MIMECAST The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the (1) unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the fiscal year endedMarch 31, 2021 , included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission , or theSEC , onMay 27, 2021 . This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the "Exchange Act." These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. In particular, statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to, statements concerning our strategy and operational and growth initiatives, the impacts of the COVID-19 pandemic and related market and economic conditions on our business, results of operations and financial condition, fluctuations in foreign exchange rates, the security of our network, products and services, statements regarding the recently disclosed security incident and our current understanding of the identity and likely targets of the sophisticated threat actor, the scope and impact of the attack, and the results to date of our investigation, are forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled "Risk Factors" in this Quarterly Report on Form 10-Q and set forth in our otherSEC filings, including our Annual Report on Form 10-K filed with theSEC onMay 27, 2021 . We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We are a leading global provider of next generation cloud security and risk management services for email and corporate information. Our integrated suite of proprietary cloud services protects customers of all sizes from the significant business and data security risks they are exposed to through their email and other corporate systems. Our Email Security 3.0 and Cyber Resilience Extension offerings are designed to protect customers from today's rapidly changing security environment. We developed our proprietary cloud architecture to offer customers a comprehensive cyber resilience strategy. Our Email Security 3.0 strategy addresses threats in three distinct zones: at the email perimeter (Zone 1); inside the network and the organization (Zone 2); and beyond the perimeter (Zone 3). Additionally, our Cyber Resilience Extensions expand resilience to other critical elements of an organization's digital infrastructure. Our primary offerings include: email security; email continuity and sync & recover; email archiving; awareness training; web security; DMARC analyzer; CyberGraph; brand exploit protection; and threat intelligence and our API ecosystem. We operate our business as a software-as-a-service, or SaaS, model with renewable annual subscriptions. Customers enter into annual and multi-year contracts to utilize various components of our services. Our subscription fee includes the use of the selected service and technical support. We believe our technology, subscription-based model, and customer support have led to our high net revenue retention rate, which has helped us drive our strong revenue growth. We have historically experienced significant revenue growth from our existing customer base as they renew our services and purchase additional products. We market and sell our services to organizations of all sizes across a broad range of industries. As ofJune 30, 2021 , we provided our services to approximately 40,600 customers and protected millions of their employees across the world. We generate sales through our network of channel partners as well as through our direct sales force. Our growth and future success depend on our ability to expand our customer base, sell additional services to our existing customers, and retain our customers. In the three months endedJune 30, 2021 , we generated 50% of our revenue outside ofthe United States , with 28% generated from theUnited Kingdom , 11% fromSouth Africa and 11% from the rest of the world. In the three months endedJune 30, 2020 , we generated 47% of our revenue outside ofthe United States , with 29% generated from theUnited Kingdom , 10% fromSouth Africa and 9% from the rest of the world. Our most significant growth market isthe United States . We also believe that there is a large opportunity in our other existing markets. We intend to make significant investments in sales and marketing to continue expanding our customer base in our target markets. We were founded in 2003 in theUnited Kingdom with a mission to make email safer and better, and to transform the way organizations protect, store and access their email and corporate information. Our Mimecast Email Security 3.0 offerings include Mimecast Email Security, Mimecast Targeted Threat Protection, Awareness Training, Internal Email Protect, DMARC Analyzer, Brand Exploit Protect, and CyberGraph. Our CyberGraph offering was launched in June of fiscal 2022. Our Cyber Resilience Extensions include Mimecast Enterprise Information Archiving, Mimecast Email Continuity, including Sync & Recover,Mimecast 19 --------------------------------------------------------------------------------
Web Security that provides a Domain Name System, or DNS, solution alongside our core email offerings, Mimecast Secure Messaging, Mimecast Privacy Pack, and Mimecast Large File Send.
Recent Developments
Global Covid-19 Pandemic. The global COVID-19 pandemic continues to evolve, and to date has led to the implementation of various responses, including global government-imposed quarantines, stay-at-home orders, travel restrictions, mandated business closures and other public health safety measures. These efforts have caused significant societal and economic disruption worldwide, including in all of the regions in which we operate our business and sell our products and services. COVID-19 infection rates declined somewhat during the late spring and summer of 2020 but increased dramatically in the fall and early winter of 2020 in many locations, which caused governments to reinstate, or consider reinstating, some restrictions. The widespread distribution of effective vaccines and continued containment efforts have helped substantially to stabilize infection rates, but, more recently, the rise in variants of the original virus has led to localized outbreaks in many locations, including in many of the countries in which we operate. We remain committed to supporting our employees, customers and partners, and their communities during the pandemic. As a result of the COVID-19 pandemic we took a number of actions, which included: (i) instituting a closure of all of our global offices, including our global headquarters inLondon, United Kingdom and our offices inthe United States , and shifting to a remote working environment for all of our employees; (ii) implementing a travel ban, (iii) cancelling or shifting to virtual-only customer, industry and employee events; and (iv) establishing an employee support fund to offset the impact of the pandemic on our more vulnerable employees. The expected duration of these actions is uncertain. More recently, we have opened some of our smaller global offices on a significantly limited basis and in accordance with government requirements and plan to do the same at our two primary offices located inLondon, United Kingdom andLexington, Massachusetts in the summer of 2021. We expect, however, that the transition back to normal operations will in any event take significant time, perhaps several months. We believe that the global COVID-19 pandemic and the resulting societal and economic disruption has negatively impacted and will continue to negatively impact our business and results of operations in a number of ways. Demand for our products and services has been and may continue to be negatively impacted by a decline in the rate of IT spending and a delay in purchasing decisions as IT and security staff focus on addressing the disruption to their businesses, which may impact sales to prospects and existing customers and increase customer attrition. Additionally, the global COVID-19 pandemic and the governmental and economic responses have impacted some industries, such as travel, hospitality and retail, more significantly than others. Our global sales and marketing operations have been disrupted as we have moved to a remote working environment and canceled many customer and industry events. Some customers have requested extended payment terms, have reduced the number of seats that they purchase, or have not increased the number of seats as they historically have, and we expect that these trends will continue, or potentially accelerate if the economy worsens. The economic disruption may also negatively impact the collectability of our accounts receivables as customers experience extreme distress. We have been closely monitoring the impact of the global COVID-19 pandemic on all aspects of our business, including how it will impact our operations, and we may take further precautionary and preemptive actions