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LogMeIn (NASDAQ:LOGM)

Q4 2012 Earnings Call

February 14, 2013 5:00 pm ET

Executives

Rob Bradley - Director of Investor Relations

Michael K. Simon - Chairman, Chief Executive Officer, President and Secretary

James F. Kelliher - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Darren R. Jue - JP Morgan Chase & Co, Research Division

Charles Eugene Munster - Piper Jaffray Companies, Research Division

David Wang - Barclays Capital, Research Division

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Tim Klasell - Northland Capital Markets, Research Division

Scott Zeller - Needham & Company, LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by and welcome to the LogMeIn Q4 and Full Year 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, February 14, 2013.

And I would now like to turn the conference over to Rob Bradley, Director of Investor Relations. Please go ahead, sir.

Rob Bradley

Thank you, and good afternoon. We're pleased that you can join us on our earnings conference call to discuss the results of our quarter and fiscal year ended December 31, 2012.

Before we get into the results, let me remind you that some of the statements made during this call may be considered forward-looking statements. These statements include the company's financial guidance for the first quarter of 2013 and full year 2013. The company's security filings, including its 10-K, identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made on this call. Any forward-looking statements are made as of the date hereof and are based on current expectations, estimates, forecasts and projections, as well as the beliefs and assumptions of management. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The company's filings are available through the company or online.

During the call, non-GAAP financial measures will be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to the most comparable GAAP measures are available in the press release or on our website at www.logmein.com.

Now I will turn the call over to our CEO, Michael Simon.

Michael K. Simon

Good afternoon, and thank you for joining us today as we report on LogMeIn's fourth quarter and fiscal year 2012 results.

In Q4, we delivered revenue and earnings per share that exceeded our guidance. Total revenue for the quarter was $37 million, up 14% year-over-year from $32.3 million reported in Q4 2011. And we added approximately 27,000 new premium subscribers, another record high for net subscriber adds in a quarter while attracting 2.4 million first-time users. Annual revenue for 2012 was $138.8 million, up 16% year-over-year from $119.5 million reported in 2011.

In 2012 alone, we attracted nearly 10 million new users. We increased conversion rates each quarter, helping us to add more than 100,000 net new premium subscribers and closed the year with a growing base of more than 460,000 premium subscribers.

Last year, we invested heavily in the development of new offerings and features for Access and Collaboration product group. As we enter 2013, we will complement this activity with sales and marketing initiatives designed for customer acquisition. As a result, we expect that Access and Collaboration will be our fastest-growing product group in 2013, with revenue growth in the low 20s. This is due in large part to the continued success of join.me and the addition of Cubby to our Access and Collaboration portfolio.

We believe our next-gen RMM and our Customer Care businesses are likely to have growth rates in 2013 of approximately 10% to 12%. We expect these businesses will continue to have very high margins contributing to cash flow throughout the year, and we remain optimistic about the longer-term opportunities for both Customer Care and RMM, opportunities that we believe will play favorably into our cloud and mobile strength.

Overall, we expect that revenue growth in 2013 will be 11% to 13%. We expect even better growth in bookings so that revenue growth will accelerate in the latter part of 2013 and into 2014. We are focusing our investments on the products and markets we believe will deliver the best long-term return for the company.

As we exited 2012, growth of our newer products significantly outpaced our older services, a trend that we expect to continue in 2013, and this trend is best exemplified by our Access and Collaboration business. In the fourth quarter, join.me continued its rapid growth and remains LogMeIn's fastest-growing product in terms of new users and sales. More and more teams and organizations are adopting join.me to simplify and boost collaboration across distributed teams and environments. And in Q4, this led to key wins for join.me at Scripps Interactive, the publisher behind media properties like the Food Network and HGTV; CFC, the large multinational technology consulting and services firm; and CoStar, a large commercial real estate information company.

These and other join.me deals illustrate the strength of an approach designed to benefit from the growing trend of employee-introduced applications in the modern workplace. The free version of join.me, like other popular cloud services, is often first discovered by individual professionals who have introduced join.me to colleagues and customers in an effort to improve collaboration. Grassroots word-of-mouth adoption helps increase usage throughout organizations, and this creates opportunities for LogMeIn to convert entire teams or businesses into larger join.me pro deals.

