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Mimecast Limited  (NASDAQ:MIME)
Q3 2019 Earnings Conference Call
Feb. 11, 2019, 4:30 p.m. ET

Contents:

Prepared Remarks:

Robert Sanders -- Director of Investor Relations

Good evening and welcome to Mimecast's Earnings Call for the Fiscal Third Quarter of 2019, ended December 31, 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.

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 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-Q.

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 February 11, 2019. 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 Bauer -- Chief Executive Officer

Good evening, and thank you all for joining our third quarter 2019 earnings call. I'll start today by reviewing our third quarter performance and then I'll discuss success we're seeing with newly introduced services and some industry validation. Next, I'll give some examples of where we're winning in the market and the types of problems we're helping customers to solve. Finally, I'll cover in addition to our Board of Directors and growth in my leadership team. I'll hand over the call to Peter Campbell, our Chief Financial Officer to then cover our results in more detail.

Third quarter results exceeded our guidance on both the top and bottom lines. Revenue of $87.6 million grew 30% year-over-year, as reported and 33% in constant currency. Now this performance was the result of high customer retention, sales to our base of subscribers and the addition of a thousand net new customers to our platform. We were successful across all market segments with notable strength in larger accounts. Once again, we closed a record number of six figure transactions and additionally, we closed a seven figure deal that was the largest ever for the company.

We delivered strong execution across geographies with half of our revenue being generated outside of North America. A recent entry to the German market with the local services and data centers gained momentum, while our core regions continued to deliver strong results. As we grow, Mimecast threat research is monitoring an ever-growing volume and variety of email and web traffic. Our deep and dynamic stack of proprietary and best of breed detection technology, effectively interrogates this traffic and identifies threats, often far better than our competitors. And a web of micro services running inside of Mime OS creates a constantly evolving learning platform of security capability, that means we quickly adapt to new attacks.

We processed over 2 billion emails every working day during the third quarter. This gives Mimecast unprecedented access to the threat landscape and enables us to identifying block threats originating from bad actors around the globe, collectively benefiting all users on our platform. We describe this to our customers as a community defense strategy leveraging shared threat intelligence and strengthening cyber resilience.

Now new services introduced on the Mimecast platform in the last 18 months continue to be well received by our customers and partners. Internal Email Protection or IEP is gaining traction. IEP enables customers to apply security and policy enforcement to internal email traffic that would otherwise not pass through a gateway protecting against careless users, compromised accounts or malicious actors operating from within an enterprise. Customer adoption of sink and recover is also increasing. This service offers customers, the ability to use their archive with us as a backup with granular recovery and rebuilding of mailboxes to a point in time, determined by the administrator.

Mimecast is the only cloud archive vendor to offer this type of service for both on-premise exchange and Office 365. Mimecast awareness training is preparing for the launch of season three, adding new content and reinforcing best practices. Adversaries today have an arsenal of weapons that are constantly being refined and Mimecast awareness training goes beyond phishing simulation with practical and easy to consume training to reveal these scams and empower employees to make smart decisions.

Mimecast web security is also evolving nicely with adoption, especially among some of our small and medium-sized customers and larger customers with public Wi-Fi networks such as hospitals. This is a huge market opportunity and an exciting adjacency sharing strong synergies with email security. Our V1.1 product goes live shortly, as we learn more about customer needs and reactions to our proposition. We see this as a long game opportunity for us to add considerably more value to our customers through their Mimecast tenancy.

Onto some industry news now. Mimecast was named a 2018 Gartner Magic Quadrant leader for Enterprise Information Archiving. Mimecast positioned highest on the ability to execute access for the fourth year running, which reflects the significant scalability, reliability and performance that we offer over 10,000 organizations as the archiving partner today. To further support our leadership in cloud archiving, in January we acquired UK based Simply Migrate. This technology enables customers to more rapidly get out of the legacy archiving business themselves,

reducing on-premise cost and complexity their data more seamlessly to a comprehensively better Mimecast solution. In the third quarter, Mimecast also received the Global Business Continuity Institute Award for Continuity and Resilience, highlighting our efforts to keep businesses safe and keep employees productive. Recently, while scanning for malware in an attached document, a previously unknown vulnerability was discovered by Mimecast research labs. Subsequently, an important patch was released by Microsoft to remedy this vulnerability.

It was a great example of Mimecast leading threat research and response capability and our commitment to making email safe for business. We continue to execute against our API strategy and recently joined IBM Security App Exchange Community. Joint customers are now able to deploy Mimecast for IBM QRadar and integrate email security into IBM security intelligence technology. Sharing threat telemetry via our API improves visibility of email borne attacks, enabling prioritized incident response at a better security posture. Now we see customers of all sizes incorporating functionality enabled through our API calls. And in the third quarter, customers made millions of requests to Mime OS via our APIs every day.

Now let's consider some customer engagements from the third quarter to highlight where we’re winning. I'll highlight some of the types of issues we’re helping customers mitigate and the Mimecast services they deployed. So firstly, a global financial services company with 55,000 employees, operating across Africa and the Middle East was refreshing their IT stack, which included seeking out modern SaaS-based security solutions with local support across their regions. A rigorous testing and evaluation period commenced and Mimecast exceeded expectations across requirements, tight integration to Office 365 and our ability to comply with this organization stringent security and compliance requirements were also contributing factors. Customer purchased off full TTP (NOTE: Targeted Threat Protection) suite, as well as continuity and our large file sharing and secure messaging solution, achieving meaningful consolidation and control with our integrated suite.