as may be required by the evolving circumstances. At the current time, the extent to which the global COVID-19 pandemic may affect our business, results of operations and financial condition is uncertain. See Part II, Item 1A, "Risk Factors - The global COVID-19 pandemic, including the related containment efforts, has had, and will likely continue to have, certain negative impacts on our business and operations, and we are unable to predict with certainty the extent to which it may continue to adversely affect our business, results of operations and financial condition." Security Incident. InJanuary 2021 , we became aware of a security incident later determined to be conducted by the same sophisticated threat actor responsible for the SolarWinds supply chain attack. We immediately launched an internal forensic investigation. Our investigation was supported by leading third-party forensics and cyber incident response experts atMandiant , a division of FireEye, Inc., and in coordination with law enforcement to aid their investigation into this threat actor. During our investigation, we learned that the threat actor used the SolarWinds supply-chain compromise to gain access to part of our production grid environment. Using this entry point, the threat actor accessed certainMimecast -issued certificates and related customer server connection information. The threat actor also accessed a subset of email addresses and other contact information, as well as encrypted and/or hashed and salted credentials. In addition, the threat actor accessed and downloaded a limited number of our source code repositories, but we found no evidence of any modifications to our source code nor do we believe there was any impact on our products. As the investigation progressed, we issued a series of advisories to affected customers, including recommended precautionary steps to mitigate risk and, in some cases, to address regulatory requirements. Our forensic investigation was completed inMarch 2021 and we have eliminated the threat actor's access to our environment. We have taken a number of actions to prevent future access to our environment and we will continue to monitor for threats and take precautionary steps as needed. 20 -------------------------------------------------------------------------------- We are subject to risk and significant uncertainties as a result of this security incident, including those described in Part II, Item 1A, "Risk Factors - Data security and integrity are critically important to our business, and breaches of our information and technology networks and unauthorized access to a customer's data, including our recent security incident, could harm our business and operating results" below. While our investigation is complete, there can be no assurance as to what the overall impact of these events will be. These types of events often have cascading impacts that unfold over time and may result in a loss of revenue, a diminution of our business prospects and incremental costs, including costs associated with litigation or investigations by regulatory authorities, any of which may adversely impact our financial results. We have incurred and expect to incur significant costs related to the security incident. For the year endedMarch 31, 2021 , we recorded$0.8 million of pre-tax expenses related to the security incident, net of anticipated insurance recoveries. For the three months endedJune 30, 2021 , expenses related to the security incident were not material. Expenses include costs of the forensic investigation, remediation costs, and legal and other professional services. It is also expected that we will continue to incur costs related to our response, remediation, and investigatory efforts relating to this security incident. While we have cyber insurance coverage, the amount of such insurance may be insufficient to compensate us for any expenses or losses that may result from the security incident or the insurance carrier may refuse to reimburse us for certain costs under the terms of the policy. The full scope of the costs and related impacts of the security incident, including the availability of insurance to offset some of these costs, cannot be estimated at this time.
Key Factors Affecting Our Performance
We believe that the growth of our business and our future success are dependent upon a number of key factors, including the following:
Acquisition of new customers. We employ a sales strategy that focuses on acquiring new customers, through our direct sales force and network of channel partners, and selling additional products to existing customers. Acquiring new customers, particularly large, enterprise customers, is a key element of our continued success, growth opportunity and future revenue. We have invested in and intend to continue to invest in our direct sales force and channel partners. During the twelve months endedJune 30, 2021 , our customer base increased by approximately 1,900 organizations. Selling of additional services to existing customers. Our direct sales force, together with our channel partners and dedicated customer experience team, seek to generate additional revenue from our existing customers by adding more of their employees to our services and selling additional services. We continue to believe a significant opportunity exists for us to sell additional services to current customers as they experience the benefits of our services and we address additional business use cases. Investment in growth. We have invested in and intend to continue to invest in the expansion of our operations, headcount and software development to both enhance our current offerings and build new features and products. We expect our total operating expenses to increase, particularly as we continue to expand our sales operations, marketing activities and research and development team. We intend to continue to invest in our sales, marketing and customer experience organizations to drive additional revenue and support the growth of our customer base. Investments we make in our sales and marketing and research and development organizations will occur in advance of experiencing the full benefit from such investments. For the year endingMarch 31, 2022 , we plan to continue increasing the size of our sales force, investing in the development of additional marketing content and increasing the size of our research and development team. Currency fluctuations. We conduct business inthe United States and in other countries inNorth America , theUnited Kingdom and in other countries inEurope ,South Africa and in other countries inAfrica ,Australia and theUAE . As a result, we are exposed to risks associated with fluctuations in currency exchange rates, particularly between theU.S. dollar, the British pound and the South African rand. In the three months endedJune 30, 2021 , 53% of our revenue was denominated inU.S. dollars, 26% in British pounds, 11% in South African rand and 11% in other currencies. Given that the functional currency of our subsidiaries is generally the local currency of each entity, but our reporting currency is theU.S. dollar, devaluations of the British pound, South African rand and other currencies relative to theU.S. dollar impacts our profitability. We believe that the global COVID-19 pandemic could impact some or all of these key factors. See Part II, Item 1A, "Risk Factors - The global COVID-19 pandemic, including the related containment efforts, has had, and will likely continue to have, certain negative impacts on our business and operations, and we are unable to predict with certainty the extent to which it may continue to adversely affect our business, results of operations and financial condition." 21 --------------------------------------------------------------------------------
Key Performance Indicators
In addition to traditional financial metrics, such as revenue and revenue growth
trends, we monitor several other key performance indicators to help us evaluate
growth trends, establish budgets, measure the effectiveness of our sales and
marketing efforts and assess operational efficiencies. The key performance
indicators that we monitor are as follows:
Three months ended June 30,
2021 2020
(dollars in thousands)
Revenue constant currency growth rate (1) 15 % 21 %
Gross profit percentage 76 % 75 %
Free cash flow (1) $ 31,605 $ 18,534
Adjusted EBITDA (1) $ 38,593 $ 25,665
As of June 30,
2021 2020
Net revenue retention rate 105 % 106 %
Total customers (2) 40,600 38,600
(1) Adjusted EBITDA, free cash flow, and revenue constant currency growth rates
are non-GAAP financial measures. For a reconciliation of Adjusted EBITDA,
free cash flow and revenue constant currency growth rates to the nearest
comparable GAAP measures, see "Reconciliations of Non-GAAP Financial
Measures" below.
