Carbonite's CEO Presents at JPMorgan Global Technology, Media and Telecom Conference (Transcript)

May.15.13 | About: Carbonite Inc. (CARB)

Carbonite Inc. (NASDAQ:CARB)

JPMorgan Global Technology, Media and Telecom Conference Call

May 14, 2013 4:10 PM ET

Executives

David Friend – Chairman, President and CEO

Anthony Folger – CFO

Analysts

John DiFucci – JPMorgan

John DiFucci – JPMorgan

Good afternoon thanks for joining us this afternoon. My name is John DiFucci, I cover software at JPMorgan. We are very happy to have with us here this afternoon from Carbonite, the executive team David Friend, the CEO, and also Anthony Folger, the CFO. Do you want to make any opening statements, are else you want to go right to Q&A?

David Friend

I don’t think so. I will be assuming everybody knows what we do. No need to do that.

John DiFucci – JPMorgan

Okay. So what I’m going to do is, I’m going to go right into Q&A and then at the end, I will give the audience, well, I will give the audience time to ask questions too, feel free but when you do ask a question, if you could just step up to the microphone in the middle of the room, I would appreciate that. So anyway, so, like to open up, just talk a little bit about the online backup market David. This market that’s always made a ton of sense to me and I actually as an analyst started to look at it back in early 2000s. And it seemed to me that the infrastructure of the Internet really maybe wasn’t quite ready of that at that time.

But, that that was actually sort of a concern from any SaaS solution. But, that’s actually for most SaaS solutions anyway seems to be something that’s behind us but if there is something with online back up because you have done very well as a private company and a public company but the opportunity both for consumers and small businesses seems to me to be so much bigger than that. And I just wonder do you think that as the Internet continues to progress, is that having any effect right now, it’s hard to say suppressing work, as you are growing really fast. But, it does seem to me that it could even so much bigger.

David Friend

So, I mean, right now the team at Carbonite obviously we are transitioning from focusing on our consumer customer which has been the traditional growth engine for Carbonite to focusing on small business and we launched our small business products about a year-and-a-half ago and today we have 50,000 small businesses already signed up. We have signed up in last year or so, we signed up 3500 VARs to sell into that market. We get higher average selling price, higher margins, lower support cost, everything about that market is giving us a better return on our investment. So it’s been sort of green shoot hidden in the weeds. But, this quarter you saw for the first time, now in a while a reacceleration of bookings, new bookings growth and that’s because we now have this small business product kind of raising up from underneath this enormous consumer business that we have really starting to drive the top-line and the technology for all of this is no problem, storage cost continue to come down at a rate of 30% to 40% a year, cost of bandwidth continues to come down and almost every small business that we are dealing with already had broadband.

So, for us it’s just a matter of getting out there and replacing all of these tape drives and external hard drives that people are doing with all these various sort of swappy manual processes to back up small businesses. And we want to take that position kind of underneath the Convults, Symantecs of the world that are out there doing what we want to do for a very large enterprises.

John DiFucci – JPMorgan

So, are there any technology factors that are limiting at this point or is that pretty much behind us or will it, will it get better from here?

David Friend

In terms of infrastructure, the answer is no, I mean, it’s all working really well and that kind of thing that we do is infrastructure it’s in place today works great for that. As I said storage costs really continue to come down and so that only helps in terms of making online backup actually more and more attractive option for businesses.

John DiFucci – JPMorgan

Okay, great. And you talk about the traction you will be getting in small businesses and we have been tracking that closely. Is there anything else that you think makes sense for you at this point to even expand your product offerings to small businesses, whether it’s part of online backup or even some sort of adjacent technology.

David Friend

Well, I think online back is only a part of what we – what our mission really is. If you take, my dentist for example, somebody who uses Carbonite, if his server dies, his patients scheduling system stops, he can’t get any dental x-rays and he is basically shutdown until somebody fixes his server. Now, he never had his server die, so he hasn’t realized how many days it’s going to take get himself back up and running.

If we put ourselves in the position of the small business, they don’t care about back-up. They don’t care about anything other than getting back up and running in their business. So, our view is really has to migrate more towards complete business continuity. So when the guy server fails, how does he get back up and running as quickly as possible, obviously, you don’t have a backup. You never going to get back up and running. So that’s an important part of it. But there are many other technologies that are very wide spread use in the enterprise that now we feel we can bring down into the medium and small business markets.

