Mimecast (MIME) remains one of the leaders in email security and could be a significant beneficiary from the recent work-from-home trends. While there are many competitors in the cybersecurity market, MIME is one of the biggest players focusing on email security, along with Proofpoint (PFPT). As more enterprises focus on transitioning their employees to work-from-home, the need for enhanced email security will arise and MIME is in position to take market share and accelerate revenue growth.
Despite rebounding over 30% from recent lows, the stock remains down nearly 30% from their all-time highs of ~$54. I believe the stock will continue to rally over the coming weeks and quarters given the increased usage of remote email access, thus increasing demand for better, more complete email security.
During their last quarterly earnings, management noted FY21 revenue could be ~18-20% in constant currency, which was again confirmed at their recent analyst day. Their revenue base is largely recurring as enterprises are not likely to remove their email security protocols very often.
Even though valuation has gotten slightly more expensive in recent weeks, I believe the near-term demand impact from working from home as well as the longer-term international growth opportunities will continue to push this stock higher. I remain a buyer at these levels given the stock remains down ~30% from their all-time highs, despite business fundamentals remaining healthy.
Brief Q3 Results And Long-Term Model
Revenue growth remained strong during Q3, growing 27% constant currency to $110.2 million, slightly above expectations for ~$108 million. While revenue growth decelerated slightly from the 29% constant currency growth seen last quarter, MIME continues to expand internationally and has ~98% of its revenue coming as recurring streams.
During the quarter, gross margin expanded to 74%, up from 73% in the year-ago period. The higher gross margins helped lead to adjusted EBITDA growth of 29% to $20.6 million, representing 18.7% margin, up from 18.2% in the year-ago period.
In a surprising move, management also talked about 2021 guidance, including revenue of $505-515 million, representing constant currency growth of 18-20%. Adjusted EBITDA guidance for 2021 calls for ~$100 million, which represents growth of ~33%, much higher than the company’s revenue growth and represents ~20% margin.
Source: Company Presentation
Management also reiterated its long-term model, which includes gross margins of 72-75%, and adjusted EBITDA of 20-22%. Gross margins have historically remained in that 72-75% range. Adjusted EBITDA margin will continue to expand as the company’s revenue growth matures and S&M expenses begin to go down.
In addition, at their recent analyst day, the company noted revenue growth over the next few years could be in the 17-21% range, while free cash flow margin could expand to 23-25%, up from an estimated 16% in FY21.
Work-from-home and Valuation
In the near term, MIME will continue to see demand benefitting from companies moving their employees to a work-from-home model. The need to have a secure remote access to emails is more prevalent now than ever, thus companies will continue to invest in proper email security. While businesses may be less comfortable with larger IT spending, the need to have secure emails during these challenging economic times will drive demand flows for email security providers such as MIME.
In addition, MIME’s focus on expanding internationally might actually accelerate given the need to have secure remote access to emails. Enterprises who may have been uncomfortable investing in this area of IT security may now look towards specialized players in order to protect their email. MIME may also be able to better cross-sell their products as companies take a deeper look at their security protocols. MIME has noted over 40% of its customers use 4 or more products compared to less than 15% using only 1 product, thus exemplifying potential cross-sell opportunities.
Even after the recent ~30% run-up in the stock’s price over the past few weeks, valuation still appears pretty attractive. The company has a current market cap of ~$2.3 billion and with ~$200 million of net cash, the company has a current enterprise value of ~$2.1 billion. Management’s preliminary FY21 revenue guidance implies ~$510 million of revenue at the midpoint, which results in an FY21 revenue multiple of ~4.1x.
However, this valuation fails to recognize that MIME’s growth rate may actually accelerate in the medium term as companies look to invest more in security tools, such as remotely protecting emails. On a weekly basis, investors can read stories about enterprises being hacked and losing productivity because of this. Email security is one of the main vectors hackers use in order to gain access to a company’s IT system. In a time where a majority of employees are working from home, it is reasonable to believe enterprises will invest more in security than before.
That being said, FY21 revenue may come in much higher than the implied ~$510 million, thus a more realistic valuation is likely under 4x forward revenue, which is not overly expensive compared to other software companies growing revenue 15%+ over the next few years.
It is important to note that MIME reported recent quarterly results in February, which means they likely had some insight into how the coronavirus was impacting global operations. Management did not note how severe the impact would be, but the company did reiterate its long-term model and growth trends, which demonstrates their confidence in the long run-way they have in a rather underpenetrated market.
Even though the stock has had a nice 30% run-up in recent weeks, I believe the name remains attractive for long-term investors who believe email security will continue to be a concern for enterprises. At their recent analyst day, the company noted longer-term revenue growth of 17-21%, which demonstrates the strong demand trends seen for email security. Margins will continue to expand over time with a free cash flow margin expected to reach 23-25% over the next few years, which could solidify the company attaining the Rule of 40 target for the next several years.
With the stock remaining under $40, I continue to be bullish and think the name could re-test their all-time highs within the next few quarters.
Risks to MIME include increased competition among current players as well as new entrants. Since it trades at a premium revenue multiple compared to the market, a correction in the technology sector for premium names could cause increased adversity.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.