(2) Reflects the customer count on the last day of the period rounded to the
nearest hundred customers. We define a customer as an entity with an active
subscription contract as of the measurement date. A customer is typically a
parent company or, in a few cases, a significant subsidiary that works with
us directly. In determining the number of customers, we do not include
customers we acquired as a result of our acquisition of
or DMARC Analyzer, which transact with us on a credit card basis.
Revenue constant currency growth rate. We believe revenue constant currency growth rate is a key indicator of our performance as it measures how we are executing on our strategy exclusive of currency fluctuations, which are beyond our control. We calculate revenue constant currency growth rate by translating revenue from entities reporting in foreign currencies intoU.S. dollars using the comparable foreign currency exchange rates from the prior fiscal period. For further explanation of the uses and limitations of this non-GAAP measure and a reconciliation of our revenue constant currency growth rate to revenue, as reported, the most directly comparable GAAP measure, "Reconciliations of Non-GAAP Financial Measures" below. We expect our constant currency growth rate will decline in the fiscal year endedMarch 31, 2022 as compared to the prior fiscal year. Gross profit percentage. We believe gross profit percentage is a key indicator of our efficiency in offering our services to our customers. Gross profit percentage is calculated as gross profit divided by revenue. Our gross profit percentage has seen growth over the past three years and we expect it to remain relatively consistent for the year endingMarch 31, 2022 ; however, it has fluctuated and will continue to fluctuate on a quarterly basis due to timing of the addition of hardware and employees to serve our growing customer base. Gross profit also includes amortization of intangible assets related to acquired businesses. We provide our services in each of the regions in which we operate. Costs related to supporting and hosting our product offerings and delivering our services are incurred in the region in which the related revenue is recognized. As a result, our gross profit percentage in actual terms is consistent with gross profit on a constant currency basis. Free cash flow. We believe free cash flow is a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after the acquisition of property, equipment and capitalized software, can be used for strategic opportunities, including investing in our business, and strengthening the balance sheet. Analysis of free cash flow facilitates management's comparisons of our operating results to competitors' operating results. We define free cash flow as net cash provided by operating activities minus purchases of property, equipment and capitalized software. For further explanation of the uses and limitations of this non-GAAP measure and a reconciliation of our free cash flow to the most directly comparable GAAP measure, net cash provided by operating activities, see "Reconciliations of Non-GAAP Financial Measures" below. Adjusted EBITDA. We believe that Adjusted EBITDA is a key indicator of our operating results. We define Adjusted EBITDA as net income (loss), adjusted to exclude: depreciation, amortization, disposals and impairment of long-lived assets, acquisition-related gains and expenses, litigation-related expenses, share-based compensation expense, restructuring expense, interest income and interest expense, the benefit from (provision for) income taxes and foreign exchange income (expense). For further explanation of the uses and limitations of this non-GAAP measure and a reconciliation of our Adjusted EBITDA to the most directly comparable GAAP measure, net income, see "Reconciliations of Non-GAAP Financial Measures" below. We expect that our Adjusted EBITDA will continue to 22 --------------------------------------------------------------------------------
increase compared to the prior fiscal year; however, we expect that our operating expenses will also increase in absolute dollars as we focus on expanding our sales and marketing teams and growing our research and development capabilities.
Net revenue retention rate. We believe that our ability to retain customers is an indicator of the stability of our revenue base and the long-term value of our customer relationships. Our net revenue retention rate is driven by our customer renewals and upsells. We calculate our net revenue retention rate by annualizing constant currency revenue recorded on the last day of the measurement period for only those customers in place throughout the entire measurement period. This revenue includes renewed revenue contracts as well as additional revenue derived from the sale of additional seat licenses as well as additional services sold to these existing customers. We divide the result by revenue on a constant currency basis on the first day of the measurement period for all customers in place at the beginning of the measurement period. The measurement period is the trailing twelve months. The revenue on a constant currency basis is based on the average exchange rates in effect during the respective period. Total customers. We believe the total number of customers is a key indicator of our financial success and future revenue potential. We define a customer as an entity with an active subscription contract as of the measurement date. A customer is typically a parent company or, in a few cases, a significant subsidiary that works with us directly. In determining the number of customers, we do not include customers we acquired from DMARC Analyzer that transact with us on a credit card basis. We expect to continue to grow our customer base through the addition of new customers in each of our markets.
