424B4 1 d938556d424b4.htm 424B4 424B4
Table of Contents

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-207454

 

7,750,000 Shares

 

LOGO

Mimecast Limited

Ordinary Shares

 

 

This is an initial public offering of ordinary shares of Mimecast Limited. We are selling 7,750,000 ordinary shares.

Prior to this offering, there has been no public market for the ordinary shares. The initial public offering price per share is $10.00. Our ordinary shares have been approved for listing on the NASDAQ Global Select Market under the symbol “MIME”.

See “Risk Factors” on page 13 to read about factors you should consider before buying the ordinary shares.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $ 10.00       $ 77,500,000   

Underwriting discount(1)

   $ 0.70       $ 5,425,000   

Proceeds, before expenses, to us

   $ 9.30       $ 72,075,000   

 

(1) See the section titled “Underwriting” for a description of the compensation payable to the underwriters.

To the extent that the underwriters sell more than 7,750,000 ordinary shares, the underwriters have the option to purchase up to an additional 591,000 shares from us and up to an additional 571,500 shares from the selling shareholders at the initial public offering price less the underwriting discount. We will not receive any of the proceeds from the sale of up to 571,500 shares by the selling shareholders.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on November 24, 2015.

 

Goldman, Sachs & Co.   Barclays   Jefferies   RBC Capital Markets

 

 

Oppenheimer & Co.

 

 

Prospectus dated November 18, 2015


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     35   

Industry and Market Data

     37   

Use of Proceeds

     38   

Dividend Policy

     39   

Capitalization

     40   

Dilution

     42   

Selected Consolidated Financial and Other Data

     44   

Exchange Rate Information

     48   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     49   

A Letter From Our Founders

     79   

Business

     80   

Management

     103   

Related Party Transactions

     116   

Principal and Selling Shareholders

     119   

Description of Share Capital

     122   

Shares Eligible for Future Sale

     133   

Taxation

     135   

Underwriting

     144   

Expenses of the Offering

     150   

Legal Matters

     151   

Experts

     151   

Service of Process and Enforcement of Judgments

     152   

Where You Can Find Additional Information

     153   

Index to Consolidated Financial Statements

     F-1   

 

 

We and the selling shareholders have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the selling shareholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the ordinary shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

For investors outside the United States: We, the selling shareholders and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction, other than the United States, where action for that purpose is required. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our ordinary shares and the distribution of this prospectus outside the United States.

The trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

References in this prospectus to “Mimecast UK” are to Mimecast Limited, which was incorporated under the laws of England and Wales with company number 04698693 on March 14, 2003 as a private company limited by shares, and references to “Mimecast Limited” refer to the company incorporated under the laws of the Bailiwick of Jersey with company number 119119 on July 28, 2015 that is selling its ordinary shares in this offering.


Table of Contents

PROSPECTUS SUMMARY

This summary does not contain all of the information you should consider before buying our ordinary shares. You should read the entire prospectus carefully, especially the “Risk Factors” section beginning on page 13, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 49 and our consolidated financial statements and the related notes appearing elsewhere in this prospectus, before deciding to invest in our ordinary shares.

Company Overview

We are a leading provider of next generation cloud security and risk management services for corporate information and email. Our fully-integrated suite of proprietary cloud services protects customers of all sizes from the significant business and data security risks to which their email system exposes them. We protect customers from today’s rapidly changing threat landscape where email has become a powerful attack vector and data leak concern. We also mitigate the significant business disruption that email failure or downtime causes. In addition, our archiving services secure, store and manage critical corporate communications and information to address growing compliance and e-discovery requirements and enable customers to use this increasing archive of information to improve employee productivity.

Email is a critical tool for organizations of all sizes. Protecting and managing email has become more complicated due to expanding security and compliance requirements and the rapid increase in both the volume and the importance of the information transmitted via email. Organizations are increasingly at risk from security breaches of sensitive data as sophisticated email-based attacks and data leaks have become more common. Additionally, organizations are not just using email for communication, they are also increasing their use of email archives as an active repository of vital corporate information needed to meet compliance requirements and support employee productivity. As a result, email represents one of the highest concentrations of business risk that organizations may face.

We developed our proprietary cloud architecture to offer customers comprehensive email security, continuity and archiving capabilities in a single service that makes it easier for them to protect themselves effectively in a worsening and rapidly changing security and risk environment. Providing a fully-integrated service also simplifies ongoing management and service deployment. Customers can then decommission the often costly and complex point products and on-premises technology they have traditionally used to tackle these risks. We also make it easier for customers to move more of their IT workloads to the cloud.

We serve approximately 15,200 customers and protect millions of their employees across the world. Our service scales effectively to meet the needs of customers of all sizes and we have optimized our sales organization and channel to address each segment effectively. We have more than 600 employees in nine offices in the United States, the United Kingdom, Australia and South Africa. For the fiscal years ended March 31, 2013, 2014 and 2015, our revenues were $66.8 million, $88.3 million and $116.1 million, respectively, representing year-over-year growth of 32% for 2014 and 31% for 2015. Revenue growth on a constant currency basis was 37% and 33% for the fiscal years ended March 31, 2014 and 2015, respectively. For the six months ended September 30, 2014 and 2015, our revenues were $55.5 million and $67.8 million, respectively, representing year-over-year growth for the period of 22%. Growth for this period was 30% on a constant currency basis. Our net losses were $14.3 million and $16.9 million in the fiscal years ended March 31, 2013 and 2014, respectively, and our net income was $0.3 million in the fiscal year ended March 31, 2015. Our net loss for the six months ended September 30, 2015 was $0.1 million.

 



 

1


Table of Contents

Industry Background

A number of key considerations are leading to an increased customer need for email security, continuity and archiving services:

 

    Email is Critical to all Organizations. Email continues to be the primary way organizations exchange information and communicate externally and internally.

 

    The Amount of Critical and Sensitive Data in Email Archives is Growing Rapidly. The email archive is increasingly used by employees as their primary repository to save and access important information. As a result, the volume and value of this data continues to grow.

 

    Email is a Primary Security Target for Advanced Cyber-Attacks. Well organized and funded, including state-backed, hackers and cyber-criminals are using email-based attacks to target organizations to disrupt their operations, steal sensitive corporate data and gain access to valuable intellectual property.

 

    Data Protection, Cybersecurity and Data Privacy are Key Compliance and Regulatory Concerns for all Organizations. Governments, regulators and industry groups globally continue to enact or amend legislation and standards regarding data protection, cybersecurity and data privacy. These laws place growing obligations on organizations of all sizes, particularly those in regulated industries, to store, protect, process, share and transmit data safely, or risk significant sanctions and the threat of civil litigation.

 

    Restrictions IT Teams Put on Email Create New Security Risks. IT teams are under pressure to reduce storage costs and improve infrastructure performance, and this often results in steps that limit unfettered usage of email, driving employees to seek solutions outside the secure corporate network creating new security risks.

 

    Email Downtime is Disruptive to Employee Productivity. Given the critical nature of email for business communication and the importance of its information archive, email outages have become increasingly disruptive and costly because of the resulting impact on employee productivity.

 

    IT Workloads, Including Business Productivity Tools, are Moving to the Cloud. Organizations of all sizes are adopting cloud-based technologies to reduce the cost and complexity of their IT infrastructure and increase performance and flexibility. As organizations consider which workloads to move to the cloud, IT teams are looking beyond moving infrastructure and looking to shift traditional productivity tools to services such as Microsoft’s Office 365 or Google Apps for Work.

 

    Business Email Mailboxes are Moving to the Cloud, but this Creates New Risks to Mitigate. Moving email mailboxes to a single cloud vendor creates new security, continuity and archiving risks that need to be mitigated. These risks have delayed adoption of cloud mailbox services by many organizations, particularly larger enterprises.

 

    Traditional Email Security, Continuity and Archiving Alternatives can be Inadequate and do not Address Increasing Customer Requirements and Protect Against Next Generation Security Threats. To address security and archiving needs, many organizations have deployed a complex array of disparate or point products on-premises, or as cloud-based versions hosted by the vendor. These technologies are typically from multiple vendors and often only address narrow uses and problems. They can also be difficult to integrate and inflexible, as well as complex and expensive to manage as email and data volumes grow.

 



 

2


Table of Contents

Our Market Opportunity

The growing need of organizations to mitigate the risks of email and data security, continuity and archiving has already established a significant industry beyond the mail server. Based on recent Gartner reports, combined spending in markets catering to enterprise information and email security, continuity and archiving, which include Secure Email Gateway, Backup and Recovery Software, E-Discovery Software and Data Loss Prevention, was $9.4 billion in 2014 and will grow to $11.6 billion in 2017. We believe there is a considerable need for a comprehensive integrated cloud solution that can address the needs of customers in these markets.

Our Solution

Our fully-integrated suite of next generation cloud services for security, continuity and archiving, is designed to protect email and deliver comprehensive email risk management beyond the primary mail server. We protect customers from the growing threat to email and the corporate data it contains. We also help organizations securely and cost effectively archive their growing email and file repositories, and ensure email remains available in the event of a primary system failure or scheduled maintenance downtime. The key customer benefits of our service include:

 

    Comprehensive Email and Data Risk Management in a Single, Unified Cloud Service. Our services integrate a range of technologies into a comprehensive service that would otherwise require an array of individual devices or services from multiple vendors. As a result, our customers are able to decommission these technologies and reduce the cost and complexity of their infrastructure as a result.

 

    Best-of-Breed Security, Continuity and Archiving Services. We believe our customers should not have to compromise on the quality of their email security, continuity or archiving services in order to benefit from integration. Our strategy is to develop best-of-breed capabilities within our integrated service to compete successfully with industry-leading point products.

 

    Web Scale Performance for Organizations of All Sizes. Our cloud service is built to address the most demanding scale, performance and availability requirements of large enterprises but delivers this as a subscription-based cloud service that puts these capabilities within the reach of small and mid-market organizations too.

 

    Compelling Return on Investment. Customers can decommission a range of individual technologies they use for security, continuity and archiving and move to a subscription-based service and benefit from a long term cost improvement as result.

 

    Easy to Deploy and Manage. Our service is designed to be easier to deploy than alternative technologies. Customers simply route their email traffic through our cloud and can be up and running in a matter of days and sometimes less. Each customer then manages the service centrally via a single web-based administration console that supports all their subscribed services. Additional services can be deployed easily from the same console.

 

    Highly Agile and Adaptable Service. We are continually improving our cloud architecture and services. Our common code base and multi-tenant cloud architecture enables us to perform maintenance updates and add new features or products by updating our core code base once. Continuous service development and multi-tenant rapid deployment also means we can keep pace with emerging threats to protect and respond quickly to changing customer needs.

 



 

3


Table of Contents
    An Easier Move of Additional Critical Workloads to the Cloud. Our cloud service enables customers to decommission on-premises technologies that have been a significant historical barrier to migrating email mailboxes to the cloud, and supports customers wanting to adopt cloud services more broadly in their organization.

 

    A Safer Office 365 or Google Cloud Email and Data Implementation. Our cloud service mitigates the single-vendor exposure and security, service continuity and data assurance risks created by a move to these cloud email services.

Our Growth Strategy

Our growth strategy is focused on the following:

 

    Grow Revenue From Our Existing Customer Base. We intend to continue proactively broadening our reach with our existing customers by selling additional services.

 

    Acquire New Customers. We will continue to invest in a direct sales force combined with a focused channel strategy designed to serve the various requirements of small, mid-market and large enterprises and to bring new customers onto our cloud architecture.

 

    Actively Invest in Our Channel Partner Network. We intend to further invest in our network of channel partners to extend our global sales, service and support capabilities.

 

    Develop Our Technology and Release New Services. We will continue to build on our current capabilities and exploit additional opportunities in adjacent areas to those we serve today.

 

    Continue to Expand Our Geographic Presence. We plan to investigate additional international expansion from our regional bases in the United States (for North America), the United Kingdom (for Europe), South Africa (for Africa and the Middle East) and Australia (for Asia-Pacific).

 

    Target Organizations Moving Workloads to the Cloud. As more organizations move IT workloads to the cloud, we believe we are well-positioned to take advantage of growth opportunities that exist from augmenting services, including Office 365 and Google Apps for Work with critical security, continuity and archiving services.

Risks Related to Our Business

Our business is subject to numerous risks, as highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. Some of these risks include:

 

    We have incurred losses in the past, and we may not be able to achieve or sustain profitability for the foreseeable future.

 

    Failure to manage our growth effectively could increase our expenses, decrease our revenue and prevent us from implementing our business strategy.

 

    The markets in which we participate are highly competitive, with several large established competitors, and our failure to compete successfully would make it difficult for us to add and retain customers and would reduce or impede the growth of our business.

 

    Failure to effectively expand our sales and marketing capabilities could harm our ability to acquire new customers and achieve broader market acceptance of our services.

 

    If we are unable to maintain successful relationships with our channel partners, our ability to acquire new customers could be adversely affected.

 



 

4


Table of Contents
    We provide service level commitments under our subscription agreements and, as a result of a recent external network DDoS attack, we voluntarily paid service credits to customers. Any future service disruption could obligate us to provide refunds and we could face subscription terminations, which could adversely affect our revenue.

 

    Our business depends substantially on customers renewing their subscriptions with us. A decline in our customer renewals would harm our future operating results.

 

    If we are unable to sell additional services and features to our existing customers, our future revenues and operating results will be harmed.

 

    If we are not able to provide successful updates, enhancements and features to our technology to, among other things, keep up with emerging threats and customer needs, our business could be adversely affected.

 

    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 could harm our business and operating results.

 

    Because we recognize revenue from subscriptions for our services over the term of the agreement, downturns or upturns in new business may not be immediately reflected in our operating results and may be difficult to discern.

 

    Fluctuations in currency exchange rates could adversely affect our business.

Our History and Structure

Mimecast Limited was incorporated under the laws of the Bailiwick of Jersey with company number 119119 on July 28, 2015 as a public company limited by shares for the purpose of effecting this offering. On November 4, 2015, Mimecast Limited became the holding company of Mimecast UK, a private limited company incorporated in 2003 under the laws of England and Wales, and its subsidiaries by way of a share-for-share exchange in which the shareholders of Mimecast UK exchanged their shares in Mimecast UK for an identical number of shares of the same class in Mimecast Limited. Following the exchange, the historical consolidated financial statements of Mimecast UK included in this prospectus became the historical consolidated financial statements of Mimecast Limited.

Corporate Information

Our principal office is located at CityPoint, One Ropemaker Street, Moorgate, London, United Kingdom EC2Y 9AW, and our telephone number is +44 (0) 20 7300 7000. Our website address is www.mimecast.com. The information contained on, or that can be accessed from, our website does not form part of this prospectus. Our agent for service of process in the United States is Mimecast North America, Inc., 480 Pleasant Street, Watertown, MA 02472.

 



 

5


Table of Contents

THE OFFERING

 

Ordinary shares offered by us

7,750,000 shares

 

Ordinary shares outstanding after this offering

54,002,598 shares (or 54,593,598 shares if the underwriters’ option to purchase additional shares in this offering is exercised in full)

 

Option to purchase additional ordinary shares

We and the selling shareholders have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to 591,000 additional ordinary shares from us and up to 571,500 ordinary shares from the selling shareholders.

 

Use of proceeds

We estimate that the net proceeds from the sale of our ordinary shares in this offering will be approximately $67.9 million (or approximately $73.4 million if the underwriters’ option to purchase additional shares in this offering is exercised in full), based upon the initial public offering price of $10.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  As of the date of this prospectus, we have no specific plans for the use of the net proceeds of this offering. We currently anticipate that we will use the net proceeds of this offering for working capital and other general corporate purposes. We expect to continue to invest in and to grow our research and development capabilities as well as expand our sales and marketing teams. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, products, services, technologies or other assets. If the underwriters’ option to purchase additional shares is exercised, we will not receive any of the proceeds from the sale of up to 571,500 shares by the selling shareholders. The selling shareholders consist of members of our senior management. See the sections titled “Use of Proceeds,” “Principal and Selling Shareholders” and “Underwriting” for additional information.

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in our ordinary shares.

 

NASDAQ trading symbol

MIME
 

 



 

6


Table of Contents

The total number of ordinary shares that will be outstanding after this offering is based on 46,252,598 ordinary shares outstanding as of September 30, 2015, and excludes:

 

    6,109,916 ordinary shares issuable upon the exercise of options outstanding as of September 30, 2015 at a weighted-average exercise price of $3.38 per share;

 

    57,273 ordinary shares reserved for future issuance as of September 30, 2015 under our equity incentive plans that were in effect prior to the completion of this offering; and

 

    5,500,000 ordinary shares reserved for future issuance under our 2015 Share Option and Incentive Plan, and 1,100,000 ordinary shares reserved for future issuance under our 2015 Employee Share Purchase Plan, each of which will become effective upon the closing of this offering.

Unless otherwise indicated, all information in this prospectus assumes:

 

    no exercise of the outstanding options described above;

 

    that the underwriters do not exercise their option to purchase up to 591,000 additional ordinary shares from us and 571,500 ordinary shares from the selling shareholders;

 

    the adoption and effectiveness of our amended and restated articles of association immediately prior to the closing of this offering;

 

    the conversion of all of our outstanding Series A and Series B preferred shares into 12,576,364 ordinary shares upon the closing of this offering;

 

    the conversion or re-designation of all of our outstanding Founder, Class A, Class B and Class C ordinary shares into 33,676,234 ordinary shares upon the closing of this offering, based on the initial public offering price of $10.00 per share(1); and

 

    the 1-for-6 share consolidation effected on November 5, 2015.

 

(1) Pursuant to the terms of our articles of association that were in effect prior to the completion of this offering, upon the closing of an initial public offering, each outstanding Class C ordinary share is convertible into that number of ordinary shares equal to a fraction, the numerator of which is the excess of the initial public offering price over £0.372 and the denominator is the initial public offering price. As a result, based on the initial public offering price of $10.00 per share, the aggregate number of ordinary shares into which the 550,000 outstanding Class C ordinary shares are convertible will be 519,072 ordinary shares in the aggregate. For purposes of the Class C ordinary share conversion, the conversion factor of £0.372 has been translated into U.S. dollars at the rate of £1.00 to $1.5116, the noon buying rate quoted as of September 30, 2015 by the Federal Reserve Bank of New York.

 



 

7


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present summary consolidated financial and other data for our business. You should read this information together with the section entitled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes and other financial information included elsewhere in this prospectus. Our consolidated financial statements have been prepared in accordance with U.S. GAAP.

We derived the consolidated statements of operations data for the years ended March 31, 2014 and 2015 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated statements of operations data for the year ended March 31, 2013 from our unaudited consolidated financial statements not included in this prospectus. We derived the consolidated statements of operations data for the six months ended September 30, 2014 and 2015 and the consolidated balance sheet data as of September 30, 2015 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial data on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results to be expected in the future.

 

     Year ended March 31,     Six months ended
September 30,
 
     2013     2014     2015     2014     2015  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenue

   $ 66,750      $ 88,315      $ 116,085      $ 55,546      $ 67,835   

Cost of revenue(1)

     21,165        28,673        36,821        18,062        20,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     45,585        59,642        79,264        37,484        47,766   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

          

Research and development(1)

     11,019        12,844        14,461        7,910        7,463   

Sales and marketing(1)

     35,635        46,971        51,224        26,501        27,977   

General and administrative(1)

     13,666        11,187        15,806        9,528        8,713   

Restructuring

                   1,203        1,263          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     60,320        71,002        82,694        45,202        44,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (14,735     (11,360     (3,430     (7,718     3,613   

Other income (expense)

          

Interest income

     77        86        62        33        29   

Interest expense

     (844     (542     (703     (311     (345

Foreign exchange income (expense)

     1,188        (5,055     4,508        640        (3,100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     421        (5,511     3,867        362        (3,416
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before provision for income taxes

     (14,314     (16,871     437        (7,356     197   

Provision for income taxes

     15        19        152        76        278   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (14,329   $ (16,890   $ 285      $ (7,432   $ (81
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

8


Table of Contents
     Year ended March 31,     Six months ended
September 30,
 
     2013     2014     2015         2014             2015      
     (in thousands, except per share data)  

Net (loss) income per share applicable to ordinary shareholders:(2)

          

Basic

   $ (0.46   $ (0.53   $ 0.01      $ (0.23   $ (0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.46   $ (0.53   $ 0.01      $ (0.23   $ (0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of ordinary shares used in computing net (loss) income per share applicable to ordinary shareholders:

          

Basic

     31,060        31,719        32,354        32,058        33,371   

Diluted

     31,060        31,719        36,075        32,058        33,371   

Pro forma net loss per share applicable to ordinary shareholders:(3)

          

Basic

       $ (0.03     $ (0.04
      

 

 

     

 

 

 

Diluted

       $ (0.03     $ (0.04
      

 

 

     

 

 

 

Pro forma weighted-average number of ordinary shares used in computing pro forma net loss per share applicable to ordinary shareholders:

          

Basic

         44,899          45,916   

Diluted

         44,899          45,916   

 

     At September 30, 2015  
     Actual     Pro Forma(4)      Pro Forma As
Adjusted(5)
 
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 34,051      $ 34,051       $ 103,508   

Property and equipment, net

     24,377        24,377         24,377   

Total assets

     95,865        95,865         162,622   

Debt, current and long-term

     9,961        9,961         9,961   

Deferred revenue, current and long-term

     57,496        57,496         57,496   

Convertible preferred shares

     59,305                  

Total shareholders’ (deficit) equity

     (49,030     10,275         78,150   

 

     Year ended March 31,     Six months ended
September 30,
 
     2014     2015     2014     2015  
     (dollars in thousands)  

Supplemental Financial and Other Data:

        

Revenue constant currency growth rate(6)

     37     33     34     30

Revenue retention rate(7)

     105     107     105     108

Total customers(8)

     10,300        13,800        11,800        15,200   

Adjusted EBITDA(9)

   $ (1,170   $ 14,227      $ 3,360      $ 10,799   

 



 

9


Table of Contents

 

(1) Share-based compensation expense included in these line items was as follows:

 

     Year ended March 31,      Six months ended September 30,  
     2013      2014      2015      2014      2015  
     (in thousands)  

Cost of revenue

   $ 239       $ 151       $ 151       $ 110       $ 129   

Research and development

     174         291         544         152         74   

Sales and marketing

     2,663         395         1,684         1,417         851   

General and administrative

     3,600         395         3,047         2,547         925   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 6,676       $ 1,232       $ 5,426       $ 4,226       $ 1,979   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Basic and diluted net (loss) income per share applicable to ordinary shareholders is computed based on the weighted-average number of ordinary shares outstanding during each period. For additional information, see Note 2 to the notes to our consolidated financial statements included elsewhere in this prospectus.

 

(3) Pro forma basic and diluted net loss per share applicable to ordinary shareholders and pro forma weighted-average shares outstanding has been computed to give effect to the conversion of all of our outstanding convertible preferred shares into ordinary shares, as well as the conversion of the 550,000 outstanding Class C ordinary shares into 519,072 ordinary shares, which will occur upon the closing of this offering as if such conversions occurred as of the date of original issuance, but does not give effect to the issuance of shares in connection with this offering. Additionally, pro forma net loss includes share-based compensation expense of $1.8 million related to share-based awards that have satisfied the service condition as of September 30, 2015, which will become exercisable upon the closing of this offering. For additional information on the conversion of the preferred shares and the conversion of the Class C ordinary shares, see Notes 7 and 8 to the notes to our consolidated financial statements included elsewhere in this prospectus.

 

(4) The pro forma column reflects: (i) the automatic conversion of all outstanding convertible preferred shares into an aggregate of 12,576,364 ordinary shares, which conversion will occur upon the closing of this offering, (ii) the automatic conversion of the 550,000 outstanding Class C ordinary shares into 519,072 ordinary shares, which conversion will occur upon the closing of this offering, and (iii) share-based compensation expense of $1.8 million related to share-based awards that have satisfied the service condition as of September 30, 2015, which will become exercisable upon the closing of this offering.

 

(5) Gives effect to the pro forma adjustments described in footnote (4) above as well as the sale by us of 7,750,000 ordinary shares in this offering at the initial public offering price of $10.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Additionally, for purposes of the pro forma as adjusted amounts shown above, the net proceeds to be received by us from the sale of ordinary shares in this offering of $67.9 million has been increased by approximately $1.6 million to reflect the estimated offering expenses which had been paid by us as of September 30, 2015.

 



 

10


Table of Contents
(6) 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 the fiscal years below, revenue from entities reporting in foreign currencies was translated into U.S. dollars using the comparable prior period’s foreign currency exchange rates. For example, the average rates in effect for the fiscal year ended March 31, 2014 were used to convert revenue for the year ended March 31, 2015 and the revenue for the comparable prior period ended March 31, 2014, rather than the actual exchange rates in effect during the respective period. Revenue constant currency growth rate is a non-GAAP financial measure. A reconciliation of this non-GAAP measure to its most directly comparable U.S. GAAP measures for the respective periods can be found in the table below.

 

     Year ended March 31,     Six months ended
September 30,
 
     2014     2015     2014     2015  
     (dollars in thousands)  

Reconciliation of Revenue Constant Currency Growth Rate:

        

Revenue, as reported

   $ 88,315      $ 116,085      $ 55,546      $ 67,835   

Revenue year-over-year growth rate, as reported

     32     31     37     22

Estimated impact of foreign currency fluctuations

     5     2     (3 )%      8

Revenue constant currency growth rate

     37     33     34     30

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 report 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 U.S. GAAP. For example, revenue constant currency growth rates, by their nature, exclude the impact of foreign exchange, which may have a material impact on U.S. 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.

 

(7) We calculate our revenue retention rate by annualizing revenue on a constant currency basis recorded on the last day of the measurement period for only those customers in place throughout the entire measurement period. We include add-on, or upsell, revenue from additional employees and services purchased by 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 based on the trailing twelve months. The revenue on a constant currency basis is based on the average exchange rates in effect during the respective period.

 

(8) Rounded up to the nearest hundred customers.

 

(9) Adjusted EBITDA is a non-GAAP financial measure that we define as net (loss) income, adjusted to exclude: depreciation and amortization, share-based compensation expense, restructuring expense, interest income and interest expense, the provision for income taxes and foreign currency exchange (expense) income.

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 similar non-GAAP financial measures to supplement their GAAP results.

 



 

11


Table of Contents

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.

The following table presents a reconciliation of net (loss) income to Adjusted EBITDA:

 

     Year ended March 31,      Six months ended
September 30,
 
     2014      2015      2014      2015  
     (in thousands)  

Reconciliation of Adjusted EBITDA:

           

Net (loss) income

   $ (16,890    $ 285       $ (7,432    $ (81

Depreciation and amortization

     8,958         11,028         5,589         5,207   

Interest expense, net

     456         641         278         316   

Provision for income taxes

     19         152         76         278   

Restructuring

             1,203         1,263           

Share-based compensation expense

     1,232         5,426         4,226         1,979   

Foreign exchange expense (income)

     5,055         (4,508      (640      3,100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ (1,170    $ 14,227       $ 3,360       $ 10,799   
  

 

 

    

 

 

    

 

 

    

 

 

 

 



 

12


Table of Contents

RISK FACTORS

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our financial statements and the related notes appearing elsewhere in this prospectus, before deciding to invest in our ordinary shares. If any of the following risks actually occurs, our business, prospects, operating results and financial condition could suffer materially. In such event, the trading price of our ordinary shares could decline and you could lose part or all of your investment.

Risks Related to Our Business and Our Industry

We have incurred losses in the past, and we may not be able to achieve or sustain profitability for the foreseeable future.