Then a U.S. healthcare network with 15,000 employees embarked on a comprehensive records management project to which email was naturally central. Locally stored data needed to be transferred and managed in the cloud and Mimecast was evaluated alongside other cloud archiving solutions. In selecting Mimecast this customer had prioritized ease of use and administrative flexibility, as well as granular data retention capabilities and faster search to provide better e-discovery support. Then a U.S. healthcare network with 15,000 employees embarked on a comprehensive records management project to which email was central. Locally stored data needed to be transferred and managed in the cloud and Mimecast was evaluated alongside other cloud archiving solutions. In selecting Mimecast, this customer prioritized ease of use and administrative flexibility, as well as granular data retentions. They needed faster search importantly to provide better e-discovery support.

Then another U.S. based healthcare network with 30,000 seats showed improved protection from email-borne attacks after targeted phishing campaigns had successfully penetrated the organization. We were evaluated and selected to give them greater confidence in their Office 365 investments. Our ability to deliver a complete fiber resilience solution that was easy to deploy and manage led this organization to select our advanced security uptime assurance and archiving services. Next, a leading Central European consumer products company with about 20,000 employees was targeted with phishing and malware attacks. After evaluating potential providers in live POC projects, our demonstrated ability to block more threats and protect this customer better led to Mimecast being selected to provide advanced email protection. The breadth of services on the Mimecast platform, our ability to address future needs and our deep API library were also considerations for this customer when selecting us as a vendor. Then a global consumer packaged goods company with operations across Europe and the United Kingdom operating with all their mailboxes on Office 365 had experienced challenges with zero day and impersonation emails reaching mailboxes across the business.

The problem gained particular visibility at the executive level of the company. The Mimecast was the favored platform for cyber resilience. And we're excited to be providing, what we think is, probably the best email security in the world to this well-known consumer brand. Then an infrastructure services company with 5,000 employees, operating in Australia and New Zealand was challenged by slow and inconsistent e-Discovery results. Poor search capability put stress on the IT team and they sought a better solution. During the evaluation process, it was learned that this customer was paying for licenses for employees that were no longer with the organization. By deploying the Mimecast cloud archive and Sync and Recover, this customer was able to reduce existing IT budget and for same time greatly expand user functionality and free up IT resources.

Note across all of these engagements, the pretty diverse mix of services purchases. And I believe this broad mix of services reflects the diversity of challenges organizations face and our commitment to the – tailored to meet the individual needs of our customers. While at the same time simplifying IT with Mimecast, easy to use and deploy suite of services.

Now before I turn the call over to Peter Campbell, I want to share an update regarding some leadership changes. Firstly, in January, Robert Schechter joined our Board of Directors and Bob is a deeply experienced technology executive having served as a CEO and CFO, an Independent Director and will be a terrific advisor to me and my executive team. He brings more than 30 years of knowledge in software and telecom and we welcome Bob to our Board.

Secondly, Karen Anderson joined Mimecast as our Chief Human Resources Officer. Karen is an experienced HR Executive, who share the clear mission to make Mimecast the place where our employees do their best work and the best teamwork and achieve their greatest learning. Our people are on those valuable asset and we're delighted to have Karen with us on the team.

Finally, I'm very pleased to announce that after an extensive search Rafe Brown has accepted the role of Mimecast's Chief Financial Officer. Rafe's deep industry knowledge accumulated during his 20 plus years of experience working in the enterprise software industry is an enormous asset to the company. I've enjoyed getting to know Rafe and believe, in addition to being a dynamic leader, he possesses the drive and determination to help elevate our organization to new heights. Most recently, Rafe served as CFO of SevOne and previously as the CFO of Pegasystems and prior to that Rafe served as the SVP of Finance for salesforce.com, where he worked for nine years. We welcome Rafe.

Now to ensure a smooth transition of leadership, Peter Campbell will continue on with Mimecast in a consulting role through the filing of our full-year 2019 results. And we very much thank Peter for his role and his contribution for more than 12 years of building our Company. He's been a much loved and iconic executive of Mimecast and he has built a world-class team. We wish him very well in his future.

And with that, somewhat nostalgically, I turn the call over to Peter Campbell, one final time, to discuss our financial results in more detail.

Peter Campbell -- Chief Financial Officer

Thank you, Peter. This quarter we once again demonstrated strong performance in our top and bottom line results. In the third quarter, we exceeded the high end of our guidance for revenue and adjusted EBITDA. We generated revenue of $87.6 million, which represents growth of 30% as reported and 33% in constant currency over the third quarter of 2018.

This is an improvement over the 32% constant currency growth we reported last quarter. This achievement includes $0.3 million related to the Solebit and Ataata acquisitions. Adjusted EBITDA was $16 million in the third quarter, representing an adjusted EBITDA margin of 18% compared to $6.7 million or 10% in the same quarter in the prior year.

Adjusted EBITDA was higher than expected due to the upside in revenue as well as leverage we have generated in the business. Net customer additions were strong at 1,000. In total, 33,300 customers globally make their email safer for business with Mimecast. We were successful winning business in each region, once again showing strong performance with large enterprises.

While we added a similar number of large deals as we did in the prior quarter, the average size of these customers increased. Average order values or AOVs in this segment increased by more than 50%. A mix shift to larger enterprises, combined with our existing customers purchasing additional services, drove our total AOV higher. Total AOV increased to 10,900 compared to 10,500 in the prior quarter.