Reconciliations of Non-GAAP Financial Measures
Revenue constant currency growth rate
In order to determine how our business performed exclusive of the effect of foreign currency fluctuations, we compare the percentage change in our revenue from one period to another using a constant currency. To determine the revenue constant currency growth rate for each period, revenue from entities reporting in foreign currencies was translated intoU.S. dollars using the comparable prior period's foreign currency exchange rates. For example, the average rates in effect for the three months endedJune 30, 2020 were used to convert revenue for the three months endedJune 30, 2021 and the revenue for the comparable prior period endedJune 30, 2020 , rather than the actual exchange rates in effect during the respective periods. Revenue constant currency growth rate is a non-GAAP financial measure. A reconciliation of this non-GAAP measure to its most directly comparable GAAP measure for the respective periods can be found in the table below. Three months endedJune 30, 2021 2020 (dollars
in thousands) Reconciliation of Revenue Constant Currency Growth Rate: Revenue, as reported
$ 142,549 $ 115,176 Revenue year-over-year growth rate, as reported 24 % 16 % Estimated impact of foreign currency fluctuations (9 )% 5 % Revenue constant currency growth rate 15 % 21 % The impact of foreign exchange rates is highly variable and difficult to predict. We use revenue constant currency growth rate to show the impact from foreign exchange rates on the current period revenue growth rate compared to the prior period revenue growth rate using the prior period's foreign exchange rates. In order to properly understand the underlying business trends and performance of our ongoing operations, we believe that investors may find it useful to consider the impact of excluding changes in foreign exchange rates from our revenue growth rate. We believe that presenting this non-GAAP financial measure in this Quarterly Report on Form 10-Q provides investors greater transparency to the information used by our management for financial and operational decision-making and allows investors to see our results "through the eyes" of management. We also believe that providing this information better enables our investors to understand our operating performance and evaluate the methodology used by management to evaluate and measure such performance. However, this non-GAAP measure should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. For example, revenue constant currency growth rates, by their nature, exclude the impact of foreign exchange, which may have a material impact on GAAP revenue. Non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and therefore other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. 23 --------------------------------------------------------------------------------
Free cash flow
Free cash flow is a non-GAAP financial measure that we define as net cash provided by operating activities minus purchases of property, equipment and capitalized software. We believe free cash flow provides investors and other users of our financial information useful information about the amount of cash generated by the business that, after the acquisition of property, equipment and capitalized software, can be used for strategic opportunities, including investing in our business, and strengthening the balance sheet. Analysis of free cash flow facilitates management's comparisons of our operating results to competitors' operating results. A limitation of using free cash flow versus the GAAP measure of net cash provided by operating activities as a means for evaluating our company is that free cash flow does not represent the total increase or decrease in the cash balance from operations for the period because it excludes cash used for capital expenditures during the period. Management compensates for this limitation by providing information about our capital expenditures on the face of the cash flow statement and in the "Liquidity and Capital Resources" section below. We do not place undue reliance on free cash flow as a measure of operating performance. This non-GAAP measure should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using a non-GAAP financial measure, including that other companies may calculate this measure differently than we do, limiting the usefulness of those measures for comparative purposes.
The following table presents a reconciliation of net cash provided by operating activities to free cash flow:
Three
months ended
2021 2020
Reconciliation of Free Cash Flow: Net cash provided by operating activities$ 40,700 $ 29,305 Purchases of property, equipment and capitalized software (9,095 ) (10,771 ) Free cash flow$ 31,605 $ 18,534 Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure that we define as net income, adjusted to exclude: depreciation, amortization, disposals and impairment of long-lived assets, acquisition-related gains and expenses, litigation-related expenses, share-based compensation expense, restructuring expense, interest income and interest expense, the benefit from (provision for) income taxes and foreign exchange income (expense).
We believe that Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and facilitates comparisons with our peer companies, many of which use a similar non-GAAP financial measure to supplement their GAAP results.
We use Adjusted EBITDA in conjunction with traditional GAAP operating
performance measures as part of our overall assessment of our performance, for
planning purposes, including the preparation of our annual operating budget, to
evaluate the effectiveness of our business strategies, and to communicate with
our board of directors concerning our financial performance.
We do not place undue reliance on Adjusted EBITDA as a measure of operating
performance. This non-GAAP measure should not be considered as a substitute for
other measures of financial performance reported in accordance with GAAP. There
are limitations to using a non-GAAP financial measure, including that other
companies may calculate this measure differently than we do, that it does not
reflect our capital expenditures or future requirements for capital expenditures
and that it does not reflect changes in, or cash requirements for, our working
capital.
24
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The following table presents a reconciliation of net income to Adjusted EBITDA:
Three months ended June 30,
2021 2020
(in thousands)
Reconciliation of Adjusted EBITDA:
Net income $ 10,072 $ 3,138
Depreciation, amortization and disposals of
long-lived assets 9,876 8,852
Interest expense, net 378 706
Provision for income taxes 365 613
Share-based compensation expense 17,388 13,653
Foreign exchange expense (income) 514 (1,662 ) Acquisition-related expenses (1) - 365 Adjusted EBITDA$ 38,593 $ 25,665
(1) Acquisition-related expenses relate primarily to legal and other professional
fees incurred for acquisition activity in each respective period. See Note 10
to the unaudited condensed consolidated financial statements, included
elsewhere in this Quarterly Report on Form 10-Q for further information.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with principles generally accepted inthe United States . The preparation of these condensed consolidated financial statements requires us to use estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the estimates and assumptions involved in revenue recognition, deferred revenue, goodwill and long-lived asset impairment assessments, accounting for income taxes and share-based compensation have the greatest potential impact on our condensed consolidated financial statements and consider these to be our critical accounting policies. Historically, our estimates and assumptions relative to our critical accounting policies have not differed materially from actual results. For further information on our critical and other significant accounting policies, see the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with theSEC onMay 27, 2021 . There have been no changes to our significant accounting policies sinceMarch 31, 2021 .
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months endedJune 30, 2021 that are of significance or potential significance to us as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K filed with theSEC onMay 27, 2021 .
Components of Consolidated Statements of Operations
Revenue
We generate substantially all of our revenue from subscription fees paid by
customers accessing our cloud services and by customers purchasing additional
support beyond the standard support that is included in our basic subscription
fees. A small portion of our revenue consists of related professional services
and other revenue, which consists primarily of performance obligations related
to set-up, ingestion, and training fees.
