Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Carbonite (NASDAQ:CARB)

Q2 2013 Earnings Call

July 30, 2013 5:00 pm ET

Executives

Cassandra Hudson

David Friend - Co-Founder, Chairman, Chief Executive Officer and President

Anthony Folger - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Ben McFadden

David E. Hynes - Canaccord Genuity, Research Division

Kenneth R. Talanian - JP Morgan Chase & Co, Research Division

Brian J. Schwartz - Oppenheimer & Co. Inc., Research Division

Ben Z. Rose - Battle Road Research Ltd.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Tim Klasell - Northland Capital Markets, Research Division

Jaimin Soni - BofA Merrill Lynch, Research Division

Operator

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Carbonite, Inc. Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded.

I would now like to turn the call over to Cassandra Hudson, Corporate Controller. You may begin.

Cassandra Hudson

Thank you, operator. Good afternoon, and thank you for joining us today to review Carbonite's second quarter 2013 financial results. With me on the call today are David Friend, Chief Executive Officer; and Anthony Folger, Chief Financial Officer. After prepared remarks, we will open up the call to a question-and-answer session.

During the call, we may make statements related to our business that will be considered forward-looking statements under the federal securities laws.

Words such as, but not limited to, plan, expect, anticipate, believe, goal, estimate, potential, may, well, might, could, target and similar words will identify forward-looking statements.

These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.

The statements reflecting our current views regarding the future are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings, including our most recent quarterly report on Form 10-Q filed with the SEC on May 7, 2013, available on the SEC's EDGAR system and on our website. We encourage all investors to read our SEC filings.

Carbonite expressly disclaims any obligations or undertaking to release publicly any updates or revisions to any forward-looking statements made herein, except as required by law.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation to the most directly comparable GAAP financial measures can be found in our press release, which is available on our website, www.carbonite.com, under the Investor Relations tab. Also, please note that our webcast and the recording of today's call will be available on our website in the Investor Relations section.

With that, I'd like to turn the call over to our Chief Executive Officer, David Friend. Dave?

David Friend

Thanks, Cassandra, and I'd like to start by thanking all of you for joining us today for our second quarter 2013 conference call.

We made a great deal of progress this quarter, penetrating the small business market, and I'm pleased to say that our strategy is validated by this quarter's results. Back in January, we said that we expected our bookings growth rate to continue to increase during the year, and I'm happy to report that our bookings growth rate, year-over-year, increased again in Q2 to 24%, up from 20% in Q1 and 19% in Q4 last year.

We also stated at the beginning of this year, that we expected to be free cash flow positive or breakeven every quarter in 2013. We now have had 4 consecutive quarters of positive free cash flow, with Q2 coming in at $1.2 million, compared with $654,000 for Q1 of this year.

During the second quarter, our Small Business bookings grew to approximately 24% of total bookings, up from 15% in the prior year quarter. These results validate the demand for affordable easy-to-use Small Business solutions. By the end of this year, we expect that close to 50% of new bookings will come from our Small Business solutions.

Meanwhile, our consumer business continues to grow, at a steady rate, in the high single-digit to low double-digit range. With retention rates remaining near an all-time high, we expect positive growth to continue, particularly among home office and prosumer customers. And we expect the strong consumer business to help fund further investments in the small business market.

On the new product front, we recently announced 2 important new products for the small business market. The first of these, Enhanced Server Backup, is based on the technology we acquired when we bought Zmanda, 8 months ago, and it's the first Carbonite product aimed specifically at backing up servers. Enhanced Server Backup is priced at $999 per year, or $399 for existing Carbonite Business Premier subscribers. One subscription to Enhanced Server Backup allows users to back up an unlimited number of servers. Enhanced Server Backup saves backups both locally and to the cloud, and includes 500 gigabytes of cloud storage. Enhanced Server Backup protects production databases, such as Microsoft SQL Server, Exchange Server, SharePoint and Oracle, both locally and in the cloud.

Enhanced Server Backup also backs up the Windows system state, which means that a server can be restored in its entirety with no need to reconfigure the operating system or reload applications.