We have incurred significant losses in each period since our inception in 2003 up through our fiscal year ended March 31, 2014. We incurred net losses of $14.3 million in our fiscal year ended March 31, 2013 and $16.9 million in our fiscal year ended March 31, 2014. In our fiscal year ended March 31, 2015, we generated net income of $0.3 million. In the six months ended September 30, 2015, we incurred a net loss of $0.1 million. As of September 30, 2015, we had an accumulated deficit of $85.4 million. We have been growing rapidly, and, as we do so, we incur significant sales and marketing, support and other related expenses. Our ability to achieve or sustain profitability will depend in significant part on our obtaining new customers, expanding our existing customer relationships and ensuring that our expenses, including our sales and marketing expenses and the cost of supporting new customers, does not exceed our revenue. We also expect to make significant expenditures and investments in research and development to expand and improve our services and technical infrastructure. In addition, as a public company, we will incur significant legal, accounting and other expenses that we have not historically incurred as a private company. These increased expenditures may make it harder for us to achieve and maintain profitability and we cannot predict when we will achieve sustained profitability, if at all. We also may incur losses in the future for a number of other unforeseen reasons. Accordingly, we may not be able to achieve or maintain profitability, and we may continue to incur losses for the foreseeable future.

Failure to manage our growth effectively could increase our expenses, decrease our revenue and prevent us from implementing our business strategy.

We have been rapidly growing our revenue and number of customers, and we will seek to do the same for the foreseeable future. This rapid growth puts strain on our business, requires significant capital expenditures and increases our operating expenses. To manage this growth effectively, we must attract, train and retain a significant number of qualified sales, implementation, customer service, software development, information technology and management personnel. In addition, as we grow our revenue and customer base, we will need to maintain and enhance our technology infrastructure, in particular, our data center capacity. If we fail to effectively manage our growth or we over-invest or under-invest in our business, our business and results of operations could suffer from the resulting weaknesses in our infrastructure, systems or controls. We could also suffer operational mistakes, loss of business opportunities and employee losses. If our management is unable to effectively manage our growth, our expenses might increase more than expected, our revenue could decline or grow more slowly than expected, and we might be unable to implement our business strategy.

The markets in which we participate are highly competitive, with several large established competitors, and our failure to compete successfully would make it difficult for us to add and retain customers and would reduce or impede the growth of our business.

Our market is large, highly competitive, fragmented and subject to rapidly evolving technology, shifting customer needs and frequent introductions of new products and services. We currently

 

13


Table of Contents

compete with companies that offer products that target email and data security, continuity and archiving, as well as large providers such as Google Inc. and Microsoft Corporation, which offer functions and tools as part of their core mailbox services that may be, or perceived to be, similar to ours. Our current and potential future competitors include: Barracuda Networks, Inc., Google Apps for Work, Microsoft Exchange Server, Exchange Online Protection, Proofpoint, Inc. and Symantec Corporation, in security, MessageOne, in continuity, and Barracuda, HP Autonomy, Microsoft Office 365, Proofpoint and Symantec, in archiving. We expect competition to increase in the future from both existing competitors and new companies that may enter our markets. Additionally, some potential customers, particularly large enterprises, may elect to develop their own internal products. If two or more of our competitors were to merge or partner with one another, the change in the competitive landscape could reduce our ability to compete effectively. Our continued success and growth depends on our ability to out-perform our competitors at the individual service level as well as increasing demand for a unified service infrastructure. We cannot guarantee that we will out-perform our competitors at the product level or that the demand for a unified service technology will increase.

Some of our current competitors have, and our future competitors may have, certain competitive advantages such as greater name recognition, longer operating history, larger market share, larger existing user base and greater financial, technical and other resources. Some competitors may be able to devote greater resources to the development, promotion and sale of their products and services than we can to ours, which could allow them to respond more quickly than we can to new technologies and changes in customer needs. We cannot assure you that our competitors will not offer or develop products or services that are superior to ours or achieve greater market acceptance.

Failure to effectively expand our sales and marketing capabilities could harm our ability to acquire new customers and achieve broader market acceptance of our services.

Acquiring new customers and expanding sales to existing customers will depend to a significant extent on our ability to expand our sales and marketing operations. We generate approximately one-third of our revenue from direct sales and we expect to continue to rely on our sales force to obtain new customers and grow revenue from our existing customer base. We expect to expand our sales force in all of our regions and we face a number of challenges in achieving our hiring goals. For instance, there is significant competition for sales personnel with the sales skills and technical knowledge that we require. In addition, training and integrating a large number of sales and marketing personnel in a short time requires the allocation of significant internal resources. Our ability to achieve projected growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel. We invest significant time and resources in training new sales personnel to understand our solutions and growth strategy. In general, new hires require significant training and substantial experience before becoming productive. Our recent hires and planned hires may not become as productive as we require, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we currently operate or where we seek to conduct business. Our growth may be materially and adversely impacted if the efforts to expand our sales and marketing capabilities are not successful or if they do not generate a sufficient increase in revenue.

If we are unable to maintain successful relationships with our channel partners, our ability to acquire new customers could be adversely affected.

In order to grow our business, we anticipate that we will continue to depend on our relationships with our channel partners who we rely on, in addition to our direct sales force, to sell and support our services. In our fiscal year ended March 31, 2015, while no individual channel partner accounted for 10% or more of our sales, in the aggregate, our channel partners accounted for 62% of our sales, and we expect that sales to channel partners will continue to account for a substantial portion of our revenue for the foreseeable future. We utilize channel partners to efficiently increase the scale of our

 

14


Table of Contents

marketing and sales efforts, increasing our market penetration to customers which we otherwise might not reach on our own. Our ability to achieve revenue growth in the future will depend, in part, on our success in maintaining successful relationships with our channel partners.

Our agreements with our channel partners are generally non-exclusive, meaning our channel partners may offer customers competitive services from different companies. If our channel partners do not effectively market and sell our services, choose to use greater efforts to market and sell their own products or services or those of others, or fail to meet the needs of our customers, our ability to grow our business, sell our services and maintain our reputation may be adversely affected. Our contracts with our channel partners generally allow them to terminate their agreements for any reason upon 90 days’ notice. The loss of key channel partners, our possible inability to replace them, or the failure to recruit additional channel partners could materially and adversely affect our results of operations. If we are unable to maintain our relationships with these channel partners, our business, results of operations, financial condition or cash flows could be adversely affected.

We provide service level commitments under our subscription agreements and, as a result of a recent external network DDoS attack, we voluntarily paid service credits to customers. Any future service disruption could obligate us to provide refunds and we could face subscription terminations, which could adversely affect our revenue.

Our subscription agreements with customers provide certain service level commitments. If we are unable to meet the stated service level commitments or suffer extended periods of downtime that exceed the periods allowed under our customer agreements, we could be required to pay refunds or face subscription terminations, either of which could significantly impact our revenue.

To date, we have suffered two significant service disruptions. The first occurred in 2013 and was a result of an equipment failure. Many of our customers in the United Kingdom experienced service disruptions for several hours. The more recent service disruption, which occurred on September 21, 2015, was a result of an external network DDoS attack. Customers using our Secure Email Gateway service in the United States experienced downtime related to the delivery and receipt of external emails for several hours. The scope of the incident was limited to network traffic and no customer data was lost or compromised. We expect to incur costs and expenses related to this service disruption, including the voluntary payment of credits or subscription terminations. While we have undertaken substantial remedial efforts to prevent future incidents like these, we cannot guarantee that future attacks or service disruptions will not occur. Any future attacks or service disruptions could adversely affect our reputation, our relationships with our existing customers and our ability to attract new customers, all of which would impact our future revenue and operating results.

Our customers depend on our customer support team to resolve technical issues relating to our services. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. Increased customer demand for these services, without corresponding revenue, could increase costs and adversely affect our operating results. In addition, our sales process is highly dependent on the ease of use of our services, on our reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality support, could adversely affect our reputation and our ability to sell our services to existing and prospective customers.

Our business depends substantially on customers renewing their subscriptions with us. A decline in our customer renewals would harm our future operating results.

In order for us to maintain or improve our operating results, it is important that our customers renew their subscriptions with us when the existing subscription term expires. Although the majority of

 

15


Table of Contents

our customer contracts include auto-renew provisions, our customers have no obligation to renew their subscriptions upon expiration, and we cannot provide assurance that customers will renew subscriptions at the same or higher level of service, if at all. For each of the fiscal years ended March 31, 2013, 2014 and 2015, our customer retention rate has been consistently greater than 90%. We calculate customer retention rate as the percentage of paying customers on the last day of the relevant period in the prior year who remain paying customers on the last day of the relevant period in the current year. The rate of customer renewals may decline or fluctuate as a result of a number of factors, including our customers’ satisfaction or dissatisfaction with our solutions, the effectiveness of our customer support services, our pricing, the prices of competing products or services, mergers and acquisitions affecting our customer base, or reductions in our customers’ spending levels. If our customers do not renew their subscriptions, or renew on less favorable terms, our revenue may decline, and we may not realize improved operating results from our customer base.

If we are unable to sell additional services and features to our existing customers, our future revenues and operating results will be harmed.

A significant portion of our revenue growth is generated from sales of additional services and features to existing customers. Our future success depends, in part, on our ability to continue to sell such additional services and features to our existing customers. We devote significant efforts to developing, marketing and selling additional services and features and associated support services to existing customers and rely on these efforts for a portion of our revenue. These efforts require a significant investment in building and maintaining customer relationships, as well as significant research and development efforts in order to provide upgrades and launch new services and features. The rate at which our existing customers purchase additional services and features depends on a number of factors, including the perceived need for additional security, continuity and archiving, the efficacy of our current services, the perceived utility of our new offerings, our customers’ IT budgets and general economic conditions. If our efforts to sell additional services and features to our customers are not successful, our future revenues and operating results will be harmed.

If we are not able to provide successful updates, enhancements and features to our technology to, among other things, keep up with emerging threats and customer needs, our business could be adversely affected.

Our industry is marked by rapid technological developments and demand for new and enhanced services and features to meet the evolving IT needs of organizations. In particular, cyber-threats are becoming increasingly sophisticated and responsive to the new security measures designed to thwart them. If we fail to identify and respond to new and increasingly complex methods of attack and update our products to detect or prevent such threats, our business and reputation will suffer. The success of any new enhancements, features or services that we introduce depends on several factors, including the timely completion, introduction and market acceptance of such enhancements, features or services. We may not be successful in either developing these modifications and enhancements or in bringing them to market in a timely fashion. Furthermore, modifications to existing technologies will increase our research and development expenses. If we are unable to successfully enhance our existing services to meet customer requirements, increase adoption and usage of our services, or develop new services, enhancements and features, our business and operating results will be harmed.

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 could harm our business and operating results.

We have experienced, and will continue to experience, cyber-attacks and other malicious internet-based activity, which continue to increase in sophistication, frequency and magnitude.

 

16


Table of Contents

Because our services involve the storage of large amounts of our customers’ sensitive and proprietary information, solutions to protect that information from cyber-attacks and other threats, data security and integrity are critically important to our business. Despite all of our efforts to protect this information, we cannot assure you that systems that access our services and databases will not be compromised or disrupted, whether as a result of criminal conduct, distributed denial of service, or DDoS attacks, or other advanced persistent attacks by malicious actors, including hackers, nation states and criminals, breaches due to employee error or malfeasance, or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures or natural disasters or other catastrophic events. Any breach of security, unauthorized access to or disclosure of confidential information, disruption, including DDoS attacks, or the perception that the confidential information of our customers is not secure, could result in a material loss of business, substantial legal liability or significant harm to our reputation.

We must continually monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access. However, we may fail to identify these new and complex methods of attack, or fail to invest sufficient resources in security measures. In addition, as we increase our customer base and our brand becomes more widely known and recognized, we may become more of a target for malicious third parties. Any breach of our security measures as a result of third-party action, employee negligence and/or error, malfeasance, defects or otherwise that compromises the confidentiality, integrity or availability of our data or our customers’ data could result in:

 

    severe harm to our reputation or brand, or materially and adversely affect the overall market perception of the security and reliability of our services;

 

    individual and/or class action lawsuits, which could result in financial judgments against us and which would cause us to incur legal fees and costs;

 

    legal or regulatory enforcement action, which could result in fines and/or penalties and which would cause us to incur legal fees and costs; and/or

 

    additional costs associated with responding to the interruption or security breach, such as investigative and remediation costs, the costs of providing individuals and/or data owners with notice of the breach, legal fees, the costs of any additional fraud detection activities, or the costs of prolonged system disruptions or shutdowns.

Any of these events could materially adversely impact our business and results of operations.

Because we recognize revenue from subscriptions for our services over the term of the agreement, downturns or upturns in new business may not be immediately reflected in our operating results and may be difficult to discern.

We generally recognize subscription revenue from customers ratably on a straight-line basis over the terms of their subscription agreements, which is typically one year in duration. As a result, most of the revenue we report in each quarter is derived from the recognition of deferred revenue relating to subscription agreements entered into during the previous fiscal year or quarter. Consequently, a decline in new or renewed subscriptions with yearly terms in any one quarter may have a small impact on our operating revenue results for that quarter. However, such decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our services, and potential changes in our pricing policies, rate of expansion or retention rate may not be fully reflected in our operating results until future periods. Shifts in the mix of annual versus monthly subscription billings may also make it difficult to assess our business. We may also be unable to reduce our cost structure in line with a significant deterioration in sales. In addition, a significant majority of our costs are expensed as incurred, while revenue is recognized over the life of

 

17


Table of Contents

the agreement with our customer. As a result, increased growth in the number of our customers could continue to result in our recognition of more costs than revenue in the earlier periods of the terms of our agreements. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers is recognized over the applicable subscription term.

Fluctuations in currency exchange rates could adversely affect our business.

Our functional currency and that of our subsidiaries is the local currency of each entity and our reporting currency is the U.S. dollar. In our fiscal year ended March 31, 2015, 40% of our revenue was denominated in British pounds, 39% in U.S. dollars, 19% in South African rand and 2% in other currencies. Given that our functional currency and that of our subsidiaries is the local currency of each entity, but our reporting currency is the U.S. dollar, fluctuations in currency exchange rates between the U.S. dollar, the British pound and the South African rand could materially and adversely affect our business. There may be instances in which costs and revenue will not be matched with respect to currency denomination. We estimate that a 10% increase or decrease in the value of the British pound against the U.S. dollar would have decreased or increased our net income by approximately $500,000 in our fiscal year ended March 31, 2015 and that a 10% increase or decrease in the value of the South African rand against the U.S. dollar would have decreased or increased our net income by approximately $100,000 in our fiscal year ended March 31, 2015. To date, we have not entered into any currency hedging contracts. As a result, to the extent we continue our expansion on a global basis, we expect that increasing portions of our revenue, cost of revenue, assets and liabilities will be subject to fluctuations in currency valuations. We may experience economic loss and a negative impact on earnings or net assets solely as a result of currency exchange rate fluctuations.

We are dependent on the continued services and performance of our two founders, the loss of either of whom could adversely affect our business.

Our future performance depends upon contributions from our senior management team and, in particular, our two founders, Peter Bauer, our Chairman and Chief Executive Officer, and Neil Murray, our Chief Technology Officer. If our senior management team, including any new hires that we may make, fails to work together effectively and to execute on our plans and strategies on a timely basis, our business could be harmed. The loss of one or more of our executive officers or key employees could have an adverse effect on our business. The loss of services of either of Mr. Bauer or Mr. Murray could significantly delay or prevent the achievement of our development and strategic objectives.

We depend on highly skilled personnel to grow and operate our business, and if we are unable to hire, retain and motivate qualified personnel, we may not be able to grow effectively.

Our success depends largely upon our continued ability to identify, hire, develop, motivate and retain highly skilled personnel, including senior management, engineers, software developers, sales representatives and customer support representatives. Our growth strategy also depends, in part, on our ability to continue to attract and retain highly skilled personnel. Identifying, recruiting, training and integrating qualified individuals requires significant time, expense and attention of management. Competition for these personnel is intense, especially for engineers experienced in designing and developing software and software as a service, or SaaS, applications, and for experienced sales professionals. We have, from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may assert that these employees or we have breached their legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the equity

 

18


Table of Contents

awards they receive in connection with their employment. If the actual or perceived value of our equity awards declines, or experiences significant volatility, it may adversely affect our ability to recruit and retain key employees. If we are not able to effectively recruit and retain qualified employees, our ability to achieve our strategic objectives will be adversely impacted, and our business will be harmed.

We are subject to a number of risks associated with global sales and operations.

We operate a global business with offices located in the United States, the United Kingdom, South Africa and Australia. In the fiscal year ended March 31, 2015, we generated 42% of our revenue from the United Kingdom, 38% from the United States, 19% from South Africa and 2% from the rest of the world. In the six months ended September 30, 2015, we generated 40% of our revenue from the United Kingdom, 41% from the United States, 17% from South Africa and 2% from the rest of the world. As a result, our sales and operations are subject to a number of risks and additional costs, including the following:

 

    fluctuations in exchange rates between currencies in the markets where we do business;

 

    risks associated with trade restrictions and additional legal requirements, including the exportation of our technology that is required in some of the countries in which we operate;

 

    greater risk of unexpected changes in regulatory practices, tariffs and tax laws and treaties;

 

    compliance with multiple anti-bribery laws, including the U.S. Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act;

 

    heightened risk of unfair or corrupt business practices in certain geographies, and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, or irregularities in, financial statements;

 

    limited or uncertain protection of intellectual property rights in some countries and the risks and costs associated with monitoring and enforcing intellectual property rights abroad;

 

    greater difficulty in enforcing contracts and managing collections in certain jurisdictions, as well as longer collection periods;

 

    management communication and integration problems resulting from cultural and geographic dispersion;

 

    social, economic and political instability, terrorist attacks and security concerns in general; and

 

    potentially adverse tax consequences.

These and other factors could harm our ability to generate future global revenue and, consequently, materially impact our business, results of operations and financial condition.

Any serious disruptions in our services caused by defects in our software or otherwise may cause us to lose revenue and market acceptance.

Our customers use our services for the most critical aspects of their business, and any disruptions to our services or other performance problems with our services however caused could hurt our brand and reputation and may damage our customers’ businesses. We provide regular updates, which may contain undetected errors when first introduced or released. In the past, we have discovered software errors, failures, vulnerabilities and bugs in our services after they have been released and new errors in our existing services may be detected in the future. Real or perceived errors, failures, system delays, interruptions, disruptions or bugs could result in negative publicity, loss of or delay in market acceptance of our services, loss of competitive position, delay of payment to us, lower renewal rates, or claims by customers for losses sustained by them. In such an event, we may

 

19


Table of Contents

be required, or may choose, for customer relations or other reasons, to expend additional resources in order to mitigate or correct the problem. We seek to cap the liability to which we are exposed in the event of losses or harm to our customers, but we cannot be certain that we will obtain these caps or that these caps, if obtained, will be respected in all instances. We carry insurance; however, the amount of such insurance may be insufficient to compensate us for any losses that may result from claims arising from defects or disruptions in our services. As a result, we could lose future sales and our reputation and our brand could be harmed.

If the prices we charge for our services are unacceptable to our customers, our operating results will be harmed.

As the market for our services matures, or as new or existing competitors introduce new products or services that compete with ours, we may experience pricing pressure and be unable to renew our agreements with existing customers or attract new customers at prices that are consistent with our pricing model and operating budget. If this were to occur, it is possible that we would have to change our pricing model or reduce our prices, which could harm our revenue, gross margin and operating results. Pricing decisions may also impact the mix of adoption among our subscription plans and negatively impact our overall revenue. Moreover, large enterprises, which may account for a larger portion of our business in the future, may demand substantial price concessions. If we are, for any reason, required to reduce our prices, our revenue, gross margin, profitability, financial position and cash flow may be adversely affected.

Our research and development efforts may not produce new services or enhancements to existing services that result in significant revenue or other benefits in the near future, if at all.

We invested 17% of our revenue in research and development in our fiscal year ended March 31, 2013, 15% in our fiscal year ended March 31, 2014, 12% in our fiscal year ended March 31, 2015 and 11% in the six months ended September 30, 2015. We expect to continue to dedicate significant financial and other resources to our research and development efforts in order to maintain our competitive position. However, investing in research and development personnel, developing new services and enhancing existing services is expensive and time-consuming, and there is no assurance that such activities will result in significant new marketable services, enhancements to existing services, design improvements, cost savings, revenue or other expected benefits. If we spend significant time and effort on research and development and are unable to generate an adequate return on our investment, our business and results of operations may be materially and adversely affected.

We may acquire other businesses, which could require significant management attention, disrupt our business, dilute shareholder value and adversely affect our results of operations.

As part of our business strategy and in order to remain competitive, we may acquire, or make investments in, complementary companies, products or technologies. We have limited acquisition experience to date, and as a result, our ability as an organization to acquire and integrate other companies, products or technologies in a successful manner is unproven. We may not be able to find suitable acquisition targets, and we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by our customers, analysts and investors. In addition, if we are unsuccessful at integrating such acquisitions or the technologies associated with such acquisitions, our revenue and results of operations could be adversely affected. In addition, while we will make significant efforts to address any information technology security issues with respect to any acquisitions, we may still inherit such risks when we integrate the acquired products and systems. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully

 

20


Table of Contents

evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquired business, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisitions, each of which could adversely affect our financial condition or the value of our ordinary shares. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.

If the market for SaaS business software applications develops more slowly than we expect or declines, our business would be adversely affected.

The expansion of the SaaS business applications market depends on a number of factors, including the cost, performance and perceived value associated with SaaS, as well as the ability of SaaS providers to address data security and privacy concerns. Additionally, government agencies have adopted, or may adopt, laws and regulations regarding the collection and use of personal information obtained from consumers and other individuals, or may seek to access information on our platform, either of which may reduce the overall demand for our platform. If we or other SaaS providers experience data security incidents, loss of customer data, disruptions in delivery, or other problems, the market for SaaS business applications, including our services, may be negatively affected.

If we are unable to effectively increase sales of our services to large enterprises while mitigating the risks associated with serving such customers, our business, financial position and results of operations may suffer.

As we seek to increase our sales to large enterprise customers, we may face longer sales cycles, more complex customer requirements, substantial upfront sales costs and less predictability in completing some of our sales than we do with smaller customers. In addition, our ability to successfully sell our services to large enterprises is dependent on us attracting and retaining sales personnel with experience in selling to large organizations. Also, because security breaches of larger, more high-profile enterprises are likely to be heavily publicized, there is increased reputational risk associated with serving such customers. If we are unable to increase sales of our services to large enterprise customers while mitigating the risks associated with serving such customers, our business, financial position and results of operations may suffer.

Natural disasters, power loss, telecommunications failures and similar events could cause interruptions or performance problems associated with our information and technology infrastructure that could impair the delivery of our services and harm our business.

We currently store our customers’ information within ten third-party data center hosting facilities located in ten locations around the world. As part of our current disaster recovery arrangements, our production environment and all of our customers’ data is currently replicated in near real-time in a facility located in a different location. We cannot assure you that the measures we have taken to eliminate single points of failure will be effective to prevent or minimize interruptions to our operations. Our facilities are vulnerable to interruption or damage from a number of sources, many of which are beyond our control, including floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Any damage to, or failure of, our systems generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause customers to terminate their subscriptions and adversely affect our renewal rate and our ability to attract new customers. Our business and reputation will also be harmed if our existing and potential customers believe our service is unreliable. The occurrence of a natural disaster, an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions

 

21


Table of Contents

in our service. Even with the disaster recovery arrangements, our service could be interrupted. As we continue to add data centers and add capacity in our existing data centers, we may move or transfer our data and our customers’ data. Any unsuccessful data transfers may impair the delivery of our service. Further, as we continue to grow and scale our business to meet the needs of our customers, additional burdens may be placed on our hosting facilities.

Our existing credit agreement contains operating and financial covenants that may adversely impact our business and the failure to comply with such covenants could prevent us from borrowing funds and could cause any outstanding debt to become immediately payable.

Our existing credit agreement with Silicon Valley Bank contains operating and financial restrictions and covenants, including the prohibition of the incurrence of further indebtedness and liens, the prohibition of certain investments, the prohibition against paying dividends and redeeming or repurchasing capital stock, restrictions against merger and consolidation transactions and restrictions against the disposition of assets. This agreement requires us to maintain a minimum liquidity ratio and a minimum annual recurring revenue amount during its term, and is subject to acceleration upon a material change in control (as defined therein). These restrictions and covenants, as well as those contained in any future financing agreements that we may enter into, may restrict our ability to finance our operations and to engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control, and breaches of these covenants could result in a default under the credit agreement and any future financial agreements that we may enter into. If not waived, defaults could cause our outstanding indebtedness under our credit agreement and any future financing agreements that we may enter into to become immediately due and payable.

We employ third-party licensed software for use in or with our services, and the inability to maintain these licenses or errors in the software we license could result in increased costs, or reduced service levels, which would adversely affect our business.

Our services incorporate and rely on certain third-party software obtained under licenses from other companies. We anticipate that we will continue to rely on such third-party software and development tools in the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, integration of the software used in our services with new third-party software may require significant work and require substantial investment of our time and resources and delays in the release of our services until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated, which could harm our business. A licensor may have difficulties keeping up with technological changes or may stop supporting the software or other intellectual property that it licensed to us. Also, to the extent that our services depend upon the successful operation of third-party software in conjunction with our software, any undetected errors or defects in this third-party software could prevent the deployment or impair the functionality of our services, delay new services introductions, result in a failure of our services, and injure our reputation. Our use of additional or alternative third-party software would require us to enter into additional license agreements with third parties on terms that may not be favorable to us.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to compete depend in part on our intellectual property. We primarily rely on copyright, trade secret and trademark laws, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate. As of

 

22


Table of Contents

September 30, 2015, we had one patent and 13 patent applications in the United States. We also have one patent issued and five applications pending for examination in non-U.S. jurisdictions, and four pending Patent Cooperation Treaty patent applications, all of which are counterparts of our U.S. applications. We may not be able to obtain any further patents, and our pending applications may not result in the issuance of patents. We have issued patents and pending patent applications outside the United States, and we may have to expend significant resources to obtain additional patents as we expand our international operations due to the cost of monitoring and protecting our rights across multiple jurisdictions.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Failure to adequately enforce our intellectual property rights could also result in the impairment or loss of those rights. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Patent, copyright, trademark and trade secret laws offer us only limited protection and the laws of many of the countries in which we sell our services do not protect proprietary rights to the same extent as the United States and Europe. Accordingly, defense of our trademarks and proprietary technology may become an increasingly important issue as we continue to expand our operations and solution development into countries that provide a lower level of intellectual property protection than the United States or Europe. Policing unauthorized use of our intellectual property and technology is difficult and the steps we take may not prevent misappropriation of the intellectual property or technology on which we rely. For example, in the event of inadvertent or malicious disclosure of our proprietary technology, trade secret laws may no longer afford protection to our intellectual property rights in the areas not otherwise covered by patents or copyrights. Accordingly, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Our failure to secure, protect and enforce our intellectual property rights could materially adversely affect our brand and our business.

We may elect to initiate litigation in the future to enforce or protect our proprietary rights or to determine the validity and scope of the rights of others. That litigation may not be ultimately successful and could result in substantial costs to us, the reduction or loss in intellectual property protection for our technology, the diversion of our management’s attention and harm to our reputation, any of which could materially and adversely affect our business and results of operations.

We may be sued by third parties for alleged infringement of their proprietary rights.

There is considerable patent and other intellectual property development activity in our industry. Our success depends, in part, on our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities, including non-practicing entities, and individuals, may own or claim to own intellectual property relating to our industry.