We generally license our services on a price per employee basis under annual
contracts. In some instances, we receive upfront payments, which are determined
to be material rights to a discount upon renewal. In these instances, we
recognize revenue related to the upfront payment over the estimated customer
benefit period, which has been determined to be six years.
25
--------------------------------------------------------------------------------Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
We recognize revenue ratably on a straight-line basis over the subscription term, which begins when we have given the customer access to our SaaS solutions. Our subscription contracts are typically one year in duration and do not contain refund-type provisions.
Our professional services contracts are recognized based on out-put measures of performance.
We serve approximately 40,600 customers in multiple industries, and our revenue is not concentrated with any single customer or industry. For the three months endedJune 30, 2021 and 2020, no single customer accounted for more than 1% of our revenue, and our largest ten customers accounted for less than 10% of our revenue in aggregate. Cost of revenue Cost of revenue primarily consists of expenses related to supporting and hosting our product offerings and delivering our professional services. These costs consist primarily of personnel and related costs including salaries, benefits, bonuses and share-based compensation expense related to the management of our data centers, our customer support team and our professional services team. In addition to these expenses, we incur third-party service provider costs such as data center and networking expenses, allocated overhead costs, depreciation expense and amortization expense related to capitalized software and acquired intangible assets. We allocate overhead costs, such as rent and facility costs, information technology costs and employee benefit costs to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category. We expect our cost of revenue to increase in absolute dollars due to expenditures related to the purchase of hardware, expansion and support of our data center operations and customer support teams. We also expect that cost of revenue as a percentage of revenue will remain relatively consistent for the year endingMarch 31, 2022 and will decrease over time as we are able to achieve economies of scale in our business, although it may fluctuate from period to period depending on the timing of significant expenditures. To the extent that our customer base grows, we intend to continue to invest additional resources in expanding the delivery capability of our products and other services. The timing of these additional expenses could affect our cost of revenue, both in terms of absolute dollars and as a percentage of revenue in any particular quarterly or annual period.
Research and development expenses
Research and development expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, share-based compensation expense, costs of server usage by our developers and allocated overhead costs. We expense all research and development costs as they are incurred. We have focused our efforts on developing new versions of our SaaS technology with expanded features. Our technology is constantly being refined and, as such, we do not capitalize development costs. We believe that continued investment in our technology is important for our future growth. As a result, we expect research and development expenses to increase in absolute dollars as we make further investments in developing our Mime | OS™ platform, improving our existing services and creating new features and products. Research and development expenses as a percentage of total revenue may fluctuate on a quarterly basis but we expect it to remain relatively consistent in the coming fiscal year as a result of the expected investments noted above. The full scope of the costs and related impacts of our recent security incident, including the availability of insurance to offset some of these costs, cannot be estimated at this time.
Sales and marketing expenses
Sales and marketing expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, commissions and share-based compensation expense. In addition to these expenses, we incur costs related to marketing and promotional events, online marketing, product marketing and allocated overhead costs. We expense all costs as they are incurred, excluding sales commissions identified as incremental costs to obtain a contract, which are capitalized and amortized over the life of our customers, which we estimate to be six years. Sales and marketing expenses increased in the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 as we continued to expand our sales and marketing efforts globally, particularly inthe United States . We expect that our sales and marketing expenses will continue to increase in absolute dollars in the year endingMarch 31, 2022 but remain relatively consistent as a percentage of revenue as compared to fiscal 2021. New sales personnel require training and may take several months or more to achieve productivity; as such, the costs we incur in connection with the hiring of new sales personnel in a given period are not typically offset by increased revenue in that period and may not result in new revenue if these sales personnel fail to become productive. We expect to increase our investment in sales and marketing as we add new services, and as we continue to focus on sales to large, enterprise prospects, which will increase these expenses in absolute dollars. Over the longer term, we believe that sales and marketing expenses as a percentage of revenue will vary depending upon the mix of revenue from new and existing customers, as well as changes in the productivity of our sales and marketing programs. The full scope of the costs and related impacts of our recent security incident, including the availability of insurance to offset some of these costs, cannot be estimated at this time. 26 --------------------------------------------------------------------------------
General and administrative expenses
General and administrative expenses consist primarily of personnel and related expenses for executive, legal, finance, information technology and human resources functions, including salaries, benefits, incentive compensation and share-based compensation expense, in addition to the costs associated with professional fees, litigation-related expenses, insurance premiums, other corporate expenses and allocated overhead costs. We expect general and administrative expenses to increase in absolute dollars as we continue to incur additional personnel and professional services costs in order to support business growth, costs associated with acquisitions, legal fees and litigation-related expenses, funding transactions, and others. Over the longer term, we believe that general and administrative expenses as a percentage of revenue will decrease. The full scope of the costs and related impacts of our recent security incident, including the availability of insurance to offset some of these costs, cannot be estimated at this time.
Other income (expense)
Other income (expense) is comprised of the following items:
Interest income
Interest income includes interest income earned on our cash, cash equivalents and investments balances. We expect interest income to vary each reporting period depending on our average cash, cash equivalents and investments balances during the period and market interest rates.
Interest expense
Interest expense consists primarily of interest expense associated with our long-term debt and our finance leases. We expect interest expense in fiscal 2022 associated with our long-term debt to decrease compared to fiscal 2021 primarily due to lower principal balances associated with our long-term debt and the current interest rate environment.
Foreign exchange (expense) income and other, net
Foreign exchange (expense) income and other, net consists primarily of foreign exchange fluctuations related to short-term intercompany accounts, foreign currency exchange gains and losses related to transactions denominated in currencies other than the functional currency for each of our subsidiaries and other non-operating items including sublease income and other income. We expect our foreign currency exchange gains and losses to continue to fluctuate in the future as foreign currency exchange rates change.