While the features of Enhanced Server Backup are comparable to those found in other enterprise-grade backup systems, we have made Enhanced Server Backup relatively easy to install and use for small businesses. Cloud storage is an integral part of the product, as opposed to being a third-party add-on. And like all Carbonite products, it is priced aggressively with its simple unlimited server pricing. And yesterday, we announced that we are entering the hardware appliance market with the line of business continuity appliances. These all-in-one appliances will provide both local and cloud bare metal backup, hot backup of production databases, and virtual machine failover to keep businesses running even when their servers die. Business continuity goes beyond simple backup to attack the problem of downtime when systems fail. Since our backups maintain a complete and up-to-date image of the customer's servers, in the event of a hardware failure, these backups can be restored to a virtual machine on the appliance, which can pinch-hit for the server until it is repaired. By tuning the hardware to the software, and offering it as an integrated package, complete with cloud storage, the customer avoids the finger-pointing between hardware and software vendors that often occurs when things don't work properly.

We expect prices for our business continuity appliances to start at just $99 per month, a price that we think almost any small business can afford. The $99 per month entry-level appliance includes 1 terabyte of local storage and 500 gigabytes of integrated cloud storage. While there are many products that address the business continuity needs of very large enterprises, very few companies have attempted to bring these technologies downmarket to smaller businesses at a price they can afford. We believe the market is wide open and vast in its potential. Small businesses suffer grievously when their servers go down, so we think we are addressing a real pain point in a very under-penetrated market. Data shipments will begin in August, with full production planned for later this year.

With our traditional consumer and small-business PC, Mac and mobile device backup solutions, our new Enhanced Server Backup solution and our new business continuity appliances, we believe no other company offers a comparable breadth of solutions in our market.

We envision a world in which all small businesses turn to the cloud to protect their data, to keep their businesses running smoothly and to help their employees be productive. Our solutions will continue to evolve to meet these emerging trends.

Billions of people worldwide rely on small businesses for products, services and their own livelihoods. Our mission is to keep these small businesses running.

In conclusion, we remain committed to simplicity, disruptive pricing, a trusted brand and the best customer and reseller support in the industry. We're pleased with our progress to date and optimistic about our future.

With that, I'd like to turn the call over to Anthony Folger, Carbonite's CFO. Anthony?

Anthony Folger

Thanks, Dave, and thank you, all, for joining Carbonite's second quarter 2013 conference call. I'll start by providing details on our financial performance during the second quarter, and then I'll discuss our financial guidance for the third quarter and full year 2013.

Overall, I'm pleased to announce accelerating bookings growth, record revenue, solid gross margin expansion and the fourth consecutive quarter of positive free cash flow.

Revenue was $26.2 million, an increase of 30% over the same period last year. Bookings were $27.4 million, an increase of 24% over the same period last year and 4 percentage points higher than the 20% growth that we reported in the first quarter.

During the second quarter, Small Business bookings were 24% of total bookings, up from 15% in the second quarter of 2012. This shift reflects the progress we're making in our strategic transition from being primarily a consumer online backup company to one focused on business continuity solutions for small businesses.

Customer retention for the quarter remained strong and in line with our historical average of 96% to 97%. And as a result, total customers at the end of the quarter were 1,498,000, compared to 1,326,000 in the same period last year.

Now let's turn to costs and margins. Before I begin, I'd like to highlight that all the financial figures I'll discuss today are non-GAAP, unless I state that the measure is a GAAP number. A GAAP to non-GAAP reconciliation can be found in the tables of our press release, which is available on our website.

Gross profit for the second quarter was $18 million, representing a gross margin of 68.8%, compared to a 66.2% gross margin in the same period last year. This increase was due to sales growth in our higher-margin, Small Business products, coupled with efficiencies in data storage.

Overall, we're happy with our Q2 gross margin profile and continue to project expansion in our gross margins for the full year 2013, as compared to the full year 2012.

Operating expenses totaled $18.5 million in the second quarter, compared to $16.2 million in the same period last year.

Looking into the components, research and development expenses were $4.7 million or 18% of revenue, compared to $4.8 million or 23% of revenue in the same period last year.

As Dave outlined in his comments, our research and development efforts are and will continue to focus on new innovative solutions aimed at keeping small businesses running smoothly.

Sales and marketing expenses were $11.1 million or 42% of revenue, compared to $9.8 million or 49% of revenue in the same period last year. The reduction in sales and marketing expense as a percentage of revenue is a result of our maintaining a flat media spend, consistent with our guidance earlier this year, combined with an evolving go-to-market model focused on indirect distribution channels.

General and administrative expenses were $2.6 million or 10% of revenue, compared to $1.7 million or 8% of revenue in the same period last year. The increase year-over-year is due principally to additional personnel and professional service costs associated with supporting our overall growth and the increased administrative requirements of operating as a public company.