On a year-over-year basis, AOV improved by 1,400 or 15% over 9,500 in the third quarter of 2018. This quarter, we saw an increase in the number of products customers purchased. We sold 1,600 instances of TTP, increasing the percentage of customers who have this product to 64%. At the same time, we had 500 customers purchase IEP, with another 400 purchasing secure messaging and 300 purchasing Sync & Recover.

Newer products also saw traction with 200 new instances of AET (ph) sold. We also saw some of our first customers purchasing our web product, which is encouraging, although it is very early days for this product. On average, customers now purchase 3.1 of our 10 services. As we introduced new products, we continue to grow the total addressable market for our existing customers. Our revenue retention continued at 110%, as customers renew their subscriptions and purchase additional services. This is underscored by strong upsell in the quarter and industry leading revenue retention.

41% of our customers are using Mimecast in conjunction with Office 365, up from 38% last quarter and 29% in the third 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. GAAP gross margin for the third quarter was 73%, consistent with the prior quarter and in line with our guidance. Gross margin was 75% after adjusting for stock option expense and the amortization of acquired intangibles, an increase over the 74% achieved in the prior year.

Third quarter operating expenses were $62.8 million compared to $50.7 million for the same period in the prior year. R&D expense was 17% of revenue in the third quarter compared to 15% for the same period in the prior year, related mainly to an increase in engineering and product headcount, as we continue to fuel innovation. We expect R&D expenditures to continue at this level for the balance of the year. Sales and marketing expense of $34.5 million was 39% of revenue compared to $31.2 million or 46% 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 $4 million in commission expense in the quarter. Under ASC 605, our sales and marketing expense would have been $38.5 million or 44% of revenue on an apples-to-apples basis. G&A expense of $13.6 million or 16% of revenue compared to $9.5 million or 14% of revenue in the third quarter of 2018. This increase is predominantly related to share-based compensation expense, which includes modification charges of $1.2 million. In the absence of these charges, G&A expense was 12% of revenue compared to 13% of revenue in the prior year.

Adjusted EBITDA for the third quarter was $16 million or 18% of revenue, up from $12.3 million or 15% of revenue in the prior quarter and $6.7 million or 10% of revenue in the same quarter in the prior year. Third quarter GAAP operating income was $1.6 million compared to an operating loss of $1.1 million for the same period in the prior year. GAAP net income was $0.5 million or $0.01 per basic and diluted share compared to a GAAP net loss of $2.6 million or $0.05 per basic and diluted share in the prior year.

We expect that our GAAP net income will fluctuate between net income and net loss in the coming quarters. However, we have consistently focused on a balanced between both top and bottom line results throughout our history and believe that this shows not only the strength of our model, but the discipline that we have put into scaling this business as we grow. Our non-GAAP net income for the quarter was $5.9 million or $0.09 per diluted share compared to $1.6 million or $0.03 per diluted share for the same period in the prior year.

Our non-GAAP net income was negatively impacted by $2.6 million or $0.05 per diluted share related to the non-GAAP tax adjustments resulting from higher profit in the U.S. Note that the non-GAAP tax adjustments are non-cash due to the offsetting tax deductions through the application of excess benefits from the exercise of stock options. We generated $10.0 million in free cash flow in the quarter compared to $4.5 million in the same period in the prior year.

Operating cash flow in the quarter as a percentage of revenue was 21% compared to 19% for the same period in the prior year. Free cash flow percentage was 12% this quarter compared to 7% for the same quarter in the prior year. We expect free cash flow for Q4 to approximate the free cash flow we experienced in Q3. As of December 31, Mimecast had $156.6 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 2018. A quick note on our deferred revenue. 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 fourth quarter of 2019, we expect constant currency revenue growth to be in the range of 29% to 30%, and revenue to be in the range of $90.6 million to $91.5 million. Our guidance is based on exchange rates as of January 31, 2019 and includes an estimated negative impact of $33.9 million resulting from the strengthening of the U.S. dollar compared to the prior year.

Adjusted EBITDA for the fourth quarter is expected to be in the range of $14.7 million to $15.7 million. Full year 2019 revenue is expected to be in the range of $338.7 million to $339.7 million or 31% to 32% growth in constant currency. Foreign exchange rate fluctuations are negatively impacting this guidance by an estimated $4.5 million compared to the rates in effect in the prior year. The guidance for fiscal 2019 provided in November was $332.5 million at the midpoint. Since then, foreign exchange has positively impacted this guidance by an estimated $1.8 million. This amount combined with our over achievement in Q3 of $2.9 million, coupled with the strength we have seen in our business is leading us to raise our full year guidance by $6.7 million to $339.2 million at the midpoint.

Full year 2019 adjusted EBITDA is expected to be in the range of $52.9 million to $53.9 million. We are increasing our guidance by $3.6 million at the midpoint on adjusted EBITDA. As you know, our fiscal year-end is March 31, 2019. We have established an initial expectation for our revenue achievement with respect to the fiscal year ended March 31, 2020.

Full-year 2020 revenue is expected to be in the range of $413 million to $427 million or 21% to 25% growth in constant currency. This is an early estimate of our expected results. We plan to further refine our 2020 forecast as we complete our planning process. This is a good starting point. This is my 50th quarter with the company. When I started at Mimecast, I never would have thought we would have achieved the things that we have achieved.

