Mimecast (Nasdaq: MIME) is a SaaS/Cloud company focused on enterprise email security and archiving. The story is a little mixed up though. The company focuses on email but is positioned (at least by Gartner Group) as an information archiving company. There are also some misleading statements regarding market opportunity to take into consideration as well. The vast majority (96%) of customers buy their email security add-on for Microsoft Exchange, Microsoft Office365 and Google Apps. Beyond that a good portion (2/3rds) add an "email continuity" service which keeps enterprise email running even when there are problems with the underlying email system (Exchange, Office365 or Google Apps). Email security would probably be the best part of the "story" to go with but Mimecast is into backup and archiving as well. While this gives them some cross and up-sale opportunities with customers it broadens their exposure to focused competition and advances from the email platform providers Microsoft and Google. Looking at the vital stats Mimecast is doing well with $116M in FY15 (March) revenues growing just over 30%. Adjusted EBITDA margin is 15% and the company has a realistic target of 20-22%. Revenues are all SaaS/recurring so visibility is good and the quarterly growth has been very consistent. At the $11 mid-point the market capitalization of MIME will be $600M or 4.5x sales which is reasonable for a company with their growth and profit margins. See the Mimecast IPO roadshow slides for more information. The "market opportunity" slide is a little misleading given the product set. As shown in the graph they include the entire backup and recovery market in the graph and it makes up the largest part of it. But Mimecast isn't a backup and archiving company in the broad sense which would include other IT assets, operational data, etc. In making some adjustments to reflect a more realistic market sizing we'd accept "secure email gateway" and "data loss prevention" and then take 10% of "E-discovery" and 10% of "back up and recovery software" to come up with a 2014 market size of $3B. Applying the same math to the 2017 forecast would get us to $3.5B. The bad news is that $3.5B is a big haircut from the suggested $11.6B but given our 2020 revenue forecast for MIME of $400M it doesn't cut into the medium or even longer-term growth story. They do appear to be gaining share, especially from providers of older technology solutions. Competition is our biggest worry for Mimecast. There is already one strong public player already in ProofPoint (Nasdaq: PFPT). ProofPoint has revenues of over $250M, a market capitalization approaching $3B (about 14x sales) and has a broader solution of products. I doubt that Mimecast will be able to win deals against ProofPoint if they find themselves head-to-head. If ProofPoint caps the top end of the market the bottom may be pressured upwards by continued investments from Microsoft and Google in improving their enterprise capabilities. Security and management are certainly strategic to them and they are unlikely to want to leave it alone. Investors may see this as the ultimate end-game for Mimecast - get acquired by Microsoft. That might happen but as with all M&A related bets, it's hard to get visibility on. Another "dark horse" to potentially acquire Mimecast would be BlackBerry (BBRY). They have a stated goal to become more of an enterprise software company around messaging and Mimecast would definitely help them get there. Turning to valuation the offering at $11 is fairly attractive given the valuation afforded to companies like ProofPoint which came public in April of 2012 at a price of $13 and stands at $75/share today. MIME is better than PFPT in terms of size at the time of the IPO and profitability and many investors will appreciate that. Our IV estimate is about $18 for this year and $23 for next. Buying stock anywhere below $15 seems like a fairly safe bet.
Subscribe to get our latest content by email.