Non-GAAP net loss improved to a loss of $431,000 this quarter, compared to a loss of $2.9 million in the same period last year, and was significantly ahead of our expectations. Our non-GAAP net loss excludes $1.2 million of stock-based compensation expense, $400,000 of patent litigation expense, $214,000 from the amortization of intangible assets, and a $107,000 lease exit charge. Our non-GAAP net loss per common share was $0.02 this quarter. This compares to a non-GAAP net loss of $0.11 in the second quarter of 2012.

On a GAAP basis, our net loss was $2.3 million or $0.09 per common share this quarter, an improvement compared to a loss of $4.2 million or $0.17 per common share in the same period last year.

Cash flow provided by operations for the quarter on a GAAP basis was $3.4 million, compared to $1.4 million in the same period last year. CapEx for the second quarter was $2.2 million, compared to $3.5 million in Q2 2012, the improvements largely reflecting storage efficiencies I mentioned earlier.

Free cash flow was $1.2 million, this compares to a free cash flow burn of $2.1 million in the same period last year. Our cash, cash equivalents and short-term investments totaled $58.5 million, compared to $55.3 million as of December 31, 2012.

Now let's move to the third quarter and full year 2013 guidance. Starting with the third quarter, we expect total revenue to be in the range of $26.9 million to $27.1 million, and non-GAAP net loss per common share to be in the range of $0.07 to $0.08.

For the full year 2013, we are increasing our revenue guidance, and we expect total revenue to be in the range of $105 million to $106 million. In addition, we are narrowing our non-GAAP net loss per common share to be in the range of $0.34 to $0.36.

Carbonite's expectations for non-GAAP net loss per common share for the third quarter and the full year excludes stock-based compensation expense, patent litigation expense and amortization expense on intangible assets, and assume a tax rate of 0% and weighted average shares outstanding of approximately 26.2 million and 26 million, respectively.

Our expectation remains that we will be free cash flow breakeven to positive every quarter in 2013, excluding the cash impact of one-time items such as non-GAAP adjustments for the potential cash impact associated with the lease abandonment of our Boston data center, which we previously disclosed.

Turning to CapEx. We expect that we will continue to realize some level of efficiencies in data storage and project our full year 2013 CapEx to be slightly lower than our spend in 2012.

Overall, our strong Q2 performance reflects the demand we're seeing from small businesses for easy-to-use, secure and affordable backup and business continuity solutions. We continue to execute on our strategy to penetrate and take share in the small business market, expand our indirect distribution channels and bring innovative business continuity services to market, and we look forward to continued success in the second half of 2013.

Operator, I think we're ready to begin the Q&A session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We'll hear first today from Rob Owens of Pacific Crest Securities.

Ben McFadden

This is Ben, on for Rob. I was just wondering if you guys could give us an update of how things are going with the -- both Comcast and the Staples relationship?

Anthony Folger

Sure, Ben. It's Anthony here. [indiscernible] to the -- both Comcast and Staples relationships are progressing nicely. We went live with both of those in Q1 of this year, and I think we're seeing pretty good traction with both. We're hopeful for improved traction as the year goes on. But it's probably still a bit early in terms of development of those relationships to start breaking out revenue or guiding numbers from those.

Ben McFadden

And then also, could you maybe give us an update also, kind of where you are as far as expanding the channel for your SMB solutions? And maybe, I don't know, if you have an updated figure on how many resellers you have now?

David Friend

You know, I'll let Anthony...

Anthony Folger

Yes. We are -- I think, expansion in the indirect channel continues to progress pretty nicely. I think we're happy with where we're at. In terms of production from the indirect channel, right now, we're running at just about 3,750 resellers, and those are productive resellers. So those are resellers currently carrying an active Carbon subscription.

Operator

Moving on, we'll hear from Richard Davis with Canaccord.

David E. Hynes - Canaccord Genuity, Research Division

Guys, it's DJ. Maybe you could talk about seasonality in the SMB bookings? And how you're thinking about bookings growth in the back half of the year?

Anthony Folger

Sure, DJ, it's Anthony here. Now we haven't -- Small Business for us, right now, is growing off, what I'll say, a relatively small base but becoming pretty significant in terms of the overall mix. We haven't really experienced a lot of seasonal trends. At this point, we don't have big government business or anything other than sort of the traditional Q4 budget flush. A couple of points to note, in Q4 and in Q1, we do have a large pool of renewals associated with the old legacy business product that we had. And that can have some influence on our numbers, I wouldn't necessarily call it a seasonality in terms of the business model, but certainly, it affects the numbers. I think until we're at a scale, where we can sort of bury those, it's going to continue to move the needle a little bit in Q4 and in Q1. Otherwise, we'll continue to see really high growth rates on the Small Business side. We haven't seen seasonal trends affect that business yet.

