Uncommon Idea: Safeguarding URLs and Emails Mimecast MIME

The Uncommon Idea in Brief

Buy Mimecast Limited (MIME) stock for the long term. (Published July 17, 2017)

-Build a long position below $28. Add aggressively on a breakout over $28.50 or a pullback into the $24-$25 area.

The Industry Opportunity

Email and URLs, used by almost every company on the planet, offer hackers easy access to a company’s most important resource: information. Companies need a low-cost, efficient solution to address this growing threat.

Insider Threat Prevention

-Value: According to Insight’s 2017 Annual technology survey of IT decision makers, 51% of IT leaders have said investment in security-as-a-cloud-service (SaaCS) is a priority. Many businesses are struggling as hackers are bypassing current email gateway protections.

-First-Mover Advantage: Companies will work with cyber security firms with affordable pricing, scale, experience and, most importantly, reputation. There is a network effect in being first to market.

-Moat: Clients are sticky, but price sensitive initially. A low average selling price cost model with a base platform and expansion model holds the highest advantage. Once clients begin expanding, they become sticky and price insensitive. There is a significant amount of work in migrating from one cyber-security provider to another.

MIME’s multi-tenant platform is built for the cloud and is potentially among the best in the industry. The ever-evolving dangers of hackers continue to represent challenges for companies in every sector and industry around the world.

MIME provides an innovative, expansion software platform with a low base average selling price to meet the increasing danger of hackers. While its client base is predominantly small and mid-sized clients, the company has recently penetrated the enterprise market and expanded its total global client base to 26,400.

What Mimecast Does

Mimecast provides an innovative software platform via the cloud that protects email and URLs from cyber attacks. The company specializes in Target Threat Protection (TTP), specifically for URLs and traditional email systems, as well as emails that are sent behind the corporate firewall. Through its cloud-based platform, Mimecast users can access services that include protecting their organization against targeted attacks, enable administrators and security specialists to monitor and report attempted attacks and outline audit and reporting.

The Uncommon Market Position

The fight against hackers, both internal and external, is an evolving marketplace. One misstep in security can result not only result in lost money, but also the loss of intellectual property, the loss of customer confidence and other confidential data.

The company added 1,500 new customers in 4Q 2017 while achieving a revenue growth rate of 30%+ and increasing year-over-year gross profits to 74% from 70%. The company is heavily focused on the United States, but does have an international presence. The overall customer count has exceeded 26,400 globally without restriction to industry or sector after Mimecast added 8,400 new customers in 2017.

In addition to growing its customer base, Mimecast recently signed a North American agreement with Insight (NSIT). The agreement enables NSIT to go to market with Mimecast’s security, archiving and continuity cloud service, so it can provide its clients with comprehensive email management in one fully-integrated service, making email safer for business. Partners such as this in the Mimecast Reseller Program are helping to expand MIME’s footprint in the enterprise market.

What Sets Mimecast Apart

Mimecast’s multi-tenant Targeted Threat Protection (TTP) platform is specifically designed for the cloud and ranks as one of the best in the industry, despite coming in at a lower average selling price (ASP) than bigger name competitors like Proofpoint (PFPT). This created a high volume of growth, new customers and strong revenue retention rates exceeding 110% both in Q4 and all of 2017,  compared with a year ago.

Cyber-security threats are both internal and external, which is why the base platform system with software expansion capabilities will act as a strong growth catalyst over the next several years. Customers can add as much or as little as they require as they become more educated on the technology.

By maintaining a platform that can uncover email attacks that have gotten through incumbent email systems, Mimecast should continue to attract new clients. Furthermore, providing customers the ability to analyze and remediate email traffic that originates and is delivered inside an organization, protecting against threats that operate behind the corporate firewall as an additional component to the TTP platform allows it to be deployed to any email environment (on premise, in the cloud or hybrid). This first-to-market service is unique to Mimecast.

These aspects make the switching risk for MIME clients significant. The integration of a new system requires resources and involves the risk of lost business and breaches of systems.

Financials — Mimecast by the Numbers

Mimecast’s strong revenue retention rates should be a major draw for investors and offer clarity into revenue projections. The top line won’t depend solely upon attracting new clients, as is demonstrated by the 111% revenue retention rate for both 4Q 2017 and the full year.

Mimecast added 8,400 new customers in fiscal 2017 and more than 1,400 new customers in 4Q. Sales of Targeted Threat Protection (TTP) increased during Q4, with more than 1,400 new customers and more than 600 existing clients purchasing the service. Currently a total of 38% of MIME customers are using TTP.