Each quarter, we produced results that surpassed those of the prior one. This quarter, we have once again achieved record results. I'm proud of what we've achieved this quarter in both top and bottom line, showing increased net income and cash flow. I'm proud of the team we've built and their ability to continue to build and grow the organization to new heights. I'm excited for the future and the potential of this organization. Thanks to everyone that has made and will continue to make Mimecast such a phenomenal success.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from John DiFucci with Jefferies. Your line is now open.

John DiFucci -- Jefferies -- Analyst

Thank you. My first question is for Peter Bauer, and then I just have a follow up, I guess is more of a comment than a question. But -- so Peter, your subscription revenue accelerated this quarter and you talked a little bit about strength in larger accounts, which is contrary to what we've heard from others in the space. And I'm just curious, are you seeing any differences at the high end of the market here? And one reason, you've had less exposure there than some in this market is your contiguous architecture and logical or maybe even necessary reluctance to bend to customization demands that sometimes come from large enterprises? But are you seeing any -- any sort of relaxation of those demands? Are larger enterprises just saying, hey listen, we're not going to force customization, we're just going to -- we're going to let you do what you do and you specialize in this. Is that sort of happening? Is that why you're seeing more I guess traction up market?

Peter Bauer -- Chief Executive Officer

Yes, John, thanks for the question. So you're absolutely right. I mean our contiguous suite is something that's a key strength of the company and really been a massive advantage for us in the mid-market where customers are looking for the simplicity and ease of use and being able to kill as many birds with one stone as possible with a one-stop shop solution. I think we have seen, as our product has matured and as the capabilities have grown in the platform and our brand has become better known, particularly since we became public, that we've been pulled into more larger opportunities. And so, you've seen some of those numbers shift, in particular, the percentage of our revenue done with organizations with more than 5,000 seats is now 17%, which is up a fair amount since IPO and actually up from 16% just last quarter.

I think what we're seeing is less that we're focusing on the mega enterprise. So we are still focused on this large mid-market and SMB opportunity. But we're also getting pulled into opportunities with considerably higher seat comps and organizations that we would characterize as lean IT and security organizations. So that's large hospital groups or manufacturing concerns, education organizations, professional services offsets that -- that may not have the considerable security teams and capability of perhaps a large bank. And they are far more willing to work with a default best practice configuration that we can offer them with considerable amounts of configurability, but without requiring us to perform our natural acts to integrate with highly customized workflows and situation that they are in.

Having said that, I think the maturity of our API strategy is also starting to provide a lot of these larger organizations with more flexibility to build and do their own customizations, and work with our system in a way that meets perhaps some of the unique situations, working with the programmatic interfaces that we're making available on our platform. So I think those things are all coming together and coming through in the numbers with more 100,000 deals and then more deals in that 5,000 seat plus category.

Peter Campbell -- Chief Financial Officer

Yes, I mean just to echo that and I'll do it quickly. But I think it's not, John, that they're reluctant to reduce their requirements. I think firms are more and more looking to actually increase those requirements because security is -- it's not something that you settle on. And I think it's more of an increased awareness that those requirements are met in our existing architecture and the products that we have and then some.

John DiFucci -- Jefferies -- Analyst

That all makes a lot of sense, guys. It sounds like it's sort of happening from both directions from you, but also from them some. I guess my second question is just a statement, and just to congratulate Rafe joining a great team, but you really have a tough act to follow. So we'll miss you a lot Peter. Thank you very much.

Peter Bauer -- Chief Executive Officer

Thanks, John.

Operator

Thank you. Our next question comes from Sterling Auty with JPMorgan. Your line is now open.

Sterling Auty -- JPMorgan -- Analyst

Yes, thanks. I'll actually do that in reverse order. So Peter Campbell congratulations on one hell of a run, and good luck with all your future endeavors.

Peter Campbell -- Chief Financial Officer

Thanks, Sterling.

Sterling Auty -- JPMorgan -- Analyst

On to -- you're welcome. On to a question. I'm just kind of curious we've seen some -- some very strong results across a number of vendors in different space including cyber security. Was there any, what you would consider traditional fourth quarter budget flush spending where you had customers saying, jeez, you know what, I do have a little bit of extra budget here. So yeah, let me add that extra product as you mentioned kind of the purchase statistics of some of those new products. So any year-end special budget flush spend that aided some of the spend?

Peter Bauer -- Chief Executive Officer

No, I think, I mean I'll let Pete (inaudible) that what he is seeing from a numbers point of view, but given that a -- our results are really spread across a very large number of individual customers, many of them in the mid-market. They don't necessarily have the same budget flush dynamics that you might get in larger organizations, particularly in public sector type situation, so we don't really see a lot of that type of behavior. I think in the North American business there is an IT buying sort of rhythm that can build up towards the end of December, considering that only 50% of our business is done out of North America. I think we have very low exposure to that dynamic right now.

Peter Campbell -- Chief Financial Officer

Yeah, I mean I just, if there is a budget flush, they're not telling us about it, but I think -- I think what we are seeing is more, I mean we had a great quarter. It was a strong quarter, it was a clean quarter and very happy with it. I think there is a comment in the script, where I talked about the size of the large deals and I think those, those are really a function of the size of customers that we're seeing rather than dumping a whole bunch of products from some individual customers. So we did see an uptick in AOV in a large event that came from the average size of those customers being kind of 10,000, 15,000 seats and above, and that's what we're seeing some increase in those AOVs. But -- but yeah, if you are aware of any of those budget flush send them our way we're happy to take them.