David E. Hynes - Canaccord Genuity, Research Division

Okay. Got it. And then, Dave, maybe you can talk about brand awareness on the SMB side. I mean, clearly, you guys have established a leading position on the consumer front, but maybe talk about how brand awareness plays in as you try and build out the channel, compete with vendors who have been focused on the SMB market for, perhaps, longer than Carbonite?

David Friend

Sure, Willie. The answer to that will be largely anecdotal but, certainly, brand awareness has been a big factor according to the salespeople. And the inbound traffic, so we've acquired -- we're getting a number of resellers at this point. So we've acquired most of those resellers, almost entirely through inbound calls. And so, I don't think that would happen without the brand awareness. Otherwise, we would be out there beating the bushes trying to sign these people up. And instead, we're just complacently answering the phone and taking orders on our reseller portal on our website. So I think it's having a big impact. I mean, when you look at the total number of businesses that have purchased our business solution right now in a very short period of time of 1.5 years or something like that, we've catapulted past nearly all the competitors in this space in terms of total number of businesses using our product. And what we hear, obviously, is small business people listen to the radio, they watch TV, very high awareness of Carbonite. And resellers tell us that, that's a big factor in their wanting to resell our products because when they think of small business and say, "It's time to get rid of this old tape backup system and go to something more modern. "And the business owners says, "Like, what?" they say, "Carbonite." And more times than not the small business owner has heard of Carbonite, it makes sense, it just makes the sale a whole lot easier for the reseller.

David E. Hynes - Canaccord Genuity, Research Division

Got it, and that's helpful color. And then maybe one more, if I can. You gave kind of a roll-up number on what you're seeing in terms of retention trends. I'm curious, more specifically, what you're seeing on the consumer side of the business? If there's been any change there? I imagine the improved -- or the consistent retention is being bolstered by adding all these SMB customers? What about on the consumer side? And then maybe if you can roll that up into any comments on customer lifetime value more broadly across the customer set?

David Friend

I'll turn that one over to Anthony.

Anthony Folger

Yes. I think we're seeing consistent renewal rates and consistent retention rates across both lines of business. Now, I think we're cautious about the future when it comes to the SMB segment. Just knowing that we're addressing that market through indirect channels, renewals can operationally tend to be a bit more challenging. It's something we're aware of or focused on. We haven't seen it affect the business materially at this point. So renewal rates and the retention rates continue to really stay in pretty close alignment to the historical norms. And for us, that's still providing us with a customer lifetime of north of 7 years, which I think is very solid in terms of where the industry is at, and delivers a, I think, a very good lifetime value across both lines of business and particularly on the Small Business side, which is why we continue to pour investments in there. We clearly see the value in terms of LTV on the Small Business side, and continue to invest aggressively.

Operator

Our next question today will come from John DiFucci of JPMorgan.

Kenneth R. Talanian - JP Morgan Chase & Co, Research Division

This is Ken Talanian, in for John. Actually, another SMB question. As we think about the 2 businesses you have that address the Small Business, the PC backup and the server backup, which one do you think has the higher growth opportunity? And separately, is there some kind of a titrate we can think about, relative to customers who either are purchasing new PC backup solution or have an existing backup solution, and that are then moving to a server solution as well?

David Friend

Let me see if I can answer that. Certainly, most business backup to date in the last 10 years, if I remember, is about server backup. I think the penetration of endpoint backup, meaning the laptops on your desk and that sort of thing, that has not been very common in the Small Business. And so, I would say that if you were to ask me what's going to be more important, I think the ability to backup servers is going to have the biggest sales potential for us, for the coming years. The way our pricing is working is we're making it painless for people who are coming to us to buy server protection, to add in endpoint production. And very little additional money, if any, the way our pricing works. So I think we'll get more uptake there from people who otherwise wouldn't be interested in endpoint backup.

Kenneth R. Talanian - JP Morgan Chase & Co, Research Division

Okay, great. And if I may, one more. We've seen an increasingly weak PC unit environment, yet your business continues to do well. I just wonder, are you seeing any impact from the weak PC unit sales that we've had for the past few years now?

David Friend

Yes. I would say that's been a factor, certainly, in the slowdown in the growth rate of our consumer business, there's no doubt about that. But our penetration with somewhere in the sub-1.5 million subscribers, such a small percentage of the installed base of PCs out there, that it's not as big a factor as it might be, if we were selling something that only got sold at the time when you purchased a new PC. So it's not like we're an accessory to a PC that totally depends on those sales.