Provision for income taxes
We operate in several tax jurisdictions and are subject to tax in each country or jurisdiction in which we conduct business. We account for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases for assets and liabilities using statutory rates. In addition, this method requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Our provision for income taxes for the three months ended
Our provision for income taxes for the three months ended
27
--------------------------------------------------------------------------------Comparison of Period-to-Period Results of Operations
The following table sets forth our condensed consolidated statements of operations data for each of the periods indicated:
Three months ended June 30,
2021 2020
(in thousands)
Revenue $ 142,549 $ 115,176
Cost of revenue 33,549 28,469
Gross profit 109,000 86,707
Operating expenses
Research and development 31,486 22,802
Sales and marketing 48,262 44,043
General and administrative 17,923 17,168
Total operating expenses 97,671 84,013
Income from operations 11,329 2,694
Other income (expense)
Interest income 158 177
Interest expense (536 ) (883 )
Foreign exchange (expense) income and other, net (514 ) 1,763
Total other income (expense), net (892 ) 1,057 Income before income taxes 10,437 3,751 Provision for income taxes 365 613 Net income$ 10,072 $ 3,138 The following table sets forth our condensed consolidated statements of operations data as a percentage of revenue for each of the periods indicated: Three months ended June 30, 2021 2020 Revenue 100 % 100 % Cost of revenue 24 % 25 % Gross profit 76 % 75 % Operating expenses Research and development 22 % 20 % Sales and marketing 34 % 38 % General and administrative 13 % 15 % Total operating expenses 69 % 73 % Income from operations 8 % 2 % Other income (expense) Interest income - % - % Interest expense - % (1 )% Foreign exchange (expense) income and other, net - % 2 % Total other income (expense), net (1 )% 1 % Income before income taxes 7 % 3 % Provision for income taxes - % 1 % Net income 7 % 3 % 28
-------------------------------------------------------------------------------- We have operations in jurisdictions other thanthe United States and generate revenue and incur expenditures in currencies other than theU.S. dollar. The following information shows the effect on certain components of our condensed consolidated statements of operations data for each of the periods indicated below based on a 10% increase or decrease in foreign currency exchange rates assuming that all foreign currency exchange rates move in the same direction at the same time: Three months ended June 30, 2021 2020 (in millions) Revenue $ 7.2 $ 5.1 Cost of revenue 2.0 1.6 Research and development 2.2 1.6 Sales and marketing 2.1 1.8 General and administrative 0.6 0.5
Comparison of the Three Months Ended
Revenue
Three months ended June 30, Period-to-period change
2021 2020 Amount % Change
(dollars in thousands)
Revenue $ 142,549 $ 115,176 $ 27,373 24 %
Revenue increased $27.4 million in the three months ended June 30, 2021 compared
to the three months ended June 30, 2020 . The increase in revenue was primarily
attributable to increases in new customers, including approximately 1,900 new
customers added since June 30, 2020 , a full quarter of revenue related to new
customers added during the first quarter of fiscal 2021 and additional revenue
from customers that existed as of June 30, 2020 . Revenue for the three months
ended June 30, 2021 compared to the three months ended June 30, 2020 was
positively impacted by approximately $9.7 million as a result of the weakening
of the U.S. dollar relative to the British pound, South African rand, and
Australian dollar.
Cost of revenue
Three months ended June 30, Period-to-period change
2021 2020 Amount % Change
(dollars in thousands)
Cost of revenue $ 33,549 $ 28,469 $ 5,080 18 %
Cost of revenue increased $5.1 million in the three months ended June 30, 2021
compared to the three months ended June 30, 2020 , which was primarily
attributable to increases in data center costs of $2.2 million ,
personnel-related costs of $1.1 million , and depreciation expense of $0.6
million . Cost of revenue expenses for the three months ended June 30, 2021 as
compared to the three months ended June 30, 2020 , were negatively impacted by
approximately $2.5 million primarily as a result of the weakening of the U.S.
dollar relative to the British pound and South African rand. Data center costs
increased primarily as a result of the increase in our customer base and
expanding infrastructure, personnel-related costs increased primarily as a
result of salaries and benefits associated with annual merit increases and
increased headcount, and depreciation expense increased primarily as a result of
increased capital expenditures in support of our expanding infrastructure.
As a result of changes in foreign currency exchange rates, gross profit
increased in absolute dollars by approximately $7.2 million for the three months
ended June 30, 2021 as compared to the three months ended June 30, 2020 .
Excluding the impact of changes in foreign currency exchange rates, gross profit
as a percentage of revenue remained consistent as costs related to supporting
and hosting our product offerings and delivering our services are primarily
incurred in the region in which the related revenue is recognized.
29
--------------------------------------------------------------------------------
Operating expenses
Three months ended June 30, Period-to-period change
2021 2020 Amount % Change
(dollars in thousands)
Operating expenses:
Research and development $ 31,486 $ 22,802 $ 8,684 38 %
Sales and marketing 48,262 44,043 4,219 10 %
General and administrative 17,923 17,168 755 4 %
Total operating expenses $ 97,671 $ 84,013 $ 13,658 16 %
Research and development expenses
Research and development expenses increased$8.7 million in the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , which was primarily attributable to increases in personnel-related costs of$2.9 million , professional services costs of$2.6 million , and share-based compensation expense of$2.6 million . Research and development expenses for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 , were negatively impacted by approximately$2.3 million primarily as a result of the weakening of theU.S. dollar relative to the British pound. Personnel-related costs increased primarily as a result of salaries and benefits associated with annual merit increases and increased headcount. Professional services costs increased primarily due to increased consulting fees. Share-based compensation expense increased primarily as a result of the acceleration of expense for certain awards due to changes in requisite service periods and to a lesser extent equity grants issued to employees since the prior year.