Sterling Auty -- JPMorgan -- Analyst

You got it. All right. Great. Thanks guys.

Peter Bauer -- Chief Executive Officer

Thanks, Sterling.

Operator

Thank you. Our next question comes from Gabriela Borges with Goldman Sachs. Your line is now open.

Gabriela Borges -- Goldman Sachs Group Inc. -- Analyst

Great. Good afternoon. Thank you for taking my question. My question is the forward-looking vision of Sterling's question which is just for either Peter Campbell or Peter Bauer. Maybe just some commentary on what you're seeing in the pipeline, what does the demand environment look like, anything in particular around your European customers, your British customers around Brexit, anything to call out in terms of medium-sized business spending in the U.S., all of that color would be helpful to us. Thank you.

Peter Bauer -- Chief Executive Officer

Great. So, Gabriela, thanks. I think we are seeing a very consistent demand environment across all of our segments and across all of our geographies if that matter. I think we called out that we've seen nice momentum building in our new Central European business, which is a new environment for us. So great to see the drivers of demand and the opportunity there has started to become sort of really validated and some of the teams sales results. The UK business continues to be strong, Australia, South Africa, continuing to grow, no change in the demand environment there. Brexit is something that we watch closely, but we've not seen any change in buying behavior there and then likewise, our U.S. business continues to be very strong and none of the environmental factors around government shutdowns and so on have played into that at all. So we felt really good this quarter and the pipeline is continuing to build and we see, we see a good opportunity to finish our Q4 well.

Peter Campbell -- Chief Financial Officer

Yeah, our European business grew well. You know, Germany had a great quarter, it's still very small, when you're looking at it in terms of our overall, but very encouraging in terms of that business and well done to Michael and the team there, really starting to produce some results and that will grow over time. We're seeing very good constant currency growth in the UK and Europe. All of our regions are growing well. I mean it’s a -- we've been in this a long time and there’s a lot of environmental factors that can affect businesses, but I think that kind of over with the longer term, there is a ubiquitous need for kind of ever present threat. And so we are nicely abstracted from that to a certain degree and we just continue to kind of build and grow the business.

Gabriela Borges -- Goldman Sachs Group Inc. -- Analyst

Very good. Thank you. And a follow-up if I may, on the archiving business. Maybe just explain for us with Simply Migrate. How does that change your ability to close sales cycles and to gain share in archiving? How hard was it before and how easy would it be now that you have Simply Migrate as part of the Mimecast ecosystem. Thank you.

Peter Bauer -- Chief Executive Officer

Yeah. Thanks, Gabriela. That's a key point. I mean we've been extremely successful in growing our archiving business and bringing on some pretty large customers and doing a fair amount of legacy migration historically. The change with Simply Migrate is that, in the past if we have to do a large legacy data extraction and migration into Mimecast, it would usually have been a considerable cost associated with using a third party sort of compared to ETL, extraction transformation and loading in the data warehousing sense, Getting the data out of a legacy on-premise archive and migrating it or porting it onto our system. Now the downside in the past has been the cost and that can cause some sticker shock for customers when they realize that a migration project could equal one times or even greater the annual subscription to the archive service itself, and that can create a real barrier to getting a deal done.

And then secondly, there is the time and effort involved in that quite often is -- is all putting to customers. So what Simply Migrate has really refined and developed a great expertise in tuning around is making that probably about as simple as it can be to do this sort of fairly complex technical piece of work. And so the opportunity that we see in front of us is to be able to own that on an end-to-end basis for customers and really give them an assurance of that one-stop shop solution and also quality of the data movement, the speed of data movement because of some API integration work that we've done with Simply Migrate to put the data directly into the Mimecast system and that's been proven after several migrations.

But importantly, to have a lot more pricing flexibility when it comes to doing those migrations, because this will be people directly employed by Mimecast and intellectual property directly owned by Mimecast, that will be able to put (inaudible) these projects with. So we think that it -- it can be meaningful for us, particularly with the large archiving opportunities where there is important data sitting in underperforming legacy archive systems.

Gabriela Borges -- Goldman Sachs Group Inc. -- Analyst

I appreciate the detail and best of luck to Peter Campbell. Thank you.

Peter Campbell -- Chief Financial Officer

Thanks to everyone.

Operator

Thank you. Our next question comes from Terry Tillman with SunTrust. Your line is now open.

Eric -- SunTrust -- Analyst

Hey guys, this is Eric (ph) on for Terry. Thanks for taking the question and really nice quarter. Really appreciate the out year guidance, and was very impressive and above where the Street numbers are. But if we extrapolate that a bit, can you talk about what your thoughts are in the three markets that you serve in relation to this -- to this guidance looking at the pyramid that the small, mid-sized and enterprise and what the contribution of each is.

Peter Campbell -- Chief Financial Officer

Sure. We don't, it will -- I think the initial, let me just iterate the guidance there for people that may not be aware, 21% to 25% next year, which you know 23% is the midpoint, which we think is a good starting point for the coming year, about $420 million. It's a highly recurring revenue model. A lot of that is going to come from our base and then from sales of our core products to new customers. With respect to those customers and the segments that they're in, it's difficult to predict exactly where that's going to land. We have been seeing more success of market. This has been a steady sort of progression over the last couple of years, if you looked at in the percentage for our revenue above 5,000 seats over the last few quarters, we've been seeing that increase.