Ongoing investments in both join.me's premium capabilities and trial flow optimization are yielding a steady increase in conversion rates. And join.me's signature speed and ease-of-use continue to help to attract a base of millions of new business-centric users with a bias towards mobile collaboration, setting the stage for a broader go-to-market strategy.

As part of the strategy, we will continue to expand the cloud services we offer aimed at addressing the collaboration needs of the new mobile workplace. Earlier this month, we officially launched our new cloud and sync store service, Cubby, a simple, secure cloud-based service for sharing files across devices and with other people. Cubby represents a natural expansion of our Access and Collaboration portfolio, as well as the underlying platform that helps us deliver all of our services.

Cubby is built on our own proprietary Gravity data cloud, giving us significant pricing flexibility and security advantage -- advantages over competing products while providing a foundation for expanding Cubby and Cubby-type capabilities into a variety of offerings.

Like join.me, Cubby comes in a basic free version and a premium version called Cubby Pro. The basic free version of Cubby includes free mobile Web and desktop apps to simplify the sharing of information across all of the users' devices, the ability to sync any content and any folder on their computers and sync as many folders as they'd like; multiple ways to share files with others and collaborate on content; and 5 gigabytes of free cloud storage, with up to 20 additional gigabytes available by successfully referring Cubby to others.

Cubby Pro built on this offering -- on this by offering capabilities designed to address the needs of business-centric users, including the ability for professionals and companies to create their own private cloud, additional security controls for controlling access to and encryption of highly sensitive files, multiuser accounts designed for team and broader business use and 100 gigabytes or more of additional cloud storage.

We believe that together our collaboration services are well poised to address the key needs within the multibillion-dollar cloud data and social collaboration market. While overall contribution of these newer offerings is smaller than the recurring revenue contribution of our established core offerings, these collaboration services are well positioned to be LogMeIn's biggest growth engine in the near and longer term. And we will continue to invest heavily in these high-growth areas to best capitalize on the opportunity.

Our Customer Care business continues to attract large customer service and contact center clients. It has been bolstered by particularly strong growth of BoldChat with key fourth quarter BoldChat wins like Rackspace, Dell Perot Systems and First Data. In addition, large Rescue wins in the quarter included the likes of Telefonica O2, Heineken and DHL.

Meanwhile, our RMM business continues to attract thousands of new managed service providers and outsourced IT companies, companies that cater to meeting the IT needs of hundreds of thousands of SMBs. In 2012 alone, we added more than 2,000 new MSP and outsourced IT customers. And MSPmentor, a leading IT channel publisher, recently noted that 30% -- 36% of the world's largest MSPs now use LogMeIn products to effectively manage their clients' IT assets. This growing relationship with the MSP community provides a more cost-effective means of meeting SMB demand for IT offerings, while setting up potential avenues for future distribution of both our IT and business-centric services.

As we look ahead to 2013, we plan to invest in the products that we believe will help us accelerate growth in the midterm while delivering the best long-term value. We believe LogMeIn is uniquely positioned to meet the needs of the new mobile workplace based on our large and growing user base who are taking our apps into the workplace. Our relationship with SMB IT service providers and decision makers and our Gravity platform, which gives us a unique blend of cost efficiency, scalability and security. And we expect that the growth rates of our newer products like join.me, Cubby and BoldChat will outpace those of our overall business, a favorable development that we believe will help us to accelerate revenue growth in the latter half of 2013.

At this time, I will turn the call over to Jim Kelliher, our CFO, for more details about our Q4 financial results and outlook for 2013.

James F. Kelliher

Thanks, Michael, and thanks to all of you for joining us today as we report our fourth quarter and fiscal year 2012 financial results.

As Michael mentioned, we are pleased to report another quarter of financial results, which were above the outlook we provided last quarter on our call. Total revenue for the fourth quarter was $37 million and exceeded the high end of the outlook we provided last quarter of $36.8 million. Non-GAAP operating margins were 21% of revenue, up 1 percentage point from the operating margins implied in our outlook.