From time to time, certain third parties have claimed that we are infringing upon their intellectual property rights. In the future, we may be found to be infringing upon such rights. We closely monitor all such claims and none of the claims by the third parties have resulted in litigation, but legal actions by such parties are still possible. In addition, we cannot assure you that actions by other third parties alleging infringement by us of third-party patents or other intellectual property will not be asserted or prosecuted against us. In the future, others may claim that our services and underlying technology infringe or violate their intellectual property rights. We may also be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our services, or

 

23


Table of Contents

require that we comply with other unfavorable terms. Under all of our sales contracts, we are obligated to indemnify our customers and channel partners against third-party infringement claims, and we may also be obligated to pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify services or refund fees, any of which could be costly. Even if we were to prevail in such a dispute, any litigation regarding intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

Confidentiality arrangements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

We have devoted substantial resources to the development of our technology, business operations and business plans. In order to protect our trade secrets and proprietary information, we rely in significant part on confidentiality arrangements with our employees, licensees, independent contractors, advisers, channel partners, resellers and customers. These arrangements may not be effective to prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, if others independently discover trade secrets and proprietary information, we would not be able to assert trade secret rights against such parties. Effective trade secret protection may not be available in every country in which our services are available or where we have employees or independent contractors. The loss of trade secret protection could make it easier for third parties to compete with our solutions by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and employment laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

We may be subject to damages resulting from claims that our employees or contractors have wrongfully used or disclosed alleged trade secrets of their former employers or other parties.

We could in the future be subject to claims that employees or contractors, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of our competitors or other parties. Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are essential to our solutions, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of these parties. In addition, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to develop, market and support potential solutions or enhancements, which could severely harm our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and be a distraction to management.

The use of open source software in our offerings may expose us to additional risks and harm our intellectual property.

Open source software is typically freely accessible, usable and modifiable. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on unfavorable terms or at no cost. This can subject previously proprietary software to open source license terms.

 

24


Table of Contents

We monitor and control our use of open source software in an effort to avoid unanticipated conditions or restrictions on our ability to successfully commercialize our products and solutions and believe that our compliance with the obligations under the various applicable licenses has mitigated the risks that we have triggered any such conditions or restrictions. However, such use may have inadvertently occurred in the development and offering of our products and solutions. Additionally, if a third-party software provider has incorporated certain types of open source software into software that we have licensed from such third-party, we could be subject to the obligations and requirements of the applicable open source software licenses. This could harm our intellectual property position and have a material adverse effect on our business, results of operations and financial condition.

The terms of many open source software licenses have not been interpreted by U.S. or foreign courts, and there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to successfully commercialize our products and solutions. For example, certain open source software licenses may be interpreted to require that we offer our products or solutions that use the open source software for no cost; that we make available the source code for modifications or derivative works we create based upon, incorporating or using the open source software (or that we grant third parties the right to decompile, disassemble, reverse engineer, or otherwise derive such source code); that we license such modifications or derivative works under the terms of the particular open source license; or that otherwise impose limitations, restrictions or conditions on our ability to use, license, host, or distribute our products and solutions in a manner that limits our ability to successfully commercialize our products.

We could, therefore, be subject to claims alleging that we have not complied with the restrictions or limitations of the applicable open source software license terms or that our use of open source software infringes the intellectual property rights of a third-party. In that event, we could incur significant legal expenses, be subject to significant damages, be enjoined from further sale and distribution of our products or solutions that use the open source software, be required to pay a license fee, be forced to reengineer our products and solutions, or be required to comply with the foregoing conditions of the open source software licenses (including the release of the source code to our proprietary software), any of which could adversely affect our business. Even if these claims do not result in litigation or are resolved in our favor or without significant cash settlements, the time and resources necessary to resolve them could harm our business, results of operations, financial condition and reputation.

Additionally, the use of open source software can lead to greater risks than the use of third-party commercial software, as open source software does not come with warranties or other contractual protections regarding indemnification, infringement claims or the quality of the code.

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.

As a multinational organization, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries. Furthermore, one or more jurisdictions in which we do not believe we are currently subject to tax payment, withholding, or filing requirements, could assert that we are subject to such requirements. Any of these claims or assertions could have a material impact on us and the results of our operations.

 

25


Table of Contents

We are subject to governmental export controls and funds dealings restrictions that could impair our ability to compete in certain international markets and subject us to liability if we are not in full compliance with applicable laws.

Our software and services may be subject to export controls and we may also be subject to restrictions or prohibitions on transactions with, or on dealing in funds transfers to/from, certain embargoed jurisdictions and sanctioned persons and entities, pursuant to the U.K. Export Control Organisation’s restrictions, the U.K. Treasury’s restrictions, the European Council (EU) Regulations, the U.S. Department of Commerce’s Export Administration Regulations, the economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls and U.S. Department of State, and similar laws that may apply in other jurisdictions in which we operate or sell or distribute our services. Export control and economic sanctions laws include prohibitions on the sale or supply of certain products and services to certain embargoed or sanctioned countries, regions, governments, persons and entities, as well as restrictions or prohibitions on dealing in funds to/from those countries, regions, governments, persons and entities. In addition, various countries regulate the import of certain encryption items and technology through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our services or could limit our customers’ ability to implement our services in those countries.

The exportation, re-exportation, and importation of our software and services, including by our channel partners, must comply with applicable laws or else we may be adversely affected, through reputational harm, government investigations, penalties, and/or a denial or curtailment of our ability to export our services. Although we take precautions to prevent our services from being provided in violation of such laws, our services may have been in the past, and could in the future be, provided in violation of such laws.

In 2008, an order was placed by a third-party U.K. reseller of Mimecast Services Limited (“MSL”), our U.K. operating company, for ongoing email archiving services to Persia International Bank (“PIB”), which is based in London, United Kingdom. On July 27, 2010, PIB was named as a designated person on the EU Council Regulation against Iran. In March 2015, we determined that the provision of services after July 26, 2010 by MSL to PIB may have constituted an indirect breach by us of EU Council Regulation 267/2012. We terminated the PIB account with the U.K. reseller and also determined that no payments had been received by us from our channel partner related to this account since April 2014 and that the total revenue recognized by us over the life of the account was less than £12,500. On October 25, 2007, PIB had previously been included on the U.S. List of Specially Designated Nationals and Blocked Persons under Executive Order 13382. The designation was amended on August 16, 2010 to add a designation under the Iranian Financial Sanctions Regulations. However, based on our review to date, because of the U.K. nexus to the activities, we believe this sale did not constitute a violation of U.S. trade sanctions administered by OFAC. However, we may experience reputational harm as a result of the transaction by our U.K. operating company. We have since implemented additional export control compliance management oversight and have undertaken remedial measures and additional screenings to reduce the risk of similar events occurring in the future.

If we are found to be in violation of U.S. sanctions or export control laws, it could result in substantial fines and penalties for us and for the individuals working for us, including civil penalties of up to $250,000 or twice the value of the transaction, whichever is greater, per violation, and in the event of conviction for a criminal violation, fines of up to $1 million and possible incarceration for responsible employees and managers for willful and knowing violations. Under the terms of applicable regulations, each instance in which a company provides goods or services may be considered a separate violation. If we are found to be in violation of U.K. sanctions or export controls, it could also result in unlimited fines for us and responsible employees and managers, as well as imprisonment of up to two years for responsible employees and managers.

 

26


Table of Contents

Changes in our software or services, or changes in export, sanctions or import laws, may delay the introduction and sale of our services in international markets, prevent our customers with international operations from deploying our software or services or, in some cases, prevent the export or import of our software or services to certain countries, regions, governments, persons or entities altogether, which could adversely affect our business, financial condition and operating results.

Our quarterly results may fluctuate for a variety of reasons and may not fully reflect the underlying performance of our business.

Our quarterly operating results, including the levels of our revenue, gross margin, profitability, cash flow and deferred revenue, may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control and, as a result, may not fully reflect the underlying performance of our business. Fluctuations in quarterly results may negatively impact the value of our ordinary shares. Factors that may cause fluctuations in our quarterly financial results include, but are not limited to:

 

    foreign exchange rates;

 

    our ability to attract new customers;

 

    our revenue retention rate;

 

    the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure;

 

    network outages or security breaches;

 

    general economic, industry and market conditions;

 

    increases or decreases in the number of features in our services or pricing changes upon any renewals of customer agreements;

 

    changes in our pricing policies or those of our competitors;

 

    new variations in sales of our services, which has historically been highest in the fourth quarter of a given fiscal year; and

 

    the timing and success of new services and service introductions by us and our competitors or any other change in the competitive dynamics of our industry, including consolidation among competitors, customers or strategic partners.

If we need to raise additional capital to expand our operations and invest in new technologies in the future and cannot raise it on acceptable terms or at all, our ability to compete successfully may be harmed.

We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for at least the next twelve months. However, unforeseen circumstances may arise which may mean that we may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests and the value of our ordinary shares could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. If we need additional capital and cannot raise it on acceptable terms, if at all, we may not be able to, among other things:

 

    develop and enhance our services;

 

    continue to expand our research and development, sales and marketing organizations;

 

27


Table of Contents
    hire, train and retain key employees;

 

    respond to competitive pressures or unanticipated working capital requirements; or

 

    pursue acquisition opportunities.

Our inability to do any of the foregoing could reduce our ability to compete successfully and harm our results of operations.

We are an “emerging growth company” and we cannot be certain whether the reduced requirements applicable to emerging growth companies will make our ordinary shares less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 effective on April 5, 2012, or the JOBS Act, and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not emerging growth companies. Most of such requirements relate to disclosures that we would only be required to make if we cease to be a foreign private issuer in the future. Nevertheless, as a foreign private issuer that is an emerging growth company, we will not be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, for up to five fiscal years after the date of this offering. We will remain an emerging growth company until the earliest of: (a) the last day of our fiscal year during which we have total annual gross revenue of at least $1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on exemptions under the JOBS Act. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.

Risks Related to Our Ordinary Shares and the Offering

Our share price may be volatile, and you may lose all or part of your investment.

The initial public offering price for the ordinary shares sold in this offering was determined by negotiation between us and representatives of the underwriters. This price may not reflect the market price of our ordinary shares following this offering and the price of our ordinary shares may decline. In addition, the market price of our ordinary shares could be highly volatile and may fluctuate substantially as a result of many factors, including:

 

    actual or anticipated fluctuations in our results of operations;

 

    variance in our financial performance from the expectations of market analysts;

 

    announcements by us or our competitors of significant business developments, changes in service provider relationships, acquisitions or expansion plans;

 

    changes in the prices of our services or those of our competitors;

 

    our involvement in litigation;

 

    our sale of ordinary shares or other securities in the future;

 

    market conditions in our industry;

 

28


Table of Contents
    changes in key personnel;

 

    the trading volume of our ordinary shares;

 

    changes in the estimation of the future size and growth rate of our markets; and

 

    general economic and market conditions.

In addition, the stock markets have experienced extreme price and volume fluctuations. Broad market and industry factors may materially harm the market price of our ordinary shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation we could incur substantial costs and our management’s attention and resources could be diverted.

There has been no prior public market for our ordinary shares, and an active trading market may not develop.

Prior to this offering, there has been no public market for our ordinary shares. An active trading market may not develop following completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your ordinary shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your ordinary shares. An inactive market may also impair our ability to raise capital by selling our ordinary shares and may impair our ability to acquire other companies by using our ordinary shares as consideration.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

The trading market for our ordinary shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our shares would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our shares or publishes inaccurate or unfavorable research about our business, our share price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our shares could decrease, which could cause our share price and trading volume to decline.

We do not expect to pay dividends and investors should not buy our ordinary shares expecting to receive dividends.

We do not anticipate that we will declare or pay any dividends in the foreseeable future. Consequently, you will only realize an economic gain on your investment in our ordinary shares if the price appreciates. You should not purchase our ordinary shares expecting to receive cash dividends. Since we do not pay dividends, and if we are not successful in establishing an orderly trading market for our shares, then you may not have any manner to liquidate or receive any payment on your investment. Therefore our failure to pay dividends may cause you to not see any return on your investment even if we are successful in our business operations. In addition, because we do not pay dividends we may have trouble raising additional funds which could affect our ability to expand our business operations.

 

29


Table of Contents

The market price of our ordinary shares could be negatively affected by future sales of our ordinary shares.

Sales by us or our shareholders of a substantial number of ordinary shares in the public market following this offering, or the perception that these sales might occur, could cause the market price of our ordinary shares to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. Of our issued and outstanding shares, all of the ordinary shares sold in this offering will be freely transferable, except for any shares acquired by our “affiliates,” as that term is defined in Rule 144 under the U.S. Securities Act of 1933, as amended, or the Securities Act.

We, our executive officers and directors, and the holders of substantially all of our outstanding ordinary shares and options, have agreed with the underwriters that, subject to limited exceptions, for a period of 180 days after the date of this prospectus, we and they will not directly or indirectly offer, pledge, sell, contract to sell, grant any option to purchase make any short sale or otherwise dispose of any ordinary shares or any securities convertible into or exercisable or exchangeable for ordinary shares, or in any manner transfer all or a portion of the economic consequences associated with the ownership of ordinary shares, or cause a registration statement covering any ordinary shares to be filed except for the ordinary shares offered in this offering, without the prior written consent of the designated representative of the underwriters, who may, in its sole discretion and at any time without notice, release all or any portion of the shares subject to these lock-up agreements.

At any time after 180 days following the date of this offering, the holders of 29,366,270 of our ordinary shares are entitled to demand that we register their shares under the Securities Act for resale into the public markets. All shares sold pursuant to an offering covered by such registration statement will be freely transferable. See “Related Party Transactions—Registration Rights.”

In addition to our current shareholders’ registration rights, as of September 30, 2015, we had outstanding options to purchase 6,109,916 shares under our equity incentive plans and had an additional 57,273 shares available for future grant. The number of ordinary shares reserved for issuance under our equity incentive plans will be increased to an aggregate of 6,600,000 shares immediately following the closing of this offering. Following this offering, we intend to file a registration statement on Form S-8 under the Securities Act registering the shares under our equity incentive plans. Shares included in such registration statement will be available for sale in the public market following such filing and after the expiration of the lock-up period to which the holders of such shares are subject, subject to vesting provisions, except for shares held by affiliates who will have certain restrictions on their ability to sell.

As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of otherwise applicable SEC and NASDAQ Stock Market, or NASDAQ, requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.

As a foreign private issuer, in reliance on the listing rules of NASDAQ, which permit a foreign private issuer to follow the corporate governance practices of its home country, we will be permitted to follow certain Jersey corporate governance practices instead of those otherwise required under the corporate governance standards for U.S. domestic issuers. We currently do not intend to take advantage of any such exemptions. We may in the future elect to follow Jersey home country practices with regard to matters such as the formation and composition of our board of directors, the compensation and nominating and corporate governance committees, separate sessions of independent directors and the requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company).

 

30


Table of Contents

Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ corporate governance rules that apply to U.S. domestic issuers. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on NASDAQ may provide less protection than is accorded to investors of domestic issuers. See “Management—Corporate Governance.”

As a foreign private issuer, we will not be subject to the provisions of Regulation FD or U.S. proxy rules and will be exempt from filing certain Exchange Act reports.

As a foreign private issuer, we will be exempt from a number of requirements under U.S. securities laws that apply to public companies that are not foreign private issuers. In particular, we will be exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file annual and current reports and financial statements with the SEC as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act and we will generally be exempt from filing quarterly reports with the SEC under the Exchange Act. We will also be exempt from the provisions of Regulation FD, which prohibits the selective disclosure of material nonpublic information to, among others, broker-dealers and holders of a company’s securities under circumstances in which it is reasonably foreseeable that the holder will trade in the company’s securities on the basis of the information. Even though we intend to comply voluntarily with Regulation FD, these exemptions and leniencies will reduce the frequency and scope of information and protections to which you are entitled as an investor.

We are not required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement applicable to emerging growth companies to disclose the compensation of our Chief Executive Officer and the other two most highly compensated executive officers on an individual, rather than an aggregate, basis.

We would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to maintain foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose more detailed information about the compensation of our senior executive officers on an individual basis. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we would lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

You will experience immediate and substantial dilution in the net tangible book value of the ordinary shares you purchase in this offering.

The initial public offering price of our ordinary shares substantially exceeds the net tangible book value per share of our ordinary shares immediately after this offering. Therefore, if you purchase our ordinary shares in this offering, you will suffer, as of September 30, 2015, immediate dilution of $8.56 per ordinary share, or $8.47 per ordinary share if the underwriters exercise their option to purchase additional shares in full, in net tangible book value after giving effect to the sale of ordinary shares in

 

31


Table of Contents

this offering at the initial public offering price of $10.00 per share, less underwriting discounts and commissions and the estimated offering expenses payable by us. If outstanding options to purchase our ordinary shares are exercised in the future, you will experience additional dilution. See “Dilution.”

We have broad discretion over the use of proceeds we receive in this offering and may not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion in the application of the net proceeds from this offering and, as a result, you will have to rely upon the judgment of our management with respect to the use of these proceeds. Our management may spend a portion or all of the net proceeds in ways that not all shareholders approve of or that may not yield a favorable return. The failure by our management to apply these funds effectively could harm our business and have an adverse effect on the market price of our ordinary shares.

We have not yet determined whether our existing internal controls over financial reporting systems are compliant with Section 404 of the Sarbanes-Oxley Act, and we cannot provide any assurance that there are no material weaknesses or significant deficiencies in our existing internal controls.

Pursuant to Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, starting with the second annual report that we file with the SEC after the consummation of this offering, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, once we no longer qualify as an “emerging growth company” under the JOBS Act and lose the ability to rely on the exemptions related thereto discussed above, our independent registered public accounting firm will also need to attest to the effectiveness of our internal control over financial reporting under Section 404. We have not yet commenced the process of determining whether our existing internal controls over financial reporting systems are compliant with Section 404 and whether there are any material weaknesses or significant deficiencies in our existing internal controls. This process will require the investment of substantial time and resources, including by our chief financial officer and other members of our senior management. In addition, we cannot predict the outcome of this determination and whether we will need to implement remedial actions in order to implement effective control over financial reporting. The determination and any remedial actions required could result in us incurring additional costs that we did not anticipate. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. As a result, we may experience higher than anticipated operating expenses during and after the implementation of these changes. If we are unable to implement any of the required changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting and/or results of operations and could result in an adverse opinion on internal controls from our independent registered public accounting firm.

A change in our tax residence could have a negative effect on our future profitability.

Although we are organized under the laws of Jersey, our affairs are, and are intended to continue to be, managed and controlled in the United Kingdom for tax purposes and therefore we are resident in the United Kingdom for U.K. and Jersey tax purposes. It is possible that in the future, whether as a result of a change in law or the practice of any relevant tax authority or as a result of any change in the conduct of our affairs or for any other reason, we could become, or be regarded as having become, a resident in a jurisdiction other than the United Kingdom. If we cease to be a U.K. tax resident, we may be subject to a charge to U.K. corporation tax on chargeable gains on our assets and to unexpected

 

32


Table of Contents

tax charges in other jurisdictions on our income. Similarly, if the tax residency of any of our subsidiaries were to change from their current jurisdiction for any of the reasons listed above, we may be subject to a charge to local capital gains tax on the assets.

Taxing authorities could reallocate our taxable income among our subsidiaries, which could increase our consolidated tax liability.

We conduct operations world-wide through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between our company and its subsidiaries. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arms’ length and that appropriate documentation is maintained to support the transfer pricing. While we believe that we operate in compliance with applicable transfer pricing laws and intend to continue to do so, our transfer pricing procedures are not binding on applicable tax authorities. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arms’ length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us. In addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it would increase our consolidated tax liability, which could adversely affect our financial condition, results of operations and cash flows. Double taxation should be mitigated in these circumstances where the affiliated parties that are subject to the transfer pricing adjustments are able to benefit from any applicable double taxation agreement.

Our ability to use our U.S. net operating loss carry forwards may be subject to limitation.

As of March 31, 2015, we had U.S. federal net operating loss of approximately $30.4 million, U.S. state net operating loss of approximately $27.4 million, and non-U.S. net operating losses of approximately $15.7 million. In general, net operating losses in one country cannot be used to offset income in any other country and net operating losses in one state cannot be used to offset income in any other state. Accordingly, we may be subject to tax in certain jurisdictions even if we have unused net operating losses in other jurisdictions. Also, each jurisdiction in which we operate may have its own limitations on our ability to utilize net operating losses or tax credit carryovers generated in that jurisdiction. These limitations may increase our U.S. federal, state, and/or foreign income tax liability.

U.S. Holders of our ordinary shares could be subject to material adverse tax consequences if we are considered a Passive Foreign Investment Company (or PFIC) for U.S. federal income tax purposes.

We do not believe that we will qualify as a PFIC for U.S. federal income tax purposes in the 2015 tax year. We also do not expect to become a PFIC in the foreseeable future, but the possible status as a PFIC must be determined annually and therefore may be subject to change. If we are at any time treated as a PFIC, such treatment could result in a reduction in the after-tax return to U.S. Holders of our ordinary shares and may cause a reduction in the value of such shares. Furthermore, if we are at any time treated as a PFIC, U.S. Holders of our ordinary shares could be subject to greater U.S. income tax liability than might otherwise apply, imposition of U.S. income tax in advance of when tax would otherwise apply and detailed tax filing requirements that would not otherwise apply. For U.S. federal income tax purposes, “U.S. Holders” include individuals and various entities. A corporation is classified as a PFIC for any taxable year in which (i) at least 75% of its gross income is passive income or (ii) at least 50% of the average quarterly value of all its total gross assets is attributable to assets that produce or are held for the production of passive income. For this purpose, passive income

 

33


Table of Contents

includes certain dividends, interest, royalties and rents that are not derived in the active conduct of a trade or business. The PFIC rules are complex and a U.S. Holder of our ordinary shares is urged to consult its own tax advisors regarding the possible application of the PFIC rules to it in its particular circumstances. For information on the U.S. federal tax implications on U.S. Holders, see “Taxation.”

U.S. shareholders may not be able to enforce civil liabilities against us.

A number of our directors and executive officers are not residents of the U.S., and all or a substantial portion of the assets of such persons are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against them judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States.

There is also a doubt as to the enforceability in England and Wales and Jersey, whether by original actions or by seeking to enforce judgments of U.S. courts, of claims based on the federal securities laws of the U.S. In addition, punitive damages in actions brought in the U.S. or elsewhere may be unenforceable in England and Wales and Jersey.

The rights afforded to shareholders are governed by Jersey law. Not all rights available to shareholders under English law or U.S. law will be available to shareholders.

The rights afforded to shareholders will be governed by Jersey law and by the Articles of Association, and these rights differ in certain respects from the rights of shareholders in typical English companies and U.S. corporations. In particular, Jersey law significantly limits the circumstances under which shareholders of companies may bring derivative actions and, in most cases, only the corporation may be the proper claimant or plaintiff for the purposes of maintaining proceedings in respect of any wrongful act committed against it. Neither an individual nor any group of shareholders has any right of action in such circumstances. In addition, Jersey law does not afford appraisal rights to dissenting shareholders in the form typically available to shareholders of a U.S. corporation.

 

34


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

    our expectations regarding our revenue, expenses and other results of operations;

 

    our plans to invest in sales and marketing efforts and expand our channel partnerships;

 

    our ability to attract and retain customers;

 

    our spending of the net proceeds from this offering;

 

    our plans to continue to invest in the research and development of technology for both existing and new products;

 

    the growth rates of the markets in which we compete;

 

    our liquidity and working capital requirements;

 

    our anticipated strategies for growth;

 

    our ability to anticipate market needs and develop new and enhanced solutions to meet those needs;

 

    anticipated trends and challenges in our business and in the markets in which we operate;

 

    our ability to compete in our industry and innovation by our competitors;

 

    our ability to adequately protect our intellectual property; and

 

    our plans to pursue strategic acquisitions.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not

 

35


Table of Contents

actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

 

36


Table of Contents

INDUSTRY AND MARKET DATA

This prospectus contains estimates and other statistical data, including those relating to our industry, that we have obtained from industry publications and reports, including reports from Gartner, Inc., Endurance International Group, The Radicati Group, Inc., Forrester Research, Inc. and 451 Research. These industry publications and reports generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates, as there is no assurance that any of them will be reached. Although we have not independently verified the accuracy or completeness of the data contained in these industry publications and reports, based on our industry experience we believe that the publications and reports are reliable and that the conclusions contained in the publications and reports are reasonable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our actual results to differ materially from those expressed in the industry publications and reports.

The reports from Gartner described herein, or the Gartner Reports, represent data, research opinion or viewpoints published as part of a syndicated subscription service, by Gartner, and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Reports are subject to change without notice. The Gartner Reports are (i) Magic Quadrant for Enterprise Information Archiving Gartner, dated November 2014, (ii) Survey Analysis: Cloud Adoption Across Vertical Industries Exhibits More Similarities Than Differences, dated February 2015, (iii) Cloud Office Questions Begin the Shift From “If” to “When”, dated April 2015, (iv) Forecast: Information Security, Worldwide, 2013-2019, 2Q15 Update, dated July 2015, (v) Forecast: Storage Software Market, Worldwide, 2012-2019, 2Q15 Update, dated June 2015, and (vi) The State of E-Discovery in 2015 and Beyond, dated February 2015.

The report from Forrester Research described herein is Understand the Context of eDiscovery Tools for Your Enterprise, dated November 2013. The report from 451 Research described herein is Global Enterprise Mobility Forecast, dated March 2015.

 

37


Table of Contents

USE OF PROCEEDS

We estimate that we will receive net proceeds from the issuance of our ordinary shares in this offering of $67.9 million, based upon the initial public offering price of $10.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that we will receive net proceeds from this offering of $73.4 million. We will not receive any of the proceeds from the sale of shares by the selling shareholders. The selling shareholders consist of members of our senior management.

The principal purposes of this offering are to increase our financial flexibility, create a public market for our ordinary shares and facilitate our future access to the public equity markets. We currently have no specific plans for the use of the net proceeds of this offering and are unable to identify the amount of proceeds that will be applied to any particular purpose. We anticipate that we will use the net proceeds we receive from this offering, including any net proceeds we receive from the exercise of the underwriters’ option to acquire additional ordinary shares in the offering, for working capital and other general corporate purposes. We expect to continue to invest in and to grow our research and development capabilities as well as expand our sales and marketing teams. We may also use a portion of the net proceeds for the acquisition of or investment in businesses, products, services, technologies or other assets that we believe are complementary to our own, although we have no agreements or understandings with respect to any acquisitions at this time.

The amount of what, and timing of when, we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described under “Risk Factors” in this prospectus. Accordingly, our management will have broad discretion in applying a portion of the net proceeds of this offering. Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds of this offering in a variety of capital preservation investments, which may include term deposits, short-term, investment-grade, interest-bearing instruments and government securities.

 

38


Table of Contents

DIVIDEND POLICY

We have never declared or paid any dividends on our ordinary shares, and we currently do not plan to declare dividends on our ordinary shares in the foreseeable future. Any determination to pay dividends to holders of our ordinary shares will be at the discretion of our board of directors and will depend upon many factors, including our financial condition, results of operations, projections, liquidity, earnings, legal requirements, restrictions in our debt arrangements and other factors that our board of directors deem relevant. Pursuant to the Companies (Jersey) Law 1991, we may only pay a dividend if the directors who authorize the dividend make a prior solvency statement in statutory form.

 

39


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2015:

 

    on an actual basis;

 

    on a pro forma basis, giving effect to (i) the conversion of all of our outstanding convertible preferred shares into an aggregate of 12,576,364 ordinary shares, (ii) the redesignation or conversion of all of our outstanding Founder, Class A, Class B and Class C ordinary shares into 33,676,234 ordinary shares, and (iii) the share-based compensation expense of $1.8 million associated with certain equity awards that will become exercisable upon the closing of this offering; and

 

    on a pro forma as adjusted basis, giving effect to the pro forma adjustments set forth above and further effect to (i) the adoption and effectiveness of our amended and restated articles of association immediately prior to the closing of this offering, and (ii) the sale and issuance by us of 7,750,000 ordinary shares in this offering, based on the initial public offering price of $10.00 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

This table should be read with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Selected Consolidated Financial and Other Data” appearing elsewhere in this prospectus.