So the only way you can get as an early predictor of what that's going to look like is looking at potentially your sales force and seeing what you're going after. And I would say that we do increment in areas where we are successful. So we are continuing to sell in the small, we are continuing to sell in the mid, we are continuing to sell in the large. And we will increment where we are successful, but it is a gradual process and not – there is no tectonic shifts that are going to come over time. So if you're going to try and predict it out by segment into 2020, I would look at this year as a starting point and then make some subtle changes on it as we grow.

Eric -- SunTrust -- Analyst

Thanks for that. Appreciate the color. And then you guys touched on it briefly that the Web security opportunity that you guys have in the market and early new customers there, but can you talk a little bit deeper on the product stand, where the product stands for market readiness at this point?

Peter Bauer -- Chief Executive Officer

Yes, so we -- we introduced later last calendar year our -- version one of our Web Security product. Really a good comparison probably to the product that Cisco has in the market called Cisco Umbrella. And it offers the DNS based capability as well as an endpoint agent that will do selective proxy work. Really to enhance the customer's defenses against web-based attacks, phishing type attacks, that may not come through email, that may come through social media, that may come through some other mechanisms that – or SaaS environments where customers are interacting.

So we've continued to invest in that -- in that product. We think that's a very large market opportunity. There are some strong competitors in that space. But our interest in being in that market really stems from the significant synergy that we see both from a back-end technology point of view with our core email business, as well as the advantages for customers in terms of being able to simplify their security configurations by having web and email security embedded in the same -- in the same suite of the same solution. So the additional -- there are additional features coming through over the next few months on that product. We continue to do partner enablement and sales enablement having our sales team to learn how to sell web security effectively and we're very excited about that opportunity. But, that is a longer game.

Eric -- SunTrust -- Analyst

Got it. Thank you.

Peter Bauer -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Tim Klasell with Northland Securities. Your line is now open.

Tim Klasell -- Northland Securities -- Analyst

Hey, guys, congratulations on the great quarter and good luck in the future, Peter. My first question has to do -- my question has to do with the larger deals. Is there any particular product that seems to be attracting the attention or anything that’s different in that product profile in the larger customers and sort of a corollary there? Are these bigger customers demanding maybe extra discounting from what you would normally see? Or is your pricing able to remain firm with those larger deals? Thank you very much.

Peter Bauer -- Chief Executive Officer

Sure, sure. Just first off on the product mix in those deals, we're seeing archived being sold into those larger deals, we're seeing basic gateway, we are seeing TTP and IEP being sold into those and some of our newer products as well. So, we're not seeing a difference in terms of our product mix in those -- in those larger deals, it's across our product set. So we're continuing to be successful there. I would say, in terms of the pricing, if you have more users, you end up paying a little bit less. Our pricing is graded, fewer users you pay more, if you have more users you pay less. So the ARPU for those customers is a little bit lower. I would also highlight the margins are -- the cost of serving them is also a little bit lower. So you're looking at margins that are sometimes higher -- higher even though those ARPUs are lower. But I would expect there to be some discounting as you get into 10,000, 15,000, 20,000 seat customers compared to the 100, 200 seat customer and that is normal and we've had that throughout our history. So we haven't really seen any change in that over the last few quarters as we've been more successful in that area.

Tim Klasell -- Northland Securities -- Analyst

Great. Thank you. Very helpful.

Peter Bauer -- Chief Executive Officer

Thank you.

Operator

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

Gray Powell -- Deutsche Bank -- Analyst

Great. Thanks for taking the questions. Congratulations on the results.

Peter Bauer -- Chief Executive Officer

Thank you.

Gray Powell -- Deutsche Bank -- Analyst

Maybe just to start-offs, at least one of your peers in the security space, talks about factoring in some level of conservatism in their outlook because of the -- came (ph) just because of broader macro issues. Is that something you try to account for within your guidance? Or is your outlook purely based on the pace of the business you see today and your pipeline?

Peter Bauer -- Chief Executive Officer

I think there's a few things. I mean I mentioned the macro effects on our business before and I try and abstract those to some kind of broader degree. I think as we're kind of -- as we're looking at our guidance for the coming year, I first -- the bulk of it comes from our existing customers. And then the existing customers, the products they have and the products that we're going to sell to them in terms of our up-sell of those customers in the coming year. And then next from sales of our products to newer customers and that's based on history, that's based on pipeline, that's based on success rates to date, that's based on geographic split and where our reps exists.

So a number of different factors come together in terms of looking at that, but they are mainly about broader Mimecast execution rather than any external factors. We take into account that things don't always go as planned but we've had many years where things don't always go as planned and then also do go as planned.

So we're able to predict that, a little more accurately over time. And remember, it is a highly predictive model. I mean, this is a very high subscription based, very high recurring revenue model. So it is -- it is quite a predictive model, so -- but we take all that together, when we put our guidance out.

Gray Powell -- Deutsche Bank -- Analyst

Thanks. That's helpful. And then just a quick follow-up. I think in the prepared comments, you mentioned something about some larger enterprise statistics and you cited like a 50% growth number. What was that referring to again? I just -- I just missed that.

Peter Bauer -- Chief Executive Officer

I was referring to the average order value of those customers. So we’re talking about our AOV for our customers as a whole, our 33,300 customers being 10,700. But I wanted to call out that something that we saw over the last quarter was in the customers that are 5,000 seats and above, the average order of those customers increased substantially and we talked before, it wasn't about those customers taking multiple products, it was more of the size of average customer in that band, that we were seeing an increase there. And so we wanted to call that out because it was unusual and also something to brag about a little bit.