Operator

Your next question will come from Brian Schwartz of Oppenheimer.

Brian J. Schwartz - Oppenheimer & Co. Inc., Research Division

Got a question for David and then Anthony. Two for David, actually. David, I wonder if you can update us on current -- it's been GA for a little while now. I guess what I'm really interested in is, moving forward, do you have plans to integrate that product with your SMB products? And what could be the timing in regards to that development work? It seems like that functionality would be highly complementary with the SMB product suite.

David Friend

Yes. Currents is primarily aimed at the SMB market. I'm sure there will be some consumers and some prosumers and SOHO customers who buy it for use with our consumer products, but it is primarily aimed at the SMB market. And I would say almost all the beta users that we have right now are Small Business users who want the ability to access their computer remotely, they want the ability to have file synced across multiple PCs, they want the ability to edit a file and so called, put it back. And those are all the features, and sort of like the collaboration around the office, those are all the features that are being addressed with Currents. And I agree with you. I think it will be -- once we start to promote it -- once it gets into GA and we start promoting it, it will be, I think a really nice kind of frosting on the cake for customers. And I sort of compare it to when you're out shopping for a new car, and your wife says, "Well, all I want is heated leather seats and good cup holders." And so, something as small as that may become a determining factor on what car you buy. And when I think these capabilities that allow you to extend the usefulness of your backup into sort of day-to-day office operations are going to become big factors in people deciding which backup system to buy.

Brian J. Schwartz - Oppenheimer & Co. Inc., Research Division

And, David, if I could ask you another question, really, on a different topic here. Just want to tap your brain in terms of how you're thinking about, really from a timing standpoint, stepping up your international strategy? Now it seems to me that the product suite, the the reseller channel is now getting large enough to really enter new geographies more aggressively with partners. So wondering how you guys are thinking about stepping up the international strategy at this point in time?

David Friend

Sure. Well I think both with our server backup product and with the new appliances that we announced a day or so ago, I think there's a ready channel there that's very similar to the reseller channel we have in the U.S. And indeed, we already have a few such relationships that we inherited through Zmanda that are working quite well in foreign markets. And whereas, I believe that it would -- was a difficult proposition for us to do anything like consumer in foreign countries because of the required ad spend and so forth, it's pretty clear that most small businesses can be -- internationally, can be accessed through reseller channel. And that reseller channel, whether it's in Germany or Japan or Korea or South America, it's pretty similar in the way that it operates to the reseller channel in the U.S. And Anthony had a lot of experience with that in his previous company, at Kronos [ph]. And indeed, that's pretty much the way they sold throughout the world with very high percentage of their revenue coming through these kinds of channels.

Brian J. Schwartz - Oppenheimer & Co. Inc., Research Division

And then, Anthony, 2 questions for you. One is on the gross margin line. Clearly, a major positive here in the quarter. Looks like the biggest expansion I've seen in a long time. And your commentary does state that you do think that, that trend is sustainable. I just wanted to maybe question you on the sustainability of that trend, because this will be meaningful, I think, for investors. As you're continuing to introduce new products here, is there going to be a need for additional data center capacity? Or is there, potentially, any other additional higher COGS cost that could be associated with these new products that could maybe mute the type of expansion that we've been seeing here over the last couple of quarters?

Anthony Folger

Yes. Brian, it's a good question. And I think in the remarks I had, I really wanted to remain, I would say, cautiously optimistic on the margin expansion. Q2 was certainly a good quarter in terms of expansion. I think the increasing sales from SMB products and really, a lot of the storage efficiencies that we're continuing to get, I mean, putting higher density drives into production, continuing to increase our operational efficiency in our data centers, all of that led to some pretty healthy expansion. As we look at the second half of the year, we've got the ability and we do send new products out on third-party storage infrastructure from time to time. We did announce the beta launch of a new line of hardware appliances yesterday. And both those things, I would say, could mute further expansion. And so really, when I look at gross margin, I'm looking at full year 2013 versus full year 2012. And I expect to see a couple points of expansion there. I don't expect it to be quite as dramatic as it was last year, when you look at 2012 versus '11. But again, I'm sort of taking a full year view on margins, trying to be cautiously optimistic in saying I do expect a few points of expansion for the year, and I think Q2 was a good indicator of that.

Brian J. Schwartz - Oppenheimer & Co. Inc., Research Division

One last one for me and I'll pass it along. Just looking for an update on the integration work with Zmanda. Clearly, we've seen all the success you've had on the product side. How about on the back-office side, in terms of integrating the business -- businesses? Are there still areas left where you're currently running duplicative processes that still need to be consolidated and could be an area of, maybe, some slight leverage here, as we look out into the second half of the year and into next year?