John DiFucci – JPMorgan

Could you identify those beyond continuity, beyond those sort of broad?

David Friend

You will be seeing some new products coming out in the second half of this year, they would address some of those things. I can give you a little more visibility but I’m not going to tell you about it.

John DiFucci – JPMorgan

Anthony, maybe if you can address the profitability difference between consumer and business, in small business I think you saw, I think you said on the call, you saw some slight leverage in sales and marketing as you ship towards selling to small businesses and I believe you said that on a gross margin basis, small businesses is slightly more profitable. Can you maybe even estimate the operating profit difference between small business and consumer?

Anthony Folger

The way we generally look at it is, there are much better economics in the small business side for us. Number one, higher price point, number two, the pricing model is storage based. So we don’t have unlimited offerings in the small business side. We think we are priced at a point where we can be disruptive in the market, we are probably four times cheaper than our nearest competitor but, having said that we are charging for all the storage that a small business is using. So that is stark contrast to the consumer offering, where we have got an unlimited offering out there for $59 a year.

So that obviously gives us an advantage. We do think about lifetime value. We get higher retention rates on the small business offering, slightly higher couple of points right now. And it’s early in the game still, or maybe 6 to 9 months into the old cycle but the trend looks good in terms of retention. With a better price point, capacity based pricing model lower support burden on the small business side. We do end up with a gross margin that’s I would say materially better than what our consumer margin is. But really the key loss is lifetime value. We got a longer customer life on the small business side. And we just get significantly more value out of one small business subscriber. So, when we think about how to allocate resources and which markets to go after. That’s one of the things we consider and one of the things is leading us that way.

John DiFucci – JPMorgan

Could you estimate what Carbonite that was all consumer versus Carbonite what was all small business, what the delta in margins might be?

Anthony Folger. Yeah, I mean, you may see, we don’t really carve our line of business and margins. But I think our operating model called for a steady state gross margin in the mid 70s and we are obviously not there yet. We are high 60s at this point and I think there is a – the consumer offering is a bit of drag on that right now. So I don’t want to give out specifics it’s still a bit early in the game for the small business side. It’s materially higher than the consumer offering.

John DiFucci – JPMorgan

Okay, great. You said something that was interesting and at least for the consumer, it’s my understanding, we know that Carbonite would be a less expensive option in part mostly because you can – because you are backend infrastructure and you just said that for the small business you think you are about four times less expensive than your closest competitor, did I hear that right?

So I guess maybe if you could address how you can do that maybe David too on the technology side, I would assume it has something to do with the technology?

Anthony Folger

Yeah, I mean, I will let David talk to it. I think it is squarely focused around proprietary technology on the back end.

David Friend

I mean, we have an enormous data base. We get 350 million new files everyday coming into Carbonite, we buy a petabyte of storage which is a million gigabyte of storage about every week and a half. So it’s one of the largest kind of data bases out there anywhere, I mean, it’s more than what Yahoo Mail would have or many of those sort of things.

Database can either be fast and expensive or can be slow and cheap. There are a lot of applications for slow and cheap, so we have to build it. And that’s what we did back in 2005 when we started the company – my business partner came up with an architecture for a very low cost, very efficient database that you probably wouldn’t use for serving up webpages, but it works great for what we do. And we have scaled it and scaled it and scaled it, I mean, it’s got 10s and millions of dollars of investment in it at this point. It’s going to be unique thing in the marketplace very different in its characteristics cost structure than say Amazon S3 or databases that are designed for serving up webpages in milliseconds.

So that’s kind of the bases of having a very low cost infrastructure and ultimately gives us the ability to price things like our business product much cheaper than our competitors. I will say, however, that the pricing on the small business product which is $229 for an unlimited number of computer sharing with 250 gigs of data was not picked solely on the basis of our cost, it was picked because that after a lot of work on pricing analysis. There are a lot of businesses that can afford to spend $250 a year on back up and there a lot of fewer that will spend $1000 a year on backup. So it was really a matter of having a much broader market that we could address and penetrate at this point in our life.

And so we didn’t see much point in trying to come in 20% cheaper or 30% cheaper than our competitors that’s not disruptive, what is disruptive is when you get to a fraction of the cost of your competitors. And we can still make a good merging at those prices and it’s very likely that our competitor’s costs are not four times higher than our costs. It’s likely they are just taking a much higher margin instead of 70 some odd percent maybe they are making 80 some odd percent. But, we are really more interested in expanding the addressable market with our aggressive pricing. And it’s worked well because we get a lot of – we got 50,000 small businesses in the same time that some of our competitors have taken 6 years to do the same thing.

