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Mimecast Limited (MIME) Q3 2021 Earnings Call Transcript

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MIME earnings call for the period ending December 31, 2020.

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Mimecast Limited (MIME 0.04%)
Q3 2021 Earnings Call
Feb 3, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Mimecast Q3 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Robert Sanders, Director of Investor Relations. Please go ahead, sir.

Robert Sanders -- Director of Investor Relations

Good morning. Welcome to Mimecast's earnings call for the fiscal third quarter 2021, ended December 31st, 2020. I'm Robert Sanders, Director of Investor Relations. With me on the call this morning are Peter Bauer, our Co-Founder, Chairman and CEO; and Rafe Brown, our CFO. Today's call is being broadcast live. A replay of this call will be available after the live call has ended.

We will make forward-looking statements regarding future events and the future financial performance of the Company, including regarding our recently disclosed security incident. 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. The COVID-19 pandemic creates additional uncertainties when making forward-looking statements, and we are providing guidance on a good faith basis aligned with SEC recommendations. We caution you to consider the important risk factors that could cause actual results to differ from those in the forward-looking statements contained in today's press release and on this call. These risk factors are further defined in Mimecast's most recent Form 10-Q filed with the Securities and Exchange Commission.

During this call, we will present both GAAP and non-GAAP financial measures. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results. A reconciliation of GAAP to non-GAAP measures and the reasons for our presentation of the non-GAAP information is included in today's press release, which can be found in the Investor Relations section of our website.

The date of this call is February 3rd, 2021. Any forward-looking statements we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events.

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

Peter Bauer -- Chief Executive Officer

Good morning, everyone, and thank you for joining us. I hope you and your families are safe and well. It's been a busy quarter for Mimecast, and we've got a lot to cover today.

Before I discuss our results, I want to frame at a high level how we're thinking about the future. We continue to navigate the ongoing impacts of the pandemic, which has not yet stabilized as we had all hoped for back in the spring. We're working quickly and thoughtfully to address our recently disclosed cyber incident, and we're still in the early innings of our long-term strategic plan, and we remain confident and excited about capitalizing on the opportunities ahead. A close may not initially come as fast as we had expected pre-pandemic, we will continue to invest in the right areas to achieve the growth that we know Mimecast is capable of.

We also continue to demonstrate the financial leverage that is inherent in our business model through expanding free cash flows. The fundamentals of that model, 98% recurring revenue, industry-leading retention, and high gross margins remain intact. These fundamentals have contributed to our achieving an exciting milestone as we cross the $0.5 billion revenue run rate.

Before we dive into the results and our achievements during the quarter, let me briefly start with an update on the cyber incident we've disclosed in January. Our top priority in responding to this incident has been protecting our customers and being transparent with them. As soon as we became aware of the situation, we launched an internal investigation supported by leading third-party forensics experts and began coordinating our activities with law enforcement.

We also immediately began working with the handful of customers who were targeted on remediation measures. And we have advised our customer base to take certain other precautionary actions to fortify their protections. Our customers and larger enterprises, in particular, understand that this is an unfortunate reality of operating today and have been highly collaborative with us throughout this process. We remain in close contact with them, and we believe that the steps we have taken to isolate and remediate the identified threat has been effective. We continue to examine and closely monitor our environment.

As previously disclosed, our investigation has confirmed that this incident is related to the SolarWinds' Orion software compromise and was perpetrated by the same sophisticated threat actor. Our investigation is ongoing, and we will continue to communicate updates directly to our customers if warranted and where appropriate disclosed them publicly on the Mimecast blog.

And now onto our quarter. We are pleased to have delivered results that exceeded the high-end of our guidance for the third quarter across all metrics. Q3 revenues came in at $129.6 million, up 17% year-over-year in constant currency terms, and we added 500 new customers, including 24 six figure deals, in line with our Q3 of last fiscal year pre-pandemic.

Rafe will be providing FY 2022 guidance later in the call, but let me touch briefly on how we are thinking about the end of this fiscal year and the next. We do expect revenue growth to improve over time, supported by an increase in our net retention rate and a gradual reacceleration of new logo ads. That said, we currently expect a U-shaped recovery over the coming year with quarterly revenue growth stabilizing throughout the next fiscal year. This was anticipated prior to identifying the security incident.

We are continuing to build operating efficiencies into our business, and that's delivering increasingly strong cash flow and meaningful margin expansion. We expect that to continue into FY 2022, even as we invest in strategic initiatives and our go-to-market team to drive growth. To be clear, longer term, achieving the Rule of 40 balance between growth and profitability remains our goal. We are on track with the bottom-line and delivering top-line growth at our long-term targets will take additional time and investment, in both our offerings and our team.

In the context of a challenging environment and a growing threat landscape, we have been executing a three-pronged strategy that is delivering results; firstly, expanding our footprint in the enterprise market; secondly, innovating on and selling our multi-product platform to more customers; and thirdly, automating to create even stronger and easier to use engagements with the SMB market and our channel efficiently at scale.

All of this is underpinned by continued investments in R&D, as we continue to meet and anticipate the changing threat landscape. Our successes this quarter demonstrate that the various elements of our strategy are building momentum. We had 24 six-figure wins this quarter. This included our largest win ever, a U.S. healthcare organization with 190,000 seats. And this customer previously used legacy technology from Symantec, and we competed against other leading vendors, and ultimately, our integrated platform, API ecosystem, and the Email Security 3.0 framework were important deciding factors to win this customer's trust.