Sales and marketing expenses
Sales and marketing expenses increased$4.2 million in the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , which was primarily attributable to increases in personnel-related costs of$4.0 million . Sales and marketing expenses for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 , were negatively impacted by approximately$2.6 million primarily as a result of the weakening of theU.S. dollar relative to the British pound, Australian dollar, and South African rand. Personnel-related costs increased primarily as a result of salaries and benefits associated with increased commissions and annual merit increases. Other income (expense) Three months ended June 30, Period-to-period change 2021 2020 Amount % Change (dollars in thousands) Other income (expense): Interest income $ 158 $ 177 $ (19 ) (11 )% Interest expense (536 ) (883 ) 347 (39 )% Foreign exchange (expense) income and other, net (514 ) 1,763 (2,277 ) nm
Total other income (expense), net
nm
nm - not meaningful
Foreign exchange (expense) income and other, net changed by
Provision for income taxes
Three months ended June 30, Period-to-period change
2021 2020 Amount % Change
(dollars in thousands)
Provision for income taxes $ 365 $ 613 $ (248 ) (40 )%
The provision for income taxes decreased by $0.2 million in the three months
ended June 30, 2021 compared to the three months ended June 30, 2020 . The
decrease in the provision for income taxes was primarily attributable to an
increase in the discrete tax benefits related to excess tax benefits on
share-based compensation realized by U.S. and U.K. employees, offset partially
by the tax on increased earnings.
30
--------------------------------------------------------------------------------Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents, investments, accounts receivable and our Revolving Facility (as defined below). The following table shows net cash provided by operating activities, net cash used in investing activities, and net cash provided by financing activities for the three months endedJune 30, 2021 and 2020: Three months endedJune 30, 2021 2020 (in thousands)
Net cash provided by operating activities
(9,095 ) (10,771 )
Net cash provided by financing activities 12,606 3,963
As of June 30, 2021 and March 31, 2021 , we had cash and cash equivalents of
$338.4 million and $292.9 million , respectively. Net cash provided by operating
activities was $40.7 million for the three months ended June 30, 2021 . In the
year ending March 31, 2022 , we expect net cash provided by operating activities
to increase as compared to the year ended March 31, 2021 . In the year ending
March 31, 2022 , we plan to continue to invest in the development and expansion
of our Mime | OS™ platform to improve on our existing solutions and develop new
services in order to provide more capabilities to our customers. Investments in
capital expenditures in the year ended March 31, 2021 were $38.6 million , of
which $36.6 million related to the expansion of our grid architecture. We expect
fiscal year 2022 capital expenditures to remain relatively consistent with
fiscal year 2021.
Based on our current operating plan, we believe that our current cash and cash
equivalents, Revolving Facility (as defined below) and operating cash flows will
be sufficient to fund our operations for at least the next twelve months from
the date of filing this Quarterly Report on Form 10-Q. Our future capital
requirements may vary materially from those planned and will depend on certain
factors, such as, our growth and our operating results. If we require additional
capital resources to grow our business or to acquire complementary technologies
and businesses in the future, we may seek to sell additional equity or raise
funds through debt financing or other sources. We cannot provide assurance that
additional financing will be available at all or on terms favorable to us. We
had commitments for capital expenditures of approximately $11.5 million as of
June 30, 2021 , primarily related to the expansion of our grid architecture.
Borrowings and Credit Facility
InJuly 2018 , we entered into a Credit Agreement, or the Credit Agreement, by and among us, certain of our subsidiaries party thereto, as guarantors, certain financial institutions party thereto from time to time, as lenders, andJPMorgan Chase Bank, N.A ., as administrative agent, or the Administrative Agent. The Credit Agreement provided the Company with a$100.0 million senior secured term loan, or the Term Loan, and a$50.0 million senior secured revolving credit facility, or the Revolving Facility, and together with the Term Loan, the Credit Facility, which is available to fund working capital and for other corporate purposes, including to finance permitted acquisitions and investments. InJune 2020 , the Credit Agreement was amended to permit us to issue letters of credit in certain additional foreign currencies beyond theU.S. dollar and the British pound (as amended, the Credit Agreement, the Term Loan and the Revolving Facility are referred to herein as the Credit Facility). Total availability under the Revolving Facility is reduced by outstanding letters of credit of$2.2 million . As ofJune 30, 2021 andMarch 31, 2021 , total availability under the Revolving Facility was$30.3 million . InJuly 2020 , we drew down$17.5 million under the Revolving Facility. See Note 12 to the unaudited condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q for further information. Interest under the Credit Facility accrues at a rate between LIBOR plus 1.375% and LIBOR plus 1.875%, based on our ratio of indebtedness to earnings before interest, taxes, depreciation, amortization and certain other adjustments, or Consolidated EBITDA. Based on this ratio, the current interest rate as ofJune 30, 2021 under the Credit Facility is LIBOR plus 1.375%.The InterContinental Exchange Benchmark Administration has announced that it will no longer publish certain tenors of the LIBOR rate starting in 2021. See Item 3, "Quantitative and Qualitative Disclosures About Market Risk" below for further information. The term of the Credit Facility is five years, maturing onJuly 23, 2023 . At the time we entered into the Credit Agreement, we had no existing debt. 31 -------------------------------------------------------------------------------- The Credit Facility has financial covenants that require us to maintain a Consolidated Secured Leverage Ratio (as described below), which commenced onSeptember 30, 2018 , of not more than 3.00 to 1.00 for the four consecutive fiscal quarter period ending on the last day of each fiscal quarter, or the Reference Period, with a step-up to 3.50 to 1.00 for any four-quarter period in which we consummate a permitted acquisition having an aggregate purchase price in excess of$25.0 million . We must also maintain a Consolidated Interest Expense Ratio of 3.00 to 1.00 which commenced onSeptember 30, 2018 and for each Reference Period thereafter. For purposes of the covenants, "Consolidated Secured Leverage Ratio" generally refers to the ratio of Consolidated Funded Debt that is secured by a lien on assets of us or our subsidiaries to Consolidated EBITDA. "Consolidated Funded Debt" generally refers to borrowed money, debt instruments, finance leases, deferred purchase price of property or services (excluding accounts payable in the ordinary course of business) and earn outs that are due and payable. "Consolidated Interest Expense Ratio" generally refers to the ratio of Consolidated EBITDA to cash interest expense with respect to indebtedness, with certain exclusions. The Company was in compliance with all covenants as ofJune 30, 2021 and management reasonably believes it will be in compliance with such covenants over the next 12 months. All obligations under the Credit Agreement are unconditionally guaranteed by all of our material direct and indirect subsidiaries organized under the laws ofthe United States , theUnited Kingdom , the Bailiwick of Jersey, and other jurisdictions agreed to by us and the Administrative Agent, with certain exceptions. These guarantees are secured by substantially all of the present and future property and assets of the guarantors, with certain exclusions. The foregoing summary (and any reference to the Credit Facility contained in this Quarterly Report on Form 10-Q) does not purport to be complete and is qualified in its entirety by reference to the Credit Agreement and the related agreements, which are filed as Exhibits 10.12, 10.13, 10.14, 10.15, 10.16, 10.17, 10.18, 10.19, 10.20 and 10.34 to this Quarterly Report on Form 10-Q and incorporated herein by reference.
