt Hedberg -- RBC Capital Markets -- Analyst

Hey, thanks, guys. Peter Campbell, first of all, I know you're still in the building for a few more quarters here, but we'll certainly miss working with you, and best of luck in the next chapter of your life. You called out a U.S. municipality within this core. That was great to hear. And we don't usually hear about the public sector for you guys. I'm wondering, can you talk about the success in kind of that global public sector market for you guys? How big of an opportunity is that?

Peter Bauer -- Co-Founder, Chairman, and CEO

So, before you've missed Peter Campbell too much, I'll dive in and focus on that one. So, public sector's very large for us globally. It's an important sector. We do a fair amount of government business in each of the international geographies, South Africa in particular, with some very large contracts in Australia and in the UK as well. So, in the U.S., it tends to be more local government, state and local government. And so, we're excited about that. Not a great -- well, not anything in federal, really. We're considering how we approach that opportunity today. But we think of the public sector as being an important sector for us as an organization. They've really fit that lean IT and security organization profile quite nicely.

Peter Campbell -- Chief Financial Officer

The product is well-suited to those customers.

Peter Bauer -- Co-Founder, Chairman, and CEO

Absolutely, yeah.

Matt Hedberg -- RBC Capital Markets -- Analyst

Got it. Thanks again, guys.

Peter Campbell -- Chief Financial Officer

Thanks, Matt.

Peter Bauer -- Co-Founder, Chairman, and CEO

Thanks, Matt.

Operator

Thank you. And our next question is from the line of Keith Bachman of BMO Capital Markets. Your line is open.

Keith Bachman -- BMO Capital Markets -- Analyst

Hi. Many thanks. I'm gonna ask a string that are related questions, just because it's the end of the call. Part one is, outside of FX, did you see any slowing in demand from some of the warm geographies, South Africa in particular, and maybe even Australia, given the economic challenges, particularly in South Africa, or was it just FX? In other words, are you able to gain more market share than what would be represented by lower GDP?

The second is, if you think about, say, the next five years, how many new GOs do you think you could open? Germany's obviously on track now. And then the third question, I just wanted to come back to what John D. was asking about. And again, I think these are somewhat related. If one of your larger competitors is facing growth challenges or formidable growth challenges, why do you think your situation is different? And that's it for me.

Peter Campbell -- Chief Financial Officer

Okay, thank you. Rob is trying to speed up our questions here.

Keith Bachman -- BMO Capital Markets -- Analyst

Well, I'm trying to make Rob's life as difficult as possible.

Peter Campbell -- Chief Financial Officer

I'm gonna try and -- he's giving a lot of hand signals. But so, first off, regional growth with respect to our different GOs, you don't necessarily see it in our financials because it's gonna be in actual currency, so. But if you look at constant currency growth across our GOs, South Africa was in the high 20s. The UK was in the high 20s. In fact, in the UK, we had one of our strongest quarters in quite some time, although that will play out in the future, rather than in revenue in the current quarter. So, we're not seeing any real slowdown in our regional growth. In fact --

Keith Bachman -- BMO Capital Markets -- Analyst

Okay.

Peter Campbell -- Chief Financial Officer

-- across the base. And obviously, we're heavily penetrated in somewhere like South Africa. So, over time, we would expect to see that. But we're still seeing very key wins there, and we're still continuing to drive and grow that business. Obviously, foreign exchange does have an effect. With respect to the new GOs, we're careful about how we do those. So, planting a data center into Germany isn't just for Germany. We've been selling into Europe for many years. We expect to continue to sell into Europe and the surrounding countries around Germany. So, we're gonna keep building on top of that. We don't put in a new data center lightly. We have an office in the Netherlands as well as in Germany, and obviously, an office in the UK, so we are selling into that market, and have been for a number of years. Looking at a whole new GO is something that we would do -- you're talking about -- I think you said five years.

Keith Bachman -- BMO Capital Markets -- Analyst

Yeah.

Peter Campbell -- Chief Financial Officer

Maybe one. Because it's easily an epicenter. Not to -- I don't know if that term's only used for earthquakes. But we put that it in, and then we do the surrounding area. So, maybe one in the next five years. I think we're gonna concentrate on the markets that we're in, because they are very, very large markets, and we still have a very small piece of that market.

So, in terms of your last question on the larger competitors, I can't speak to their growth challenges. I mean, I think growing has its own challenges however you want to slice it. And we're continuing to kind of build and grow this business. To John's question before, we have the benefit of a fairly predictable model, a very loyal and happy customer base that we continue to sell additional products to, to make and buy new products that we can sell to that base. We continue to add new customers to that base. So, we're focusing on those challenges and the challenges that we have in doing that -- getting the right people, making sure we have the right products for the right issues, making sure that we protect our customers fully and completely. So, we're gonna keep focusing on that. And hopefully, that'll continue to pay off.

Keith Bachman -- BMO Capital Markets -- Analyst

Okay. I will cede the floor. Thank you.

Peter Campbell -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question is from the line of Sterling Auty of JPMorgan. Your line is open.

Ugam Kamat -- JPMorgan -- Analyst

Hi, guys. This is actually Ugam Kamat for Sterling. So, just one question on the FX. You mentioned about what impact it has on the topline. But if I were to look at the impact it has on expenses, how much of your EBITDA guidance for 2019 is going up from the FX statements you are seeing from operating expenses was this natural leverage that you're getting within the models?

Peter Campbell -- Chief Financial Officer

Well, the EBITDA was naturally negatively impacted rather than positively impacted by that, because obviously, if you're losing on the revenue -- so, I understand your comment, in that there are some offsetting benefits when you are naturally hedged with expenses in the same region that you sell to your customers. But we are -- the benefit isn't enough to offset the effect on the revenue. So, when we're looking at EBITDA and we're looking at the outward piece of the year, it's about a $2 million negative effect as of our October rates quarter-over-quarter guidance. So, you're looking at about a $2 million negative -- whatever the opposite of benefit is -- detriment to EBITDA.

Ugam Kamat -- JPMorgan -- Analyst

Okay. That was it from my side. Thank you.

Peter Bauer -- Co-Founder, Chairman, and CEO

Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude the question and answer session. I would like to turn the conference over to Mr. Peter Bauer for the closing remarks.

Peter Bauer -- Co-Founder, Chairman, and CEO

Yeah. Thanks, everybody, for joining us for this earnings results announcement. We look forward to presenting you with our next set of results in a few months' time. Have a good evening.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

Duration: 65 minutes

Call participants:

Robert Sanders -- Director of Investor Relations

Peter Bauer -- Co-Founder, Chairman, and CEO

 

Peter Campbell -- Chief Financial Officer

Shaul Eyal -- Oppenheimer -- Analyst

Gabriela Borges -- Goldman Sachs -- Analyst

Gray Powell -- Deutsche Bank -- Analyst

John DiFucci -- Jefferies -- Analyst

Harry Tillman -- SunTrust -- Analyst

Dan Park -- Needham & Company -- Analyst

Saket Kalia -- Barclays Capital -- Analyst

Catharine Trebnick -- Dougherty & Company -- Analyst

Tim Klasell -- Northland Securities -- Analyst

Matt Hedberg -- RBC Capital Markets -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Ugam Kamat -- JPMorgan -- Analyst

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