In another example, an EU pharmaceutical company selected our security solution to build more confidence and security around their Office 365 deployment. And this win further underscores the competitive advantage provided by having a broad platform in Mimecast for countering sophisticated cyber disruption. We continue to see an uptick in our multi-product strategy this quarter, with average number of services per customer increasing to 3.5 from 3.3 in the same quarter last year. Hundreds of existing customers added additional services, including a U.S. technology company, which added archiving to their subscription for 58,000 employees. We also saw net new customers acquire bundled services, such as a U.S. professional services company for 100,000 seats with services across our Email Security 3.0 solution framework, including targeted threat protection, internal email protect, DMARC Analyzer, and our continuity services.

Our results this quarter further demonstrated that advancing our multi-product strategy overlaps well with our focused upmarket. In addition to those I've already touched on, we won displacement solutions at two new U.S. healthcare organizations, one 20,000 seat firm, and the other, 16,000 seat firm, replacing their legacy provider with each selecting multiple services, including email security, archiving, and awareness training. We also won a large Australian engineering firm with 16,000 employees, which selected services across the Email Security 3.0 solution framework, adding security, awareness training, DMARC Analyzer, brand exploit protect and our continuity services.

Our public sector business also continued to grow this quarter, with a large central government agency in one of our international markets for 14,000 seats. And we made continued strides in key growth markets, such as Canada and Central Europe, with Central Europe again growing more than 100%. During the quarter, we continued to build out our platform of solutions with the new innovations introduced with our Case Review app, enhancing our archive and eDiscovery capabilities, SAFE Phish, which further differentiates our awareness training product in Zone 2, and CrowdStrike integration, which shares threat intelligence from our Email Security 3.0 solution to help customers build even more robust security architectures.

We also recently hosted our SecOps virtual conference co-sponsored by Palo Alto Networks, CrowdStrike, Splunk Rapid7, Netskope, where we delivered numerous educational sessions helping customers to learn more about how to leverage Mimecast's APIs and our out of the box integrations across their security estates. And this underscores the power of our cloud-native platform MimeOS to help customers achieve their goals.

Notwithstanding these wins, growth continues to trend below our pre-pandemic expectations. And to accelerate revenue growth, we are prioritizing resources in line with a three-pronged strategy I mentioned earlier; moving up-market, advancing our multi-product strategy, and automating to create even stronger and easy-to-use engagements with the SMB market and our channel efficiently at scale.

Now, we are implementing a staff restructuring, which includes the reduction in force of approximately 80 roles, which is roughly 4% of our workforce. And it's never easy to have colleagues depart, especially in an environment as tough as this one, but we did not make this decision lightly. However, we are confident that this is the right decision for the business and essential to being able to invest in the right areas and achieve our goals.

We know that enterprise customers look for high-touch customized service, and so we are taking steps to expand and further strengthen this team. And we believe this will enable us to get in front of more customers, win more when we do, and ultimately, deliver better service to them. We expect investments in our sales and product teams to fuel our multi-product strategy, with both existing and new customers. And we will also be investing to enhance our customer service capabilities by improving access to data, investing in automation, and leveraging our growing talent pool in South Africa. We are excited about these initiatives and confident they will enable us to realize the market opportunity.

In January, Helene Auriol Potier joined our Board of Directors, and Helene brings significant industry expertise and international operating experience to our Board.

Now, in summary, we have the right ingredients for success in a world that needs us more than ever. There remains a very large market opportunity and favorable market drivers that position us for strong profitable growth. I want to thank the team of engineers, technical folks, leaders, and others at Mimecast who have worked diligently and tirelessly on the security incident over the last few weeks. And I also want to thank the rest of our team, departing and staying on, for your relentless focus on our customers, your dedication to problem-solving, your teamwork and you're resilience, especially this past year.

With that, I'll turn it over to Rafe to review the details of our results.

Rafe Brown -- Chief Financial Officer

Thank you, Peter. I'm pleased to report that we exceeded the high-end of our guidance for revenue, adjusted EBITDA, and free cash flow for the third quarter of fiscal 2021. Our results demonstrate our ability to deliver both topline growth and bottom line margin expansion, even amid a challenging operating environment.

Before I jump into our financial results for the quarter, I would like to take a moment to review the financial implications of the reduction in force Peter mentioned. First, and as you will see when we get to our initial guidance for fiscal '22 in a few minutes, I would like to reiterate that we remain committed to driving top-line growth and expanding margins and cash flow in FY '22 and beyond.

Second, as Peter outlined, while we are eliminating approximately 80 roles today, we will be reinvesting some of the savings in growth initiatives that we believe will enable us to reach more customers from both a go-to-market and product perspective, as well as to continue to improve our systems and processes to drive further efficiencies in our business. And finally, please note that these headcount reductions will result in a restructuring charge of approximately $3.7 million in the fourth quarter of fiscal '21.

Let's now turn to the third quarter results. First, a note on the continuing impact we're seeing from COVID-19. As we've said on our prior earnings calls, the pandemic has had a significant impact on our core geographies. Our efforts to protect our customers, support our team, and derisk our business have helped us to navigate this challenging period, despite our customers facing an uncertain operating environment and tight budgets.

While the macro headwinds persist, late in the third quarter, our North American team did see a marginal pickup in bookings from larger customers, consistent with the pipeline increases we had noted in our last earnings call. While there was a slowdown in pipeline generation activity in the month of January, we continue to believe that the North American market is showing early, albeit gradual, signs of recovery. Unfortunately, the U.K. and South African economies appear to still be struggling and will likely be slower to recover.

Now to the results. In the third quarter, we generated revenue of $129.6 million, which represents an 18% improvement over the prior year in absolute dollar terms. Adjusting for the $900,000 of currency tailwind, our constant-currency growth rate over the prior year stood at 17% for the quarter. Note that since providing guidance in November, foreign currency fluctuations positively impacted our third quarter results by $1.3 million.