 

     As of September 30, 2015  
     Actual     Pro Forma     Pro Forma
As Adjusted(1)
 
     (in thousands, except share and per share
data)
 

Cash and cash equivalents

   $ 34,051      $ 34,051      $ 103,508   
  

 

 

   

 

 

   

 

 

 

Debt, current and long-term

   $ 9,961      $ 9,961      $ 9,961   

Convertible preferred shares, $0.012 par value, 12,576,364 shares authorized, issued and outstanding, actual; 12,576,364 shares authorized, no shares issued or outstanding, pro forma; no shares authorized, issued or outstanding, pro forma as adjusted.

     59,305                 

Shareholders’ equity (deficit):

      

Ordinary shares, $0.012 par value, 118,657,039 shares authorized, 33,707,162 shares issued and outstanding, actual; 118,657,039 shares authorized, 46,252,598 shares issued and outstanding, pro forma; $0.012 par value, 300,000,000 shares authorized, 54,002,598 shares issued and outstanding, pro forma as adjusted

     404        555        648   

Preferred shares, no shares authorized, issued or outstanding, actual; no shares authorized, issued or outstanding, pro forma; $0.012 par value, 5,000,000 shares authorized, no shares issued or outstanding, pro forma as adjusted

                     

Additional paid-in capital

     35,597        96,553        164,335   

Accumulated deficit

     (85,413     (87,215     (87,215

Accumulated other comprehensive income

     382        382        382   
  

 

 

   

 

 

   

 

 

 

Total shareholders’ (deficit) equity

     (49,030     10,275        78,150   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 20,236      $ 20,236      $ 88,111   
  

 

 

   

 

 

   

 

 

 

 

(1) For purposes of the pro forma as adjusted amounts shown above, the net proceeds to be received by us from the sale of ordinary shares in this offering of $67.9 million has been increased by approximately $1.6 million to reflect the estimated offering expenses which had been paid by us as of September 30, 2015.

 

40


Table of Contents

The table above excludes:

 

    6,109,916 ordinary shares issuable upon the exercise of options outstanding as of September 30, 2015 at a weighted-average exercise price of $3.38 per share;

 

    57,273 ordinary shares reserved for future issuance as of September 30, 2015 under our equity incentive plans that were in effect prior to completion of this offering; and

 

    5,500,000 ordinary shares reserved for future issuance under our 2015 Share Option and Incentive Plan, and 1,100,000 ordinary shares reserved for future issuance under our 2015 Employee Share Purchase Plan, each of which will become effective upon the closing of this offering.

 

41


Table of Contents

DILUTION

If you invest in our ordinary shares in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our ordinary shares and the pro forma as adjusted net tangible book value per share of our ordinary shares immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of ordinary shares in this offering and the pro forma as adjusted net tangible book value per share immediately after completion of this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of ordinary shares outstanding immediately prior to the offering. Our historical net tangible book value as of September 30, 2015 was $10.0 million, or $0.30 per share. Our pro forma net tangible book value as of September 30, 2015 was $10.0 million, or $0.22 per share, based on the total number of ordinary shares outstanding as of September 30, 2015, after giving effect to the conversion of all of our outstanding convertible preferred shares as of September 30, 2015 into an aggregate of 12,576,364 ordinary shares and the conversion of the 550,000 outstanding Class C ordinary shares as of September 30, 2015 into 519,072 ordinary shares, which conversions will occur upon the closing of this offering. After giving effect to the issuance and sale of the ordinary shares in this offering, at the initial public offering price of $10.00 per share, and the receipt of the net proceeds therefrom, our pro forma as adjusted net tangible book value at September 30, 2015 would have been $77.9 million, or $1.44 per share. This represents an immediate increase in pro forma net tangible book value to existing shareholders of $1.22 per share and an immediate dilution to new investors of $8.56 per share.

The following table illustrates this dilution on a per share basis:

 

Initial public offering price per ordinary share

     $ 10.00   
    

 

 

 

Historical net tangible book value per ordinary share as of September 30, 2015

   $ 0.30     

Decrease in net tangible book value per ordinary share attributable to the conversion of our outstanding convertible preferred shares and Class C ordinary shares into ordinary shares

     (0.08  
  

 

 

   

Pro forma net tangible book value per ordinary share as of September 30, 2015

   $ 0.22     

Increase per ordinary share attributable to new investors in this offering

     1.22     
  

 

 

   

Pro forma as adjusted net tangible book value per ordinary share as of September 30, 2015 after giving effect to this offering

       1.44   
    

 

 

 

Dilution per ordinary share to new investors

     $ 8.56   
    

 

 

 

The following table presents, on a pro forma as adjusted basis as of September 30, 2015, the differences between the existing shareholders and the new investors purchasing our ordinary shares in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of ordinary shares and convertible preferred shares, cash received from the exercise of share options, and the average price per share paid or to be paid to us at the initial public offering price of $10.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Ordinary Shares
Purchased
    Total Consideration     Average
Price
per Share
 
     Number      Percent     Amount      Percent    

Existing shareholders

     46,252,598         86   $ 75,747,108         49   $ 1.64   

New investors

     7,750,000         14        77,500,000         51        10.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     54,002,598         100   $ 153,247,108         100   $ 2.84   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

42


Table of Contents

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise their option to purchase additional shares in full, our existing shareholders would own 85% and our new investors would own 15% of the total number of our ordinary shares outstanding upon the completion of this offering.

The number of ordinary shares that will be outstanding after this offering is based on 46,252,598 shares outstanding as of September 30, 2015, and excludes:

 

    6,109,916 ordinary shares issuable upon the exercise of options outstanding as of September 30, 2015 at a weighted-average exercise price of $3.38 per share;

 

    57,273 ordinary shares reserved for future issuance as of September 30, 2015 under our equity incentive plans that were in effect prior to the completion of this offering; and

 

    5,500,000 ordinary shares reserved for future issuance under our 2015 Share Option and Incentive Plan, and 1,100,000 ordinary shares reserved for future issuance under our 2015 Employee Share Purchase Plan, each of which will become effective upon the closing of this offering.

 

43


Table of Contents

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present selected consolidated financial and other data for our business. You should read this information together with the sections entitled “Summary Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes and other financial information included elsewhere in this prospectus. Our consolidated financial statements have been prepared in accordance with U.S. GAAP.

We derived the consolidated statements of operations data for the years ended March 31, 2014 and 2015 and the consolidated balance sheet data as of March 31, 2014 and 2015 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated statements of operations data for the year ended March 31, 2013 and the consolidated balance sheet data as of March 31, 2013 from our unaudited consolidated financial statements not included in this prospectus. We derived the consolidated statements of operations data for the six months ended September 30, 2014 and 2015 and the consolidated balance sheet data as of September 30, 2015 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial data on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results to be expected in the future.

 

     Year ended March 31,     Six months ended
September 30,
 
     2013     2014     2015     2014     2015  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenue

   $ 66,750      $ 88,315      $ 116,085      $ 55,546      $ 67,835   

Cost of revenue(1)

     21,165        28,673        36,821        18,062        20,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     45,585        59,642        79,264        37,484        47,766   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

          

Research and development(1)

     11,019        12,844        14,461        7,910        7,463   

Sales and marketing(1)

     35,635        46,971        51,224        26,501        27,977   

General and administrative(1)

     13,666        11,187        15,806        9,528        8,713   

Restructuring

                   1,203        1,263          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     60,320        71,002        82,694        45,202        44,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (14,735     (11,360     (3,430     (7,718     3,613   

Other income (expense)

          

Interest income

     77        86        62        33        29   

Interest expense

     (844     (542     (703     (311     (345

Foreign exchange income (expense)

     1,188        (5,055     4,508        640        (3,100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     421        (5,511     3,867        362        (3,416
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before provision for income taxes

     (14,314     (16,871     437        (7,356     197   

Provision for income taxes

     15        19        152        76        278   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (14,329   $ (16,890   $ 285      $ (7,432   $ (81
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share applicable to ordinary shareholders:(2)

          

Basic

   $ (0.46   $ (0.53   $ 0.01      $ (0.23   $ (0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.46   $ (0.53   $ 0.01      $ (0.23   $ (0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

44


Table of Contents
     Year ended March 31,     Six months ended
September 30,
 
     2013      2014      2015     2014      2015  
     (in thousands, except per share data)  

Weighted-average number of ordinary shares used in computing net (loss) income per share applicable to ordinary shareholders:

             

Basic

     31,060         31,719         32,354        32,058         33,371   

Diluted

     31,060         31,719         36,075        32,058         33,371   

Pro forma net loss per share applicable to ordinary shareholders:(3)

             

Basic

         $ (0.03      $ (0.04
        

 

 

      

 

 

 

Diluted

         $ (0.03      $ (0.04
        

 

 

      

 

 

 

Pro forma weighted-average number of ordinary shares used in computing pro forma net loss per share applicable to ordinary shareholders:

             

Basic

           44,899           45,916   

Diluted

           44,899           45,916   

 

     At March 31,     At September 30,
2015
 
     2013     2014     2015    
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 36,458      $ 19,158      $ 32,890      $ 34,051   

Property and equipment, net

     14,563        24,974        23,159        24,377   

Total assets

     73,453        75,783        88,829        95,865   

Debt, current and long-term

     8,669        9,092        12,364        9,961   

Deferred revenue, current and long-term

     35,222        46,131        53,308        57,496   

Convertible preferred shares

     59,305        59,305        59,305        59,305   

Total shareholders’ deficit

     (44,700     (56,750     (53,851     (49,030

 

     Year ended March 31,     Six months ended
September 30,
 
     2014     2015     2014     2015  
     (dollars in thousands)  

Supplemental Financial and Other Data:

        

Revenue constant currency growth rate(4)

     37     33     34     30

Revenue retention rate(5)

     105     107     105     108

Total customers(6)

     10,300        13,800        11,800        15,200   

Adjusted EBITDA(7)

   $ (1,170   $ 14,227      $ 3,360      $ 10,799   

 

(1) Share-based compensation expense included in these line items was as follows:

 

     Year ended March 31,      Six months ended September 30,  
     2013      2014      2015      2014      2015  
     (in thousands)  

Cost of revenue

   $ 239       $ 151       $ 151       $ 110       $ 129   

Research and development

     174         291         544         152         74   

Sales and marketing

     2,663         395         1,684         1,417         851   

General and administrative

     3,600         395         3,047         2,547         925   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 6,676       $ 1,232       $ 5,426       $ 4,226       $ 1,979   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

45


Table of Contents
(2) Basic and diluted net (loss) income per share applicable to ordinary shareholders is computed based on the weighted net-average number of ordinary shares outstanding during each period. For additional information, see Note 2 to the notes to our consolidated financial statements included elsewhere in this prospectus.

 

(3) Pro forma basic and diluted net loss per share applicable to ordinary shareholders and pro forma weighted-average shares outstanding has been computed to give effect to the conversion of all of our outstanding convertible preferred shares into ordinary shares, as well as the conversion of the 550,000 outstanding Class C ordinary shares into 519,072 ordinary shares, which will occur upon the closing of this offering as if such conversions occurred as of the date of original issuance, but does not give effect to the issuance of shares in connection with this offering. Additionally, pro forma net loss includes share-based compensation expense of $1.8 million related to share-based awards that have satisfied the service condition as of September 30, 2015, which will become exercisable upon the closing of this offering. For additional information on the conversion of the preferred shares and the conversion of the Class C ordinary shares, see Notes 7 and 8 to the notes to our consolidated financial statements included elsewhere in this prospectus.

 

(4) 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 the fiscal years below, revenue from entities reporting in foreign currencies was translated into U.S. dollars using the comparable prior period’s foreign currency exchange rates. For example, the average rates in effect for the fiscal year ended to March 31, 2014 were used to convert revenue for the year ended March 31, 2015 and the revenue for the comparable prior period ended March 31, 2014, rather than the actual exchange rates in effect during the respective period. Revenue constant currency growth rate is a non-GAAP financial measure. A reconciliation of this non-GAAP measure to its most directly comparable U.S. GAAP measures for the respective periods can be found in the table below.

 

     Year ended March 31,     Six months ended
September 30,
 
     2014     2015     2014     2015  
     (dollars in thousands)  

Reconciliation of Revenue Constant Currency Growth Rate:

        

Revenue, as reported

   $ 88,315      $ 116,085      $ 55,546      $ 67,835   

Revenue year-over-year growth rate, as reported

     32     31     37     22

Estimated impact of foreign currency fluctuations

     5     2     (3 )%      8

Revenue constant currency growth rate

     37     33     34     30

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 report 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 U.S. GAAP. For example, revenue constant currency growth rates, by their nature, exclude the impact of foreign exchange, which may have a material impact on U.S. 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.

 

(5)

We calculate our revenue retention rate by annualizing revenue on a constant currency basis recorded on the last day of the measurement period for only those customers in place throughout the entire measurement period. We include add-on, or upsell, revenue from additional employees and services purchased by existing customers. We divide the result by revenue on a constant currency basis on the first

 

46


Table of Contents
  day of the measurement period for all customers in place at the beginning of the measurement period. The measurement period is based on the trailing twelve months. The revenue on a constant currency basis is based on the average exchange rates in effect during the respective period.

 

(6) Rounded up to the nearest hundred customers.

 

(7) Adjusted EBITDA is a non-GAAP financial measure that we define as net income (loss), adjusted to exclude: depreciation and amortization, share-based compensation expense, restructuring expense, interest income and interest expense, the provision for income taxes and foreign currency exchange (expense) income.

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.

The following table presents a reconciliation of net (loss) income to Adjusted EBITDA:

 

     Year ended March 31,     Six months ended
September 30,
 
     2014     2015     2014     2015  
     (in thousands)  

Reconciliation of Adjusted EBITDA:

        

Net (loss) income

   $ (16,890   $ 285      $ (7,432   $ (81

Depreciation and amortization

     8,958        11,028        5,589        5,207   

Interest expense, net

     456        641        278        316   

Provision for income taxes

     19        152        76        278   

Restructuring

            1,203        1,263          

Share-based compensation expense

     1,232        5,426        4,226        1,979   

Foreign exchange expense (income)

     5,055        (4,508     (640     3,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (1,170   $ 14,227      $ 3,360      $ 10,799   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

47


Table of Contents

EXCHANGE RATE INFORMATION

Our business to date has been conducted primarily in the United Kingdom. The following table presents information on the exchange rates between British pounds and the U.S. dollar for the periods indicated. Such U.S. dollar amounts are not necessarily indicative of the amounts of U.S. dollars that could actually have been purchased upon exchange of pounds sterling at the dates indicated.

 

(U.S. dollar per pound)    Period End      Average      Low      High  

Year Ended March 31,

           

2011

     1.6048         1.5564         1.4344         1.6387   

2012

     1.5985         1.5967         1.5301         1.6691   

2013

     1.5193         1.5802         1.4877         1.6275   

2014

     1.6675         1.5895         1.4837         1.6750   

2015

     1.4850         1.6139         1.4686         1.7165   

Month Ended:

           

May 31, 2015

     1.5286         1.5456         1.5118         1.5772   

June 30, 2015

     1.5727         1.5576         1.5187         1.5882   

July 31, 2015

     1.5634         1.5560         1.5353         1.5634   

August 31, 2015

     1.5363         1.5578         1.5362         1.5731   

September 30, 2015

     1.5116         1.5338         1.5116         1.5573   

October 31, 2015

     1.5445         1.5343         1.5162         1.5475   

 

48


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the section entitled “Selected Consolidated Financial and Other Data” and the consolidated financial statements and related notes and other financial information included elsewhere in this prospectus. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus.

Overview

We are a leading provider of next generation cloud security and risk management services for corporate information and email. Our fully-integrated suite of proprietary cloud services protects customers of all sizes from the significant business and data security risks to which their email system exposes them. We protect customers from today’s rapidly changing threat landscape where email has become a powerful attack vector and data leak concern. We also mitigate the significant business disruption that email failure or downtime causes. In addition, our archiving services secure, store and manage critical corporate communications and information to address growing compliance and e-discovery requirements and enable customers to use this increasing archive of information to improve employee productivity.

We operate our business on a 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 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. Revenue recognized during the year ended March 31, 2015 for customers that existed at March 31, 2014 was $106.0 million representing 91% of total revenue.

We market and sell our services to organizations of all sizes across a broad range of industries. As of September 30, 2015, we provided our services to approximately 15,200 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 depends on our ability to expand our customer base and to sell additional services to our existing customers. The total number of our customers increased by 34% from March 31, 2014 to March 31, 2015, and 28% from September 30, 2014 to September 30, 2015.

In the fiscal year ended March 31, 2015, we generated 62% of our revenue outside of the United States, with 42% generated from the United Kingdom, 19% from South Africa and 2% from the rest of the world. In the six months ended September 30, 2015, we generated 59% of our revenue outside of the United States, with 40% generated from the United Kingdom, 17% from South Africa and 2% from the rest of the world. Our most significant growth market is the United States. We also believe that there is significant 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.

The majority of our revenue is generated from annual subscriptions. Our services are implemented, configured and operated without the need for substantial training or professional

 

49


Table of Contents

services. For customers that choose to develop increased proficiency in our service or who require assistance for more complex configurations and for those that wish to import historical data, we offer additional services.

We were founded in 2003 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 first service, Mimecast Email Security, which we launched in late 2003 and was quickly followed by Mimecast Email Continuity. In 2004, we added Mimecast Enterprise Information Archiving. These three services generate a large proportion of our revenue today. In 2006, we started the development of our proprietary cloud architecture, which we refer to as Mime | OS. We believed early on that investing in the development of our own cloud operating system was a strategic requirement that would enable us to integrate and scale our services. Mimecast Large File Send was released in 2013 and was followed by Mimecast Targeted Threat Protection in 2014, our advanced persistent threat protection service. In 2014, we also released comprehensive risk mitigation technologies specifically for Office 365, and in 2015, we released Mimecast Secure Messaging.

We have achieved significant revenue growth in recent periods. Our revenue grew 32% from $66.8 million in the year ended March 31, 2013 to $88.3 million in the year ended March 31, 2014. Revenue grew 31% from $88.3 million in the year ended March 31, 2014 to $116.1 million in the year ended March 31, 2015. We incurred net losses of $14.3 million and $16.9 million in the years ended March 31, 2013 and 2014, respectively, and had net income of $0.3 million in the year ended March 31, 2015. Revenue grew 22% from $55.5 million in the six months ended September 30, 2014 to $67.8 million in the six months ended September 30, 2015. We incurred a net loss of $0.1 million in the six months ended September 30, 2015.

Service Disruption

On September 21, 2015, we experienced a service disruption that resulted in service downtime for many of our customers for several hours. As a result of the service disruption, we expect to voluntarily provide service credits in the amount of approximately $0.7 million, which was accrued during the quarter ended September 30, 2015 and is expected to be paid during the quarter ended December 31, 2015.

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 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 year ended March 31, 2015, our customer base increased by approximately 3,500 organizations. From September 30, 2014 to September 30, 2015, our customer base increased by approximately 3,350 organizations.

Further Penetration of 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 employees and selling additional services. We 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.

 

50


Table of Contents

Investment in Growth. We are expanding our operations, increasing our headcount and developing software to both enhance our current offerings and build new features. 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 any benefits from such investments. In the year ending March 31, 2016, we plan to continue increasing the size of our direct sales force and to invest in the development of additional marketing content. We also expect to significantly increase the size of our research and development team.

Currency Fluctuations. We conduct business in the United States, the United Kingdom and other countries in Europe, South Africa and other countries in Africa, and also Australia. As a result, we are exposed to risks associated with fluctuations in currency exchange rates, particularly between the U.S. dollar, the British pound and the South African rand. In the year ended March 31, 2015, 40% of our revenue was denominated in British pounds, 39% in U.S. dollars, 19% in South African rand and 2% in other currencies. In the six months ended September 30, 2015, 38% of our revenue was denominated in British pounds, 42% in U.S. dollars, 17% in South African rand, and 2% in other currencies. Given that our functional currency and that of our subsidiaries is the local currency of each entity but our reporting currency is the U.S. dollar, devaluations of the British pound, South African rand and other currencies relative to the U.S. dollar impacts our profitability.

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:

 

     Year ended March 31,     Six months ended
September 30,
 
     2014     2015     2014     2015  
     (dollars in thousands)  

Gross profit percentage

     68     68     67     70

Revenue constant currency growth rate(1)

     37     33     34     30

Revenue retention rate

     105     107     105     108

Total customers(2)

     10,300        13,800        11,800        15,200   

Adjusted EBITDA(1)

   $ (1,170   $ 14,227      $ 3,360      $ 10,799   

 

(1) Adjusted EBITDA and revenue constant currency growth rate are non-GAAP measures. For a reconciliation of Adjusted EBITDA and revenue constant currency growth rate to the nearest comparable GAAP measures, see “Selected Consolidated Financial and Other Data.”

 

(2) Rounded up to the nearest hundred customers.

Gross Profit Percentage. Gross profit percentage is calculated as gross profit divided by revenue. Our gross profit percentage has remained relatively constant over the past three years. 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 the same as it would be on a constant currency basis.

Revenue Constant Currency Growth Rate. We believe revenue constant currency growth rate is a key indicator of our operating results. We calculate revenue constant currency growth rate by

 

51


Table of Contents

translating revenue from entities reporting in foreign currencies into U.S. dollars using the comparable foreign currency exchange rates from the prior fiscal year. For further explanation of the uses and limitations of this measure and a reconciliation of our revenue constant currency growth rate to revenue, as reported, the most directly comparable GAAP measure, please see “Selected Consolidated Financial and Other Data.” As our total revenue grew over the past three years, our revenue constant currency growth rate has declined slightly over the same period, as the incremental growth from period to period represented a smaller percentage of total revenue as compared to the prior period.

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 revenue retention rate is driven by our customer renewals and upsells. For each of the fiscal years ended March 31, 2013, 2014 and 2015 our customer retention rate has been consistently greater than 90%. We calculate our 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. We include add-on, or upsell, revenue from additional employees and services purchased by 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. Our revenue retention rate has remained relatively constant over the past three years.

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. We expect to continue to grow our customer base through the addition of new customers in each of our markets.

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 and amortization, share-based compensation expense, restructuring expense, interest income and interest expense, the provision for income taxes and foreign currency exchange (expense) income. For further explanation of the uses and limitations of this measure and a reconciliation of our Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss), please see “Selected Consolidated Financial and Other Data.” We expect that our Adjusted EBITDA will decrease in the near term as we focus on growing our research and development capabilities as well as expand our sales and marketing teams.

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 set-up, ingestion fees and training fees.

We generally license our services on a price per employee basis under annual contracts. Some services, such as ingestion services, are invoiced upfront and recognized on a straight-line basis over the longer of the contract term or the average customer life.

We serve thousands of customers in multiple industries, and our revenue is not concentrated with any single customer or industry. For the years ended March 31, 2014 and 2015 and for the six months ended September 30, 2014 and 2015, 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.

 

52


Table of Contents

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. At March 31, 2015, deferred revenue was $53.3 million. Estimated future recognition from deferred revenue at March 31, 2015 was $45.3 million in 2016, $4.0 million in 2017, $2.0 million in 2018 and $2.0 million thereafter.

We have continued to expand our customer base, and have recently signed on more customers with monthly, instead of annual, billing terms. The proportion of aggregate contract value reflected on our balance sheet as deferred revenue may decrease if this trend continues.

We recognize revenue ratably on a straight-line basis over the subscription term, which is typically one year in duration, provided that an enforceable contract has been signed by both parties, we have given the customer access to our SaaS solutions, collection of the fee is probable, and the fee is fixed or determinable. Our subscription service arrangements do not contain refund-type provisions.

Our professional services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, as discussed in the section below entitled “—Critical Accounting Policies and Estimates”, these revenues are recognized as the services are rendered.

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 include 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 and depreciation expense. 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 currently expect our cost of revenue to increase in absolute dollars due to expenditures related to 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 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, 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 invest in further developing our Mime | OS platform, improving our existing services and creating new features that will increase the functionality of our new and existing products. Research and development expenses as a percentage of total revenue may fluctuate on a quarterly basis but we expect it to increase in the near-term as a result of the substantial expected investments noted above.

 

53


Table of Contents

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, commissions and share-based compensation. Other costs included are those relating to marketing and promotional events, online marketing, product marketing and allocated overhead costs. We expense all costs as they are incurred, including sales commissions. We expect that our sales and marketing expenses will increase substantially in the year ending March 31, 2016 as we expand our sales and marketing efforts globally, and particularly in the United States. 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, which will increase these expenses in absolute dollars. Over the long term, we believe that sales and marketing expenses as a percentage of revenue will decrease, but 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.

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, in addition to the costs associated with professional fees, insurance premiums, other corporate expenses and allocated overhead costs. In future periods, 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 meet the compliance requirements of operating as a public company, including those costs incurred in connection with Section 404 of the Sarbanes-Oxley Act. Over the long term, we believe that general and administrative expenses as a percentage of revenue will decrease.

Restructuring

Restructuring consist of severance, outplacement, and other separation benefits.

Other Income (Expense)

Other income (expense) is comprised of the following items:

Interest income

Interest income includes interest income earned on our cash and cash equivalents balance. We expect interest income to vary each reporting period depending on our average cash and cash equivalents balance during the period and market interest rates.

Interest expense

Interest expense consists primarily of interest expense associated with our credit facility and our outstanding debt.

Foreign exchange (expense) income

Foreign exchange (expense) income consists primarily of foreign exchange fluctuations related to short-term intercompany accounts and foreign currency exchange gains and losses related to

 

54


Table of Contents

transactions denominated in currencies other than the functional currency for each of our subsidiaries. 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 taxes 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 of 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. To date, we have incurred cumulative net losses and maintain a full valuation allowance on our net deferred tax assets. Therefore, we have not recorded any domestic (U.K.) tax provisions and our effective tax rate differs from statutory rates. Our tax expense for the fiscal year ended March 31, 2015 and prior years primarily relates to our U.S. domiciled entity, including state tax provisions. Our tax expense for the six months ended September 30, 2015 was primarily attributed to estimated taxes related to our domestic jurisdictions.