Non-GAAP net income for the fourth quarter of 2012 was $6 million, exceeding the high end of our outlook, and non-GAAP net income per share for the fourth quarter was $0.24. Non-GAAP net income and net income per share reflect a onetime tax benefit associated with the reversal of a valuation allowance. At a 39% effective tax rate, which was the effective tax rate we provided in our outlook, fourth quarter non-GAAP net income was $0.19 or $0.01 greater than the high end of our guidance. Non-GAAP net income excludes $4.4 million of stock compensation expense, $1.1 million of patent litigation-related expense and $1.1 million of acquisition-related costs and amortization.

Non-GAAP operating cash flow for the fourth quarter was $6.2 million or 17% of total revenue. GAAP net income for the fourth quarter was $2.2 million or $0.09 per share.

Total revenue in the quarter increased 14% over the fourth quarter of 2011 to $37 million from $32.3 million. Total subscription revenue in the quarter increased 20% to $36.5 million from $30.4 million. For the full year -- for the full fiscal year 2012, revenue was $138.8 million, an increase of 16% from 2011, and subscription revenue in 2012 was $136.7 million, an increase of 23% from 2011. Internationally, revenue in the quarter and for the year was 35% of total revenue, consistent with the prior year. Renewal rates continue to be strong at approximately 80% on an annualized dollar basis.

On a product line basis, Access and Collaboration subscription revenue was approximately 20% of total subscription revenue. Revenue from next-gen RMM was approximately 30% and Customer Care was approximately 50%. All percentages are consistent with both the prior quarter and the prior year.

Our Access and Collaboration subscription revenue driven by increased revenue associated with join.me continue to be our fastest-growing service. Revenue growth in Access and Collaboration offsets slower growth in both our RMM and Customer Care services.

Hereafter, I will discuss our performance on a non-GAAP basis. It excludes stock compensation expense, patent litigation-related expense and acquisition-related cost and amortization. These non-GAAP results are more representative of how we internally measure the business and are reconciled in the tables attached to our press release.

Non-GAAP gross margins in the fourth quarter were 90%. Non-GAAP operating margins in the fourth quarter were 21%, up 1 percentage point from the outlook we provided and up 1 percentage point from our non-GAAP operating margins from Q3.

Non-GAAP sales and marketing expenses were $16.8 million or 46% of revenue, an increase of $200,000 from the third quarter of 2012. The increase in sales and marketing expense was due to increased search and marketing program spending.

Non-GAAP research and development expenses in the fourth quarter were $5.3 million or 14% of revenue, an absolute decrease of $100,000 from the prior quarter. Non-GAAP G&A expenses were $3.6 million or 10% of revenue in the fourth quarter, an increase of $700,000 from the prior quarter. This increase was driven by increased recruiting and headcount cost associated with additional hiring, as well as an increase in legal costs.

Our non-GAAP effective tax rate for the quarter was approximately 23% versus our guidance of 39%. The decrease in our effective tax rate is largely due to the recording the tax benefit related to the reversal of a valuation allowance associated with the company's wholly owned subsidiary, Cosm!

Turning to the balance sheet, we closed the quarter with cash, cash equivalents and marketable securities of $212 million. This is an increase of $6.9 million from the prior quarter. Non-GAAP operating cash flow for the fourth quarter was $6.2 million or 17% of revenue. Non-GAAP free cash flow for the fourth quarter was $4.8 million and includes approximately $1.4 million of capital expenditures.

For the full fiscal year of 2012, non-GAAP operating cash flow was $30.5 million or 22% of revenue. Non-GAAP free cash flow was $24.2 million or 17% of revenue. Total accounts receivable were $13.2 million versus $10.6 million in the prior quarter. The increase in accounts receivable from the third quarter is largely due to an increase in sales in the fourth quarter versus the prior quarter. Total deferred revenue in the fourth quarter was $69.6 million, an increase of $4.3 million over the prior quarter and an increase of 20% over the prior-year fourth quarter.

Now with regard to our outlook for the first quarter and the full year 2013, our 2013 guidance reflects continued strong revenue growth and increased investment in our Access and Collaboration cloud services, which includes join.me, our collaboration and online meeting service, and Cubby, our recently released cloud sync and storage server. This strong revenue growth is offset by slower growth in our higher-margin, next-gen RMM and Customer Care groups. As a result, our revenue guidance for the fiscal year 2013 is in the range of 11% to 13% growth year-over-year, and our non-GAAP operating margin guidance is approximately 15% and reflects the increased investment in our higher-growth Access and Collaboration services.

Specifically, for the first quarter of 2013, we expect total revenue to be in the range of $36 million to $36.5 million. Non-GAAP net income for the first quarter is expected to be in a range of $2.2 million to $2.6 million or $0.09 to $0.10 per diluted share. Non-GAAP net income excludes an estimated $5.4 million of stock compensation expense, $3 million in patent litigation-related expenses and $1 million in acquisition-related costs and amortization.

Non-GAAP net income for the first quarter assumes an effective tax rate of 50%. The increase in our non-GAAP effective rate in 2013 is due to our long-term strategic investment in developing our international organization. This investment will have a 1-year impact on our effective tax rate of approximately 10% to 12%, but we believe will result in effective tax rate in the low 30 percentage in 2014 and beyond.

Including stock compensation expense, patent litigation-related expenses and acquisition-related costs and amortization, we expect to report a GAAP net loss for the first quarter in the range of $5 million to $5.5 million or $0.20 to $0.22 per share. And the GAAP net loss for the first quarter assumes an income tax expense of $1.2 million to $1.4 million.

For the full fiscal year, we expect total revenue to be in the range of $154 million to $157 million. Non-GAAP net income for the full year is expected to be in the range of $11 million to $12.5 million or $0.43 to $0.49 per diluted share. Non-GAAP net income excludes an estimated $20.7 million of stock compensation expense, $3.8 million in patent litigation-related expenses and $3.3 million in acquisition-related costs and amortization. Non-GAAP net income for the fiscal year 2013 assumes an effective tax rate of 50%.

The GAAP net loss for the full year 2013 is expected to be a loss in the range of $6.5 million to $9 million or $0.26 to $0.36 per share, and the GAAP net loss for the full year assumes an income tax expense of $3.5 million to $4 million.

Finally, we also announced that our Board of Directors has approved a $25 million share repurchase program. We believe that our current cash balances and projected cash flows are adequate to support our operating and investment needs. Accordingly, we will get a percentage of our excess cash requirements to repurchase shares, increase the shareholder return and is an effective use of our capital. Repurchases under the program will be made from time to time in the market and will be based on a number of factors including the various regulatory requirements.

With that, I will now turn the call back to the operator to take any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Robert Breza from RBC Capital Markets.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Jim, you kind of talk about the subscription revenue percentages, Access at 20%, RMM at 30% and Customer Care at 50%. Given your prepared remarks talking about -- I'm wondering if you could help us understand, does that vary dramatically by bookings? And then if you think about next year, you talked about the percentages kind of changing or at least based -- implied on your guidance, I would expect those percentages to be changing. Can you help us understand how you think about that as we're looking back at this time next year?

James F. Kelliher

Yes, I think that as we said, our Access and Collaboration business is the fastest part of our business. So you will see some creep or increase in that as a percentage of our total revenue. It's still the smaller bucket at 20% of total revenue, but you should see that increase slightly in 2013 as a percentage of revenue. And bookings or sales, as we call them, likewise, that is our fastest-growing part of the business and so that would even -- accelerate even more with regards to the percentages coming out of Access and Collaboration.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Okay, that's helpful. I also wanted to follow up, is there anything that you're doing from a pricing perspective that would influence the revenue guidance is I think it was about $10 million below on a full year basis from where we were from an estimate perspective. I'm just curious if there's something going on from a pricing perspective as I know you've introduced new bundling, et cetera.

Michael K. Simon

There is activity going on in bundling, as you mentioned. But the bulk of the difference is really related to slower than perhaps we anticipated a couple of quarters ago performance with our service products, particularly Rescue, which is growing much slower than our Access and Collaboration business. So I think it's more -- the difference is more related to that product over our sales performance than a pricing change per se.

Operator

And our next question comes from the line of Gregg Moskowitz from Cowen.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Gentlemen, just following on Rob's question and, Mike, your comments on Rescue, just curious what has really sort of caused the change here in terms of what appears to be some maturation in that business. For a while it appeared that you had a lot of runway particularly with mobile operators. And just kind of curious if there's anything from a market perspective and I think from a competitive standpoint, if any color that you might be able to shed on that.

Michael K. Simon

Yes, so essentially, Rescue, there's really I think that to -- this is Michael -- so there's a couple of components on that. As some of the people on the call will remember that Europe was a great source of growth for Rescue particularly in 2011, and it has continued to -- in 2012, it did not perform nearly as well and continues not to do so. On the broader question is really with respect to many of our customers are still geared towards PC and Mac or Note support. And as I think everyone is aware, the mark, if you will, end-users are increasingly consuming computational power on non-PC devices. And it's safe to say that many of our types of customers are lagging in their transition to mobile support. We continue to invest quite heavily in our mobile care initiatives and believe ultimately the amount of technical support that goes to whether it's smartphones or consumer electronic devices, increasingly smart world of devices should, in the longer run, be a little bit more robust. But this year, we do anticipate fairly slow growth rate in the Rescue business.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Okay. Just one follow-up getting back to the Access and Collaboration segment, wondering if you could elaborate on the nature of investments that you've planned to be making around sales and marketing. And also, any kind of quantification around that just to sort of help on the modeling perspective.

Michael K. Simon

Sure. So we've actually increased our, if you will, the percentage of our revenue going into sales and marketing by about 3% in 2013 versus 2012 actual or expected results. And the reason is that we feel like in 2013 we have much better prospects for new bookings growth than we did in 2012. And it's fairly easy, I think conceptually, to understand where if we have an opportunity to acquire users fairly efficiently and those users then have an expected life of more than 5 years of great renewal rates and good longevity, if your rate of return from acquisition cost to the lifetime revenue is a factor 3, 4, 5, and historically we've seen LogMeIn be in the roughly 5x range acquisition cost to lifetime revenue versus acquisition cost. When you're in that environment, you would like to really be as aggressive as possible in terms of acquiring new customers. And we see now both with join.me and the introduction of Cubby those opportunities in front of us again, so we're quite aggressively investing in customer acquisition. And that's the bulk of the change in our margin profile in 2013 versus 2012. And overall, we feel like BoldChat, Cubby -- it's BoldChat as well as Cubby and join.me give us very good growth opportunities and high ROI opportunities compared to customer acquisition costs.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Okay, that's helpful. Then just finally, it's in the guidance for Access and Collaboration to grow low 20s in terms of revenues in 2013. Can you say roughly what sort of contribution you're assuming from Cubby?

Michael K. Simon

So Cubby this year, in terms of revenue, will still be in our outlook as somewhat immaterial. It's due to 2 factors. One, it is a brand-new product, one we've been shipping 1 week. But the other thing is in that revenue guidance, as you know, there's a lag between bookings and realized revenue. So in this particular -- in our outlook as of today, Cubby is in for an immaterial amount in terms of revenue contribution.

Operator

And our next question comes from the line of John DiFucci from JPMorgan.

Darren R. Jue - JP Morgan Chase & Co, Research Division

It's Darren Jue on for John. Just a question on the first quarter guidance because it seems to imply a sequential decrease in subscription revenue, and I'm just trying to understand how that could happen. And is it something to do with renewal rates? And for that matter, could you comment on what your renewal rates were in the last quarter?

James F. Kelliher

Yes, so let me take the latter first. So renewal rates continue to be very strong at 80%. So we've seen no change in our renewal rates and feel very good about where they're at. I think part of the change on a quarter-to-quarter basis, remember this is a fast business and we recognize revenue on a daily basis, so when you go into that first quarter, the month of February having 28 days, you really lose a couple of days of revenue as you look at Q4 versus Q1. And so that component of it is a big component of the reason for a decrease on a subscription revenue perspective. That couple of days is meaningful when you apply it against $36 million or $37 million of subscription revenue. We traditionally see that, right. And so as you go back through the years, traditionally Q1 is our -- a quarter in which our revenue doesn't have a big step up from Q4 because of the number of days that are in the quarter.

Darren R. Jue - JP Morgan Chase & Co, Research Division

Right. But I mean, is it correct to say that revenue is actually going to decline? Because that would be atypical from past first quarters.

James F. Kelliher

Well, I think if you went back and look on a subscription basis, again on a days basis, it will -- 2 days of revenue is equal to roughly $800,000 of revenue on a quarter-over-quarter basis. So losing 2 days really means, as a SaaS company, again, you lose $800,000 of revenue.

Michael K. Simon

And Darren, I would also point out we do have -- roughly 1.5% of our revenue is from perpetual licenses, 1.5% to 2%. And our expectation this year is that that would be modestly lower, which would be more noticeable in Q1 than you would have normally in the rest of the year. But the subscription revenue itself, if you were just to look at the subscription revenue, it actually would be slightly up and including the fact that there is roughly a 2% hit because of the reduction in number of days.

Operator

And our next question comes from the line of Gene Munster from Piper Jaffray.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Question on Rescue. It's pretty clear, but I just want to make sure we're all on the same page, is that you talk about the majority of the revenue guide down for the calendar year is related to Rescue. How much more -- what's the probability that -- or how big of a business is that, if you want to remind us that, and how much smaller could it get? I guess, what's -- is there still kind of lingering risk that next quarter we have another step down? So I guess the basic question is how big is -- remind us how big of a business that is.

Michael K. Simon

[indiscernible]

James F. Kelliher

Well, it's our -- it's the biggest component of our Customer Care business. So our Customer Care business is roughly 50% of our business. Rescue is the biggest component of that, so Rescue is between 40% and 45% in total of our business. It's the biggest component within Customer Care.

Michael K. Simon

To sort of qualitatively answer that, we do continue to see good performance of rescue in bigger opportunities, the likes of like the carriers and larger technology companies. So we believe that we've incorporated all the risk we see right now in our outlook. And there's a very modest amount of growth in Rescue because of that.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Okay. And then my second question is just in terms of maybe some of the specifics around the increase in marketing you've talked around Cubby and join.me and BoldChat. Is there -- is it search-related? I mean, what are -- can you maybe focus us a little bit more as far as what that actual investment, I mean, is related to?

Michael K. Simon

Well, essentially, those 3 products have sort of 3 different market dynamics going on. So BoldChat which is growing well for us, very well for us, is really a sales-driven product. So typically, that product, the increase in marketing investment into the sales and marketing investment is skewed more towards headcount, salesperson headcount. Whereas both Cubby and join.me, as you would sort of intuitively get, are much more market rather than sales-driven and touch millions of people, huge, huge funnels of people. Cubby, for instance, was our most popular beta product ever. It actually had more beta users than join.me. And so it is typically more marketing-driven. And it's principally online. It's not limited to search but is very much an online-centric, online advertising-centric spend.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Have you seen anything competitively that's made it more urgent or more apparent to kind of increase this spending? Or is this just new product, you guys want to make sure they're off to a good start or how do you feel about those -- that count?

Michael K. Simon

It really comes down to what we feel like we see an opportunity to acquire customers at a great rate of ROI. And if you kind of step way back at our entire sales and marketing line compared to the new business that we generate, it runs something between 1.3 and 1.45 of new business is in our sales and marketing line. And so that is expensive year 1 to acquire new revenue and new customers. But if you look at our renewal rates, you have a lifetime, expected lifetime of our -- of that revenue in excess of 5 years. In some cases, well in excess of that. So if you were to look simply at it from a standpoint of modeling customer acquisition, if you're in a high ROI situation, it feels like you ought to do as much of it as possible as long as you can maintain efficiency. And in 2012, we didn't have nearly as many opportunities to do that efficiently because we didn't have Cubby and we had a substantially lower conversion rate on join.me. But if you were to kind of replay some of the comments we made in our earnings script, we actually have steadily increased the join.me conversion rate so that we now feel we can be increasingly aggressive on marketing investment into it in a way that doesn't just drive revenue pop but actually genuinely creating shareholder value.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Okay. And my final question is any update to the 01 Communique litigation?

Michael K. Simon

Well, essentially with 01, we do look forward to the trial, which is beginning -- scheduled to beginning -- to begin on March 18. And we are confident in our overall strength of our defense, which is really built around 3 aspects: non-infringement, invalidity and unenforceability. And we look forward to our day in court. Unfortunately, given the proximity of the trial date, I really can't make any additional comments on that beyond those.

Operator

And our next question comes from the line of David Wang from Barclays.

David Wang - Barclays Capital, Research Division

What metrics or KPIs can you talk about that help to give us some confidence about how effectively you can monetize the large user base you have in Access and Collaboration? Maybe something about the conversion rate, for example?

Michael K. Simon

Sure. I think that if you -- in the past, a lot of people have wondered about how important conversion rates are for LogMeIn, and I would say now it's actually increasingly important. Given that our business is -- the growth engine of our business right now is our Access and Collaboration business, which is very much a funnel business, meaning we're trying to attract a large number of new users and then convert them into paying users at the bottom of the funnel. The conversion rates actually increased each and every quarter this year. And if you just sort of do a simple back of the envelope, the key -- the KPIs, as you would say, the key performance indicators would be what are the net subscribers that we add. We had a record quarter in Q4 with 27,000. And if you do sort of a back of the envelope conversion rate, you realize that about 2% of our funnel actually ends up as being paying customer versus roughly 1.5% of the funnel in the early part of last year. And I think that's a good indicator that is a little bit more leading than just revenue.

David Wang - Barclays Capital, Research Division

Right. Sure, sure. I've seen the 2% as a blended average across your products except for the newer products. Is it something like 5% perhaps that is being dragged down at an average by it?

Michael K. Simon

It's actually the opposite. And so essentially, over time, we have always tended to get better in conversion rates. Our older products have a higher conversion rate, our new ones have a lower one. And but the reason they tend to get better is really threefold. One, over time, we get better at identifying which types of users have a higher propensity to buy. And we can tailor our marketing over time to try and attract those users more frequently than other types of users. Second is we also get better at what we often call funnel mechanics but actually improving the process for when -- for putting the proposition for something to buy in front of them. And it's really, if you will, optimizing the user experience so that you increase propensity to buy. And the third, and this is, I think, very important for us is to actually increase the quality of the offering on the premium side. In the last, let's say, the last 2 years, we spent an awful lot of time and effort to dramatically increase the scope and size and value of our top of funnel, going from about 700,000 to almost 2.5 million people, new users, in each quarter. This last year, we invested very heavily and it's starting to come to fruition to having a richer, broader set of premium offers. So join.me pro and Cubby Pro, and I think those things together along with our LogMeIn Access product are increasing in terms of differentiation of the value of the pro offering versus the free.

Operator

And our next question comes from the line of Shaul Eyal from Oppenheimer & Co.

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Jim, what was the headcount exiting 2012? And what would that be as you guys think about exiting 2003 (sic) [2013] from a headcount perspective?

James F. Kelliher

Total headcount as we exit 2012 is around 575 heads. And as we exit 2013, that headcount number will be between 650 and 625. So call it roughly a growth of 45 heads on a base of 575. So roughly 8% to 10% growth in headcount.

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Got it. And maybe one more time on Rescue. Specifically on a competitive environment, was there anything different specifically on the Rescue side this quarter? Or is it kind of mostly macro and just the whole kind of PC era you guys are seeing?

Michael K. Simon

We believe it is mostly macro. If we look at some of the limited public data that's available from our competitors, they did slow down perhaps more than we did. So it wasn't a situation of losing market share, we believe. We do believe that it's something of a transition period for that industry, and we have actually continued in Rescue. Rescue is a very high margin business for us, and it does support not just investment in our new product in Access and Collaboration, but pretty serious R&D in its own right. And so over the longer run, we do believe that the need for remote customer care is likely to be a large economic problem affecting everyone who's living the digital lifestyle. But I would think that clearly in our guidance, we don't think this particular year will be a strong growth as it's really very much a PC-centric world from our customer care perspective, which is sort of lagging the reality of the rest of the world which is more of a mobile device-centric world.

Operator

And our next question comes from the line of Tim Klasell from Northland Capital Markets.

Tim Klasell - Northland Capital Markets, Research Division

Jumping back to the competitive situation with Rescue. In Europe, do you primarily bump up against Citrix or is it TeamViewer? How should we think of that?

Michael K. Simon

Essentially, it depends very much on the size of the opportunity. TeamViewer, which is historically a German company, its strength is definitely in Europe more than in North America, but strength, relative strength let's say, tends to be in for smaller deployments, whereas Citrix tends to be the competitor we would see more often in like a large care. So just to remind everyone, we have companies ranging from Microsoft to Symantec to Dell to Sony to Toshiba and to many, many -- roughly 50 carriers running Rescue. And that sort of large business-to-consumer-type facing customer care organization, we typically would not see something like TeamViewer, and it would be more likely that we would see Citrix. And frankly, more often than not, we would actually prevail and win. It's pretty rare for us to lose in a competitive environment. But to answer your question, you sort of have TeamViewer being a little bit stronger in Europe and a little bit stronger in the smaller-sized deployment company.

Tim Klasell - Northland Capital Markets, Research Division

Okay, very good. And then on Cubby. As we begin to start thinking of our outyear models, what would be the gross margins with that given that that has a storage component to it in the offering? How should we think of that?

Michael K. Simon

They will be a little bit lower than our historic business. Short term, they won't have an enormous impact on gross margins. But one of the things that is an important part of the Cubby story is that it's actually built on our own Gravity data cloud, Gravity services data cloud. And the reason we did that, which required many years, many, many, many years of engineering and R&D was to actually engineer a platform that is very, very scalable from a maintenance and linear scalability from adding people, so easy to maintain and scale out. That's very efficient from a cost structure. It cost us a small fraction to run Cubby on what it would to run on like a third-party service provider such as Amazon's Web services, for example. And the last is it also gives it advantages in security. And one of the important differentiation points of Cubby is that it was really architected from the bottom-up to be secured to the point that our customers can actually maintain their own encryption key so that we don't have the encryption keys, which is important for compliance or privacy concerns for many of our users. So I think that our margin with Cubby, the whole business model was engineered from the bottom up to give us a distinct competitive advantage in terms of service delivery cost compared to other types of cloud service providers.

Tim Klasell - Northland Capital Markets, Research Division

Okay, very good. And then one final question. 01 Communique, how long do you expect -- the trial date has been set, how long would you expect it to last?

Michael K. Simon

I would expect it to be over before the end of the quarter. These trials are relatively short once they start.

Operator

And our next question comes from the line of Scott Zeller from Needham & Company.

Scott Zeller - Needham & Company, LLC, Research Division

Earlier in the conversation, there was a question about contribution from Cubby for calendar '13. I thought I'd ask the same question about join.me. When you look at '12 and then '13, what should -- what did we see and what should we expect for contribution?

Michael K. Simon

Well, we haven't broken -- as you might remember, we don't report an individual product. We do it in product group, and we try and give some color for people to understand. So join.me, we anticipate approximately, plus or minus a little bit, triple digit growth. It is a very rapid growing product for us, and we feel like we still have tremendous opportunities in that product in terms of leverage for growth. But in terms of the contribution out of that overall group, it's less than a quarter still. But each quarter that goes by, it increases its contribution.

James F. Kelliher

And as Michael said, Scott, it's our fastest-growing product, adding large number of users as well as some sales and revenue. So we're quite pleased with how it's done and how its monetization has increased over the year.

Scott Zeller - Needham & Company, LLC, Research Division

Okay. And then regarding the conversion rates. Michael had mentioned that, I think, ending the year it was nearly about 2% after starting the year off around 1.5%. How should we think about the March quarter? I mean, should we expect every quarter to be incrementally up as we've seen through calendar '12? Would that continue as a pattern?

Michael K. Simon

Well, it's probably a little bit early to say that because if we didn't introduce a new product, we would say yes very much so. But with Cubby, we're hoping obviously to both add to the top and bottom of the funnel and there is a lag, a time lag. So this particular quarter, I wouldn't necessarily anticipate a dramatic sequential change. In fact, it could go down because of the -- Cubby adding to the top of funnel. I wouldn't expect it to go down significantly, but it's unlikely just to tick up like clockwork.

Operator

And at this time, there are no further questions in the queue. I'd like to turn the conference back over to management for closing comments.

Michael K. Simon

Well, thank you for your questions tonight. In 2013, we will continue to invest in the products and opportunities that we believe will help us accelerate growth while delivering the best return on investment.

We remain optimistic about the combined Access and Collaboration, next-gen RMM and Customer Care opportunities. And we remain confident that LogMeIn is uniquely positioned to meet the needs of the new mobile workplace.

Thank you for the time -- for your time this evening, and we look forward to sharing more about our progress and results during our Q1 earnings call in April.

Operator

Thank you. Ladies and gentlemen, this does conclude our conference for today. This conference will be available for replay until February 21 until midnight. You may access the replay system at any time by dialing (303) 590-3030 or 1 (800) 406-7325 and entering the access code of 4592333#.

We thank you for your participation. And at this time, you may now disconnect.

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