And so we are rapidly gaining market share in this space. And it’s also going to force a lot of people out. I mean, there are people who have a high class infrastructure ultimately I don’t know how what they are going to do eventually they will have to do something else. Because customers who are going to hear our ads on TV and radio and they are going to say why am I paying $1000 when Carbonite is selling something that sounds like the same thing for $229. And so I think ultimately that will work for us.

John DiFucci – JPMorgan

Is there – are there any limiting factors in your technology that won’t will – that once you got to be a certain size and scale of that that would be – become much more difficult or?

David Friend

Well, scaling to the size that we are at has been very difficult, I mean, it’s been a lot of very smart engineers have a ton of money over the last six years to get it. I mean scaling anything whether its Oracle or Carbonite or Google, I mean, any large scale system takes years of effort, it’s not the kind of thing where you can throw a whole bunch of engineers at it and hope that it works. Because a lot the problems that you get in scaling don’t appear until you have a million people sending your data at the same time. As Carbonite like taking the cap off a (inaudible) data just comes pouring out. And there is no way to test for that you can’t design a test that’s going to simulate that sort of thing you have to do it in real life and hope to help fix the problems before they become bottlenecks.

John DiFucci – JPMorgan

Okay. I would like to stick a little bit with the technology, I would like you talk a little bit about Zmanda, your acquisition and what’s that done for you?

David Friend

Right. So when we were a purely consumer company all we did was back up files, so you got 10,000 files on your pc, we back them up to the cloud, when we started to get into the business market we started to encounter businesses head servers, running exchange server, Oracle, SQL server, and these were typically connected with accounting systems backends to customer management systems, all kinds of production stuff. And backing up the production databases was a very technical and different job from backing up files, you have to databases, production databases have lots of moving parts, you have to create the database. And there are technical products out there, like Backup Express, Backup Exact and so forth. They have been on the market for a while to do that sort of thing, we needed that kind of capability if we are going to be a full service solution to a small business. So it’s great that we backup all the files on your pc, but companies also running, quick books, so that they have got a SQL server database behind that, we need to back that up too.

It’s a big job to design something like that and one of the things we wanted was even if we built it ourselves IT people wouldn’t trust it for several years. So went out to look for something that we could buy and that already had proven itself in the marketplace. And Zmanda, its out in Sunnyvale, and we are lucky to find them, they had an interesting strategy, they are the most popular open source database backup product in the markets called Amanda, was originally designed by the people at the University at Maryland, it’s been in the open source community for about 15 years, probably has over 200 man years of contributed development into it, used on over an millions severs worldwide mostly in academia and government where Linux is the thing.

And this Amanda guys came along and said we can do for Amanda what RedHat did for Linux. We can turn these things by porting it to run in Windows and Mac by changing it so that it supports commercial databases like Oracle and SQL Server, we can turn these thing into a backup product that will rival Symantec’s products and sell into the commercial marketplace. And they were just getting up the ramp with about 25-30 employees out in Silicon Valley when we met them and they said we have got a problem which is we are trying to sell sever backup and our customers are saying what you about the PC’s, we don’t have a good answer. And I’m saying, we backup the PC’s but we don’t backup the servers. And CEO and I decided it would be really make a lot of sense for us to (inaudible).

So, we acquired them last fall for 14 somewhat million dollars. And now we have got a complete suits so we can go in and say not only do we backup all the PCs and the tablets and the smartphones and everything else but we also can do a really good job of backing up your production database servers. And Amanda has the reputation in the market that people and the credibility to be allowed us to do that.

So, it really allowed us to move forward with this strategy that we have of moving up into the SMB market.

John DiFucci – JPMorgan

Indeed, this technology, I guess why did you have to buy a rather than just buy a license or support from, actually was this Amanda technology open source also, but what was that?

David Friend

Amanda was not open source, Amanda itself is open source but that’s the Amanda’s stuff is proprietary. Well, I mean we are trying to build a very large business based on this, I wanted to own that technology, but they were just starting to make movement of most of these things backup to a local device, external device or some sort, and they were just starting to make movements. So, let’s backup to the Cloud because that’s what people are asking for. And I wanted to make sure that we could drive that process and make sure that it backed up to our Cloud and it was fully integrated with Carbonite and I didn’t want to have to get into discussions what source code we could get and which we didn’t, so…

John DiFucci – JPMorgan

Is there anybody in your knowledge, anybody that’s going after the same market, you are going after the small business that has this kind of functionality?