Comparison of Period-to-Period Results of Operations

The following table sets forth selected consolidated statements of operations data for each of the periods indicated:

 

     Year ended March 31,     Six months ended
September 30,
 
     2014     2015     2014     2015  
     (in thousands)  

Revenue

   $ 88,315      $ 116,085      $ 55,546      $ 67,835   

Cost of revenue

     28,673        36,821        18,062        20,069   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     59,642        79,264        37,484        47,766   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Research and development

     12,844        14,461        7,910        7,463   

Sales and marketing

     46,971        51,224        26,501        27,977   

General and administrative

     11,187        15,806        9,528        8,713   

Restructuring

            1,203        1,263          
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     71,002        82,694        45,202        44,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (11,360     (3,430     (7,718     3,613   

Other income (expense)

        

Interest income

     86        62        33        29   

Interest expense

     (542     (703     (311     (345

Foreign exchange (expense) income

     (5,055     4,508        640        (3,100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (5,511     3,867        362        (3,416
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before provision for income taxes

     (16,871     437        (7,356     197   

Provision for income taxes

     19        152        76        278   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (16,890   $ 285      $ (7,432   $ (81
  

 

 

   

 

 

   

 

 

   

 

 

 

 

55


Table of Contents

The following table sets forth our consolidated statements of operations data as a percentage of revenue for each of the periods indicated:

 

     Year ended March 31,     Six months ended
September 30,
 
         2014             2015         2014     2015  

Revenue

     100     100     100     100

Cost of revenue

     32        32        33        30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     68        68        67        70   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Research and development

     15        12        14        11   

Sales and marketing

     53        44        48        41   

General and administrative

     13        14        17        13   

Restructuring

            1        2          
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     81        71        81        65   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (13     (3     (14     5   

Other income (expense)

        

Interest income

                            

Interest expense

     (1     (1     (1     (1

Foreign exchange (expense) income

     (5     4        1        (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (6     3               (6
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before provision for income taxes

     (19            (14     (1

Provision for income taxes

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (19 )%          (14 )%      (1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

We have operations in jurisdictions other than the United States and generate revenue and incur expenditures in currencies other than the U.S. dollar. The following information shows the effect on certain components of our consolidated statements of operations data for each of the periods indicated based on a 10% unfavourable movement in foreign currency exchange rates:

 

     Year ended March 31,      Six months ended
September 30,
 
         2014              2015          2014      2015  
     (in millions)  

Cost of revenue

   $ 1.8       $ 2.3       $ 1.2       $ 1.2   

Research and development

     1.0         1.3         0.7         0.7   

Sales and marketing

     2.4         3.0         1.6         1.3   

General and administrative

     0.7         0.8         0.6         0.4   

Comparison of the Six Months Ended September 30, 2014 and 2015

Revenue

 

     Six months ended
September 30,
     Period-to-period change  
     2014      2015      Amount          % Change      
     (dollars in thousands)  

Revenue

   $ 55,546       $ 67,835       $ 12,289         22

Revenue increased $12.3 million in the six months ended September 30, 2015 compared to the six months ended September 30, 2014. The increase in revenue was primarily attributable to a 28% increase in new customers since September 30, 2014 and to a lesser extent additional revenue from

 

56


Table of Contents

existing customers. Our revenue for the six months ended September 30, 2015, was negatively impacted by approximately $4.7 million as a result of the strengthening of the U.S. dollar relative to the foreign currencies in which we operate.

Cost of Revenue

 

     Six months ended
September 30,
     Period-to-period change  
     2014      2015      Amount          % Change      
     (dollars in thousands)  

Cost of revenue

   $ 18,062       $ 20,069       $ 2,007         11

Cost of revenue increased $2.0 million in the six months ended September 30, 2015 compared to the six months ended September 30, 2014 which was primarily attributable to increases in data center costs of $0.8 million, professional services costs of $0.7 million, personnel-related costs of $0.5 million and information technology and facilities costs of $0.4 million, partially offset by a decrease in depreciation expense of $0.3 million. Total cost of revenue for the six months ended September 30, 2015 as compared to the six months ended September 30, 2014 was positively impacted by approximately $1.3 million as a result of the strengthening of the U.S. dollar relative to the foreign currencies in which we operate. Data center costs increased as a result of the increase in our customer base, professional services costs increased primarily as a result of an increase in vendor fulfillment costs, and personnel-related cost increased primarily as a result of salaries and benefits associated with increased headcount.

Operating Expenses

 

     Six months ended
September 30,
     Period-to-period change  
     2014      2015      Amount         % Change      
     (dollars in thousands)  

Operating expenses:

          

Research and development

   $ 7,910       $ 7,463       $ (447     (6)%   

Sales and marketing

     26,501         27,977         1,476        6%   

General and administrative

     9,528         8,713         (815     (9)%   

Restructuring

     1,263         —           (1,263     nm   
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 45,202       $ 44,153       $ (1,049     (2)%   
  

 

 

    

 

 

    

 

 

   

 

nm – not meaningful

Research and development expenses

Research and development expenses decreased $0.4 million in the six months ended September 30, 2015 compared to the six months ended September 30, 2014. Total research and development expenses for the six months ended September 30, 2015 as compared to the six months ended September 30, 2014 were positively impacted by approximately $0.6 million as a result of the strengthening of the U.S. dollar relative to the foreign currencies in which we operate, partially offset by an increase in consulting costs of $0.2 million.

Sales and marketing expenses

Sales and marketing expenses increased $1.5 million in the six months ended September 30, 2015 compared to the six months ended September 30, 2014 which was primarily attributable to increased marketing costs of $2.1 million, information technology and facilities costs of $0.4 million,

 

57


Table of Contents

and professional services of $0.3 million, partially offset by decreases in share-based compensation expense of $0.6 million and personnel-related costs of $0.5 million. Total sales and marketing expenses for the six months ended September 30, 2015 as compared to the six months ended September 30, 2014 were positively impacted by approximately $1.6 million as a result of the strengthening of the U.S. dollar relative to the foreign currencies in which we operate. Marketing costs increased primarily as a result of increased lead generation and exhibition costs and professional services increased primarily due to an increase in recruiting costs. Personnel-related costs decreased primarily as a result of the positive impact of foreign exchange rates.

General and administrative expenses

General and administrative expenses decreased $0.8 million in the six months ended September 30, 2015 compared to the six months ended September 30, 2014 which was primarily attributable to decreases in share-based compensation expense of $1.6 million partially offset by increases in professional services costs of $0.6 million. The increase in professional service costs is due to an increase in legal, accounting and consulting services.

Restructuring expenses

We recorded restructuring expenses of $1.3 million in the six months ended September 30, 2014 in connection with the termination of employees in the United States and the United Kingdom. Restructuring expenses consisted of employee severance charges, outplacement, and other separation benefits. We did not incur restructuring expenses in the six months ended September 30, 2015.

Other Income (Expense)

 

     Six months ended
September 30,
    Period-to-period change  
     2014     2015     Amount         % Change      
     (dollars in thousands)  

Other income (expense):

        

Interest income

   $ 33      $ 29      $ (4     (12 )% 

Interest expense

     (311     (345     (34     11

Foreign exchange income (expense)

     640        (3,100     (3,740     584
  

 

 

   

 

 

   

 

 

   

Total other income (expense)

   $ 362      $ (3,416   $ (3,778     nm   
  

 

 

   

 

 

   

 

 

   

 

nm – not meaningful

Other income (expense)

Other income (expense) decreased $3.8 million in the six months ended September 30, 2015 compared to the six months ended September 30, 2014 attributable primarily to changes in foreign exchange income (expense). Foreign exchange income (expense) in the six months ended September 30, 2014 and 2015 was primarily attributable to the re-measurement of short-term intercompany asset and liability balances. In the first half of fiscal 2015, the British pound weakened against the U.S. dollar when compared to the foreign exchange rate as of March 31, 2014, resulting in foreign exchange income. In the first half of fiscal 2016, the British pound strengthened against the U.S. dollar when compared to the foreign exchange rate as of March 31, 2015, resulting in foreign exchange expense.

 

58


Table of Contents

Provision for Income Taxes

 

     Six months ended
September 30,
     Period-to-period change  
     2014      2015      Amount          % Change      
     (dollars in thousands)  

Provision for income taxes

   $ 76       $ 278       $ 202         266

Provision for income taxes

Provision for income taxes increased $0.2 million in the six months ended September 30, 2015 compared to the six months ended September 30, 2014 attributable primarily to taxes related to our domestic jurisdictions.

Comparison of Years Ended March 31, 2014 and 2015

Revenue

 

     Year ended March 31,      Period-to-period change  
     2014      2015      Amount          % Change      
     (dollars in thousands)  

Revenue

   $ 88,315       $ 116,085       $ 27,770         31

Revenue increased $27.8 million in the year ended March 31, 2015 compared to the year ended March 31, 2014 which was primarily attributable to increases from new customers as well as increases in revenue from existing customers. Of the total increase in revenues, 36% represented revenue from new customers acquired after March 31, 2014, and 64% represented revenue from existing customers as of March 31, 2014. Revenues recognized during the year ended March 31, 2015 for customers that existed at March 31, 2014 were $106.0 million representing 91% of total revenue. Our total customers increased 34% from March 31, 2014 to March 31, 2015.

Cost of Revenue

 

     Year ended March 31,      Period-to-period change  
     2014      2015      Amount          % Change      
     (dollars in thousands)  

Cost of revenue

   $ 28,673       $ 36,821       $ 8,148         28

Cost of revenue increased $8.1 million in the year ended March 31, 2015 compared to the year ended March 31, 2014 which was primarily attributable to personnel-related costs of $3.1 million, increased data center costs of $2.2 million, increased depreciation expense of $1.9 million, and increased information technology and facilities costs of $0.7 million. Personnel-related cost increases were primarily attributable to salaries and benefits associated with increased headcount. Data center costs increased in line with the increase in revenue.

 

59


Table of Contents

Operating Expenses

 

     Year ended March 31,      Period-to-period change  
     2014      2015      Amount          % Change      
     (dollars in thousands)  

Operating expenses:

           

Research and development

   $ 12,844       $ 14,461       $ 1,617         13

Sales and marketing

     46,971         51,224         4,253         9   

General and administrative

     11,187         15,806         4,619         41   

Restructuring

             1,203         1,203         nm   
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 71,002       $ 82,694       $ 11,692         16
  

 

 

    

 

 

    

 

 

    

 

nm — not meaningful

Research and development expenses

Research and development expenses increased $1.6 million in the year ended March 31, 2015 compared to the year ended March 31, 2014 which was primarily attributable to personnel-related costs of $1.0 million, increased share-based compensation of $0.3 million, and increased information and technology and facility costs of $0.2 million. Personnel-related cost increases were primarily attributable to salaries and benefits associated with increased compensation, including bonuses.

Sales and marketing expenses

Sales and marketing expenses increased $4.3 million in the year ended March 31, 2015 compared to the year ended March 31, 2014 which was primarily attributable to personnel-related costs of $3.2 million, additional share-based compensation expense of $1.3 million, increased information and technology costs of $0.3 million, and increased third-party commissions of $0.4 million. These increases were partially offset by a decrease in personnel training costs of $0.5 million. Personnel-related cost increases were primarily attributable to increased commissions.

General and administrative expenses

General and administrative expenses increased $4.6 million in the year ended March 31, 2015 compared to year ended March 31, 2014 which was primarily attributable to increased share-compensation expense of $2.7 million, increased personnel-related costs of $2.0 million, increased information technology and facilities costs $0.5 million, and increased insurance costs of $0.3 million. These increases were partially offset by decreases in professional services costs of $0.6 million.

Restructuring expenses

We recorded restructuring expenses of $1.2 million in the year ended March 31, 2015 in connection with the termination of employees in the United States and United Kingdom. Restructuring expenses consisted of employee severance charges outplacement, and other separation benefits. We did not incur restructuring expenses in the year ended March 31, 2014.

 

60


Table of Contents

Other Income (Expense)

 

     Year ended March 31,     Period-to-period change  
         2014             2015         Amount         % Change      
     (dollars in thousands)  

Other income (expense)

        

Interest income

   $ 86      $ 62      $ (24     (28 )% 

Interest expense

     (542     (703     (161     30   

Foreign exchange (expense) income

     (5,055     4,508        9,563        (189
  

 

 

   

 

 

   

 

 

   

Total other income (expense)

   $ (5,511   $ 3,867      $ 9,378        (170 )% 
  

 

 

   

 

 

   

 

 

   

Other income (expense)

Other income (expense) increased $9.4 million in 2015 compared to 2014 attributable primarily to changes in foreign exchange (expense) income. In the year ended March 31, 2014, we recognized foreign exchange expense, primarily attributable to the re-measurement of short-term intercompany asset and liability balances as a result of the U.S. dollar weakening compared to the British pound.

In the year ended March 31, 2015, we recognized foreign exchange income attributable primarily to the re-measurement of short-term intercompany asset and liability balances as a result of the U.S. dollar strengthening compared to the British pound. The increase in interest expense was attributable primarily to higher weighted-average principal outstanding in the year ended March 31, 2015 as compared to the year ended March 31, 2014.

Provision for Income Taxes

 

     Year ended March 31,      Period-to-period change  
       2014          2015        Amount      % Change  
     (dollars in thousands)  

Provision for income taxes

   $ 19       $ 152       $ 133         700

Provision for income taxes

Provision for income taxes increased $0.1 million in 2015 compared to 2014 attributable primarily to taxes related to our foreign jurisdictions.

 

61


Table of Contents

Quarterly results of operations data

The following tables set forth our unaudited quarterly consolidated statements of operations for each of the ten quarters in the period ended September 30, 2015. We have prepared the quarterly consolidated statements of operations data on a basis consistent with the audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results to be expected for any future period.

 

    Quarter ended  
    Jun 30,
2013
    Sept 30,
2013
    Dec 31,
2013
    Mar 31,
2014
    Jun 30,
2014
    Sept 30,
2014
    Dec 31,
2014
    Mar 31,
2015
    Jun 30,
2015
    Sept 30,
2015
 
   

(in thousands)

       

Revenue

  $ 19,867      $ 20,755      $ 23,306      $ 24,387      $ 26,943      $ 28,603      $ 29,824      $ 30,715      $ 33,328      $ 34,507   

Cost of revenue (1)

    6,552        6,608        7,150        8,363        8,925        9,137        9,584        9,175        9,876        10,193   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    13,315        14,147        16,156        16,024     

 

 

 

 

 

18,018

 

 

  

 

 

 

 

 

 

19,466

 

 

  

 

 

 

 

 

 

20,240

 

 

  

 

 

 

 

 

 

21,540

 

 

  

 

 

 

 

 

 

23,452

 

 

  

 

 

 

 

 

 

24,314

 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

                   

Research and development (1)

    3,190        3,063        3,193        3,398        3,954        3,956        3,407        3,144        3,530        3,933   

Sales and marketing (1)

    11,585        10,938        12,089        12,359        12,775        13,726        11,642        13,081        13,121        14,856   

General and administrative (1)

    2,875        2,324        2,897        3,091        3,940        5,588        2,632        3,646        4,691        4,022   

Restructuring

                                       1,263        (60                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    17,650        16,325        18,179        18,848        20,669        24,533        17,621        19,871        21,342        22,811   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (4,335     (2,178     (2,023     (2,824     (2,651     (5,067     2,619        1,669        2,110        1,503   

Other income (expense)

                   

Interest income

    23        14        31        18        20        13        14        15        17        12   

Interest expense

    (132     (129     (132     (149     (133     (178     (207     (185     (177     (168

Foreign exchange income (expense)

    (779     (2,634     (1,137     (505  

 

 

 

(1,246

 

 

 

 

 

1,886

 

  

 

 

 

 

1,676

 

  

 

 

 

 

2,192

 

  

 

 

 

 

(3,841

 

 

 

 

 

741

 

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    (888     (2,749     (1,238     (636  

 

 

 

(1,359

 

 

 

 

 

1,721

 

  

 

 

 

 

1,483

 

  

 

 

 

 

2,022

 

  

 

 

 

 

(4,001

 

 

 

 

 

585

 

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before provision for income taxes

    (5,223     (4,927     (3,261     (3,460     (4,010     (3,346     4,102        3,691        (1,891     2,088   

Provision for income taxes

    5        5        5        4        38        38        38        38        358        (80
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (5,228   $ (4,932   $ (3,266   $ (3,464  

 

 

$

 

 

(4,048

 

 

 

 

 

$

 

 

(3,384

 

 

 

 

 

$

 

 

4,064

 

 

  

 

 

 

$

 

 

3,653

 

 

  

 

 

 

$

 

 

(2,249

 

 

 

 

 

$

 

 

2,168

 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Share-based compensation expense included in these line items was as follows:

 

    Quarter ended  
    Jun 30,
2013
    Sept 30,
2013
    Dec 31,
2013
    Mar 31,
2014
    Jun 30,
2014
    Sept 30,
2014
    Dec 31,
2014
    Mar 31,
2015
    Jun 30,
2015
    Sept 30,
2015
 
   

(in thousands)

       

Cost of revenue

  $ 37      $ 37      $ 38      $ 39      $ 30      $ 80      $ 22      $ 19      $ 22      $ 107   

Research and development

    38        39        41        173        34        118        116        276        29        45   

Sales and marketing

    87        91        91        126        349        1,068        151        116        83        768   

General and administrative

    94        94        103        104        99        2,448        229        271        709        216   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total share-based compensation expense

  $ 256      $ 261      $ 273      $ 442      $ 512      $ 3,714      $ 518      $ 682      $ 843      $ 1,136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

62


Table of Contents
    Quarter ended  

As a % of Revenue

  Jun 30,
2013
    Sept 30,
2013
    Dec 31,
2013
    Mar 31,
2014
    Jun 30,
2014
    Sept 30,
2014
    Dec 31,
2014
    Mar 31,
2015
    Jun 30,
2015
    Sept 30,
2015
 

Revenue

    100     100     100     100     100     100     100     100     100     100

Cost of revenue (1)

    33        32        31        34        33        32        32        30        30        30   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    67        68        69        66        67        68        68        70        70        70   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

                   

Research and development (1)

    16        15        14        14        15        14        11        10        11        11   

Sales and marketing (1)

    58        53        52        51        47        48        39        43        39        43   

General and administrative (1)

    14        11        12        13        15        20        9        12        14        12   

Restructuring

                                       4                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    88        79        78        78        77        86        59        65        64        66   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (21     (11     (9     (12     (10     (18     9        5        6        4   

Other income (expense)

                   

Interest income

                                                                     

Interest expense

    (1     (1     (1     (1            (1     (1     (1     (1       

Foreign exchange income (expense)

    (4     (13     (5     (2     (5     7        6        7        (12     2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    (5     (14     (6     (3     (5     6        5        6        (13     2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before provision for income taxes

    (26     (25     (15     (15     (15     (12     14        11        (7     6   

Provision for income taxes

                                                            1          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (26 )%      (25 )%      (15 )%      (15 )%      (15 )%      (12 )%      14     11     (6 )%      6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We have historically experienced some seasonality in terms of when we enter into customer agreements for our services, most significantly in respect to the timing of our customer’s respective financial year end, as well as our own. This seasonality is not immediately apparent in our revenue because we recognize revenue ratably on a straight-line basis over the subscription term, which is typically one year. As a result, a slowdown in our ability to enter into customer agreements may not be apparent in our revenue for the quarter, as the revenue recognized in any quarter is primarily from customer agreements entered into in prior quarters. Historical patterns should not be considered a reliable indicator of our future sales activity or performance.

Our revenue has increased over the periods presented above due to the acquisition of new customers and due to existing customers increasing their use of our services through the purchase of additional services and the addition of employees.

Our gross margin has remained relatively consistent during the quarterly periods as increases in revenue have coincided with increases in cost of revenue due to expenditures related to additional hardware, the expansion and support of our data centers and customer support teams. While we expect our cost of revenue to increase in absolute dollars, we also expect that the cost of revenue as percentage of revenue 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.

Our operating expenses have increased sequentially primarily due to increases in headcount and other related expenses to support our growth. In those periods in which operating expenses have not increased sequentially, this has been primarily due to variability in our share based-compensation expense. In fiscal 2015, our operating expenses increased by 15%, excluding the impact of restructuring over the preceding fiscal year. We anticipate our operating expenses will continue to increase in absolute dollars as we invest in the long-term growth of our business.

 

63


Table of Contents

Liquidity and Capital Resources

Our principal sources of liquidity are cash and cash equivalents, accounts receivable and our credit facility. The following table shows net cash (used in) provided by operating activities, net cash used in investing activities, and net cash (used in) provided by financing activities for the years ended March 31, 2014 and 2015 and the six months ended September 30, 2014 and 2015:

 

     Year ended March 31,     Six months ended
September 30,
 
     2014     2015     2014     2015  
     (in thousands)  

Net cash (used in) provided by operating activities

   $ (967   $ 23,247      $ 5,887      $ 11,949   

Net cash used in investing activities

     (17,888     (12,583     (8,412     (7,402

Net cash (used in) provided by financing activities

     (222     5,431        7,035        (3,654

To date, we have financed our operations primarily through private placements of equity and borrowings from our primary bank lender. In the year ended March 31, 2015, operating losses were reduced and we generated significant operating cash flows. In the year-ended March 31, 2014, cash flows from operating activities were near break-even. While we expect to generate an operating loss in the year ending March 31, 2016, we expect to continue to generate cash flows from operating activities. However, we may require additional capital resources to continue to grow our business. In the year ending March 31, 2016, we plan to continue to invest in the development and expansion of our Mime | OS platform to improve on our existing solutions in order to provide more capabilities to our customers. Investments in capital expenditures in the year ended March 31, 2015 were $12.6 million. We expect this level of investment to be maintained in the year ending March 31, 2016.

As of March 31, 2015 and September 30, 2015, we had cash and cash equivalents of $32.9 million and $34.1 million, respectively. Based on our current operating plan, which includes the growth strategies described in “Use of Proceeds” and “Business—Our Growth Strategy”, other than acquisitions of complementary business, products and technologies, in the absence of this offering, we believe that our current cash and cash equivalents, cash to be received from existing and new customers, and availability under our credit facility will be sufficient to fund our operations for at least the next twelve months. If we acquire any such complementary businesses, products or technologies, we may use a portion of the net proceeds from this offering to do so. 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. The sale of additional equity could result in additional dilution, and the terms of any financing arrangements may include restrictions on our business that could impair our operating flexibility and would cause us to incur interest expense. We cannot provide assurance that additional financing will be available at all or on terms favorable to us. We had no material commitments for capital expenditures as of March 31, 2015 or September 30, 2015.

Borrowings and Credit Facility

Since January 2012, we have entered into various term loan borrowings with Silicon Valley Bank. The term loans have fixed interest rates of 4.5% and principal repayment periods of 36 equal monthly installments with various maturities through January 2018. As of March 31, 2015, the aggregate principal balance of the term loans was $12.4 million, of which $5.3 million is payable in the year ending March 31, 2016. As of September 30, 2015, the aggregate principal balance of the term loans was $10.0 million, of which $5.4 million is payable through September 30, 2016. As of March 31, 2015 and September 30, 2015, there were no amounts available for future borrowings under the term loans.

 

64


Table of Contents

In January 2013, we entered into a loan and security agreement with Silicon Valley Bank providing for a revolving credit facility. In July 2014, we amended and restated that agreement to increase the borrowing capacity under the facility from £7.5 million to £10.0 million (or, in each case, the equivalent amount in either U.S. dollars or Euros). This facility has £5.0 million in immediately available credit and another £5.0 million upon completion of an additional equity financing. The credit facility bears interest at the greater of (i) the Bank of England base rate plus 3.5% or (ii) 4.0% and has a term of 24 months. As of March 31, 2015 and September 30, 2015, the effective rate on the line of credit was 4.0%. The line of credit is collateralized by substantially all of our assets, and we are required to meet certain financial covenants, including recurring revenue and adjusted quick ratio covenants. The agreement also contains the following negative covenants:

 

    a commitment not to pay dividends or make distributions or payments or to redeem, retire or repurchase our share capital; and

 

    negative pledges by us and our subsidiaries, including with respect to:

 

    limitations on dissolution, any subordinated debt arrangement, mergers, acquisitions, investments, dispositions and transactions with affiliates not in the ordinary course of business;

 

    limitations on assigning, mortgaging, pledging, granting a security interest or encumbering any of our property (other than permitted liens identified in the agreement); and

 

    restrictions on changes in business, management, ownership, business locations or organizational structure.

Failure to meet these financial and other covenants would enable the bank to demand immediate repayment of all outstanding balances under the facility. We were in compliance with the terms of the credit facility as of March 31, 2015 and September 30, 2015. As of March 31, 2015 and September 30, 2015, there was no balance outstanding under the line of credit and £5.0 million was available for future borrowing. On November 13, 2015, we amended the loan and security agreement to reflect the change in reporting entity, to make available the additional £5.0 million in available credit under the facility that is accessible upon the completion of the additional equity financing, and to adjust certain financial covenants, including recurring revenue and adjusted quick ratio covenants.

Operating Activities

For the six months ended September 30, 2015, cash provided by operating activities was $11.9 million. The primary factors affecting our operating cash flows during the period were our net loss of $0.1 million, adjusted for non-cash charges of $5.2 million for depreciation and amortization of our property and equipment, $2.0 million of share-based compensation, $2.8 million in net foreign currency losses, and $0.2 million in excess tax benefits related to exercises of share options. The primary drivers of the changes in operating assets and liabilities were a $3.9 million increase in deferred revenue, a $0.8 million decrease in prepaid expenses and other current assets, and a $0.5 million increase in accrued expenses and other liabilities partially offset by a $2.3 million increase in accounts receivable and a $0.4 million decrease in accounts payable.

For the six months ended September 30, 2014, cash provided by operating activities was $5.9 million. The primary factors affecting our operating cash flows during the period were our net loss of $7.4 million, adjusted for non-cash charges of $5.6 million for depreciation and amortization of our property and equipment, $4.2 million of share-based compensation, and $0.7 million in net foreign currency gains. The primary drivers of the changes in operating assets and liabilities were a $2.8 million decrease in accounts receivable, a $0.9 million increase in deferred revenue, a $0.3 million decrease in prepaid expenses and other current assets and a $0.2 million increase in accounts payable.

For the year ended March 31, 2015, cash provided by operating activities was $23.2 million. The primary factors affecting our operating cash flows during the period were our net income of $0.3 million, adjusted for non-cash charges of $11.0 million for depreciation and amortization of our

 

65


Table of Contents

property and equipment, $5.4 million of share-based compensation, and $4.1 million in net foreign currency gains. The primary drivers of the changes in operating assets and liabilities were an $11.4 million increase in deferred revenue, a $2.8 million increase in accrued expenses and other liabilities, and a $0.7 million decrease in prepaid expenses and other current assets, partially offset by a $4.3 million increase in accounts receivable due primarily to overall growth in our business.

For the year ended March 31, 2014, cash used in operating activities was $1.0 million. The primary factors affecting our operating cash flows during this period were our net loss of $16.9 million, adjusted for non-cash charges of $9.0 million for depreciation and amortization of our property and equipment, $1.2 million of share-based compensation and $2.3 million in net foreign currency losses. The primary drivers of the changes in operating assets and liabilities were an $8.8 million increase in deferred revenue and a $2.9 million increase in accrued expenses and other liabilities, partially offset by a $6.6 million increase in accounts receivable, and a $1.7 million increase in other assets. The increase in accrued expenses and other current liabilities was attributable primarily to the timing of our cash payments and the increase in accounts receivable attributable primarily to overall growth in our business.

Investing Activities

Cash used in investing activities of $8.4 million and $7.4 million for the six months ended September 30, 2014 and 2015, respectively, were due to capital expenditures. Our capital expenditures were associated primarily with computer equipment purchased in support of our expanding infrastructure.

Cash used in investing activities of $12.6 million for the year ended March 31, 2015 and $17.9 million for the year ended March 31, 2014 was due to capital expenditures. Our capital expenditures were associated primarily with computer equipment purchased in support of our expanding infrastructure.

Financing Activities

Cash used in financing activities of $3.7 million for the six months ended September 30, 2015 was due primarily to payments on debt of $2.8 million and payments of deferred initial public offering issuance costs of $1.6 million, partially offset by $0.5 million of proceeds from exercises of share options and $0.2 million in excess tax benefits related to exercises of share options.

Cash provided by financing activities of $7.0 million for the six months ended September 30, 2014 was due primarily to $8.3 million in proceeds from the issuance of debt, net of issuance costs and $0.3 million in proceeds from exercises of share options, partially offset by $1.6 million of payments on debt.

Cash provided by financing activities of $5.4 million for the year ended March 31, 2015 was due primarily to proceeds from the issuance of debt, net of issuance costs of $8.3 million, and $0.6 million in proceeds from exercises of share options, partially offset by $3.5 million of payments on debt.

Cash used in financing activities of $0.2 million for the year ended March 31, 2014 was due primarily to repayments of term loan borrowings.