Bolstering our top-line results were continued year-over-year increases in average order values or AOV. Calculated at January 26 FX rates, AOV for all customers stands at $13,400, up approximately 8% over the prior year in constant-currency terms. This trend of improvement is attributable to a favorable shift in the average number of services per customer across our customer base, currently at 3.5 services per customer compared to 3.3 services this time last year, as well as our increasing success with larger organizations.

We added 500 customers in the third quarter. As we've been discussing over the last few quarters, the COVID-19 pandemic is having an outsized impact on our smaller customers and we thus expect to see pressure on the net new customer count metric until the broader economies of our major markets begin to recover.

Net revenue retention stood at 104% for the four-quarter period ended December 31, in line with our expectations. Looking at its components, upsell totaled 112%, helped by strong interest in our Zone 2 solutions of internal email protection, which added 800 customers in the quarter, awareness training, which added 600 customers, and our Zone 3 DMARC solution, which added 200 customers in the quarter.

Down sell and churn totaled 8% as of the end of the third quarter, consistent with last quarter, which reflects continued economic challenges our customers are facing. We anticipate our net revenue retention rate is likely to reach 103% by the end of the fourth quarter, again in line with the expectations we shared earlier this year.

We continue to drive improvements in gross margins. We recognized a 77.4% non-GAAP gross margin, up 180 basis points from the third quarter of the prior year.

Adjusted EBITDA for the third quarter totaled $34.6 million, representing an adjusted EBITDA margin of 26.7% compared to 18.7% in the same quarter of the prior year. On a net basis, the quarter derived approximately $3.9 million of discrete bottom-line benefit as a result of COVID-19-driven cost reductions, consisting primarily of travel savings. Thus, even excluding these cost savings from the computation, our adjusted EBITDA margins would have been approximately 23.7%, representing 500 basis points of EBITDA margin expansion compared to the prior year. We achieved this expansion through operational efficiencies driven by gross margin improvements, resource prioritization throughout our operating expenses, and year-on-year improvements in our real estate footprint.

Now, turning to the bottom line. Our non-GAAP operating profit for the third quarter was $25.7 million or 19.8% of revenue, an improvement of 830 basis points from the prior year. Our non-GAAP net income for the quarter was $21.5 million or $0.33 per diluted share, based on 66 million fully diluted weighted average shares outstanding.

Our non-GAAP tax rate was 20% for the quarter. As we have implemented a number of changes to our global operating structure, we are now modeling a full-year non-GAAP tax rate of approximately 21%.

We reported GAAP net income of $10.8 million for the third quarter or a profit of $0.16 per diluted share, again based on 66 million fully diluted weighted average shares outstanding. Our GAAP tax charges totaled approximately $1.2 million in the third quarter. Fourth quarter tax expense is expected to be approximately $500,000. Our full-year GAAP tax expense is currently estimated to be approximately $2.9 million.

Turning to cash flow. Third quarter operating cash flows totaled $35 million or 27% of revenue. Free cash flow jumped to $24.2 million for the quarter or 18.7% of revenue, driven by higher profitability and by better-than-expected collections late in the quarter. As of December 31, Mimecast had $271 million of cash on the balance sheet, up $97 million from the beginning of the year. Net of debt, our current cash balance stands at $165 million.

Let me now turn to guidance. For the fourth quarter of fiscal 2021, revenue is expected to be between $130.5 million and $131.5 million, or 11% to 12% growth in constant-currency terms. Our guidance is based on exchange rates as of January 26, 2021 and includes an estimated positive impact of $3.8 million resulting from the weakening of the U.S. dollar compared to the prior year. Adjusted EBITDA for the fourth quarter is expected to be between $28.3 million and $29.3 million. At this point, we are continuing to assume very little travel in the fourth quarter. Free cash flow for the fourth quarter is expected to be approximately $22 million.

Turning to the full fiscal year. Fiscal 2021 revenue is expected to be between $498 million and $499 million, or approximately 17% growth in constant-currency terms. Adding the details, foreign exchange rate fluctuations are positively impacting this guidance by an estimated $400,000 compared to the rates in effect in the prior year. The prior guidance for fiscal year 2021 provided in early November was $492 million at the mid-point. Our over achievement in Q3 is leading us to raise the midpoint of our full-year guidance by $1.9 million in constant-currency terms. This increase of $1.9 million is being positively impacted by $4.6 million of foreign exchange tailwind that has arisen since the rates used in our November call, resulting in the midpoint of our full-year guidance moving up by $6.5 million in absolute dollar terms from $492 million to $498.5 million.

We are raising full-year 2021 adjusted EBITDA guidance to between $122.2 million and $123.2 million. At the midpoint, this represents a $12.9 million or a 230 basis point improvement over our prior guidance. We are also raising full-year 2021 free cash flow expectations to a range of $86 million to $87 million, reflecting a free cash flow margin of 17.4% at the midpoint of our revenue guidance. This is 860 basis point improvement over the prior year and 40 basis point improvement over our prior guidance provided in November.

I would also like to take this time to set initial expectations for the year ending March 31, 2022. Please note again that this guidance is based on foreign exchange rates as of January 26, 2021. Full-year FY '22 revenue is expected to be in the range of $558 million to $568 million, or approximately 9% to 11% growth in constant-currency terms when measured against the midpoint of our guidance.