David Friend

Well, Mozy is our biggest competitor, they’re subsidiary at MCS between what they brought to the table and the dozens of other backup kind of other technologies that MCS acquired over the year, certainly can do what we do in the marketplace. The difference is they are going after somewhat larger deals leveraging the EMC sales force, so you know they made an announcement that they sold, I forgot tens of thousands of seats to General Electric. And that make sense for them to do. We are going more a channel strategy and to the smaller businesses where we think we can – competing directly with sales forces from EMC and Convult and Symantec.

John DiFucci – JPMorgan

Anthony you talked about the small business and sort of how you look at profitability and also the sustainability. I don’t (inaudible) use that word. But the same ability of those small business, the total lifetime value, can you talk a little bit about once the small business is using Carbonite, how difficult would it be to unwind that like how differently say, I don’t want to use Carbonate anymore, I want to use Mozy or back it up onto my own systems.

Anthony Folger

I think it’s certainly a sticky value proposition I think renewal rates for us are extremely high, the renewal rates run 82% overall blended and on the small business side, there’re even a few points higher again. So, when you think about annual retention rates, when you’re factor in multi-year contracts were up closer to 86% for an annual retention rate. So, that creates a long customer life you know on the small business side probably close to seven years.

And so we can realize a lot of value over that lifetime and I think of course businesses get acquired small businesses go out of business and there is always going to be some amount of churn but once you backed up all of your data to a Cloud and we’ve got the type of offering where we can give you access to your data. We’ve got products out and data now they can sink your data across any device you want.

A lot of that is designed to enhance lock-in, improve the value proposition keep our customers engaged at a higher level and lock them in for even longer. So, I think the notion of getting all of your data into someone’s Cloud offering more services around that, make it a really, very sticky product for us and, we don't see people coming to the market right now and disrupting us on price. We think this small business market is largely unreserved I think when we look at the market overall, we estimate about 6 million small businesses are out there and maybe 16% or 17% of them are backing up online, over the long run we think, all of them should be backing up on line. And like I said we are, we’re price disruptively, we don't see that type of pressure in the market. It’s a sticky offering and we’re making it stickier with new services that we rollout. So, we feel good about the lifetime value proposition.

John DiFucci – JPMorgan

Carbonite as talk about you, you mentioned like new services and David mentioned new services that were not going to hear about today but you’ve talked about new services in past too and I actually would speaking with somebody recently this week, actually this weekend and they were, they were talking about what they needed because it was actually a client, I was actually meeting yesterday and he had a laptop fry in his words and is very, very painful right now. And I said well, and he said I just and I have to start using Dropbox and actually, I don't think Dropbox sort of solved all your problems, you should have been using Carbonite and he is like okay, okay. Well, let’s talk about that. But then he also, I also came to the realization that he probably should have been using both and can you talk a little bit about because you have going on that direction also and you talk about for the consumer but also this small business?

David Friend

Yeah, the small business faced you know Dropbox is a very popular product, I using myself. It’s really great for sinking and sharing. So if I’m working on something at the office and I want to continue working on it after dinner at home you stick the thing in your Dropbox folder and magically it would be on your home machine when you get there. It’s not back-up obviously, it’s a completely different application but it does have some of my stuff in the Cloud.

And I think in the consumer space, there is a lot of confusion which is if I got my stuff and Dropbox why do I need to back it up, there are certain truth to that but I think, IT people certainly understand the difference, that’s one of the reasons that attracted to the small business market is, nobody in the small business market is confused by that. But, when you think about that process. You got earlier files were up in the Carbonite Cloud, now you’re putting your files up in Dropbox’s Cloud, what a duplication there and the obvious question is, if I already got my files in Carbonite’s Cloud, why should I have to upload them yet again to somebody else’s Cloud. And so I think the table stakes to in our game has to include a certain amount of file sharing and sinking, so that I can do something useful with all of those files set it up in the Cloud. And we are certainly making a lead with that. I don't want to expect Carbonite to become another Dropbox but I certainly think that the fact that we have all of your files in the Cloud already enables us to do things that are useful to the customers that that might make it unnecessary for you already used Dropbox or you sent it or any number of other applications that required that you upload your files to somebody else’s Cloud yet again. And so, that’s becoming something where I think people will expect to see those kinds of capabilities from anybody, that’s in our business.