The company produced 42% year-over-year growth in the most recent quarter, delivering revenue of $52.4 million. This translated to a non-GAAP breakeven for the quarter. Managements guided revenue higher for the new fiscal year. Expectations are for growth of 35% to 36%% on revenue of $54.7 million to $55.3 million in 1Q with an EBITDA of $3.3 million to $4.3 million. For the full year, the company anticipates revenue of $239.4 million to $247.6 million and EBITDA of $18.7 million to $20.7 million.

Why the Stock Is a Buy

While the current price-to-earnings ratio is not yet registering anything significant as Mimecast only produced non-GAAP net income per share of $0.08 in 2017, it is important to note the company has no debt along with $111.7M in cash, which translates to $2.02 per share. Furthermore, gross profits have increased from 71% to 73% for the full year even as the company’s sales grew 30%+.  With a total addressable market of $11.5B, growth of 25-35% for the next few years is a realistic expectation.

Free cash flow of $4.8 million in in 1Q along with the strong current cash position allow Mimecast to continue to develop product as well as broaden its marketing to take enterprise and mid-market customers. Mimecast’s platform is built specifically for the cloud and it offers up as product with all the quality of the best on the market at a lower price.

Cyber security is a priority in every industry. Security-as-a-cloud-service platforms are unique in an industry still in its infancy undergoing huge growth along with its share of complications. Threats, both internal and externally, are constantly evolving. So, a land-and-expand platform offers customers the optimum approach to addressing the issue. A base platform with expansive capabilities targeting a customer’s specific needs should excel in the exploding marketplace of both mid-market and enterprise clientele.

The Technical Analysis – On a Breakout Over $28.50 or Pullback to $25.50, MIME is an optimal technical BUY

Mimecast has been in a strong uptrend since mid-March. Prior to the recent breakout, shares traded in a wide consolidation channel for nearly five months prior to the breakout. This has created strong support at the $22.50 breakout level and becomes a targeted point for any break of the current $25 level of support found in the current uptrending bullish channel.

Should the current support levels fail, we would target the $21.00$-22.50 area as a price where we’d be aggressive buyers of shares. The current pattern appears to be mimicking the 2016 action that saw the stock rise from the single digits to the high teens.

Traders seeking entry in the current environment should focus on the bullish channel and its two levels: $25 and $28.50. The first approach is to focus on support and use that area as a price target to acquire stock. A pullback to $25 should find support worthy of a buy. Furthermore, the 13-week and 20-week simple moving averages (SMA) have been mirroring the support levels of the channel and have acted as intraday week support when the stock dips below the channel.

Mimecast, MIME, chart, technical analysis

For those who prefer buying strength, then a weekly close over $28.50 will get the stock new closing highs. We’d anticipate new high and momentum buyers to come into the stock and push Mimecast quickly higher. Our initial target on a breakout, independent of fundamental views would be $30.50 in short fashion with an ultimate upside of $33.50 within twelve months. Mimecast offers up a clean channel, so whether focusing on support or a breakout of resistance, the timing for entry should come quickly.

Catalysts for the Thoughtful Investor

The evolution of technology and businesses use of the internet will bring about a continued evolution of hackers and their methods to access systems. Mimecast’s newly introduced Email Security Risk Assessor (ESRA), which helps uncover email attacks that have gotten through incumbent email systems, should spur its growth in both the mid-market and enterprise customers.

According to Summit Redstone, the market is undervaluing MIME’s enterprise business. A total of 21% of customers used Mimecast in conjunction with Microsoft Office 365 in Q4 in comparison to 19% in Q3. This brings the total of customers now using Mime to protect Microsoft Office 365 to more than 5,600 customers. As Microsoft Office penetrates more and more businesses of all sizes, Mimecast should piggyback on its growth.

The Bottom Line

  1. Mimecast is an emerging leader in the cyber-security sector.
  2. The cyber-security market is growing rapidly. Internal and external threats are forcing companies to accelerate changes in the way they handle data and communications. The ongoing and evolving risks associated with hackers creates a pressing need to immediate and adaptive solutions. Mimecast’s base platform plus expansion capabilities can remedy those concerns, so companies can focus on doing what they do best.
  3. Mimecast has strong early penetration in the mid-market, but with the potential revenues from the enterprise market, the overall market is huge at $11.5 billion and not factored into current financial guidance.
  4. In the range of $25 to $28 we like MIME as a long-term buy and hold. Over $28.50, we like MIME as a momentum breakout long. The small-cap nature, short interest, evolving business model and aggressive valuation will make it volatile.
  5. Cyber-security is an evolving and developing marketplace.

At the time of publication, neither the author nor the company held positions in the stocks mentioned, but positions may change at any time.

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