I would remind everyone that approximately 98% of our revenue is recognized ratably. Thus, bookings in any given quarter typically have minimal impact on that quarter's revenue, and that the most important bookings quarter for fiscal '22 is arguably Q4 of fiscal '21. For purposes of modeling our year, even assuming a strengthening economy yields higher bookings for the whole of FY '22, the nature of our revenue recognition leads us to expect revenue growth will be relatively flat across fiscal '22. We would then anticipate revenue growth acceleration as we move into fiscal '23.

Returning to guidance. Full-year FY '22 adjusted EBITDA is expected to be approximately $146 million, which at the midpoint of our revenue guide would represent an adjusted EBITDA margin of 26% and would be approximately 130 basis point margin improvement over fiscal '21. For modeling purposes, I would note that on a preliminary basis we expect full-year FY '22 GAAP taxes to total approximately $7 million and a non-GAAP FY '22 tax rate of approximately 25%.

Free cash flow for the full-year FY '22 is expected to be approximately $121 million, which at the midpoint of our revenue guide would represent a free cash flow margin of 22% and will be an approximately 410 basis point margin improvement over fiscal '21. This would represent significant progress toward reaching the long-term free cash flow targets of 23% to 25%, which we discussed at our Analyst Day last February.

To conclude, despite the impact of the global pandemic, the Mimecast business is demonstrating its resilience. As our third quarter results show, the team is working hard to meet and exceed expectations. While we have had to make some difficult business decisions, we are investing to meet the growth opportunity and delivering on our commitments to expand free cash flow margins.

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

Peter Bauer -- Chief Executive Officer

Thanks, Rafe. It's always been in Mimecast's DNA to change and it's how we've been able to grow and thrive for the last 18 years, and it's how we'll achieve our vision for the future. We have the talent, tenacity and long-term commitment needed to power the next evolution of our business, and we're confident we will deliver. In the near term, we remain nimble, continuing to prioritize our customers and taking actions to rebuild toward the higher growth rates we know we're capable of delivering.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Matt Hedberg with RBC Capital Markets. You may proceed with your question.

Matthew G. Hedberg -- RBC Capital Markets -- Analyst

Hey. Great. Thanks for taking my question guys. Peter, I wanted to ask you a little bit about the compromise. Maybe I missed it at the top of the call, but could you maybe provide a bit more details about the number of customers that were actually impacted by this versus the potential number? And then, kind of thinking longer term, could there actually be a benefit to you guys from the SolarWinds breach in terms of customers turning to Mimecast for additional third-party email protection, things of that nature?

Peter Bauer -- Chief Executive Officer

Yeah. That's a good question. Thanks, Matt. Okay. So I think what we disclosed was -- in the initial statement was that five or so customers had been targeted by this and we put out subsequent statements. I'd encourage you to go and look at our blog and the things that we said publicly. We don't have anything additional material to share beyond that. But we did, as you know, go out more broadly to our customer base with some precautionary actions for them to take, and those are ongoing and continue to be successful.

I think, broadly speaking, when we look at what this represents, clearly, there is a significantly elevated threat level in the world, a particularly elevated threat level around public sector and government as a result of this threat actor. What I think it has shown us is that cybersecurity really requires transparency and teamwork among vendors and we continue to be very committed to that, and email remains a very significant threat vector for organizations. So I think it really underlines and underscores the importance of the work that we're doing to help customers, in particular protect their very significant investments in collaboration environments like Office 365.

Matthew G. Hedberg -- RBC Capital Markets -- Analyst

That's great. And then, the other thing that stood out to me, I mean you called out the Symantec replacement, you have the large deal win there. I'm curious -- which is your largest win ever, which is great to hear. Could you talk a bit about that Symantec momentum? I think we've all thought that it could be a pretty significant and really long-term tailwind to the business as deals come up for renewal, but maybe just a little bit of an update about the broader trends that you're seeing within that opportunity beyond this obviously very large deal.

Rafe Brown -- Chief Financial Officer

Yeah. Thanks. This is Rafe. I'll start us off on this one at least. We are encouraged by the business we're seeing from formerly Symantec customers heading our way. When you look year-over-year on -- for the quarter or even a year-to-date basis, it has shown a nice uptick. And we continue to be encouraged by what we're seeing in the pipeline. So I think some of those things we talked about, about long-term contracts that they had with Symantec and setting us up for a renewal or an opportunity when those contracts come up for renewal, that is starting to come to pass and that's been helpful.

Matthew G. Hedberg -- RBC Capital Markets -- Analyst

Thanks, Rafe.

Operator

Thank you. Our next question comes from Catharine Trebnick with Colliers. You may proceed with your question.

Catharine A. Trebnick -- Colliers Securities -- Analyst

Thank you for taking my question. Could you dive in a little bit more into Email 3.0 and Email 2.0 as far as the opportunities are evolving and how they lay out in that landscape? Thanks.

Peter Bauer -- Chief Executive Officer

Yeah. Sure, Catherine. So in the context of our Email Security 3.0 strategy, which is really the framework that we've been working to communicate to customers about how to think about email security and messaging security generally in the modern threat landscape, is really breaking that down into three zones, Zone 1 being our classic perimeter environment and we've had tons of additional innovation and investment around that, and that continues to be a significant opportunity out there in the market. I think with the TTP product and that in Zone 1, we added 800 new TTP deals in this last quarter. So I think that's an important sort of anchor on the story.

Then when we look at Zone 2, those are really important, inside the perimeter capabilities, looking at lateral movement of threats inside the email network, identifying vulnerabilities in terms of the human layer with our awareness training products, some of the new innovations that we've delivered around things like SAFE Phish that really enhance the phishing simulation capabilities to make them much more representative of the actual threat landscape today. So those two products are really important for customers, and again in this quarter strong uptake there with 800 new IEP purchases and 600 new awareness training purchases. So that's a really strong part of our Email Security -- emerging Email Security 3.0 play.