Anthony Folger

Thanks, Brian, I don't think that there's a lot less -- I mean, you're right, from a product standpoint, I think we've done a lot of good integration work and the release of Enhanced Server Backup certainly is a reflection of that. We're now selling well-demanded products directly through our website, our sales force, into our channel partners. And from a back-office standpoint, I think the integration work is largely complete. I wouldn't expect whether maybe some duplicative process is still in place, it's pretty minor. I wouldn't expect that we're going to see a leverage from that in the second half of the year.

Operator

Moving on, we'll hear from Ben Rose with Battle Road Research.

Ben Z. Rose - Battle Road Research Ltd.

A couple of questions on the new appliance line. I congratulate you on announcing that. For David, what is the inspiration for, essentially, going into the hardware business? And could you speak a little bit to this sort of hybrid strategy of addressing the cloud, but also the data center as well?

David Friend

Yes. So I guess I would put it this way. If the server in my dentist's office died tomorrow, he wouldn't be able to schedule appointments, he wouldn't know who's coming in next, he wouldn't be able to access anybody's dental records or x-rays. Basically, he would be dead in the water until that server was fixed. And when we look at that kind of customer, and there are millions of potential customers like that just in the U.S., his concern is not just protecting his data but his concern is, "I need to get back up and running quickly." So -- because downtime is what you're really worried about. And obviously, there's no way to get back up and running if you don't have a backup, so that goes without saying. But if the issue is the hard drive in my server crashed, and I need to restore and get it operating quickly, there's -- that suggests other solutions. And that's where the appliance really came in, because that dentist should have this $99-a-month box sitting there right next to his Dell server. And in the event that, that Dell server crashes, the backup should be able to be restored to a virtual machine on the appliance and within a very short period of time, I'm talking minutes, maybe an hour, that appliance should be able to pinch-hit for the dead server, until he gets that server fixed. And it's just -- it's an obvious thing when you go out and visit small businesses and you say, "What is it that this person is really worried about and what is it that would really impact his business?" And it's difficult to do all of that just with software, it's too complicated for a small business. So that's where I -- we got the idea for, let's just put the whole thing in one box and make it really simple, and the instructions are you open the box, you take out the appliance, you plug in the electricity, you plug in the ethernet and then you call the 800 number and let Carbonite do the install for you remotely. That's the latest thing that's going to work. And I'm hoping that we will see one of these little Carbonite appliances sitting next to every server in every small business in the country someday.

Ben Z. Rose - Battle Road Research Ltd.

Sounds good. And just a follow-up question. Have you identified hardware partners from whom you might source the actual hardware? And I guess a follow-up question would also be for Anthony. Do we think that the gross margin structure for this line of appliances would be broadly similar to that of Carbonite as a whole?

David Friend

Well, I'll answer the first part, and the answer is yes, of course. We've been evaluating hardware for the last 3 or 4 months. And we're actually shipping, as we've said in our press release, we're actually shipping a fair number of beta units to customers this month. And those units, they are here and ready to go. So -- but the -- there are multiple vendors who can easily provide this hardware. We're doing a little bit of customization, but it -- there's no reason why you couldn't easily obtain this kind of hardware from any number of computer -- white label computer vendors.

Anthony Folger

And I'll take the second part of the question, Ben. I think that -- we're, I think, getting increasingly good at data storage, certainly within our data centers. And the objective for us was to take a slice of that and put it on trend with our Small Business customers. And so, we did leverage a lot of the same channels, a lot of the same supply chain that we used for our data centers, where we've got really pretty good economies of scale in order to source the appliances. And so we can think that the gross margin profile that we'll get from the appliance will be pretty similar to the gross margin profile that we've got now. And we're not really projecting any degradation in the margin, at this point, of the appliance.

Operator

Your next question will come from Bhavan Suri of William Blair.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Probably just a couple quick questions for Anthony before I turn it over to David. Anthony, what was the channel as a percentage of bookings? Maybe I didn't get that number.

Anthony Folger

Yes, Bhavan. We actually aren't disclosing direct or indirect mix just yet. And the reason for that is we're working off a relatively small base again on a year-over-year basis. The indirect channel, overall, is growing very quickly as a percentage of our total bookings and as a percentage of revenue. As we get into, maybe, future quarters or maybe 2014, when things start to stabilize a bit, we may start to put out some metrics on it. But at this point, it's probably a bit early for it.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Okay. I guess, more importantly, you guys have sort of commented that, that could be 50% of bookings by year-end, is that still kind of the target? Or are we looking at maybe that being mid to -- mid next year?