U.S. Net Operating Loss Carryforwards

As of March 31, 2015, we had net operating loss carryforwards for U.S. federal income tax purposes of $30.4 million. As of March 31, 2015, we had net operating loss carryforwards for state income tax purposes of approximately $27.4 million. These net operating loss carryforwards expire at

 

66


Table of Contents

various dates through 2035. In addition, as of March 31, 2015, we had net operating loss carryforwards in the U.K. and our other non-U.S. locations of approximately $9.5 million and $6.2 million, respectively. The non-U.S. operating loss carryforwards are unlimited in duration.

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

The following table represents our contractual obligations as of March 31, 2015, aggregated by type:

 

            Payments due in:  
     Total      Less than 1
year
     1-3 years      3-5 years      More than 5
years
 
     (in thousands)  

Debt obligations principal

   $ 12,442       $ 5,314       $ 7,128       $       $   

Debt obligations interest

     717         457         260                   

Operating lease obligations

     14,684         2,955         6,573         4,660         496   

Data center obligations

     38,112         9,330         18,041         10,741           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 65,955       $ 18,056       $ 32,002       $ 15,401       $ 496   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We lease our facilities under non-cancelable operating leases with various expiration dates through October 2021. We have outstanding letters of credit of $0.4 million related to certain operating leases.

Recently Issued and Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. This guidance was effective for annual reporting and interim periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective application, with early adoption not permitted. On July 9, 2015, the FASB voted to approve a one-year deferral of the effective date of this guidance. In accordance with the agreed upon delay, the guidance is effective for us on April 1, 2018. We are currently evaluating the adoption method we will apply and the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. ASU 2014-15 requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist that raise

 

67


Table of Contents

substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and earlier application is permitted. We are currently evaluating the impact of the adoption of ASU 2014-15, but the adoption is not expected to have a material effect on our consolidated financial statements or disclosures.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810)-Amendments to the Consolidation Analysis, which amends the criteria for determining which entities are considered variable interest entities, or VIEs, amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. ASU 2015-02 is effective for annual periods, and interim periods therein, beginning after December 15, 2015. We are currently evaluating the impact the adoption of ASU 2015-02 will have on our financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires us to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 will be effective for annual reporting periods beginning after December 15, 2015 and interim periods within fiscal years beginning after December 15, 2016, with early adoption permitted. The new guidance will be applied retrospectively to each prior period presented. We are currently in the process of evaluating the impact and timing of adoption of the ASU 2015-03 on our consolidated financial statements.

Off-Balance Sheet Arrangements

Up to and including the 2014 and 2015 fiscal years and the six months ended September 30, 2015, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As a result, we are not exposed to related financing, liquidity, market or credit risks that could arise if we had engaged in those types of arrangements.

Critical Accounting Policies and Estimates

Our consolidated financial statements and the related notes included elsewhere in this prospectus are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make 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 of our significant accounting policies, which are described in Note 2 to the notes to our consolidated financial statements included elsewhere in this prospectus, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations.

 

68


Table of Contents

Under the JOBS Act, an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. However, we are irrevocably choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption is required for non-emerging growth companies.

Revenue Recognition

We derive our revenue from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing our cloud services and from customers purchasing additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services and other revenue, which consists primarily of set-up, ingestion and training fees.

We recognize revenue when all of the following conditions are satisfied:

 

    there is persuasive evidence of an arrangement;

 

    the service has been or is being provided to the customer;

 

    the collection of the fees is probable; and

 

    the amount of fees to be paid by the customer is fixed or determinable.

Our subscription arrangements provide customers with the right to access its hosted software applications. Customers do not have the right to take possession of our software during the hosting arrangement. Accordingly, we recognize revenue in accordance with ASC 605, Revenue Recognition, and Staff Accounting Bulleting (SAB) No. 104, Revenue Recognition.

We sell our products and services directly through our dedicated sales force and also indirectly through third-party resellers. In accordance with the provisions of ASC 605, we have considered certain factors in determining whether the end-user or the third-party reseller is our customer in arrangements involving resellers. We concluded that in the majority of transactions with resellers, the reseller is our customer. In these arrangements, we considered that it is the reseller, and not us, that has the relationship with the end-user. Specifically, the reseller has the ability to set pricing with the end-user and the credit risk with the end-user is borne by the reseller. Further, the reseller is not obligated to report its transaction price with the end-user to us, and in the majority of transactions, we are unable to determine the amount paid by the end-user customer to the reseller in these transactions. As a result of such considerations, revenue for these transactions is presented in the accompanying consolidated statements of operations based upon the amount billed to the reseller. For transactions where we have determined that the end-user is the ultimate customer, revenue is presented in the accompanying consolidated statements of operations based on the transaction price with the end-user.

We recognize subscription and support revenue ratably over the term of the contract, typically one year in duration, beginning on the commencement date of each contract.

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.

Our professional services contracts are on a time and material basis. When these services are not combined with subscription revenues as a single unit of accounting, as discussed below, we recognize these revenues as the services are rendered.

 

69


Table of Contents

Revenue is presented net of any taxes collected from customers.

We may enter into arrangements with multiple-deliverables that generally include multiple subscriptions, premium support and professional services. For arrangements with multiple deliverables, we evaluate each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) whether the delivered item has value to the customer on a stand-alone basis; and (b) if the contract includes a general right of return relative to the delivered item, whether delivery or performance of the undelivered items is considered probable and substantially within our control.

If the deliverables are determined to qualify as separate units of accounting, consideration is allocated to each unit of accounting based on the units’ relative selling prices. We determine the relative selling price for a deliverable based on its vendor-specific objective evidence of fair value (VSOE), if available, or its best estimate of selling price (BESP), if VSOE is not available. We have determined that third-party evidence of selling price (TPE) is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.

Subscription services have standalone value as such services are often sold separately. In determining whether professional services sold together with the subscription services have standalone value, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the determination that customers cannot resell the services that Mimecast provides, the timing of when the professional services contract was signed in comparison to the subscription service start date and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work. Professional services sold at the time of the multiple-element subscription arrangement typically include customer set-up and ingestion services. To date, we have concluded that all of these professional services included in executed multiple-deliverable arrangements do not have standalone value and are therefore not considered separate units of accounting. These professional services are purchased by customers only in contemplation of, or in concert with, purchasing one of our core subscription services and, therefore, are not considered a substantive service, such that the provision of such service does not reflect the culmination of the earnings process. Mimecast does not sell these services without the related underlying primary subscription as there would be no practical interest or need on the behalf of a customer to buy these services without the underlying subscription. We do not have any knowledge of other vendors selling these services on a stand-alone basis and there is no way for an end-user to resell the deliverable. Accordingly, the deliverables within the arrangement including both subscription services and other professional services are accounted for as a single unit of accounting. On these occasions, revenue for the professional services deliverables in the arrangement is recognized on a straight-line basis over the contractual term or the average customer life, as further described below.

Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services described above and is recognized as the revenue recognition criteria are met. In addition, deferred revenue consists of amounts paid by customers related to upfront set-up or ingestion fees. Revenue related to such services is recognized over the contractual term or the average customer life, whichever is longer. The estimated customer life has been determined to be five years.

Deferred revenue that is expected to be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as non-current in the accompanying consolidated balance sheets.

 

70


Table of Contents

Income Taxes

We are subject to income tax in the United Kingdom, the United States and other international jurisdictions, and we use estimates in determining our provision for income taxes. We account for income taxes in accordance with ASC 740, Income Taxes. ASC 740 is an asset and liability approach that requires recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax basis, and for net operating loss and tax credit carryforwards. ASC 740 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. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such position are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. At March 31, 2014 and 2015 and September 30, 2015, we did not have any uncertain tax positions that would impact our net tax provision.

Accounting for Share-Based Compensation Awards

We account for share-based compensation awards in accordance with the provisions of ASC 718, Compensation—Stock Compensation, which requires the recognition of expense related to the fair value of share-based compensation awards in the statements of operations. For share options issued under our share-based compensation plans to employees and members of our Board of Directors for their services on the Board, the fair value of each option grant is estimated on the date of grant, and an estimated forfeiture rate is used when calculating share-based compensation expense for the period. For restricted share awards issued under our share-based compensation plans, the fair value of each grant is calculated based on the fair value of our ordinary shares on the date of grant. For service-based awards, we recognize compensation expense on a straight-line basis over the requisite service period of the award. For awards subject to both performance and service-based vesting conditions, we recognize share-based compensation expense using an accelerated recognition method when it is probable that the performance condition will be achieved. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Certain awards granted by us are subject to service-based vesting conditions and a performance-based vesting condition based on a liquidity event, defined as either a change of control or an initial public offering. As a result, no compensation cost related to share-based awards with these performance conditions has been recognized through March 31, 2015 or September 30, 2015 as we determined that a liquidity event was not probable at March 31, 2014 or 2015 or September 30, 2015. We will record the expense for these equity-awards using the accelerated attribution method over the remaining service period when management determines that achievement of the liquidity event is probable, which will occur upon the closing of this offering.

We estimate the fair value of employee share options on the date of grant using the Black-Scholes option-pricing model, which requires the use of highly subjective estimates and assumptions. Historically, as a private company, we lacked company-specific historical and implied volatility information. Therefore, we estimate our expected volatility from the historical volatility of selected

 

71


Table of Contents

publicly-traded peer companies and expect to continue to do so until we have adequate historical data regarding the volatility of our traded share price. The expected term assumption for service-based awards has been determined using the simplified method. The simplified method is based on the average of the vesting tranches and contractual life of each grant. The risk-free interest rate is based on a treasury instrument whose term is approximately equal to the expected life of the share option. We use an expected dividend rate of zero as we currently have no history or expectation of paying dividends on our ordinary shares. In addition, we have estimated expected forfeitures of share options based on our historical forfeiture rate and used these rates in developing a future forfeiture rate. If our actual forfeiture rate varies from our historical rates and estimates, additional adjustments to compensation expense may be required in future periods.

The following table presents the weighted-average assumptions used to estimate the fair value of options granted to employees during each of the periods indicated below:

 

     Year ended March 31,     Six months ended
September 30,
 
         2014             2015             2014             2015      

Expected term (in years)

     6.4        6.3        6.3        6.3   

Risk-free interest rate

     2.5     3.1     3.4     2.4

Expected volatility

     53.0     52.6     52.6     43.7

Expected dividend yield

                

Estimated grant date fair value per share of Class B ordinary shares

   $ 3.00      $ 7.20      $ 6.48      $ 10.50   

The following table presents the grant dates, numbers of underlying ordinary shares and the per share exercise prices of share options granted between April 1, 2014 and September 30, 2015, along with the fair value per share utilized to calculate share-based compensation expense:

 

Date of Issuance

   Number of shares
underlying share
options granted(1)
     Per share exercise
price of share
options granted(2)
     Per share fair value
of ordinary share
on grant date
 

April 2014

     217,432       $ 6.48       $ 6.48   

May 2014

     250,000       $ 6.48       $ 6.48   

August 2014

     183,333       $ 6.48       $ 6.48   

December 2014(3)

     15,432       $ 6.48       $ 6.78   

January 2015(3)

     24,627       $ 6.48       $ 6.78   

March 2015(4)

     176,799       $ 6.78       $ 9.78   

April 7, 2015(5)

     125,000       $ 6.78       $ 9.78   

April 28, 2015(5)

     203,601       $ 6.78       $ 9.78   

May 6, 2015(6)

     161,344       $ 1.62       $ 9.78   

May 11, 2015(5)

     133,332       $ 6.78       $ 9.78   

August 1, 2015(7)

     708,588       $ 9.78       $ 10.98   

August 18, 2015(7)

     15,000       $ 9.78       $ 10.98   

September 18, 2015

     166,666       $ 10.98       $ 10.98   

 

(1) For all share options granted, the underlying shares are B ordinary shares.

 

(2) The per share exercise price of share options granted represents the fair value of one ordinary share on the date of grant, as determined by our board of directors, after taking into account our most recently available contemporaneous valuations of an ordinary share as well as additional factors that may have changed since the date of such contemporaneous valuation through the date of grant.

 

(3)

At the time of the option grants in December 2014 and January 2015, our board of directors determined that the fair value of our ordinary shares of $6.48 per share calculated in the

 

72


Table of Contents
  contemporaneous valuation as of November 30, 2013 reasonably reflected the per share fair value of an ordinary share as of the grant date. However, as described below, the fair value of our ordinary shares at the date of these grants was adjusted to $6.78 per share in connection with a retrospective fair value assessment for financial reporting purposes.

 

(4) At the time of the option grants in March 2015, our board of directors determined that the fair value of our ordinary shares of $6.78 per share calculated in the retrospective valuation as of September 30, 2014 reasonably reflected the per share fair value of an ordinary share as of the grant date. However, as described below, the fair value of our ordinary shares at the date of these grants was adjusted to $9.78 per share in connection with a retrospective fair value assessment for financial reporting purposes.

 

(5) At the time of the option grants in April and May 2015, our board of directors determined that the fair value of our ordinary shares of $6.78 per share calculated in the retrospective valuation as of September 30, 2014 reasonably reflected the per share fair value of an ordinary share as of the grant date. However, as described below, the fair value of our ordinary shares at the date of these grants was adjusted to $9.78 per share in connection with a retrospective fair value assessment for financial reporting purposes.

 

(6) Share options granted on May 6, 2015 were issued in substitution for share options originally granted in prior fiscal years to employees of our U.K. based subsidiary under our Approved Plan. In 2015, these original share options were determined to have been issued inconsistent with the rules of the Approved Plan from which they were granted and the tax rules of the U.K. under which the plan is governed. In recognition of this, these original share options were cancelled and re-issued on May 6, 2015 with exercise prices, grant dates and vesting schedules consistent with the original share options.

 

(7) At the time of the option grants in August 2015, our board of directors determined that the fair value of our ordinary shares of $9.78 per share calculated in the retrospective valuation as of March 31, 2015 reasonably reflected the per share fair value of an ordinary share as of the grant date. However, as described below, the fair value of our ordinary shares at the date of these grants was adjusted to $10.98 per share in connection with a retrospective fair value assessment for financial reporting purposes.

Determination of Fair Value of Ordinary Shares on Grant Dates

We are a private company with no active public market for our ordinary shares. Therefore, we have periodically determined the estimated per share fair value of our ordinary shares at various dates using valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, also known as the Practice Aid. Once a public trading market for our ordinary shares has been established in connection with the completion of this offering, it will no longer be necessary for us to estimate the fair value of our ordinary shares in connection with our accounting for share options and restricted shares, as the fair value of our ordinary shares will be their trading price on the NASDAQ Global Select Market.

For financial reporting purposes, we performed ordinary share valuations, with the assistance of a third-party specialist, as of November 30, 2013, September 30, 2014, March 31, 2015 and August 31, 2015 which resulted in valuations of our ordinary shares of $6.48, $6.78, $9.78 and $10.98 per share, respectively, as of those dates. In conducting the valuations, we considered all objective and subjective factors that we believed to be relevant for each valuation conducted, including our best estimate of our business condition, prospects and operating performance at each valuation date. Within the valuations

 

73


Table of Contents

performed, a range of factors, assumptions and methodologies were used. The significant factors included:

 

    the lack of an active public market for our ordinary shares and our convertible preferred shares;

 

    the prices of shares of our convertible preferred shares that we had sold to outside investors in arm’s length transactions, and the rights, preferences and privileges of the convertible preferred shares relative to our ordinary shares;

 

    our results of operations, financial position, and our ability to expand our client base and increase adoption of our solution within existing clients;

 

    the material risks related to our business;

 

    our business strategy;

 

    the market performance of publicly traded companies in the SaaS and technology sectors, and recently completed mergers and acquisitions of companies comparable to us;

 

    the likelihood of achieving a liquidity event for the holders of our ordinary shares, such as an initial public offering (IPO) or sale of the company given prevailing market conditions; and

 

    any recent contemporaneous valuations of our ordinary shares prepared in accordance with methodologies outlined in the Practice Aid.

The dates of our valuations have not always coincided with the dates of our share option grants. In determining the fair value of the shares underlying options set forth in the table above, we considered, among other things, the most recent contemporaneous valuations of our ordinary shares and our assessment of additional objective and subjective factors we believed were relevant as of the grant date. The additional factors considered when determining any changes in fair value between the most recent contemporaneous valuation and the grant dates included our client base expansion, increased adoption of our solution within existing clients, our operating and financial performance and current business conditions.

There are significant judgments and estimates inherent in the determination of the fair value of our ordinary shares. These judgments and estimates include assumptions regarding our future operating performance, the time to completing an IPO, or other liquidity event, the related company valuations associated with such events, and the determinations of the appropriate valuation methods. If we had made different assumptions, our share-based compensation expense, consolidated net loss (income) and consolidated net loss (income) per share applicable to ordinary shareholders could have been significantly different.

Ordinary Share Valuation Methodologies.    Our contemporaneous and retrospective valuations were prepared in accordance with the guidelines in the Practice Aid, which prescribes several valuation approaches for determining the value of an enterprise, such as the cost, market and income approaches.

These valuations estimated the fair value of a minority interest in our ordinary shares, determined based on our business enterprise value, or BEV. Our BEV was estimated using a combination of generally accepted approaches: the income approach using the discounted cash flow method, or DCF method, and the market approach using the guideline public company method, or GPCM. The DCF method estimates the enterprise value based on the estimated present value of future net cash flows the business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is referred to as the terminal value. The estimated present value is calculated using a discount rate known as the weighted-average cost of capital, which accounts for

 

74


Table of Contents

the time value of money and the appropriate degree of risks inherent in the business. The market approach considers multiples of financial metrics based on guideline public companies. These multiples are then applied to our financial metrics to derive a range of indicated values. Once calculated, the DCF method and GPCM are then weighted. Our indicated BEV was allocated to the preferred shares, ordinary shares, and share options. Estimates of the volatility of our ordinary shares were based on available information on the volatility of common stock of comparable, publicly traded companies. We applied a discount for lack of marketability to our ordinary shares based on studies of comparable company-specific adjustments along with consideration of a protective put option model.

Methods Used to Allocate Our Enterprise Value to Classes of Securities.    In accordance with the Practice Aid, we considered the various methods for allocating the enterprise value across our classes and series of capital shares to determine the fair value of our ordinary shares at each valuation date.

Our ordinary share valuations as of November 30, 2013, September 30, 2014 and March 31, 2015 were prepared utilizing the Option-Pricing Method, or OPM. Our ordinary share valuation as of August 31, 2015 was prepared utilizing the Hybrid Method.

OPM.    The OPM treats ordinary shares and convertible preferred shares as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the ordinary shares have value only if the funds available for distribution to shareholders exceed the value of the liquidation preferences at the time of a liquidity event, such as a strategic sale or merger. The ordinary shares are modeled as call options on the underlying equity value at a predetermined exercise price. In the model, the exercise price is based on a comparison with the total equity value rather than, as in the case of a regular call option, a comparison with a per share price. Thus, ordinary shares are considered to be call options with a claim on the enterprise at an exercise price equal to the remaining value immediately after the convertible preferred share liquidation preference is paid.

The OPM uses the Black-Scholes option-pricing model to price the call options. This model defines the securities’ fair values as functions of the current fair value of a company and uses assumptions, such as the anticipated timing of a potential liquidity event and the estimated volatility of the equity securities.

In the OPM, the assumed volatility factor was based on the historical trading volatility of our publicly traded peer companies. At each valuation date, a determination was made by us as to the appropriate volatility to be used, considering such factors as the expected time to a liquidity event and our stage of development.

To derive the fair value of the ordinary shares using the OPM, the proceeds to the ordinary shareholders were calculated based on the preferences and priorities of the convertible preferred shares and ordinary shares. We then applied a discount for lack of marketability to the ordinary shares to account for the lack of access to an active public market.

Hybrid Method.    The Hybrid Method is a hybrid between the probability-weighted expected return method and the OPM. In the Hybrid Method, management estimates a price range for a potential IPO and calculates the present value of each projected share price using the company’s weighted-average cost of capital. Based on management’s expected time horizon for a liquidity event and the pricing estimates for its ordinary shares, the company determined a range of present values for the value of its ordinary shares in an IPO scenario.

 

75


Table of Contents

To derive the fair value of the ordinary shares using the Hybrid Method, the calculated values derived from the OPM method and the IPO scenarios were then weighted to arrive at the ordinary share valuation as of August 31, 2015. We then applied a discount for lack of marketability to the ordinary shares to account for the lack of access to an active public market.

The foregoing valuation methodologies are not the only methodologies available and they will not be used to value our ordinary shares once this offering is complete. We cannot make assurances as to any particular valuation for our ordinary shares. Accordingly, investors are cautioned not to place undue reliance on the foregoing valuation methodologies as an indicator of future share prices.

JOBS Act

In April 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing to not take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable. In addition, we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided by the JOBS Act.

Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), or (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of our chief executive officer’s compensation to median employee compensation.

These exemptions will apply for a period of five years following the completion of our initial public offering or until we no longer meet the requirements of being an “emerging growth company,” whichever is earlier.

Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency rates, although we also have some exposure due to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.

 

76


Table of Contents

Foreign Currency Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British pound and South African rand. Percentage of revenues and expenses in foreign currency is as follows:

 

     Year Ended March 31,   Six months
ended September 30,

2015
              2014                     2015           

Revenues generated in locations outside the United States

   66%   62%   59%

Revenues in currencies other than the U.S. dollar

   65%   61%   57%

Expenses in currencies other than the U.S. dollar

   61%   62%   57%

Percentage of revenues and expenses denominated in foreign currency for the years ended March 31, 2014 and 2015 and the six months ended September 30, 2015:

 

     Year Ended March 31, 2014  
         Revenues             Expenses      

British pound

     42     50

South African rand

     21        9   

Other currencies

     2        2   
  

 

 

   

 

 

 

Total

     65     61
  

 

 

   

 

 

 
     Year Ended March 31, 2015  
         Revenues             Expenses      

British pound

     40     50

South African rand

     19        10   

Other currencies

     2        2   
  

 

 

   

 

 

 

Total

     61     62
  

 

 

   

 

 

 
     Six months ended September 30, 2015  
         Revenues             Expenses      

British pound

     38     46

South African rand

     17     7

Other currencies

     2     4
  

 

 

   

 

 

 

Total

     57     57
  

 

 

   

 

 

 

As of March 31, 2014 and 2015 and September 30, 2015, we had $15.9 million, $16.5 million and $16.7 million, respectively, of receivables denominated in currencies other than the U.S. dollar. We also maintain cash accounts denominated in currencies other than the local currency, which exposes us to foreign exchange rate movements. As of March 31, 2014 and 2015 and September 30, 2015, we had $14.6 million, $17.1 million and $17.7 million, respectively, of cash denominated in currencies other than the U.S. dollar. As of March 31, 2014, cash denominated in British pounds and South African rand was $10.4 million and $3.4 million, respectively. As of March 31, 2015, cash denominated in British pounds and South African rand was $13.7 million and $2.4 million, respectively. As of September 30, 2015, cash denominated in British pounds and South African rand was $14.3 million and $2.6 million, respectively.

In addition, although our foreign subsidiaries have intercompany accounts that are eliminated upon consolidation, these accounts expose us to foreign currency exchange rate fluctuations. Exchange rate fluctuations on short-term intercompany accounts are recorded in our consolidated statements of operations under “foreign exchange (expense) income.”

 

77


Table of Contents

Currently, our largest foreign currency exposures are the British pound and South African rand. Relative to foreign currency exposures existing at March 31, 2014, significant movements in foreign currency exchange rates would expose us to significant losses in earnings or cash flows or significantly diminish the fair value of our foreign currency financial instruments. For the year ended March 31, 2014, we estimate that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenues by $5.7 million, decreased expenses by $6.0 million and increased operating income by $0.3 million. For the year ended March 31, 2015, we estimate that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenues by $7.1 million, decreased expenses by $7.5 million and increased operating income by $0.4 million. For the six months ended September 30, 2015, we estimate that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenue by $3.9 million, decreased expenses by $3.6 million and decreased operating income by $0.3 million. The estimates used assume that all currencies move in the same direction at the same time and the ratio of non-U.S. dollar denominated revenue and expenses to U.S. dollar denominated revenue and expenses does not change from current levels. Since a portion of our revenue is deferred revenue that is recorded at different foreign currency exchange rates, the impact to revenue of a change in foreign currency exchange rates is recognized over time, and the impact to expenses is more immediate, as expenses are recognized at the current foreign currency exchange rate in effect at the time the expense is incurred. All of the potential changes noted above are based on sensitivity analyses performed on our financial results as of March 31, 2014 and 2015 and September 30, 2015.

Inflation Risk

Inflationary factors, such as increases in our operating expenses, may adversely affect our results of operations, as our customers typically purchase services from us on a subscription basis over a period of time. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, an increase in the rate of inflation in the future may have an adverse effect on our levels of operating expenses as a percentage of revenue if we are unable to increase the prices for our subscription-based services to keep pace with these increased expenses.

Interest Rate Risk

We are exposed to market risk related to changes in interest rates. Our investments primarily consist of money market funds. As of March 31, 2015 and September 30, 2015, we had cash and cash equivalents of $32.9 million and $34.1 million, respectively. The carrying amount of our cash equivalents reasonably approximates fair value, due to the short maturities of these investments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, we believe only dramatic fluctuations in interest rates would have a material effect on our investments. We do not believe that an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio. As such we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

As of March 31, 2015 and September 30, 2015, we had an outstanding balance of $12.4 million and $10.0 million, respectively, aggregate principal amount on our term loans, which have a fixed interest rate of 4.5%. Since these instruments bear interest at fixed rates, we have no financial statement risk associated with changes in interest rates. However, the fair value of these instruments fluctuates as interest rate changes.

 

78


Table of Contents

A LETTER FROM OUR FOUNDERS

It is difficult to imagine work without email. Email has become such an essential part of our working lives that it is easy to take it for granted. Email is synonymous with communication, but it is capable of so much more. While email today has far surpassed being just a conversation tool, there is a great deal more innovation to come from companies like ours as email technology continues to transform itself throughout the cloud era.

We started Mimecast because we believed that the cloud would become the ideal platform for email, and because we saw that email needed help and protection as it grew more popular. Because of the important role email plays in work, and the treasure trove of data it holds, email is a magnet for cyber criminals and is under constant and evolving attack. Plus, growing compliance obligations mean email and its data must be stored safely, even as data volumes balloon. Finally, because we rely so much on it, any length of downtime is disruptive. Email must work all day, every day.

So, our founding mission was to build a secure cloud infrastructure and services to make email safer for business. Twelve years later we have built our own proprietary cloud architecture and operating system called Mime | OS that makes it possible for us to scale effectively and deliver elegant, fully integrated services that can meet the needs of thousands of organizations.

Today, we are proud that approximately 15,200 organizations and millions of their employees from around the world have entrusted their email and data to us. They use Mimecast to improve the security, reliability and archiving capabilities of their own email servers or primary cloud email service. We take our responsibility to protect their email and the petabytes of business information this includes very seriously.

But there is more potential to unlock. Email has gone from being just a communication platform to probably the greatest single repository of corporate knowledge any organization holds. Almost all corporate activity, discussion or ideas touch email at some point, so we also help customers to mine the archive data we hold for them to uncover the richness of knowledge and insight it contains. While our mission remains to make email safer, we also work hard to make it better for business too.

We now find ourselves at another important milestone in the history of our business as we become a publicly-traded company. We have come a very long way and we’d like to thank our customers, partners, investors and employees (past and present) for their commitment to our mission. Now, we would like to also welcome new investors. To you all, we’d like to say a personal “Thank you” for playing an important part in our story.