And then, of course, in Zone 3, some really important capabilities in what we talk about us beyond the perimeter. And I think DMARC really is starting to become a must-have capability for all organizations. In this quarter, we added 200 new customers -- paying customers to our DMARC solution. So it's a great framework, it's an important framework, and it's clearly really relevant for organizations to think about email security much more as a pervasive multi-zone strategy as opposed to historically a perimeter kind of gateway filtering service. So thanks for the question, Catherine.

Catharine A. Trebnick -- Colliers Securities -- Analyst

Yeah. No, thank you. I always need to clarify that. When you talk about your wins, it seems like you're willing to have more two and three in the win category when you announced these bigger deals. So it's nice to see. Thank you.

Peter Bauer -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Steve Koenig with SMBC Nikko. You may proceed with your question.

Steve Koenig -- SMBC Nikko -- Analyst

Hey, gentlemen. Thank you for taking my question. I wondered if you might be able to give us some color on what you're thinking about the breach in terms of its impact on win rates or sales cycles? Any initial indications about how customers are responding and how you might tweak your go-to-market? And then, just more generally, aside from the incident, any changes in your go-to-market kind of tactics or approach this year or greater emphasis on certain products, etc., versus last year? Thanks very much.

Rafe Brown -- Chief Financial Officer

Yeah. Steve, this is Rafe. I'll start us off here, and thanks for being up early with us this morning from the West Coast. With the security incident, I think the direct impact that we would -- that's worth noting is, for a couple of weeks, we've really devoted the entire Company to making sure we're serving our customers, helping them through credential changes, and making sure we're just available. And so that did have a short-term impact on pipeline generation activities in January. That team is all back to their day jobs if you will, generating pipeline and working on that. So aside from that specific point, there is nothing that really changes our initial expectations, at least that we're seeing thus far.

Now, I think when we look a little broader longer term, one of the things as Pete noted at the top of the call, in times like this, we focus very much on our customer success and on transparency. And frankly, in a lot of the calls with our enterprise customers what we've gotten is a great feedback from them that they appreciate that, that transparency, that going that extra mile because frankly the SolarWinds attack has really reminded all of us just how sophisticated these threat actors are and how much we need to work together and collaborate to defend ourselves against them. So I would say, for what has been an eventful last few weeks, it seems like the general feedback is that they appreciate the efforts that we've taken to be transparent with them.

To the part of your question about what are the changes going forward, I mean one of the shifts that is certainly taking place within the organization is, as we are aligning our resources more and more toward the strategic initiatives that Pete laid out, and the first one he called out was that continued focus and investment on the enterprise and certainly in our go-to-market function that some of the changes that they're going through right now, and as we look toward this next fiscal year, will be continued hiring into the enterprise place, whether it's on the rep level, whether it's more senior technical resources and sales engineers to get out there and help with those accounts, or how we support those customers from a customer service perspective. That's probably the most profound change to call out.

I don't want to take anything away from the rest of the business that's focused on some of these smaller customers, but we're digging deep to make sure we're handling the small guys as efficiently as we can and building the systems and evolving the systems to serve them, and focusing more and more of those resources on those larger customers.

Peter Bauer -- Chief Executive Officer

Yeah. Thanks, Rafe. I think what I would add to that is, when a sophisticated actor like this has been so successful on an industrywide scale, one of the other things that it really underscores is the importance of an integrated security architecture, and so I think we're -- for many organizations in the early stages of building truly integrated security architectures. So our work and in particular around our SecOps virtual conference work in terms of building integrations to help customers much more seamlessly create these integrated, intelligent and highly responsive security architectures with Mimecast being a really powerful contributor to that architecture, I think that's one of the key emphases for us going into FY '22.

Steve Koenig -- SMBC Nikko -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Sterling Auty with JPMorgan. You may proceed with your question.

Matt -- JP Morgan -- Analyst

Hi, guys. This is Matt[Phonetic] on for Sterling. Thanks for taking my question. In terms of the guidance, we appreciate some of the pieces there that you explained. Just trying to understand how much of that -- 10% growth in the next fiscal year, how much of that is coming from the bookings impact that you mentioned possibly from the hack, as well as how much of that is just coming from lower tailwinds from Office 365 migrations? Thanks.

Rafe Brown -- Chief Financial Officer

Yeah. Thank you. So on next year's guidance, which [Technical Issues] all aligned is 9% to 11%, or 10% is the midpoint as you noted. We've been talking all year along, well, most of the year anyways, about the impact that COVID has had on our business. And I think that is really the place to focus in terms of looking at those bookings, how those bookings translate into revenue for us for FY '22. It goes without saying, but worth reinforcing that we're very much still in this COVID environment. I did call out that we had seen a bit of strength in the North American market in December in particular, and I think that's encouraging. But remember that we get almost half of our business from outside the U.S. and some of those areas are appearing to be a little slower to recover.

So just as you well know, the SaaS revenue recognition model, really puts undue weight, if you will, on next year's guidance on how the bookings come in for the rest of this quarter and the next just because gives them full time to amortize into the revenue. And that sets us up for this next five, six months being extremely important in terms of next year's guide. And so when we look at that with COVID still raging and markets still being a little slow to recover, it does cause us to have to consider that the recovery on the revenue line will lag the bookings and so thus will probably impact FY '22 as we've described.