Gray Powell -- Deutsche Bank -- Analyst

Got it. Okay. And that's up 50% year-over-year?

Peter Bauer -- Chief Executive Officer

Yes, over the prior quarter.

Gray Powell -- Deutsche Bank -- Analyst

Over the prior quarter. Okay. Thank you.

Peter Bauer -- Chief Executive Officer

It is also over the prior year, but it was also sequential.

Gray Powell -- Deutsche Bank -- Analyst

Got it. Okay. Thank you very much.

Peter Bauer -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Keith Bachman with BMO. Your line is now open.

Keith Bachman -- BMO Capital Markets -- Analyst

Hi, thank you very much. I actually wanted to ask about the comment that you made, the 50% number. You indicated that was, it sounds like primarily seats that was growing that, but within the context of the 5,000 customer base, how are you seeing mix help drive revenues? In other words, how was the adoption of greater range of applications, also driving that growth?

Peter Bauer -- Chief Executive Officer

That's a good question. I mean, I would, something I would highlight is that as we kind of -- quarter-over-quarter, we have seen, our AOVs in each of our segments grow. But obviously the 5,000 seat and above it increased -- it increased more substantially, which is why we called it out. In terms of the product mix kind of affecting that, there is nothing really that kind of stands out. I mean, I do think the -- if the average size of customer increases from 10,000 to 15,000 and they're buying the same products at the same prices, we would have seen that -- we would have seen that increase. And I think it happened more like that, that your average size of your customer going up rather than us benefiting from a cross-section of multi-product purchases from these customers. I mean we did see them buy archive. We did see them buy SCG and TTP and IEP together. We had seen those last quarter, we had seen those last year.

So it really is a customer size issue. And again, look, we're not coordinating all of our efforts to 15,000 seat and above customers. But, you know, to John's comment earlier about the platform. It is suitable to 10s of 1000s of customers and to the absolute largest customers. And I think they are starting to see the effects and the power of the product that we have and how -- and the way in which we serve it.

Keith Bachman -- BMO Capital Markets -- Analyst

Yes. Appreciate that. It just seemed like that might be future hunting ground as well as they're expanding the seats so meaningfully, that you can go back and resell and perhaps some of the other products.

Peter Bauer -- Chief Executive Officer

That certainly is -- that certainly is an upsell opportunity for us, yes.

Keith Bachman -- BMO Capital Markets -- Analyst

Let me just ask about competition for a second. And it really has two prongs to it. One is, as one of your competitors is not demonstrating the same consistency as you are, are you seeing them come down market at all and try to get say the 3,000 to 5,000 seat engagements. And the second part of that is, are you seeing any difference in behavior with your customer segments on Office 365 and the E5 bundle, specifically perhaps not being as a target rich area for Mimecast? And that's it for me. Thank you.

Peter Bauer -- Chief Executive Officer

Great. So in terms of competitive landscape, we are seeing that very consistent quarter-over-quarter, not much change to that at all.

Keith Bachman -- BMO Capital Markets -- Analyst

Okay.

Peter Bauer -- Chief Executive Officer

So I think we have seen some of the competitors who have come out of the public markets and gone private and they've had some changes in pricing strategy and things like that which -- which I believe have benefited us probably more on the lower end of the market than on the higher end of the market. I think from an Office 365 and a Microsoft point of view, we continue to see very good attach rates of our solution with Office 365. I think we now have 41% of our customers using us with Office 365, that's over 13,000 organizations, to date.

And I think that they – Microsoft, with their different bundling or unbundling strategies, we haven't really seen that play out in any way in terms of demand for our solution. I think the independent offering that we bring with advanced diverse layered security on top of 365 continues to demonstrate an advantage to Office 365 customers whether they are on E3 or E5 or have any of the additional security capabilities switched on with Microsoft. We’re still adding a lot of value alongside that. I think the broader suite capabilities with up time assurance and continuity, particularly relevant, recently -- many organizations affected by some reliability challenges that Office 365 has manifest in the past few weeks.

Our data recovery capability is also popular Sync & Recover for Office 365, the search and independent archive functionality and DLP capability for compliance requirements that customers have. So it's a broad range of use cases that are driving attacks to to Office 365. And I think that's been really robust, no matter what the packaging or bundling offerings are that Microsoft is putting together.

Keith Bachman -- BMO Capital Markets -- Analyst

Okay. Great. Many thanks.

Peter Bauer -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Catharine Trebnick with Dougherty. Your line is now open.

Catharine Trebnick -- Dougherty and Company -- Analyst

Thanks for taking my question. And Peter best of luck, will miss working with you.

Peter Campbell -- Chief Financial Officer

Thanks, Catherine.

Catharine Trebnick -- Dougherty and Company -- Analyst

Yeah. So when we did the headquarters story, you talked a little bit with us about your email security risk assessment. And I'm curious because again this quarter, you had large deals. And how much does this really play into your ability to pull up a really competitive bake-off off?

Peter Bauer -- Chief Executive Officer

Yeah, absolutely. So I think with larger organizations there is a proof-of-value, a project that we work with these customers to perform and it's really running the ESRA, the Email Security Risk Assessment behind or alongside their current security arrangements. And then demonstrating to them, the additional efficacy that they would benefit from working with us. Frequently customers, our large customers when they’re doing a bake-off will run that or pass one of our other POC options and compares with other providers in the marketplace.