Best wishes

Peter Bauer (chief executive officer and co-founder)

Neil Murray (chief technology officer and co-founder)

 

79


Table of Contents

BUSINESS

Overview

We are a leading provider of next generation cloud security and risk management services for corporate information and email. Our fully-integrated suite of proprietary cloud services protects customers of all sizes from the significant business and data security risks to which their email system exposes them. We protect customers from today’s rapidly changing threat landscape where email has become a powerful attack vector and data leak concern. We also mitigate the significant business disruption that email failure or downtime causes. In addition, our archiving services secure, store and manage critical corporate communications and information to address growing compliance and e-discovery requirements and enable customers to use this increasing archive of information to improve employee productivity.

Email is a critical tool for organizations of all sizes. Protecting and managing email has become more complicated due to expanding security and compliance requirements and the rapid increase in both the volume and the importance of the information transmitted via email. Organizations are increasingly at risk from security breaches of sensitive data as sophisticated email-based attacks or data leaks have become more common. Additionally, organizations are not just using email for communication, they are also increasing their use of email archives as an active repository of vital corporate information needed to meet compliance requirements and support employee productivity. As a result, email represents one of the highest concentrations of business risk that organizations may face.

Traditional approaches to addressing these risks have left customers managing disparate point products from multiple vendors that are often hard to use, costly to manage, difficult to scale, can fail to fully address today’s increasing and rapidly changing threats, and limit the use of corporate information to enhance productivity. These approaches also suffer from inefficient over-provisioning because of the need to resource for occasional peak demand. The resulting infrastructure complexity caused by disparate products and legacy architectures also makes it difficult to move more IT workloads to the cloud, which continues to be an increasing priority of organizations of all sizes.

We developed our proprietary cloud architecture to offer customers comprehensive email security, continuity and archiving capabilities in a single service that makes it easier for them to protect themselves effectively in a worsening and rapidly changing security and risk environment. Providing a fully-integrated service also simplifies ongoing management and service deployment. Customers can then decommission the often costly and complex point products and on-premises technology they have traditionally used to tackle these risks. We also make it easier for customers to move more of their IT workloads to the cloud.

We serve approximately 15,200 customers and protect millions of their employees across the world. Our service scales effectively to meet the needs of customers of all sizes and we have optimized our sales organization and channel to address each segment effectively. We have more than 600 employees in nine offices in the United States, the United Kingdom, Australia and South Africa. For the fiscal years ended March 31, 2013, 2014 and 2015, our revenues were $66.8 million, $88.3 million and $116.1 million, respectively, representing year-over-year growth of 32% for 2014 and 31% for 2015. Revenue growth on a constant currency basis was 37% and 33% for the fiscal years ended March 31, 2014 and 2015, respectively. For the six months ended September 30, 2014 and 2015, our revenues were $55.5 million and $67.8 million, respectively, representing year-over-year growth for the period of 22%. Growth for this period was 30% on a constant currency basis. Our net losses were $14.3 million and $16.9 million in the fiscal years ended March 31, 2013 and 2014, respectively, and our net income was $0.3 million in the fiscal year ended March 31, 2015. Our net loss for the six months ended September 30, 2015 was $0.1 million.

 

80


Table of Contents

Industry Background

Email is a critical tool for organizations of all sizes. Email also captures a comprehensive history of corporate activity, knowledge and data vital for day-to-day business operations and employee productivity, the full potential of which is only beginning to be realized. Consequently, email needs protection and the technology needed to do this has extended well beyond the mailbox itself to include additional security, continuity and archiving services, all of which have typically been offered by separate vendors with different approaches.

Email is Critical to all Organizations

Email continues to be the primary way organizations exchange information and communicate externally and internally. According to a 2015 report by The Radicati Group, employees spend 2.38 hours of their work day on email. They also predict that the number of business emails sent each day worldwide will grow from 112.5 billion in 2015 to 128.8 billion in 2019, and the number of business email users will grow from 922 million to over 1 billion in the same period. Every customer segment and region will experience growth.

Email is also a productivity tool highly valued by employees as evidenced by a December 2014 survey by Pew Research where corporate internet users ranked email as more important than any other communication tool, including the internet itself.

In addition, many other critical IT systems depend on email to operate effectively. For example, sales, customer relationship management, human resources, finance and marketing systems typically rely on email for workflow management, important notifications and other functions, making email continuity and disaster recovery technologies particularly vital to the overall operations of an organization.

The Amount of Critical and Sensitive Data in Email Archives is Growing Rapidly

The Radicati Group report also predicts that the average email storage per business user will grow by 65% in the next four years. The value of this archive of sensitive corporate data contained in email grows with every email or file exchanged. Traditionally, protecting and storing this archive has been a priority for compliance or risk officers, but the email archive is increasingly being used by employees as their primary repository to save and access important information. A 2014 report by Gartner estimates that by 2019, 75% of organizations will treat archive data, including email, as an active data source and not simply as a separate repository to be viewed or searched periodically, up from less than 10% today.

Actively managing these dramatically expanding email archives with traditional on-premises storage technology is costly, so organizations are turning to cloud-based services to meet their archiving needs. A 2014 report by Gartner states that archiving as a service (a.k.a. cloud archiving) has rapidly surpassed on-premises archiving as the preferred deployment model for most organizations. Gartner sees that 60% to 70% of new or replacement email archiving implementations as being cloud-based. Moreover, organizations are increasingly requiring more powerful capabilities to search their email archive in support of e-discovery and employee productivity. 46% of respondents to Forrester’s 2013 Foresights Security Survey of enterprise IT architects, and other IT decision makers, stated e-discovery was a high or critical priority over the next year.

Email is a Primary Security Target for Advanced Cyber-Attacks

In recent years, there has been an increase in the number of high profile security breaches and data leaks. Well organized and funded, including state-backed, hackers and cyber-criminals are targeting organizations to disrupt their operations, steal sensitive corporate data and gain access to

 

81


Table of Contents

valuable intellectual property. Email is often the primary target for these external attacks as well as the source of damaging data leaks from insiders, whether accidental or malicious. According to the monitoring service breachlevelindex.com, there have been over three billion reported lost data records since 2013 globally.

Spear-phishing attacks, which involve sending authentic looking emails designed to trick the recipient into sharing sensitive data or clicking on a malicious link leading to a malware infection, have become a widespread and an effective attack technique against organizations of all sizes. Many of the highest profile data breaches have been the result of phishing attacks, including the Home Depot breach in 2014, the Target attack in 2013 and the RSA attack in 2011. These attacks are not limited to large enterprises. In 2015, Endurance International reported that 71% of small businesses have been the victim of phishing attacks.

In addition to advanced and targeted threats, spam and other email-based cyber scams remain a significant problem for organizations, especially as the volume of emails continues to increase. A 2015 report by Kaspersky stated that spam represented 67% of all email flows in 2014.

As a result of the widespread impact of phishing attacks, the disruption of spam and the magnitude of recent data breaches, organizations are elevating the priority of IT security projects.

Data Protection, Cybersecurity and Data Privacy are Key Compliance and Regulatory Concerns for all Organizations

Governments, regulators and industry groups globally continue to enact or amend legislation and standards regarding data protection, cybersecurity and data privacy. Examples of such laws in the United States include the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Graham-Leach-Bliley Act of 1999 (GLBA) and the Sarbanes-Oxley Act of 2002. Countries in Europe have each adopted their own laws under the Data Protection Directive adopted in 1995, which is expected to be superseded in the next two years by a single law under the European Data Protection Regulation. These laws place growing obligations on organizations of all sizes, particularly those in regulated industries, to store, protect, process, share and transmit data safely, or risk significant sanctions as well as the threat of civil litigation. In addition, email communications, and the data they contain, may need to be produced as evidence in litigation or may be necessary to address legal, regulatory or internal queries that may arise in the future. This makes secure email archiving and the ability to access and search data an increasingly critical requirement.

Restrictions IT Teams Put on Email Create New Security Risks

As employees seek to become more productive, exchange files and collaborate, email usage and archive sizes continue to grow, placing greater demands on email resources. Meanwhile, IT teams are under pressure to reduce storage costs and improve infrastructure performance, and this often leads them to take steps to limit unfettered usage of email. This can include blocking large file sending to avoid choking network traffic and putting a file size limit on inboxes to reduce storage infrastructure, which makes it difficult for employees to use the email archive as their primary communication and file store. The frustration this creates can cause employees to seek solutions outside the secure corporate network, such as Dropbox and other web-based file sharing sites, increasing the risk of data leakage and making it difficult for the compliance department to monitor data traffic within and outside the organization.

Email Downtime is Disruptive to Employee Productivity

Given the critical nature of email for business communication and the importance of the information archive, email outages have become increasingly disruptive and costly because of the

 

82


Table of Contents

resulting impact on employee productivity. Employees are accustomed to being “always on” and accessing their email and data from mobile phones, tablets and other handheld devices, in addition to desktop devices. According to a report by Osterman Research, email systems experience a 53-minute mean of unplanned downtime each month, or 10.6 hours each year. Osterman estimates that employees become 25% less productive when their email system is down. This impact is not only felt in an outage, since organizations also must plan for regular maintenance and schedule downtime usually after hours at higher cost given overtime wages.

IT Workloads, Including Business Productivity Tools, are Moving to the Cloud

Organizations of all sizes are adopting cloud-based technologies to reduce the cost and complexity of their IT infrastructure and increase performance and flexibility. Gartner reports that 75% of organizations use public cloud services today, although sparingly, and 78% plan to increase their investment in cloud services in the next three years. 91% of organizations across all industries plan to use external providers to help with cloud adoption. IT spending on public cloud infrastructure as a service (IaaS), platform as a service (PaaS), software as a service (SaaS) and business process as a service (BPaaS) is growing at a five-year compound annual growth rate of 18% through 2018, more than six times the growth rate of IT spending generally — 2.7% — over the same time period. This trend is a continuation of the disruptive shift that is seen elsewhere in the application market as a number of high growth SaaS vendors like Salesforce.com, NetSuite, ServiceNow and Workday continue to attract critical IT workloads from on-premises technologies to the cloud. Leading cloud infrastructure vendors such as Amazon Web Services and Microsoft Azure are also seeing significant growth as organizations of all sizes adopt their offerings.

As organizations consider which workloads to move to the cloud, IT teams are looking beyond moving infrastructure and looking to shift traditional productivity tools to Microsoft’s Office 365 or Google Apps for Work. Gartner states that “the proportion of business users provisioned, in whole or in part, with office system capabilities from the cloud will grow from approximately 15% in 2015 to 60%, or approximately 700 million users by 2022.”

Business Email Mailboxes are Moving to the Cloud, but this Creates New Risks to Mitigate

While business email continues to grow, the number of on-premises mailboxes will decline as organizations put them into the cloud. Organizations that move their primary email service to Office 365 or Google face significant risks from their single vendor exposure as they depend on one company for a reliable service, comprehensive threat protection and guaranteed data integrity.

These risks will only increase as services like Office 365 become more popular over time. With more organizations relying on the same hosting infrastructure, any outage or downtime can cause severe industry-wide disruption. Also attacking Office 365 or Google is increasingly attractive for cyber criminals because they know they only have to find a way to attack the single security stack used by these hosting providers to access multiple targets. This is easier and more efficient than targeting organizations one at a time.

As a result, most organizations prefer to have third-party security, continuity and archiving providers in place to reduce their risk posture and provide additional layers of redundancy and enhanced service quality. As organizations adopt cloud infrastructure services, they have also increased spending on securing these workloads with cloud-based security products.

 

83


Table of Contents

Traditional Email Security, Continuity and Archiving Alternatives can be Inadequate and do not Address Increasing Customer Requirements and Protect Against Next Generation Security Threats

As the threat landscape becomes more dynamic and complex, and customers want to put more critical IT workloads into the cloud, we believe the point products and traditional architectures that address email security, continuity and archiving will not be able to adequately address increasing customer requirements.

Point Products are Inflexible and only Address Part of the Problem

To address their security, continuity and archiving needs, many organizations have deployed a complex array of disparate or point products on-premises, or cloud-based versions hosted by the vendor.

These technologies are typically from multiple vendors, sometimes developed in-house or use features that shipped with the mail server and only address narrow uses and problems. They can be difficult to integrate, inflexible, unreliable, complex and expensive to manage, particularly as email and data volumes grow. The growing complexity associated with broader IT risks and the escalation of security threats requires a solution that is integrated and agile, and increasingly cloud-based as organizations move more IT workloads there. As a result, organizations who rely on traditional point products will struggle to adapt their infrastructure cost-effectively for today’s email requirements.

Traditional On-Premises or Hosted Architectures have Performance Limitations and are Expensive

Existing technologies, whether on-premises or hosted, are typically built on a single-tenant architecture, which requires extra provisioning to plan for occasional peak volumes and unplanned circumstances for each customer. This approach is inefficient and expensive as it requires a higher minimum investment for each implementation than a native cloud approach that utilizes pooled provisioning across multiple tenants. Hosted “cloud” versions of an on-premises approach rely on the same single-tenant IT architecture as the on-premises version that limits scalability, is inflexible, hard to update rapidly and more expensive to deploy and manage.

Large enterprises that have invested heavily in traditional on-premises technology to address their mounting email risks are increasingly finding themselves exposed as these systems are not adequate or agile enough to adapt to the evolving threat landscape. Smaller and mid-market organizations are also at risk and often more vulnerable as they lack the same level of IT resources or budgets to counter these threats with many having purchased limited security technology. In a recent survey by Endurance, only 42% of small business owners had recently invested resources into any form of security protection, which may not be sufficient given the hostile threat landscape.

Organizations Need a New Approach to Email Security and Management

The limitations of traditional technologies mean customers need to rethink their approach to protecting email and corporate information. They need to mitigate the risks they face from email, and want to reduce the cost and complexity, and move more of their workloads to the cloud.

Meeting this growing customer demand requires an email and data security cloud service that meets the following requirements:

 

    Integrated Offering. By bringing multiple requirements into one unified service, the next-generation email service would help the organization reduce the complexity and cost of managing point technologies from disparate vendors and bring additional benefits from new capabilities made possible due to unification.

 

84


Table of Contents
    Strong Technology. As organizations substitute specialized products provided by different vendors with a unified email service, it is imperative that the individual products are as good, or better, than those being replaced. Organizations are not willing to compromise on performance or security at a product level.

 

    Native Cloud. As organizations shift workloads to the cloud, and move away from retaining on-premises or single tenant hosted cloud infrastructure, today’s email security and information management technology must be natively cloud-based eliminating the need for local software and hardware, virtual machines and device hosting.

 

    Built for Scale. As email traffic and data storage continues to increase dramatically, the risk of threats escalates and the need for real-time, on-demand email access becomes more prominent, organizations cannot compromise on email performance and availability. The ideal solution must be easily scalable to match customer demand and be able to handle large volumes.

 

    Easy to Deploy and Manage. A cloud platform should simplify the process of service updates, new product deployments and on-boarding. System improvements should also be handled centrally, reducing this burden for the customers’ own IT team. A unified service also means it should be managed from a single administration console.

 

    Adaptable to Customer Needs. With the rapidly shifting threat landscape and other IT requirements, customer email needs are continuously evolving, and it is important that email and information management solutions adapt quickly to help organizations keep pace with changing risks and enhance productivity.

 

    Lower Total Cost of Ownership. The new approach for corporate email security, continuity and archiving should solve the current problems of integration, performance and scalability while simplifying the IT email infrastructure, reducing the initial capital outlay, recurring maintenance costs and the growing storage costs that many companies face as their volumes scale.

 

85


Table of Contents

Our Market Opportunity

The growing need of organizations to mitigate the risks of email and data security, continuity and archiving has already established a significant industry beyond the mail server. According to 451 Research, an information technology research company, there were approximately 194 million active mobile email users alone worldwide in businesses with 10 - 499 employees in 2015. 451 Research projects this number to increase to 311 million by 2019, representing a compound annual growth rate of 12.5%. In addition, according to the U.S. Small Business Administration, there are approximately 5.7 million organizations employing 113.4 million employees in the United States. Among them, there are over 570,000 small and mid-size organizations, which are defined as those organizations employing 20 to 4,999 employees, that together have approximately 55 million employees. Based on recent Gartner reports, combined spending in markets catering to enterprise information and email security, continuity and archiving, which include Secure Email Gateway, Backup and Recovery Software, E-Discovery Software and Data Loss Prevention, was $9.4 billion in 2014 and will grow to $11.6 billion in 2017. We believe there is a considerable need for a comprehensive integrated cloud solution that can address the needs of customers in these markets.

 

LOGO

Our immediate opportunity is to replace incumbent email security, continuity and archiving vendors. As we extend our products into adjacent areas, we anticipate this will open up additional opportunities beyond this to take further market share in a wider range of enterprise security and data management markets. We also expect to benefit from the growing popularity of cloud email services, specifically Office 365 and Google, and the customer need for complementary security, archiving, back-up and continuity services.

Our Solution

Our fully-integrated suite of cloud services for security, continuity and archiving is designed to protect email and deliver comprehensive email risk management beyond the primary mail server. We protect customers from the growing threat to email and the corporate data it contains from malware, spam, data leaks and advanced threats like spear-phishing. We also help organizations securely and cost effectively archive their growing email and file repositories to support employee productivity,

 

86


Table of Contents

compliance and e-discovery. Our continuity services ensure email and corporate information remain available in the event of a primary system failure or scheduled maintenance downtime.

Our customers benefit from:

 

    Comprehensive Email and Data Risk Management in a Single, Unified Cloud Service. Our services integrate a range of technologies into a comprehensive service that would otherwise require an array of individual devices or services from multiple vendors. We enable customers to decommission these technologies, reduce the cost and complexity of their infrastructure, redeploy IT resources, and improve the security and risk management of their corporate email environment.

 

    Best-of-Breed Security, Continuity and Archiving Services. We believe our customers should not have to compromise on the quality of their email security, continuity or archiving services in order to benefit from integration. Our strategy is to develop best-of-breed capabilities within our integrated service to compete successfully with industry-leading point products in three critical areas:

 

    Email and Data Security: We protect customers from a comprehensive range of email and data related threats that include, but are not limited to, spam, viruses, phishing and spear phishing, identity theft, advanced persistent threats, malicious attachments, known and unknown malware, outbound spam outbreaks and malicious inbound URLs. We combine our proprietary cloud-based scanning, detection and real-time intelligence gathering technologies with third-party threat data and malware libraries to deliver comprehensive and overlapping protection reflective of a best-of-breed security service.

 

    Email Service Continuity: Our continuity service enables customers to send, receive and view emails and calendars during email gateway failures or planned maintenance downtime, without the need to build or host their own replicated email environment. Our service has immediate fail-over and fail-back capabilities, and is fully-integrated into Microsoft Outlook. Employees can continue to access their email and data using their preferred mobile, tablet or desktop device, or via our web-based portal, so there is limited interruption to how they normally operate.

 

    Data Archiving: We enable organizations to archive rapidly growing volumes of email and associated data safely and centrally in the cloud to support their need to archive data cost effectively to meet long term storage, compliance, governance, risk mitigation and regulatory obligations. We also provide powerful search tools that can increase employee productivity, and enable them to utilize their archive as a live file store. Key features of our service include, unlimited and perpetual legal hold, discovery and early legal case assessment, onsite and cloud-linked retention management, administrator and employee-led retention controls, onsite and metadata synchronization and record destruction policies and services.

 

    Web Scale Performance for Organizations of All Sizes. Our cloud service is built to address the most demanding scale, performance and availability requirements of large enterprises but delivers this as a subscription-based cloud service that puts these capabilities within the reach of small and mid-market organizations too. Our data centers process approximately 180 million emails per day, and store over 100 billion emails and approximately 15 petabytes of customer data. We achieve demanding continuity service commitments with data centers that are replicated in each geography and operate in active-active mode enabling fast failover and fail-back as required.

 

   

Compelling Return on Investment. Our unified, cloud-based service enables our customers to decommission a range of legacy and disparate technologies that support their email server and recover this cost. We utilize cost-efficient commodity hardware, and share a single instance of the operating software as well as storage and processing hardware securely across

 

87


Table of Contents
 

the whole customer base within each data center, allowing us to deliver cloud-scale economic and performance benefits to our customers. Customers also benefit from the continuous improvement of our service without the need to pay for service packs or updates. Our service bundles and subscription-based pricing also enable customers to pay per employee and select their desired services making costs easy to predict and affordable.

 

    Easy to Deploy and Manage. Our service is designed to be easier to deploy than alternative technologies. Customers simply route their email traffic through our cloud and can be up and running in a matter of days and sometimes less. We then enable our customers to add or delete new services and employees, and manage all security and other policies centrally via a single web-based administration console that significantly simplifies the ongoing management of their email and data environment.

 

    Highly Agile and Adaptable Service. We are continually improving our cloud architecture and services. Our common code base and multi-tenant cloud architecture enables us to perform maintenance updates and add new features or products by updating our core code base once. Continuous service development and multi-tenant rapid deployment also means we can keep pace with emerging threats to protect and respond quickly to changing customer needs.

 

    An Easier Move of Additional Critical Workloads to the Cloud. For those customers that want to put more workloads into the cloud, our technology facilitates the migration of email in particular by removing the complexity that has stalled many customers to date. Our interoperability with cloud-based email servers, such as Office 365, makes this easier to achieve and helps to mitigate remaining concerns about the single-vendor security, data integrity and continuity risk of such a move. Our data ingestion services also allow customers to bring legacy data into their new cloud archive to ensure it is a complete record of current and historic data.

Our Growth Strategy

We will continue to invest in extending our leadership in cloud security and risk management services, and as more organizations move IT workloads such as email to the cloud, we believe we are well positioned to continue capitalizing on this growing opportunity globally.

Our growth strategy is focused on the following:

 

    Grow Revenue From Our Existing Customer Base. We serve approximately 15,200 customers of all sizes. We provide a high level of service that results in our customers staying with us year over year. This large and loyal customer base provides us with the opportunity to sell additional services and add more employees to their subscriptions. As a result, we have achieved a revenue retention rate of 107% and 108% for the fiscal year ended March 31, 2015 and the twelve month period ended September 30, 2015, respectively. As of September 30, 2015, 28% of our customers subscribed to one of our services, 18% of our customers subscribed to two of our services, 33% of our customers subscribed to three of our services, and 21% of our customers subscribed to four or more of our services. As of September 30, 2015, approximately 14,400 of our customers subscribed to our Email Security service, approximately 10,300 subscribed to our Mailbox Continuity service, and approximately 8,600 subscribed to our Enterprise Information Archiving service. As a result, we believe we have significant upsell potential in our existing customer base with current and new services. We intend to continue proactively broadening our reach with our existing customers and sell additional services.

 

   

Acquire New Customers. We have built our global cloud architecture to offer best-of-breed capabilities and to be highly scalable and affordable for organizations of any size, ranging from small and mid-market customers to the largest global enterprises. Moreover, we offer our security, continuity and archiving email services as bundles and in a modular fashion, enabling us to win new customers by addressing a variety of initial needs and use cases that we expand over time as we cross sell other offerings. We will continue to invest in a direct sales force combined

 

88


Table of Contents
 

with a focused channel strategy designed to serve the various requirements of small, mid-market and large enterprises and to bring new customers onto our cloud architecture.

 

    Actively Invest in Our Channel Partner Network. The majority of our sales are through a reseller channel designed specifically to meet the requirements of each of our target customer segments. In the large enterprise market, we are building on existing relationships with leading systems integrators such as Hewlett Packard, Dimension Data and Avanade. In small and mid-market organizations, we are extending our network of leading IT resellers like Softcat, SHI and Softchoice. We expect to expand our channel strategy over time to incorporate additional security or cloud specialists, as well as resellers focusing on supporting customers with the transition to Office 365. We intend to further invest in our network of channel partners to further extend our global sales, service and support capabilities.

 

    Develop Our Technology and Release New Services. We regularly update and improve our software and architecture and seamlessly deploy these updates to our customers. In the fiscal year ended March 31, 2015, we launched two new revenue-generating services. We will continue to build on our current capabilities and exploit additional opportunities in adjacent areas to those we serve today. This will extend the value our customers can gain from our architecture and enable them to consolidate additional email and data services to our integrated cloud service working seamlessly with Microsoft Exchange, Office 365 and Google Apps for Work.

 

    Continue to Expand Our Geographic Presence. We were founded outside the United States and, consequently, 62% and 59% of our sales in fiscal year 2015 and the six months ended September 30, 2015, respectively, were derived from non-U.S. locations. Revenue from the United States grew at 47% and 41% from the fiscal year ended March 31, 2014 to the fiscal year ended March 31, 2015, and from the six months ended September 30, 2014 to the six months ended September 30, 2015, respectively, and we view this as our most significant growth market. Since founding our U.S. business in 2008, we have established a successful direct sales, channel and service infrastructure to exploit this opportunity. We have also established a presence in Australia and expect expansion in that geography as our data centers there are now operational. We plan to investigate additional international expansion from our regional bases in the United States (for North America), the United Kingdom (for Europe), South Africa (for Africa and the Middle East) and Australia (for Asia-Pacific).

 

    Target Organizations Moving Workloads to the Cloud. Given the compelling cost benefits and improved agility of cloud-based solutions, organizations are increasingly moving critical workloads to the cloud. As these IT workloads move to the cloud, we believe we are well-positioned to take advantage of growth opportunities that exist from augmenting services, including Office 365 and Google Apps for Work.

Our Technology

We have developed a native cloud architecture, including our own proprietary SaaS operating system and customer-facing services, to address the specific risks and functional limitations of business email and data. Our innovative cloud-based approach requires no on-premises or hosted appliances. We believe we are one of only a few cloud architects that have fully committed to native cloud development.

We have a proven record of performing successfully at considerable scale and addressing rapidly growing customer demands. We process approximately 180 million emails per day with over 100 billion under management. We archive approximately 15 petabytes of customer data and add more than 150 terabytes of customer data per month and employee queries of their Mimecast email archive have grown from approximately 500,000 to over 900,000 per week in just one year.

We are able to provision customer email flows and onboard massive amounts of email data from legacy archives rapidly and efficiently. This drives customer adoption and makes the cloud transition

 

89


Table of Contents

easier than our customers typically expect. Once a customer is live on our service, adding new products to their subscription only requires activating it from within their single administration console. This can be done with as little as one click and the new service is available across their business.

Our Proprietary Native Cloud Architecture—Mime | OS

We developed a proprietary operating system called Mime | OS for native cloud services. Mime | OS enables secure multi-tenancy and takes advantage of the cost and performance benefits of using industry-standard hardware and resource sharing specifically for the secure management of email and data. This enables us to provision efficiently and securely across our customer base, minimizing the impact of spare or over-provisioned processing and storage capacity, reducing the cost of providing our services.

Mime | OS utilizes a common code base to control the hardware, and the storage, indexing, processing, services, administrator and user interface layers of our cloud environment. It has been specifically designed to enable us to scale our storage, processing and services to meet large enterprise-level email and data demands, while retaining the cost and performance benefits of a native cloud environment.

Mime | OS also streamlines our customer application development and enables strong integration across our services. All of our customer applications or services, use Mime | OS to interact with our single data stores and processing technology, as well as interoperate effectively with each other.

As set forth below, Mime | OS is our proprietary operating system that controls the interface, services, processing, indexing and storage layers of Mimecast’s cloud architecture.

The Mimecast Cloud Architecture

 

LOGO

 

90


Table of Contents

Continuous Development Methodology and Multi-Tenancy Advantage

As we enhance and expand our technology, we can update services centrally with little or no intervention required by the customer as everyone shares the same core operating and application software. Improvements, upgrades, new products or patches are applied once and are available immediately across our whole service to customers. It also means we have only one, up-to-date version of our service to maintain and support, as well as a single, common data store for all customers that simplifies management, support and product development.