Anthony Folger

Well, I think -- let me just make sure I've got my metrics right. I think, long-term, and certainly not by the end of this year, but long-term, I think, we would -- the growth in the Small Business segment could envision indirect channels contributing roughly 50% of total bookings when we're sort of steady state as a business, but that's, I would say, long-term modeling. The 50% that we've talked about or the close to 50% is when we think about Small Business and we think about new bookings. We still feel like we're on track, where roughly half of new bookings will come from Small Business products as we exit the year.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Okay. Okay. And then turning to just the 3Q numbers. 3Q has been seasonally a quarter where you increase spend on the consumer side with -- trying to target some of the go-to-school markets. And so I look at the sales and marketing line here, and just seasonally, should we envision that ticking up relative to that? Or is that something you guys are holding back on, given the sort of increased focus on the SMB?

Anthony Folger

Again, I think you should expect to see the same sort of seasonal factors, as you've seen in years past. So I -- we would expect still, with some of the strategic relationships we've got with Staples and others and the installed base of consumers that we've got, that we are still going to market to those folks for the back-to-school season. We're not really seeing -- I wouldn't say a significant change, at this point, in the business there.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Okay. And then turning it over to David. David, as you look at the hybrid -- the model with your new appliance offering, and you look at the not resellers but kind of a VARs or distributors or service partners, how do you envision that shifting? Because guys managing some of these appliances will probably be a different category of folks and maybe more attuned to the Zmanda set of folks. Do you envision sort of adding incremental marketing and distribution -- dollars for distribution out there? Or do you imagine leveraging the Zmanda guys right now?

David Friend

Well, Zmanda didn't have a very big network of resellers when we bought them. I mean, compared to what we have today, it's very small. So -- but I think that the point here is that if an appliance or any solution is complicated, it's going to limit you to a relatively small number of resellers who can deal with that level of complexity. If you can figure out a way to make the product really simple to use, and every Tom, Dick, and Harry, you know great fix shop can deal with it. And that's the objective. And my thesis has always been that if you come from a background of building a really simple consumer product, it's easy enough to use that your so-called "your mother-in-law" could install it. Then you're in much better shape to be able to create a product that a -- pretty much any reseller could deal with. And that's, I think, an advantage for us over companies who have traditionally been in the enterprise space, who are trying to move down market and take what is inherently a very complex product and figure out some way to simplify it. That's very difficult, and rarely has proven to be successful in the market.

Bhavan Suri - William Blair & Company L.L.C., Research Division

All right. And then when you look at that market, there's not a whole lot of folks that do that. Do you see any competitors there at all today offering something similar? Or is this...

David Friend

In the appliance space?

Bhavan Suri - William Blair & Company L.L.C., Research Division

In the sort of hybrid office-use storage that will support a server failure right on your premise, and then have a more distributed back up in the cloud? It feels like no one's sort of crossed that hybrid model there at all. And I was just wonder if you've seen any competition there?

David Friend

The answer is yes. There are 2 or 3 very capable private companies that appear to be doing extremely well right now in this space. And I'd be happy to share some of that with you offline. But the results that I've seen from these competitors is quite encouraging, to put it mildly.

Bhavan Suri - William Blair & Company L.L.C., Research Division

No. Yes, the market is big enough to support multiple players.

David Friend

Oh, yes. Absolutely. And these other players, while they are all venture-backed companies, have little brand awareness at the present time. So I have no doubt that if we can produce a good product, we can be extremely competitive.

Operator

Our next question today will come from Tim Klasell of Northland Securities.

Tim Klasell - Northland Capital Markets, Research Division

Yes. First question has to sort of follow along with the last ones. With the appliance market and the Currents markets, you address -- trying to address the speed of recovery. Given the fact that with sync we think you can choose which files you need immediately, could that be used to increase the recovery time? And have you thought about putting Currents and the appliance together?