And I think we are really, very satisfied with the way in which we’re performing in those tests. And I think some of these win rates are already starting to speak to the, particularly to the efficacy of the solution. Customers, of course, love the ease of use so they love the broader suite. But at the end of the day we are being chosen very frequently because of our superior ability to identify threats inside emails, very obscure evasive threats inside email and show customers, at quite a deep forensic level, exactly what attackers are trying to do and that's helping us win.

Catharine Trebnick -- Dougherty and Company -- Analyst

All right. Thank you.

Peter Bauer -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Alex Henderson with Needham & Company. Your line is now open.

Daniel Park -- Needham & Company -- Analyst

Hey guys, good evening. This is Dan Park on for Alex. Thanks for taking my question. So I know, earlier in January, you had mentioned the acquisition of Simply Migrate. Just wondering if you could maybe provide some color for us on sort of how this sort of make sure archiving segment more robust? And how you expect to sort of roll these new features into future solutions?

Peter Bauer -- Chief Executive Officer

Great. So our archiving businesses is fairly sizable within our base, we have more than 40% of our customers who’ve purchased archiving. And so there's still a great opportunity to upsell customers as well as winning new customers in the market. What we've seen is there is a certain barrier to adoption of archiving technology when a customer has a lot of data in a legacy archive, on-premise archive. Some of the formats are complex to extract reliably. And so what Simply Migrate has been a Company that we partnered with very successfully over the past year or so to do some of those migrations. So by being part of Mimecast, it gives us control of the roadmap, the ability to do a greater level of integration between their toolsets and our technology, but also change some of the economics and the ergonomics for customers that are looking to get out of the legacy email archiving business. So it's going to be a competitive advantage for us in targeting some of those legacy archive environments, migrations to cloud.

Daniel Park -- Needham & Company -- Analyst

Okay. Great. Thanks so much for the color.

Operator

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

Dan Bergstrom -- RBC Capital Markets -- Analyst

Hey, it's Dan Bergstrom for Matt Hedberg. Thanks for getting our question in here. Just curious, any more color around the seven figure deal, what vertical was the replacement deal? Any products to highlight from it?

Peter Bauer -- Chief Executive Officer

Sure, without giving too much detail, Financial Services customer working across Middle East and Africa, about 55,000 employees. They were using a SaaS-based email security product that we would consider to be from one of our more legacy competitors in the marketplace and really looking at a next-generation solution that could provide them with greater levels of control and consolidation of some of the other services. But in particular, in order to meet their stringent compliance requirements, being able to show that they had a really strong level of email security to combat things like business email compromise and email fraud, and so on. So, a great -- a great win for us and we look forward to doing some more deals like that as we bid them down into a strong referenceable customer.

Dan Bergstrom -- RBC Capital Markets -- Analyst

Great. Thanks.

Operator

Thank you. Our next question comes from Steve Koenig with Wedbush Securities. Your line is now open.

Steve Koenig -- Wedbush Securities -- Analyst

Hey, thanks a lot guys for squeezing me in. Just congrats to Peter, welcome to Mr. Brown as well. Wanted to just ask two quick ones. First one is, how often is a breach the catalyst for deal? And are you seeing this change like the percentage that at times, this is the catalyst is that -- is this evolving, is it different for Office 365 customers? And then just real quickly, if you could just comment on the email threat landscape that you're seeing evolve in 2019. What are the hot topics right now for your customers in terms of what they're worrying about more this year?

Peter Bauer -- Chief Executive Officer

Great. So, I would say less than -- so breach is always catalysts. It doesn't have to be the -- the company themselves experiencing a breach, it can be somebody in the ecosystem or them becoming aware of a breach. What I would say is a big driver to all what we classify as close shaves, so where customers are seeing particularly dangerous emails landing up within the inboxes perhaps having employees almost fall for something or even fall for something without there being a considerable damage, but it being something that really alarms the organization. Perhaps it's purchasing iTunes gift cards or something like that where the financial implications aren’t particularly big, but it makes them realize quite how vulnerable they are and how much more impactful an attack like that could become. So things like that really drive the need for products like our awareness training product as well as our more advanced email security offerings. So that's an important driver of the market.

Steve Koenig -- Wedbush Securities -- Analyst

Terrific. Well great, thanks for your – for your answer and appreciate the help.

Peter Bauer -- Chief Executive Officer

Super. Thank you.

Operator

Thank you. With that, I show no further questions. So I would like to turn it back over to Mr. Bauer for closing remarks.

Peter Bauer -- Chief Executive Officer

Great. Folks, thanks very much for joining our call and we hope you enjoyed your very last call with Peter Campbell. Want to say thank you once again to him for everything he has done to help us build the company and we look forward to our next call with you in a few months' time with our new CFO, Rafe Brown. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Everyone have a wonderful day.

Duration: 61 minutes

Call participants:

Robert Sanders -- Director of Investor Relations

Peter Bauer -- Chief Executive Officer

Peter Campbell -- Chief Financial Officer

John DiFucci -- Jefferies -- Analyst

Sterling Auty -- JPMorgan -- Analyst

Gabriela Borges -- Goldman Sachs Group Inc. -- Analyst

Eric -- SunTrust -- Analyst

Tim Klasell -- Northland Securities -- Analyst

Gray Powell -- Deutsche Bank -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Catharine Trebnick -- Dougherty and Company -- Analyst

Daniel Park -- Needham & Company -- Analyst

Dan Bergstrom -- RBC Capital Markets -- Analyst

Steve Koenig -- Wedbush Securities -- Analyst

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