Operating activities
For the three months endedJune 30, 2021 , cash provided by operating activities was$40.7 million . The primary factors affecting our operating cash flows during the period were our net income of$10.1 million , adjusted for non-cash items of$17.4 million of share-based compensation expense,$9.9 million for depreciation and amortization of our property, equipment and intangible assets,$8.3 million of amortization of operating lease right-of-use assets, and$4.2 million in amortization of deferred contract costs. The drivers of the changes in operating assets and liabilities were a$8.0 million decrease in operating lease liabilities, a$6.9 million decrease in accrued expenses and other liabilities, a$6.6 million decrease in deferred revenue, a$5.4 million increase in deferred contract costs, and a$1.2 million increase in prepaids and other current assets, partially offset by a$13.9 million increase in accounts receivable and a$4.4 million increase in accounts payable. For the three months endedJune 30, 2020 , cash provided by operating activities was$29.3 million . The primary factors affecting our operating cash flows during the period were our net income of$3.1 million , adjusted for non-cash items of$13.7 million of share-based compensation expense,$7.1 million for amortization of our operating lease right-of-use assets,$8.9 million for depreciation and amortization of our property, equipment and intangible assets, and$2.9 million for amortization of deferred contract costs, partially offset by unrealized currency gains on foreign denominated transactions of$2.7 million . The primary drivers of the changes in operating assets and liabilities were an$8.2 million decrease in operating lease liabilities, a$5.6 million decrease in deferred revenue, a$5.2 million increase in deferred contract costs, and a$2.0 million decrease in accounts payable, partially offset by a$12.4 million decrease in accounts receivable and a$5.3 million increase in accrued expenses and other liabilities primarily due to participation in one-time government programs that allow for payment deferrals due to the global COVID-19 pandemic.
Investing activities
For the three months endedJune 30, 2021 , cash used in investing activities consisted of$9.1 million in purchases of property, equipment and capitalized software, primarily associated with computer equipment purchased in support of our expanding infrastructure. For the three months endedJune 30, 2020 , cash used in investing activities consisted of$10.8 million in purchases of property, equipment and capitalized software, primarily associated with computer equipment purchased in support of our expanding infrastructure.
Financing activities
Cash provided by financing activities of$12.6 million for the three months endedJune 30, 2021 was primarily due to proceeds from issuance of ordinary shares under our equity plans of$22.0 million , partially offset by withholding taxes related to net share settlement of employee stock purchase plan, or ESPP, purchases and vesting of restricted share units, or RSUs, of$7.2 million and payments on debt of$1.9 million . 32 -------------------------------------------------------------------------------- Cash provided by financing activities of$4.0 million for the three months endedJune 30, 2020 was due to proceeds from issuance of ordinary shares under our equity plans of$8.1 million , partially offset by withholding taxes related to net share settlement of ESPP purchases and vesting of RSUs of$2.6 million and payments on debt of$1.3 million .
Net operating loss carryforwards and income tax credits
As ofJune 30, 2021 , we had net operating loss carryforwards in theU.K. ,U.S. federal and state,Australia ,Germany ,Israel , andCanada .U.S. federal net operating losses generated through the fiscal year endingMarch 31, 2018 expire at various dates through 2038 whileU.S. federal net operating losses generated afterMarch 31, 2018 do not expire. Substantially allU.S. state net operating loss carryforwards expire at various dates through 2041. Net operating losses inCanada expire in 2041. Net operating loss carryforwards in theU.K. ,Australia ,Germany andIsrael do not expire. As ofJune 30, 2021 , we hadU.K. income tax credit carryforwards that do not expire. As ofJune 30, 2021 , we hadIsrael income tax credit carryforwards that expire at various dates from 2024 through 2026. In assessing our ability to realize our net deferred tax assets, we considered various factors including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations, to determine whether it is more likely than not that some portion or all of our net deferred tax assets will not be realized. Based upon these factors, we have determined that the uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against our net deferred tax assets.
Contractual obligations and commitments
Our principal commitments consist of obligations under debt facilities, leases for office space, leases for data center facilities, non-lease data center obligations, intangible asset obligations, and capital expenditures. For more information regarding our debt obligations, see Note 12 to the condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q. For more information regarding our lease obligations, see Note 6 to the condensed consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-K. For more information regarding our other contractual commitments associated with agreements that are enforceable and legally binding and that specify all significant terms refer to our Annual Report on Form 10-K filed with theSEC onMay 27, 2021 .
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