John DiFucci – JPMorgan

So why, why wouldn’t you become another Dropbox because I can see, one of the things that happens to consumers and small businesses it’s still use a lot of different things sometimes like it’s overwhelming and to use to be able to get like these two functionalities from the same vendor but to me would sound compelling.

David Friend

Yeah, and I would expect that if you are using Carbonite, I think our share in sinking product called Current Switches which is in labs.carbonite.com right now is actually very clever to take and hold business of I’m working at home and I went to work at the office, I want to share my file with Anthony and I went him to be able to put the copy back. It does a really nice job at that but that’s to say that you, you wouldn’t necessarily need to use dropbox if you are a Carbonite customer is different from dropbox, dropbox is 60 million free users who aren’t paying them a nickel. And their business model is based on some small percentage of those people running out of space on the free to being my offer and then having to buy more. So it’s – their business is just a different business model from our. And I would be – you probably have to wonder whether not if I said, I thought we could come out with a hit record like dropbox, it would suddenly get millions of people to sign up for a free product that would be coming on to revamp the Carbonite, I would love for that to happen, maybe it will. But, mostly what I want to say is that if you are a Carbonite customer you get a suite of tools that would make it, so you wouldn’t necessarily have to use all those other vendors products.

John DiFucci – JPMorgan

And would that be for the consumer also?

David Friend

Yes. I mean to the extent that a lot of consumer customers are actually SOHO, they are not just people at home with scrap books. A lot of our consumer customers people like you, they who have some business work on their computer, some home stuff. And I certainly I use currents because for all kinds of things because it’s a great way to – to me it’s easier to use them than dropbox for the kinds of things that I do.

John DiFucci – JPMorgan

By the way I have had CEO say things a lot more outrageous than that would have been, maybe you said, I’m going to ask one more question, then I’m going to open up to the audience. And the question has to do with partner selection in economics. You went through with the phase earlier in your development as a company when you are private, you are engaged with bunch of partners. And that was some success but you then you decided that wasn’t really the right way to go at that time. And today it sounds like you are seeing significant engagement with partners, actually partners engagement with you. And what’s the difference now, why is they working now versus before?

David Friend

Right. So we are very early on the company’s growth, we had partnerships with people like CableVision. And they wanted light label product. They wanted CableVision online back-up powered by Carbonite and the small print. And we were unable to persuade them at that time that it ought to be Carbonite online back-up just the same way they sell Norton Antivirus. And their response was well, you are not Norton. And so ended up with CableVision, the thing I realized was people hate their cable companies and they are certainly the last people they want to trust and trust their data too is their cable company because they know darn well that the message is, it’s a sticky product. It’s going to keep you from switching to Verizon or something like that. And you will continue to pay your outrageous cable fees because you are stuck with their online backup service didn’t work.

So we pulled the plug on that and I decided to that, there was no way I wanted to do anything that didn’t have the Carbonite brand on it. The Carbonite brand is so important to us right now, and it’s our identity, you know, people trust Carbonite, and I don’t know, 40 billion files that we have backed up. We have never had one stolen you know, that’s the reputation that we have built around our brand, so we just don’t do white label anymore. And now that we do have a high brand recognition, I mean, we are 3 or 4 times the unaided brand awareness of anybody else in the backup industry right now.

We are finding that people like Staples and Comcast, which is a deal that we announced a few months ago, they are suddenly discovering that they need to be in the online services business, so they are trying to look for things that they can sell to their customer base, and guess what, they have changed their tune, and then they now say, oh, it’s much easier to sell a branded product, where we can say, oh, we are going out and cut a deal with Carbonite, and now you can get Carbonite for 5% off, because you are a CableVision subscriber. That’s working a lot better. And so, they are now, we are now finding a lot of these kinds of people coming to us saying we would like to do business with you because of anybody in the backup space, you guys have the brand name, it’s already out there.

And so we are just at the beginning of that process, but the Staples deal is producing a lot of volume for us, the Comcast deal is ramping up and I think that’s going to be important because they have, I forget how many, but several million small business subscribers who rely on them for broadband. And these are the kind of channel deals that they are going to push. You are going to see a year from now the majority of our business is going to come through resellers and channels, and you will see that ads spend that we have been addicted to for since the beginning of the company start to come down as a percentage of revenue and that money get redirected to the channel. This sales people provide discounts for achieving certain volume limits and things of this sort.