Our services already process and manage large volumes of customer data and this is growing daily. Our commitment to continual improvement in Mime | OS, our customer applications and hardware infrastructure mean we are constantly strengthening the performance of our service as we scale. These improvements include faster archive search times and data ingestion, greater storage density, improved processing and extended security coverage. Each week, we roll out updates and enhancements centrally that benefit our customers without the need for additional infrastructure investment on their part. Additionally, when new threats emerge, we act once by making changes to our service and all customers benefit immediately. We can also identify and act on threats to one customer and quickly prevent them from impacting others by changing our core system.

How Our Services Work

Mimecast Email Security

We protect inbound and outbound email from malware, spam, advanced persistent threats, email DoS and DDoS, data leaks and other security threats.

Inbound email is directed through Mimecast Email Security, which performs comprehensive security checks before the email is delivered to the customer’s infrastructure, e.g. Exchange, Office 365 or Google. This prevents unwanted email even reaching the customer in the first place and cluttering their infrastructure unlike on-premises services from competitors. Each day, we monitor approximately 375 million messages delivering, on average, less than 50% to the customer.

Outbound email sent from the customer also passes through us and is checked before being sent on to prevent it from presenting a security threat to the recipient. Outbound email can also be encrypted, and scanned by our comprehensive content controls to prevent confidential documents or data leaving the business. Data leak prevention is a key consideration for all organizations.

Mimecast Mailbox Continuity

Email is a 24x7 tool and, traditionally, customers who want to ensure their email does not experience downtime as a result of an inevitable outage or maintenance have had to replicate their own infrastructure in a second location, doubling their email-related costs. The cost and management burden of doing this is prohibitive for many, particularly small or mid-market organizations.

We are a cost effective alternative as there is no need for additional infrastructure. As all customer outbound and inbound email is coming through us anyway, when the customer’s primary email service fails, our Mimecast Mailbox Continuity service takes over the delivery and sending of email in real time or at the request of the administrator, offering immediate fail-over and fail-back. When the primary service is re-established, the customer is reassured that there has been no loss of data and that the archive is maintained. For employees the process is virtually invisible—they continue to work as before in their Microsoft Outlook desktop email client, their Mimecast mobile app or their Mac Desktop App.

 

91


Table of Contents

Mimecast Enterprise Information Archiving

Email, and the data it contains, needs to be safely archived to meet growing compliance, regulatory and legal obligations. Also, employees are increasingly using their email archive as their primary information store so this is further reason to ensure it is protected and archived effectively.

As email, file attachments, and associated critical metadata that identifies activity is sent or received, it can be saved in a secure, tamper-proof archive in the single Mimecast cloud automatically and indefinitely. Our employee mobile and desktop search tools, and administration console, then allow for detailed investigation of the archive. We also enable customers with legacy archive data to put this into their single Mimecast archive, which improves adherence to data compliance obligations and gives employees access to a complete historical view of their archive.

Our Mimecast Enterprise Information Archiving service offers secure lifetime storage of email, files and instant messaging conversations paid for on a per-employee not data basis. Expensive and ineffective onsite archives can be decommissioned, reducing the data load on the primary email service too. Our search tools make it easy for legal staff and employees themselves to quickly find data without the need to turn to the IT team. Finally, our archive can also include legacy data that would otherwise be held in additional storage. This can be ingested over-the-wire or via physical drives sent encrypted from the customer to us.

Our Global Data Center Network

We have built a network of ten data centers in five locations around the world to deliver our services. This gives customers geographic and jurisdictional control over data location, which enables them to address data privacy concerns. Each region operates two identical data centers that function in active-active mode in different locations, and have N+1 set-ups to meet our continuity of service commitments. Because of this redundancy, we are able to switch operations from one data center to another to maintain our customers’ email and data services. We have developed a modular approach to provisioning a new data center and can transition amongst data centers as needed in existing or new geographies.

 

92


Table of Contents

Mimecast’s ten co-located data centers, which are illustrated below, are replicated and operate in active-active mode to allow for continuity of service in the event of downtime or maintenance.

 

LOGO

Our Services

Our cloud security, continuity and archiving services protect email and data, giving customers comprehensive email risk management in a single, fully-integrated subscription service.

Mimecast Email Security protects against malware, spam, advanced phishing and other emerging attacks, while also preventing data leaks. Mimecast Mailbox Continuity ensures employees can continue using email during unexpected and planned outages such as system maintenance. Mimecast Enterprise Information Archiving unifies email, file and Lync Instant Messaging data to support e-discovery, and gives employees fast access to their personal archive via PC, Mac and mobile apps.

Mimecast Email Security

Email security is a critical defense against hackers seeking to capture and exploit valuable corporate information and disrupt business operations. Our Mimecast Email Security service provides comprehensive email security. It prevents spam, viruses, advanced threats, bulk mail and defined content from reaching inboxes, and protects the security and integrity of outbound email communications. It gives administrators granular security and content policy control for all inbound and outbound email traffic to prevent risks including data leaks. Integration into Outlook and mobile apps provides employees the freedom to be self-sufficient and have the ability to manage their quarantines.

Customers can also purchase the following additional services as part of our Mimecast Email Security offering:

 

    Targeted Threat Protection: Highly sophisticated targeted attacks, including spear-phishing, are using email to successfully infiltrate organizations, exploit users and steal valuable IP and customer data. Mimecast Targeted Threat Protection extends traditional gateway security to protect organizations against these advanced and highly targeted attacks. Also a threat
 

dashboard and notification system provides real-time data, including audit and reporting, and

 

93


Table of Contents
 

enables administrators and security specialists to monitor and report attempted attacks. We launched Targeted Threat Protection URL Protect in April 2014 and Attachment Protect in July 2015.

 

    URL Protect tackles the threat from emails containing malicious links. It automatically checks links each time they are clicked, preventing employees from visiting compromised websites regardless of what email client or device they are using. It also includes innovative user awareness capabilities so IT teams can raise the security awareness of employees. Once enabled, a percentage of links in emails clicked by an employee will open a warning screen. This will provide them more information about the email and destination, prompting them to consider whether the page is safe. If they choose to continue, the choice is logged and URL Protect scans the link and blocks access if the destination is unsafe. IT administrators can adjust the frequency of these awareness prompts to ensure employee caution is maintained. Repeat offenders that click bad links will automatically receive more frequent prompts until their behavior changes. The IT team can track employee behavior from the Mimecast administration console and target additional security training as required.

 

    Attachment Protect reduces the threat from weaponized or malware-laden attachments used in spear-phishing and other advanced attacks. It includes pre-emptive sandboxing to automatically security check email attachments before they are delivered to employees. Attachments are opened in a virtual environment or sandbox, isolated from the corporate email system, security checked and passed on to the employee only if no threat is detected. It also includes the option of an innovative transcription service that automatically converts attachments into a safe file format, neutralizing malware as it does so. The attachment is delivered to the employee in read-only format without any delay. As most attachments are read rather than edited, this is often sufficient. Should the employee need to edit the attachment, they can request it is sandboxed on-demand and delivered in the original file format.

 

    Secure Messaging: Email containing sensitive or confidential information requires appropriate security and control to prevent inadvertent or deliberate data leaks and to protect its information while in transit. Mimecast Secure Messaging is a secure and private channel to share sensitive information with external contacts via email without the need for additional client or desktop software. Sensitive information is retained within the Mimecast cloud service strengthening information security, data governance and compliance, without the added IT overhead and complexity of traditional email encryption solutions. We launched Secure Messaging in April 2015.

 

    Large File Send: Employees can create security and compliance risks when they turn to large file sharing tools to overcome email size limits imposed by their IT team or email infrastructure. Mimecast Large File Send enables PC and Mac users to send and receive large files directly from Outlook or a native Mac app. It protects attachments in line with security and content policies by utilizing encryption, optional access key and custom expiration dates; supports audit, e-discovery and compliance by archiving all files and notifications according to email retention policies; and protects email system performance from the burden of large file traffic. We launched Large File Send in July 2013.

Mimecast Mailbox Continuity

Email continuity protects email and data against the threat of downtime as a result of system failure, natural disasters and the impact of planned maintenance, system upgrades and migrations. Mimecast Mailbox Continuity services significantly reduce the cost and complexity of mitigating these risks and provides uninterrupted access to live and historic email and calendar information. During an outage our service provides real-time inbound, outbound and internal email support. The continuity

 

94


Table of Contents

service can be activated and deactivated directly and instantly from our administration console by administrators for the complete organization or for specific groups affected by limited outages. All outage events are fully logged and we also support email top-up services for customers who have to recover their Exchange environments from backups. The continuity service is capable of reliably and securely supporting customers during short or long-term continuity events. Integration with Microsoft Outlook, a native app for Mac users and a full suite of mobile apps means employees have seamless access to their email in the event of an outage.

Mimecast Enterprise Information Archiving

Our cloud archive consolidates into one store all inbound, outbound and internal email, files and instant messaging in a perpetual, indexed and secure archive. Using our Mimecast Enterprise Information Archiving service, customers can also incorporate legacy data from additional archives into the same searchable store.

All data is encrypted and preserved within a Write Once Read Many (WORM) state. Proprietary indexing and retrieval solutions allow customers to search individual mailboxes or the entire corporate archive in seconds. Our mobile, tablet, desktop and web applications ensure that employees can search and make the best use of their entire corporate archive in a fast, reliable and informative way. Intensive logging services cover the use of the archive, and roles and permissions govern what employees can see in the archive based on their role. Our purpose-built ingestion and export services support rapid high-volume extraction, scrubbing and loading of significant quantities of data. Our archive solution retains metadata that arises from gateway and continuity operations and we preserve both received and altered variants of emails that pass through our secure email gateway. Retention options for customers range from individual retentions, to data retained for an entire customer on a perpetual basis.

Customers can also purchase the following additional services as part of our Mimecast Enterprise Information Archiving offering:

 

    Cloud Archive for Email: Mimecast’s Cloud Archive for Email archives inbound, outbound and internal email. Employees get instant access to the archive from their device of choice to help boost productivity, while granular litigation hold, e-discovery and reporting strengthen compliance.

 

    Archive Power Tools: This is a series of advanced archiving tools including:

 

    Mimecast Storage Management for Exchange: This enables active mailbox size management, so administrators can optimize email system performance, control costs and support archive policy enforcement.

 

    Mailbox and Folder Tools for Exchange: In an email continuity event or when searching for archived content, access to folder structures and shared mailbox content is key to productivity. This tool makes it easy to replicate individual and shared mailbox folders into the Mimecast Cloud Archive for Email.

 

    Granular Retention Management: Managing email retention policies can be complex and time-consuming, because different business groups and individuals have requirements that vary how long email should, or is required to be retained. Mimecast Granular Retention Management enables IT teams to centrally apply policies to manage the retention of email content and related metadata.

 

95


Table of Contents

Unified Bundles

Many of our customers are attracted by the ability to combine our services and capabilities into a unified service bundle managed from a single administration console, and integrated into Microsoft Outlook. Customers often start here and add additional products as required.

 

    Mimecast Unified Email Management Express: Our single suite of fully integrated email security and continuity services.

 

    Mimecast Unified Email Management Enterprise: Our integrated bundle of email security, continuity and archiving services.

 

    Mimecast Services for Office 365: A move to Office 365 creates single vendor exposure, and the associated security, continuity and data assurance risks of this have stopped many organizations from migrating to date. To overcome these risks, a comprehensive secondary service is key.

Our integrated risk management suite for Office 365 makes use of substantial portions of our unified service platform to address these risks and allows customers to maintain their commitment to a cloud-only solution for their email and data needs. Mimecast Services for Office 365 includes: Mailbox Continuity; Broad Spectrum Email Security; Data Assurance; Legacy Archive Data Management; Advanced Account Administration and Large File Send.

Mimecast’s Mailbox Continuity keeps email flowing in the event of a partial or full Office 365 service outage. Our Broad Spectrum Security adds further third-party protection to Office 365 Exchange Online Protection and adds key functionality for protection against spear-phishing, secure messaging and large file sending. Mimecast Data Assurance adds an independent to Microsoft data repository and verification service required to meet compliance and data back-up and integrity requirements fully.

Mimecast Mobile and Desktop Apps

Mobile, PC and Mac users get self-service access to security features, including spam reporting and managed sender lists, the ability to send and receive email during a primary email system outage, and access to their personal email archive to run searches on its content. Employee productivity does not come at the expense of centralized control. Administrators can use granular permissions to activate functions for individual employees or groups of users, while centralized security and policy management means IT teams can retain control over default settings.

Sales and Marketing

Our sales and marketing teams work together to build a strong sales pipeline, cultivate and retain customers and drive market awareness of our current and future products and services.

Sales

We sell our services through direct sales efforts and through our channel partners. Our sales model is designed to meet the needs of small and mid-market organizations and large enterprises across a wide range of industries and in over 100 countries. Our approach has played an important role in the growth of our customer base to date. Our sales team is based in offices in Boston, Chicago, Dallas and San Francisco, United States; London, United Kingdom; Johannesburg and Cape Town, South Africa; and Melbourne and Sydney, Australia. We maintain a highly-trained sales force of approximately 170 employees as of September 30, 2015, which is responsible for acquiring and developing new business.

 

96


Table of Contents

We also have an experienced sales team focused on developing and strengthening our channel partner relationships. Many organizations work with third-party IT channel partners to meet their security, IT and cloud service needs, so we have formed relationships with a variety of the leading partners to target large enterprises, mid-market and small organizations. For large enterprises, we work with international partners including Avanade, Hewlett-Packard and Dimension Data. In the mid-market, we work with leading national partners, including Softchoice, SHI and Softcat. The small business market is primarily served by the reseller community and also by Managed Service Providers, who typically provide or host email services. We work closely with all of these channel partners to offer cooperative marketing, deal registration, as well as support and technical resources. We believe these partners view our services as a key source of additional revenue and a way for them to add significant value to their customers as they can support their desire to move to the cloud without compromising their security position.

Sales to our channel partners are generally subject to our standard, non-exclusive channel partner agreement, meaning our channel partners may offer customers the products of several different companies. These agreements are generally for a term of one year with a one year renewal term and can be terminated by us or the channel partner. Payment to us from the channel partner is typically due within 30 calendar days of the date we issue an invoice for such sales.

Our sales cycle varies by size of customer, the number of products purchased and the complexity of the project, ranging from several days for incremental sales to existing customers, to many months for sales to new customers or large deployments.

We plan to invest in our sales organization to support both the growth of our direct sales organization and our channel partners.

Marketing

Our marketing strategy is designed to meet the specific needs of each of our customer segments. We are focused on building our brand and product awareness, increasing customer adoption of our products, communicating the advantages of our solution and its benefit to organizations, and generating leads for our channel partners and direct sales force. We execute our marketing strategy by using a combination of internal marketing professionals and a network of global channel partners. We invest in field, channel, product and brand marketing and have increased our investment in digital marketing to drive greater lead generation volume and efficiency. Our local marketing teams support the conversion of these leads into qualified opportunities for inside sales and are responsible for branding, content generation and product marketing.

Customer Service and Support

We maintain our strong customer retention rate through the strength and quality of our products, our commitment to our customers’ success and our award-winning local customer service and support team, which consists of more than 170 employees worldwide dedicated to ensuring a superior experience for our customers. For each of the fiscal years ended March 31, 2013, 2014 and 2015, our customer renewal rate has been consistently greater than 90%. We calculate our annual customer retention rate as the percentage of paying customers on the last day of the prior year who remain paying customers of the last day of the current year.

We have designed a comprehensive monitoring methodology that tracks and evaluates the interactions we have with our customers from sales and on-boarding to support and renewal. Our cross-functional teams, under the supervision of our Chief of Customer Operations, work together to ensure the best customer experience is achieved and to address customer needs as they arise.

 

97


Table of Contents

A key aspect of our customer on-boarding process is our Legacy Data Migration services. Our customers often have legacy email archives that they want to move to the cloud. Our data migration service helps solve the problems customers face when extracting that data and getting it into the right format for importing to the cloud, which can be expensive, time-consuming and involve interactions with multiple vendors.

In addition, we offer a full range of support services to our global customer base, including comprehensive online resources and 24x7 email support with no outsourcing of support or account management to third parties. We also offer a range of additional services that include options for 24x7 telephone support and a dedicated technical account manager. These support services are priced and tiered to meet specific customer requirements.

We also have a dedicated training team and resources designed to enable customers to get the full benefit from their Mimecast investment. Our comprehensive education and consultancy resources include administrator training and certification, end user training and e-discovery training for compliance teams, all of which are available in-person and online.

Beyond customer support and training, we also provide a range of services that are designed to provide additional support to some customers, especially larger enterprises with more complex email infrastructure and legacy data. Our professional services team works with the customer, or supports our partners to assist them, in planning, migration and service activation.

We also offer a standard service level agreement as part of our standard contract that contains commitments regarding the delivery of email messages to and from our servers, the speed at which our archive can produce search results, and our ability to correctly identify and isolate spam and viruses. In the event that we do not achieve these levels, the customer can request a credit. Payment of the credit will be made subject to verification of the problem. These credits are tiered according to the extent of the service issued. The amount of credits provided to date has been immaterial in all historical periods.

Customers

As of September 30, 2015, we had approximately 15,200 customers and protected millions of their employees in over 100 countries. Our diverse global footprint is evidenced by the fact that in the fiscal year ended March 31, 2015, we generated 42% of our revenue from the United Kingdom, 38% from the United States, 19% from South Africa and 2% from the rest of the world. In the six months ended September 30, 2015, we generated 41% of our revenue from the United States, 40% from the United Kingdom, 17% from South Africa and 2% from the rest of the world. Our customers range from large enterprises with over 7,500 employees to small organizations with less than 500 employees and represent a diverse set of industries. For example, in the fiscal year ended March 31, 2015, we generated 17% of our revenue from customers in the legal services industry, 14% from customers in the professional, scientific and technical services industry, 13% from customers in the manufacturing industry and 12% from customers in the finance and insurance industry. Our business is not dependent on any particular customer. No single customer represented more than 1% of our annual revenues in the fiscal year ended March 31, 2015 or the six months ended September 30, 2015.

 

98


Table of Contents

Case Studies

We believe the following case studies are representative examples of how our customers have benefited from our services.

Competitive security swap-out integrated with additional email continuity and archiving services. An international management and technology consulting firm (4,200 users)

Problem: The customer needed to replace an existing email security solution that was no longer serving its needs. They had also suffered from disruptive email outages and had a local server that was being used to archive a significant and growing volume of email data.

Solution: Initially the customer contacted Mimecast for email security but after speaking with us about their wider challenges, it was clear that the addition of our continuity service would enable them to achieve their goal of improved email reliability. They started with Unified Email Management Express but upgraded later to Enterprise to add our email and instant messaging archiving capability.

Result: The customer was able to meet, and unify into a single cloud service, their security, continuity and archiving needs previously handled by different technologies.

Replacing on-premises technology and enhancing security, archiving and continuity. A global manufacturing business (10,600 users)

Problem: The customer wanted to improve security, reduce the cost of managing email, and replace an existing on-premises email infrastructure with a cloud solution. It was also important to improve archiving as weekly backups often failed and consumed considerable IT team time along with the necessity for onsite upgrades. Finding and retrieving email from its old archiving system was a manual search and recovery process that sometimes took days.

Solution: The customer initially selected Mimecast’s service to replace its on-premises archiving and anti-spam/anti-virus devices. As the customer outgrew their on-premises email infrastructure, they made the decision to move to Office 365 supported by Mimecast’s enhanced security, archiving and continuity services. The customer has also since deployed additional Mimecast services including Mimecast Large File Send.

Results: The customer believes the move to Mimecast has saved significant infrastructure cost, delivered time savings and streamlined email efficiency, improved its security posture, and reduced storage. The customer reports significant improvements in archive search times and accuracy in particular over its previous services.

Security, large enterprise and competitor swap-out. A regional government (79,000 users)

Problem: The customer was using leading competitors for on-premises security and to enable the sending of secure messages and attachments to external recipients. Problems with the solution were creating support issues from end-users and the solution was considered difficult to use. For the IT team, supporting multiple technologies was creating unwanted administrative burden and cost.

Solution: Mimecast replaced the secure email gateway technologies with one solution integrated with Microsoft Outlook to meet the requirement for ease of use for end-users. Secure messaging was built into the solution with the addition of Mimecast Closed Circuit Messaging.

Result: Spending on the secure email gateway infrastructure was reduced as this was consolidated from multiple vendors to Mimecast. They also reduced their planned spend on a replacement email encryption solution with the addition of Closed Circuit Messaging.

 

99


Table of Contents

Research and Development

Our engineering, operations, product and development teams work together to enhance our existing products, technology infrastructure and underlying Mime | OS cloud architecture, as well as develop our new product pipeline. Our research and development team interacts with our customers and partners to address emerging market needs, counter developing threats and drive innovation in risk management and data protection. We operate a continuous delivery model for improvements to our infrastructure and products to ensure customers benefit from regular updates in protection and functionality without the need for significant intervention on their part.

Our research and development efforts give prominence to services that enhance our unification commitment and allow customers to displace point or on-premises products. We also prioritize a “build rather than acquire” approach to ensure that we combine best-of-breed functionality with effective integration to maintain our commitment to the delivery of a superior experience to our customers and their employees.

Our research and development expenses were $11.0 million, $12.8 million and $14.5 million for the fiscal years ended March 31, 2013, 2014 and 2015, respectively. For the six months ended September 30, 2015, our research and development expenses were $7.5 million.

Competition

Our market is large, highly competitive, fragmented, and subject to rapidly evolving technology and security threats, shifting customer needs and frequent introductions of new products and services. We do not believe that any specific competitor offers the fully unified service and integrated technology that we do. However, we do compete with companies that offer products that target email and data security, continuity and archiving, as well as large providers such as Google Inc. and Microsoft Corporation, who offer functions and tools as part of their core mailbox services that may be, or be perceived to be, similar to ours. Our current and potential future competitors include: Barracuda Networks, Inc., Google Postini, Microsoft Exchange Server, Exchange Online Protection, Proofpoint, Inc. and Symantec Corporation, in security, MessageOne, in continuity, and Barracuda, HP Autonomy, Microsoft Office 365, Proofpoint and Symantec in archiving. Some of our current and future competitors may have certain competitive advantages such as greater name recognition, longer operating history, larger market share, larger existing user base and greater financial, technical and other resources. Some competitors may be able to devote greater resources to the development, promotion and sale of their products than we can to ours, which could allow them to respond more quickly than we can to new technologies and changes in customer needs. We cannot provide any assurance that our competitors will not offer or develop products or services that are superior to ours or achieve greater market acceptance.

The principal competitive factors in our market include:

 

    reliability and effectiveness in protecting, detecting and responding to cyber-attacks;

 

    scalability and multi-tenancy of our system;

 

    breadth and unification of our services;

 

    cloud-only delivery;

 

    total cost of ownership;

 

    speed, availability and reliability;

 

    integration into office productivity, desktop and mobile tools;

 

    speed at which our services can be deployed;

 

    ease of user experience for IT administrators and employees; and

 

    superior customer service and commitment to customer success.

 

100


Table of Contents

We believe that we compete favorably on the basis of these factors. Our ability to remain competitive will depend to a great extent upon our ongoing performance in the areas of product and cloud architecture development, core technical innovation, channel management and customer support.

Intellectual Property

Our success is dependent, in part, on our ability to protect our proprietary technologies and other intellectual property rights. We rely on a combination of trade secrets, copyrights and trademarks, as well as contractual protections to establish and protect our intellectual property rights. As of September 30, 2015, we had one patent and 13 patent applications in the United States. We also have one patent issued and five applications pending for examination in non-U.S. jurisdictions, and four pending Patent Cooperation Treaty patent applications, all of which are counterparts of our U.S. applications. We intend to pursue additional patent protection to the extent that we believe it would be beneficial and cost effective.

We have registered “Mimecast” and certain other marks as trademarks in the United States and several other jurisdictions. We also have a number of registered and unregistered trademarks in the United States and certain other jurisdictions, and will pursue additional trademark registrations to the extent we believe it would be beneficial and cost effective. We are the registered holder of a variety of domestic and international domain names that include “mimecast.com,” “mimecast.co.uk,” “mimecast.co.za,” and similar variations.

In addition to the protection provided by our intellectual property rights, as part of our confidentiality procedures, all of our employees and independent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and they assign to us any ownership that they may claim in those works. We also generally enter into confidentiality agreements with our employees, consultants, partners, vendors and customers, and generally limit access to and distribution of our proprietary information.

Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours.

Some license provisions protecting against unauthorized use, copying, transfer and disclosures of our products may be unenforceable under the laws of certain jurisdictions and foreign countries. In addition, the laws of some countries do not protect proprietary rights to as great of an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States. Our exposure to unauthorized copying and use of our products and misappropriation of our proprietary information may increase as a result of our foreign operations.

We expect that software and other solutions in our industry may be increasingly subject to third-party infringement claims as the number of competitors grows and the functionality of products in different industry segments overlap. Moreover, many of our competitors and other industry participants have been issued patents or filed patent applications, and have asserted claims and related litigation regarding patent and other intellectual property rights. Third parties, including non-practicing patent holders, have from time to time claimed, and could claim in the future, that our technologies infringe patents they now hold or might obtain or be issued in the future. See “Risk Factors – We may be sued by third parties for alleged infringement of their proprietary rights”.

 

101


Table of Contents

Properties

Our corporate headquarters is located in London, United Kingdom where we currently lease approximately 40,473 square feet of space under a lease expiring in December 2019. Our U.S. headquarters is located in Watertown, Massachusetts in an office consisting of approximately 33,669 square feet of space under a lease expiring in October 2020. We also occupy space in Johannesburg, South Africa consisting of 16,576 square feet under a lease expiring in October 2016 and in Melbourne, Australia consisting of 3,003 square feet under a lease expiring in April 2018. We also maintain additional leased facilities in Cape Town, South Africa, Sydney, Australia as well as in Chicago, Dallas and San Francisco in the United States.

We lease all of our facilities and do not own any real property. We intend to procure additional space as we add employees and expand geographically. We believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed to accommodate planned expansion of our operations.

Employees

As of March 31, 2015, we had 524 employees and subcontractors with 271 located in the United Kingdom, 169 in the United States, 72 in South Africa and 12 in Australia. As of September 30, 2015, we had 619 employees and subcontractors with 312 located in the United Kingdom, 199 in the United States, 83 in South Africa and 25 in Australia. The following table shows the breakdown of our global workforce of employees and subcontractors by category of activity as of the dates indicated:

 

     As of March 31,      As of
September 30,

2015
 
     2013      2014      2015     

Sales and marketing

     219         256         212         251   

Research and development

     95         98         88         116   

Services and support

     121         142         161         176   

General and administrative

     46         56         63         76   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     481         552         524         619   
  

 

 

    

 

 

    

 

 

    

 

 

 

None of our employees work under any collective bargaining agreements. We have never experienced labor-related work stoppages or strikes and believe that we have good relations with our employees.

Legal Proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a party to any material litigation. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

102


Table of Contents

MANAGEMENT

The following table sets forth the names, ages and positions of our executive officers and directors. Unless otherwise indicated, the business address of all of our executive officers and directors is CityPoint, One Ropemaker Street, Moorgate, London, EC2Y 9AW, United Kingdom.

 

Name

   Age     

Position

Executive Officers and Employee Directors:

     

Peter Bauer

     41       Chief Executive Officer and Chairman

Peter Campbell

     51       Chief Financial Officer and Director*

Neil Murray

     48       Chief Technology Officer and Director

Ed Jennings

     45       Chief Operating Officer

Non-Employee Directors:

     

Christopher FitzGerald(1)(3)

     70       Director

Bernard Dallé(1)(3)

     48       Director

Norman Fiore(2)

     45       Director

Jeffrey Lieberman(2)(3)

     41       Director

Hagi Schwartz(1)(2)

     53       Director