Matt -- JP Morgan -- Analyst

Great. That's very helpful. And then one follow-up, you talked about some of the long-term growth. At the Analyst Day, you guys mentioned 17% to 21% growth kind of in that fiscal '23 to '25 range. And just wanted to make sure in terms of, do you think that those targets are still achievable given -- within the time frame that you gave, given some of the bookings headwinds that you mentioned for this next year? Thanks.

Rafe Brown -- Chief Financial Officer

Sure. I think we still think like that mid- to upper-teens range is the right way to think about our business in terms of the market that's available, our products and the opportunity that's before us. So I think that is quiet -- that remains strong and true for us. I think we gave that guidance shortly before the COVID crisis came along. So what we're likely to see is that it will probably take us a bit longer to get to that revenue range than we had originally anticipated.

What I would also note that in addition to the top-line guidance that you mentioned, we also talked about a free cash flow range of 23% to 25%. And you're seeing in our guidance that cash flow inflection we talked about at that time is really coming to pass. We've seen that in FY '21. The guidance for FY '22 is arguably ahead of schedule. So on a balanced scorecard perspective, the free cash flow numbers, I think, are showing nice improvement and we're going to get there on schedule or a little bit early. And in terms of the top line, they're the right way to think about the business, but given COVID, it's going to take a little longer to get there.

Matt -- JP Morgan -- Analyst

Great. That's very helpful. Thanks, guys.

Operator

Thank you. Our next question comes from Terry Tillman with Truist. You may proceed with your question.

Terrell F. Tillman -- Truist Securities -- Analyst

Yeah. Thanks for taking my questions. I guess the first question, Peter, is just a bigger picture question about the Office 365 opportunity. And as this pandemic just grinds on, how is that opportunity changing, as well as with even the Sunburst incident recently, what's different now about the O-365 opportunity compared to three months ago, six months ago, and then thinking going forward? And then a follow-up.

Peter Bauer -- Chief Executive Officer

Yeah. Great question. So I mean Office 365 continues to be a significant source of business for us in terms of adding additional layers of security and capability on top of 365. More than half of our customers are using us to protect Office 365. So that's north of 20,000 organizations. I think what this Sunburst threat has really underlined for us or clarified for us once again is, how significant a target the Office 365 environment is for adversaries and that while Microsoft is very determined to provide a robust and secure environment, there is some level of an intractable problem in terms of securing that environment continuously and successfully in isolation. And that, I think, is really showing the need for additional independent specialist layers of security to help shore up and protect Office 365, so that customers can be -- feel confident and secure doing business with a considerable dependency on Office 365. So we remain bullish about that opportunity.

Terrell F. Tillman -- Truist Securities -- Analyst

Yeah. And my follow-up, I'm not sure who this is for, I will just throw it out there, and then you all can fight over my awesome question. But if I look at the FY '22 guidance, I mean how do we think though about the mixes of business? And just how much of -- are we looking at a more of a stair-step increase in the enterprise exposure as opposed to the small business and the mid-market? Or is it still going to be a gradual kind of uptick in enterprise? I'm just trying to understand how to think about that into '22 and really even into '23 in terms of how quickly will this pick up in terms of proportion of total? Thank you.

Rafe Brown -- Chief Financial Officer

Yeah. No, that's very helpful. I think the right way to think about it, it will be somewhat gradual. We've been talking about having that highest end of our market at 18% of revenue. We continue to watch how that grows over time, but it does grow somewhat gradually. And that is -- we talk on these calls a lot about the enterprise, but we have some really strong business with some mid and mid- to large-sized customers, as well as even on the lower end of the business. So with the whole business growing, the enterprise is getting a lot of attention and good investment, but at our size and scale, you'll recognize that growth on a somewhat slow basis.

Robert Sanders -- Director of Investor Relations

Operator, next question.

Operator

Thank you. Our next question comes from Brent Thill with Jefferies. You may proceed with your question.

Joe -- Jefferies -- Analyst

Hey, guys. This Joe on for Brent. Thanks for the question. Great to hear about the public sector being strong in the quarter. Has there been any issues with the recent compromise in that regard? And then, perhaps just elaborating further on the sense of the size and the future growth aspirations in that business.

Peter Bauer -- Chief Executive Officer

Yeah. Okay. So yeah, I mean, government business and education sector as well remain important target markets for us. We recently announced our FedRAMP Ready status on that grid, and it will be several quarters before we have our full authority to operate in FedRAMP, but that's clearly a focus sector for us. I think in the U.S., it's a key market, but also internationally, in the prepared remarks, I called out a large international government agency that had signed with us in the quarter.

And interestingly, our government sector business and education grew in the last quarter from 6% of our revenue to 7%. So we feel like we're making good progress through those results there. One thing that we've seen very clearly with this Solarwinds' SUNBURST attack is the elevated threat level presented to public sector generally and how governments really have to take the cyber security threat significantly more seriously. I think encouraging signs coming out of the new administration in terms of commitment of resource and skill to counteract this threat. And we think it's such an important market; a), for us to serve, but also most likely a lucrative market on a global basis for Mimecast going forward.

Joe -- Jefferies -- Analyst

Awesome. And then Peter everything you said on the call was logical and appreciate all the added detail. What gives you the comfort that this is truly a macro issue and a no-decision issue versus a competitive issue and people going with Microsoft? Maybe Microsoft is good enough in email security?

Peter Bauer -- Chief Executive Officer

Well, so great question. I mean, we have operated in a competitive environment for the duration of our history. So we know we have to earn our business. We know we have to demonstrate higher efficacy and keep innovating, and keep serving customers more successfully. But I think the current threat landscape has indicated that it's really important for organizations to layer in additional specialist security and not merely rely on the underlying application vendors to secure their environments.

It's important that they do secure their environments, but I think recent events have proven quite clearly that that may not be enough and that additional specialist focused security and tooling that can help organizations feel more confident, be more resilient with that dependency, with that dependency being on the [Indecipherable] target for adversaries being mitigated significantly. So again, we feel really good about that opportunity, but very conscious that we have to message and innovate and serve really well in order to go and continue to grow in this environment.

Joe -- Jefferies -- Analyst

Makes sense. Thanks, guys.

Operator

Thank you. Our next question comes from Keith Bachman with Bank of Montreal. You may proceed with your question.

Keith F. Bachman -- BMO Capital Markets -- Analyst

Hi. Thank you very much for taking the question. I had two I wanted to ask. The first one is, I was wondering if you could give any context or comments on the net retention rate that you see. You've given 103%[Phonetic] for Q4. Just any kind of color on how that may unfold as you look at the next fiscal year? Directionally, does it -- how quickly can it move back to something as you get throughout the new fiscal year? And then, I'll ask my follow-up after.

Rafe Brown -- Chief Financial Officer

Yes. So I think -- first, keep in mind with that net revenue retention number, it is a trailing four-quarter metric with most of our contracts being approximately a year. We look back to those contracts and see how they perform. So by its nature, it's going to move somewhat slowly. I think the key here and the key indications that we will all be watching is, I noted that the customer count metric is probably going to continue to run a little bit suppressed for a while as we're still working through COVID, but that's an important metric to watch because it's going to speak to that -- those net customer adds number, will speak to how we're experiencing some of the challenges out there. You'll note, it stabilized between last quarter and this quarter. And so it does feel like we've worked through some of that initial shock, and we're seeing some stability in it. So we'll continue to be watching that in the coming quarters and I think that's a key piece.

I would caution, as everyone know on this, it needs to be looked at in tandem. So take the net customer adds number, look at the AOV number, and that's going to give you a much better view of how the organization as a whole is performing. But I think that's a good indication. We would certainly hope that as some of these companies come out of the COVID crisis, we saw a lot of down-sell. Remember, we'd really focus on let's keep them as customers even if it's for a smaller estate, but as they come out of the COVID crisis, a lot of these businesses in the retail, hospitality sector and places like that, they need people to function. And so we're quite hopeful we would see, as we move through that, an uptick in those numbers as the year progresses. Again, somewhat dependent on the COVID recovery in the respective markets.

Keith F. Bachman -- BMO Capital Markets -- Analyst

Okay. Peter, I'll direct this to you. And again, I missed the very initial discussion on the conference call. But if you could just talk about how you balance taking a headcount reduction to make sure that you're trying to set up the Company for future growth on a durable basis and where are some of those reductions, but more importantly, how do you balance this as you look at the organization over the next two and three years?

Peter Bauer -- Chief Executive Officer

Yeah. Great question, Keith. So we've been extremely thoughtful about this and looked at our strategic plans and looked at what are the key initiatives that we want to be able to invest more in. And then, by implication, there are certain areas that we are going to be investing slightly less in. And so that rebalancing to be able to say, how do we double down on enterprise, how do we double down on automation and efficiency for our mid-market and our long-tail of SMB customers, and what are those changes that we need to make to set ourselves up to execute well on that long-term plan.

So I think that the changes that we've made, I mean, some of them are difficult. It's not easy to make these organizational shifts, but they help us to be able to both invest in the right areas of the Company, but also yield some of the efficiencies and demonstrate some of the strength on the bottom-line and cash generation that's inherent in our model. So I feel good about how we've got that balance right and we are now set up for FY 2022 to just get out there and execute.

Keith F. Bachman -- BMO Capital Markets -- Analyst

Okay. Alright. Many thanks. Good luck.

Peter Bauer -- Chief Executive Officer

Thank you.

Rafe Brown -- Chief Financial Officer

Thanks, Keith.

Operator

Thank you. Our next question comes from Nehal Chokshi with Northland Capital. You may proceed with your question.

Nehal S. Chokshi -- Northland Securities -- Analyst

Yeah. Thank you. Could you give some color on the U-shaped recovery, where do you expect constant currency growth rate to bottom at throughout the course of fiscal year 2022?

Rafe Brown -- Chief Financial Officer

Yeah. Thanks. As I noted, one of the things that we think we'll be be roughly in this range of the guidance range across FY 2022. Obviously, depending on how bookings go, might we have an impact on late in the quarter rates, but again, we have SaaS revenue recognition. That revenue growth rate needs to have bookings activities well in front of the ultimate uptick in revenue growth. So yeah, I think the right way to think about it is, we will be roughly within that range for FY 2022.

Nehal S. Chokshi -- Northland Securities -- Analyst

And how would you expect the net revenue retention rate to profile throughout that, also relatively even at the current rates?

Rafe Brown -- Chief Financial Officer

I think that -- roughly speaking and again, based on how things play out over the course of the year, I think that's roughly the right way to think about it in approximately this range.

Nehal S. Chokshi -- Northland Securities -- Analyst

Okay. And then, for my follow-up question, out of the three prongs described in terms of returning to the [Indecipherable] really accelerating back up to the long-term growth rate, what's the most important, which prong will be experiencing the biggest benefit from the restructuring that you guys have taken?

Peter Bauer -- Chief Executive Officer

Well, I think it's difficult to sort of single them out specifically, but I do feel that our focus on the enterprise is clearly one of the very important parts of that strategy that will benefit from additional investment. But importantly, our investment in R&D generally, and our ability to continue to be successful with multi-product sales across the platform. So driving higher levels of penetration. You've seen our average products per customer move up from 3.3 to 3.5 year-over-year, being able to really invest in that and drive that multi-product strategy into the customer base and into new business, I think those two are both set to benefit from this investment plan.

Nehal S. Chokshi -- Northland Securities -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Shaul Eyal with Oppenheimer. You may proceed with your question.

Shaul Eyal -- Oppenheimer & Co., Inc. -- Analyst

Thank you. Good morning, gentlemen. I had just one question. I know the aftermath or the derivative of the recent SUNBURST is different materially from the outage that you've experienced back in -- I think it was 2015 or maybe 2016. But maybe can you compare [Technical Issues] lessons learned from that outage five, six years ago? What did you learn that could be applied this time? Because if I'm looking back, I think, for everybody who covered you for such a long time, you actually came out much stronger over the course of the past five, six years? So maybe just a compare/contrast for us will be greatly appreciated.

Peter Bauer -- Chief Executive Officer

Yeah. That's a great question, Shaul. I think every time we had a setback, I think as a Company, we are wired to learn and to come back stronger, whether that's in terms of things we can take on from a product development and R&D point of view, whether it's our own security posture, whether it's our operations. But I think one of the key things that we've learned historically is that being very open and transparent with our customers and really engaging with them as part of their teams is crucial to getting through some of these setbacks. And so what you've seen from Mimecast, particularly in this incident, is how open we've been. And as soon as we have information that customers can use to mitigate risk, we lead with that regardless of how difficult or complicated or how much we might worry about the impact of doing that. So we're very kind of forthcoming with that.

I think there is a lot of things that one learns when one has an encounter with a sophisticated adversary like this. And certainly, we are going to absolutely indulge in all of those learnings and look at all of the opportunities that we can extract from that to both develop products on our side, as well as sort of improve the robustness of Mimecast as an organization.

Robert Sanders -- Director of Investor Relations

Operator, we'll take one final question.

Operator

Thank you. Our next question comes from Brian Essex with Goldman Sachs. You may proceed with your question.

Brian L. Essex -- Goldman Sachs -- Analyst

Hi. Good morning, and thank you for taking the question. I really appreciate it. Sorry about this if this was covered previously, but just had a question on -- from a geo perspective, thoughts on Europe and the U.K. We've heard in other segments that U.K. was pretty weak, but just from a geo perspective, where you saw strength and weakness, and what your outlook is given the, I guess, maybe softer 1Q and then, flatter full -- or I guess, flatter full-year guidance that you've given?

Rafe Brown -- Chief Financial Officer

Yeah. Thanks. I think our experience in the U.K. is in line -- both the U.K. and South Africa are very much feeling the impact of the COVID crisis and the impact on the economy. I will say, our U.K. team I think is optimistic though as we look forward. Some of this is, Brexit is now behind everyone, and we're still moving forward. So it's having some certainty there, is giving -- at least to the degree we are having, is giving our sales team some confidence when they look out across the year as a whole.

Likewise, in COVID, with people getting vaccinated, I think there is a general sense of optimism, but to be sure, it hasn't really shown up yet in certainly through Q3. And frankly, I think until the COVID crisis is more in check, the U.K. and South Africa are going to struggle a bit. And those are very important economies to us. Where I did note a little bit of a positive is, as the third quarter went on, in December, we started to see some positive momentum, at least a bit with some of our customers late in the quarter. And so there was -- again, this is -- we should be moderate here like it's -- but there was certainly some positive indications that companies in the U.S. or North America certainly were starting to look beyond the COVID crisis and getting back to work.

Brian L. Essex -- Goldman Sachs -- Analyst

Got it. That's helpful. And again, I apologize if you discussed it already, but interested in competitive dynamics upmarket, particularly what you're seeing in the pipeline and what you've seen in the quarter? The ability to land larger customers, how large I guess might those customer wins be? And is it significantly larger than you've seen in the past or are you just penetrating a substantial segment of the larger enterprise market?

Peter Bauer -- Chief Executive Officer

Yes. That's right. We feel really good about that enterprise market opportunity. I think in the prepared remarks I called out that we had 24 $100,000[Phonetic] plus deals. And then, also, some really nice anecdotal examples of large account wins with tens of thousands of seats, some north of 100,000 seats. So we think that very large enterprises have sophisticated needs that Mimecast is extremely capable of addressing, and that's being proven out each quarter as we add more of these very large enterprises to our platform. So yes, significant opportunity, no particular limits in terms of where we feel we can hint now as we've evolved as a Company, as we've built our technology and our engagement teams, and yes.

Brian L. Essex -- Goldman Sachs -- Analyst

Okay. Great. Very helpful. Thank you.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Peter Bauer for any further remarks.

Peter Bauer -- Chief Executive Officer

Thanks for joining our FY 2022 -- Sorry, FY 2021 Q3 earnings announcement this morning. Thanks for those on the West Coast who got up early to join us. Have a great rest of the week. And we look forward to updating you in three months or so those time.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Robert Sanders -- Director of Investor Relations

Peter Bauer -- Chief Executive Officer

Rafe Brown -- Chief Financial Officer

Matthew G. Hedberg -- RBC Capital Markets -- Analyst

Catharine A. Trebnick -- Colliers Securities -- Analyst

Steve Koenig -- SMBC Nikko -- Analyst

Matt -- JP Morgan -- Analyst

Terrell F. Tillman -- Truist Securities -- Analyst

Joe -- Jefferies -- Analyst

Keith F. Bachman -- BMO Capital Markets -- Analyst

Nehal S. Chokshi -- Northland Securities -- Analyst

Shaul Eyal -- Oppenheimer & Co., Inc. -- Analyst

Brian L. Essex -- Goldman Sachs -- Analyst

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