John DiFucci – JPMorgan

And about how much of your revenue today comes from resellers and channel?

Anthony Folger

We haven’t broken it out yet, but as it gets bigger, we probably will be willing to talk about that specifically, but the growth from the channel is going to drive Carbonite’s growth.

John DiFucci – JPMorgan

Okay, great. Any questions from the audience, and if you could just come to the centre at the microphones.

Question-and-Answer Session

Unidentified Analyst

Maybe, something reconcile your annual rise versus first quarter revenue versus (inaudible) and the guidance applies flat revenue for three quarters…

John DiFucci – JPMorgan

The question is. Please reconcile the guidance for – annual guidance versus what was done in the first quarter, the question, it says that it implies flat revenue for three quarters.

Anthony Folger

Yeah, I think the annual guide around revenue was 104 to 106, obviously we thought that Q1 was a good quarter. We have given guidance for Q2, I think when you look at the seasonality in the year-over-year aspect of the business, it sort of point you back to Q2 of last year where there was a bit of a depth in the business that may account for some of that if you can’t reconcile Q1 to the rest of the year. So on a year-over-year basis Q2 last year was a light quarter, but I think really, what we are looking for is some reacceleration, gradual reacceleration in bookings growth which is largely going to be small business driven. But I think if there is one point whether maybe disconnect, we would probably looking back at Q2 of last year and the impact that would have on current year revenue.

David Friend

Yeah, don’t forget, GAAP tends to smooth things out, so you know, eventually the GAAP --

Unidentified Analyst

Yeah, year-over-year growth is (inaudible) GAAP in fact should be consistent.

David Friend

Right,

Anthony Folger

Yeah, what’s happening is, we had a deceleration in 2012 in bookings growth, so the growth level decelerated through the year, we felt like it bottomed out in Q4, it was about 18.8% growth in Q4 2012, Q1 started to tick up at bit, in terms of bookings growth it was back up close to 20%, I think 19.8%, 19.7%, so it’s slight uptick. And we expect from a booking standpoint that’s going to gradually continue to move up through the year.

On the revenue side, we were north of 30% revenue growth and again it’s a GAAP issue in terms of how those bookings get recognized, but over time the 30 plus percent revenue growth and the 20 plus percent bookings growth, those growth rates will converge.

Unidentified Analyst

Could you just clarify your revenue recognition…

Anthony Folger

Revenue recognition, we’re selling annual subscriptions and recognizing daily.

Unidentified Analyst

Recognizing what type?

Anthony Folger

Recognizing revenue daily and selling annual subscriptions, no monthly billing, really no material monthly subscriptions.

John DiFucci – JPMorgan

Any other questions from the audience? I have one more, yes, you were talking about expanding through the small business, but can you talk a little bit about the potential for international expansion?

David Friend

International has been sort of a point for me for a long time. Our traditional consumer model which was based on very heavy spending on radio and TV didn’t translate to international very well. There aren’t equivalent of talk shows that we use in the U.S. and most countries around the world. So we never found a good way to do that, now that we are selling more through VARs and resellers, VARs and resellers, in England, in Germany, in Brazil, and Taiwan, and all the pretty similar to VARs in the U.S. So, we have a head count in the budget for the second half of this year to hire an international, an international guy to start building up resellers in international markets, it look like there, kind of easy pickings so really for the first time since 2005 when we founded the company, I think we’ve got a way forward in the international market.

John DiFucci – JPMorgan

You know, I’m going to ask one question, I haven’t used this yet, so I have to, this is a – one of our online people I guess, the question is, does Carbonite management envision using Carbonite’s backup optimized right one storage infrastructure for Carbonite currents and how would leverage that an infrastructure if so or not.

David Friend

Yeah, so, it’s not really right. It’s just rewrite. But it’s mostly right because about 13% of the transactions storage data base are reading 80 somewhat percent. But the answer is they are sort of – for currents right now, we are using a third party storage that will be brought in-house in the next quarter or two.

So, we’re trying to use third party back and forth to bring up new applications fast when we see that there is enough volume then it makes sense to do the cost reduction of bringing them in-house and interfacing to our own data base. So, that would come.

John DiFucci – JPMorgan

Yeah, okay, great. Thank you David, thank you Anthony.

David Friend

Thank you everyone.

John DiFucci – JPMorgan

Thank you.

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