David Friend

The recovery time, it depends on what's happened. So if your server's hard drive fails, you need to do a complete restore. And that's the reason to have a local backup rather than just a cloud backup. One of the problems with a cloud backup is that it's nice and safe if the building blows up or somebody breaks in and steals all your equipment, you still got your copy in the cloud. But the recovery time is limited by the speed of the internet, and that is typically going to be, call it, 100x slower than it would be to recover off of a local backup, where you've got a multi-gigabit LAN. So that's the reason we want to have this hybrid approach, where if what's happened is the server has failed and you need to do a local restore to rebuild it, that's going to happen very quickly off of a local backup. And even more quickly if you're restoring to a virtual machine on the appliance itself. The other kind of failure that happens typically is a database file like a SQL Server file gets corrupted, and you need you to rollback to the way it was an hour ago or a day ago or a week ago. And that also is something the appliance will be able to do very quickly. And of course, a lot more quickly than restoring the whole machine because you're only, essentially, restoring a few files when you do that. So that should be, not instantaneous, but very close to it.

Tim Klasell - Northland Capital Markets, Research Division

Okay, great. And then going onto Zmanda. What is the attach rate that you're seeing with your customers taking Zmanda versus just taking the core backup?

David Friend

Well, Zmanda as renamed and enhanced as Carbonite Enhanced Server Backup, which is the product we introduced a few days ago, that was based on the Zmanda technology. That is now being marketed as its own product. So if somebody shows up in our sales queue and what they want to do is backup that server that's under the desk, that's what we sell them. And up 'til very recently, we weren't selling that as a standalone option. So that -- I think there's a big market for that. We get a lot of people who have been calling, looking for that kind of capability for obvious reasons, because that's pretty much what they've been doing with tape drives and external hard drives and all kinds of other more antiquated methods. So...

Tim Klasell - Northland Capital Markets, Research Division

Okay, great. And then one final question, and this goes to the gross margin questions. Amazon's out there and they're getting a lot of press about reducing the price of S3 and their other storage offerings on a fairly regular basis. Are your customers seeing that? And are they beginning to ask for similar types of reductions or do they see beyond just the price reductions and greater value and not pushing back too hard?

David Friend

Well, I don't think that a customer could buy just bulk storage from Amazon and achieve anything even close to what a backup system would do, like our Enhanced Server Backup, which has a lot of software functionality necessary to do a hot -- doing a hot snapshot of a SQL database that's in production, where the users don't see any interruption in service and so forth. That's very complicated technology and that's really where the value lies. I think if we were charging for storage and amount that was exorbitant compared to what you would pay for just bulk storage from somebody like Amazon, we probably would get some pushback. But the truth of the matter is that amongst backup vendors, we are typically the lowest priced by a considerable amount. And where somebody like Amazon might come into play in the future is it's they come in frequently and try to convince us that we ought to be storing more data with Amazon. They still can't match the price of our own internal storage, but that's not to say they won't in the future and for us it really doesn't matter. If they were able to do that, it would be beneficial to us, not harmful.

Operator

Moving on, we'll hear from Jaimin Soni of Bank of America.

Jaimin Soni - BofA Merrill Lynch, Research Division

A couple of quick questions. Anthony, it's good to see the bookings growth accelerate. Do you think, at some point, maybe in 2014, we could get to the level where bookings growth will surpass revenue growth?

Anthony Folger

Yes. I mean, as we talked about earlier in the year, the contract terms have remained pretty consistent at around a year, a little north of a year. And so, we have some deceleration in revenue -- in bookings last year and re-acceleration this year. Now the revenue growth rates are likely to follow that same trend. And we sort of expected that the 2 would converge this year, and they're starting to get a bit closer. We'd certainly like to be at a point where our bookings growth rate exceeds revenue in the near future, but we're not guiding on bookings at this point. And I would say we're optimistic that we'll continue to see strong growth throughout the year.

Jaimin Soni - BofA Merrill Lynch, Research Division

Okay. And I wanted to confirm if I heard it correctly on your CapEx guidance for this year. Did you say that it was going to be down year-over-year?

Anthony Folger

Yes. I think, historically, in the past couple of calls, what we've been holding to is CapEx in line, 2013 versus 2012. I think with some of the efficiencies we saw in Q2, we're likely to see CapEx come in slightly less in 2013 than it was in 2012. So now we continue to get better and a lot more efficient on our own structure in terms of managing storage, and that obviously flows back through to our CapEx line.

Operator

And that will conclude our question-and-answer session. I'd like to turn the call back to David Friend for any additional or closing remarks.

David Friend

Okay, thank you. Before we end the call, I'd like to thank everybody for joining us today. We think we had a good quarter, we're very pleased with the result and the progress that we're making, both in the marketing side and also in the new product side. And I'd like to, at this time, recognize and thank the team here for an outstanding job in the last quarter. And we look forward to speaking to you all again in 3 months.

Operator

Ladies and gentlemen, that will conclude today's conference. We do thank you all for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Carbonite Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts