September 20, 2017 | 2:48 PM by Jay Kunstman | jkunstman@jaguaranalytics.com

Mimecast (MIME) – Opportunity in Email Security

Through its security, archiving, and cloud services, Mimecast protects business emails and delivers email risk management in a single, fully integrated subscription service. It currently protects close to 25,000 customers and millions of users worldwide against targeted attacks, data leaks, malware, and spam.

Per the company’s recent Investor Presentation, they are quick to highlight their highly diverse revenue base:

Before discussing potential catalysts, let’s revisit the company’s Q2 earnings report:

-EPS of $0.01 vs $0.00 estimate – Beat
-Revenue of $58.2M vs $54.93M estimate – Beat
-Total Revenue increased 40% Y/Y
-Revenue Retention was 111% vs 110% Y/Y
-Added 900 New Customers

In a post-earnings note, Needham analyst Alex Henderson would reiterate his Buy rating and raise his price target from $33 to $35 and would say, “The company delivered another beat and raise quarter with improvements on virtually every metric. Strong new customer wins, strong uptake of the TTP Threat Protection product licenses, and improving customer retention rate of 111% up from 110% demonstrate the health and visibility of its strong business outlook. Mimecast also reported an increase in customers using Office 365 purchasing their product, up to 24% of customers from 21% at year-end 2016.”

Potential Catalysts

Jefferies analyst John DiFucci has highlighted several key points investors should keep an eye on that can help push shares higher:

Office365 – At the end of Q2, about 24% of Mimecast’s customer base was using Microsoft Office 365, which represents an increase from 21% in the prior quarter and 14% from the end of fiscal year 2016. Additionally, management noted that this has provided a rich customer base, with superior take-rates across the platform, including 72% continuity take-rate of customers on O365 versus 60% overall, 53% for archiving versus 40% overall, and >50% on Target Threat Protection versus 42% overall. Jefferies argues that this is important, as many investors have been concerned that some companies, particularly smaller organizations, might forgo MIME’s feature-rich offering for MSFT’s basic security and archive functionality bundled with O365.

Insight – Management highlighted the recent partnership with Insight, which is a large security reseller, for North American distribution. The company continues to build out this channel, as it positions itself to better address upper-mid-market and enterprise customers.

Sync & Recover – Management highlighted this recently-introduced solution, which will be sold as an add-on for archiving customers. While this solution is not meant to replace full-scale backup and recovery solutions, Jefferies believes the gradual expansion of the platform will be accretive to the company’s results overtime.

One risk, however, that investors should keep in mind is that the company will begin to hit more difficult year-ago comps, as total constant currency revenue growth accelerated from 31% in F1Q17 to about 36% in F2Q17, 38% in F3Q17, and 45% in F4Q17.

RBC Capital Meeting

On September 10th, RBC Capital analyst Matthew Hedberg was out with a research note after their meeting with management in which they came away feeling better about the company’s position and opportunity in email security.

In the note, they highlighted a few catalysts (some of which we already highlighted above):

1. The cloud portion of McAfee end-of-life was largely over in January with the company likely doing better than it thought it would on the opportunity. From here, the on-premise opportunity should last for two-three years, though given the larger on premise deployments won’t likely represent the same potential as cloud. Finally there should begin an opportunity to upsell products to cloud customers as contracts anniversary, particularly for those that only initially adopted Security.

2. With the introduction of Internal Email Protect and recent launch of Sync & Recover, products total nine and the potential revenue/user/year moves to $100 vs. an average of $35 now. We like that customers continue to adopt more products with 30% now using four or more and that gross margins are in the 90-93% range for customers with seven products vs. 74% currently and a long term operating model target of 72-75%.

3. The opportunity around Office 365 remains early with the percentage of Mimecast customers using O365 (24% vs. 16% Y/Y) likely indicative of the larger adoption progress. We like that O365 customers tend to adopt more products than customers overall with Continuity a natural add-on in our mind (72% of O365 customers) and a general rethinking of IT infrastructure upon adoption likely driving Archiving (53% of O365 customers) as that function is moved to the cloud as well.

#MIME#MSFT

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