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Carbonite (NASDAQ:CARB)

Q3 2013 Earnings Call

October 30, 2013 5:00 pm ET

Executives

Emily Walt

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

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

Analysts

Ben Z. Rose - Battle Road Research Ltd.

John S. DiFucci - JP Morgan Chase & Co, Research Division

David E. Hynes - Canaccord Genuity, Research Division

Ben McFadden

Kash G. Rangan - BofA Merrill Lynch, Research Division

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

Mark J. Zgutowicz - Northland Capital Markets, Research Division

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Carbonite, Inc. Third Quarter 2013 Earnings Conference Call. [Operator Instructions] I would also like to remind you that today's conference is being recorded. And I'd now like to turn the call over to Ms. Emily Walt, Director of Investor Relations.

Emily Walt

Thank you, operator. Good afternoon and thank you for joining us today to review Carbonite's third 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 this call, we may make statements related to our business that will be considered forward-looking statements under federal securities laws. Words such as, but not limited to, plan, expect, anticipate, believe, target, goal, estimate, could 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. These 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 reference our annual report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC, which is available on their website or on our website under the Investor Relations section.

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. Reconciliation to the most directly comparable GAAP financial measures can be found in our press release, which is available on our website at www.carbonite.com, under the Investor Relations section. Also, please note that our webcast and a recording of today's call will also be available on our website.

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

David Friend

Thanks, Emily. And I'd like to start by thanking all of you for joining us today for our third quarter 2013 conference call. I'm pleased to report that revenue and free cash flow both came in at record levels, and we had our first ever quarter of positive non-GAAP earnings. But first, I know that many of our employees listen in on these calls, so I would like to take this opportunity to thank all my dedicated colleagues at Carbonite, who continue to drive our success.

Overall bookings growth for the quarter was roughly 14% year-over-year, reflecting flat bookings in our consumer business but a blistering 80% year-over-year growth rate in our SMB bookings. Retention rates on our consumer business are still at near-record high rates, and this part of our business provides a healthy and reliable cash flow. However, we continue to deemphasize spending on new customer acquisition on the consumer side of the business, redirecting our marketing dollars and efforts to the SMB side of the business, which is where we think our future lies.

So while there was little or no growth on the consumer side of the business, we're very excited about the continued successes we're having in the SMB market. Last quarter, we talked about the growing importance of ours and other channel partners in reaching our SMB customers. Our channel network now totals over 4,000 resellers. It's significant that we have built our reseller network with nearly 0 outbound sales effort. Instead, resellers are coming to us because their customers are asking for Carbonite by name. To accelerate the growth of channel sales, we have started to build multi-tier distribution. And during Q3, we announced our first major distribution partnership with Tech Data. Tech Data markets to a network of over 50,000 resellers. We expect channel sales to accelerate, as we engage more distributors like Tech Data.

On the product front, at the end of Q2, we completed the second phase of our integration with Zmanda, the server backup company that we bought last year. This phase of the integration has allowed us to start selling server backup directly through our website and our in-house sales team. Our Zmanda-based product, which we call Enhanced Server Backup, is off to a strong start. Unlike most of our competitors in the server backup market, Carbonite offers a complete solution, including backup for database servers, file servers, desktop PCs and Macs, laptops and smartphones. And unlike legacy products, Enhanced Server Backup is not just local backup software, it's a hybrid solution that combines local storage integrated with Carbonite's cloud backup. The enhanced server subscription includes a minimum of 250 gigabytes of cloud storage.

Pricing is another point of differentiation for Enhanced Server Backup. While most of our competitors use the traditional per-server pricing, Carbonite backs up an unlimited number of servers for one flat price. In keeping with our reputation for simplicity, we base price solely on the total amount of data stored in the cloud. We feel that this pricing model is more attractive to SMBs, who, in general, hate having to keep track of individual licenses as they add or remove servers from their data centers.

We've also gained an edge in the medical market by being one of the first cloud backup services to offer compliance with the new federal HIPAA regulations.

Strong sales of our business endpoint backup, coupled with a fast start for Enhanced Server Backup helped to drive the roughly 80% year-over-year growth in SMB bookings that I mentioned earlier. SMBs now account for approximately 27% of total bookings, up from 17% in Q3 of last-year.

Everything about the SMB market is better for Carbonite: higher ASPs, higher retention rates, higher gross margins, lower support costs, better return on marketing dollars, and a simpler path to international expansion.

While Enhanced Server Backup has given us a strong position in the server backup market, we are also excited about the beta release of our business continuity appliances. Based on the response to the beta tests, we believe there will be strong demand for both our channel partners and direct sales. We expect to begin shipment in limited quantities of the appliances through our partner network in Q4.

Business continuity is a phrase that you will hear increasingly from us in the future. The shift in focus to business continuity underscores that business customers are really concerned with downtime, not just backup. When a business's server dies, every hour of downtime can cost thousands of dollars in lost business. So getting back up and running is key.

In addition to making both local and cloud backups, our appliances can actually pinch hit for a dead server by restoring the server's backup to a virtual machine on the appliance. I think of it like a spare tire for your server infrastructure. If any server fails, the appliance can very quickly pick up the load. The business can get be back up and running in minutes instead of the hours or days that it takes to repair or replace a server.

Carbonite has always been about simplicity, and the way we're approaching the appliance line is no different. We have made the appliance installation easy enough that any small business can do it themselves. Just plug in the power, plug in the ethernet, and call the 800 number on the box. Carbonite's technicians can do the rest. But the most impressive thing is the price. $99 per month for the entry model gets you the appliance with 1 terabyte of local backup and 500 gigabytes of cloud backup. We think this pricing model is far more attractive than the traditional hardware sales model. Our simple month-to-month subscription, derisks the purchase decision and allows customers to upgrade it any time without penalty.

It's a lot to ask a small business to shell out thousands of dollars for a piece of capital equipment, but a $99 month-to-month subscription is a lot more appealing. We think the Carbonite appliance is simple to understand, simple to install, provides comprehensive protection, minimizes business interruption from server failures, and does so at a very affordable price.

We're very excited about the future of the SMB market and think it's the most dynamic market for the kinds of services we offer. Most SMBs don't need to be convinced to back up their computers. Most are already doing so, but to local devices like tape drives, hard drives and thumb drives. Our view is that over the next 5 years, most SMBs will abandon these labor-intensive manual backup methods in favor of cloud-based or hybrid solutions like ours. There are over 6 million SMBs in our target market. We currently have just over 50,000 of them as customers. So the market opportunity is enormous even without considering the international opportunity, which we estimate to be at least double the U.S. market.

In closing, our third quarter results reflect the work we are doing to become a strong player in the SMB space. This evolution does not happen overnight and I am pleased with the progress that we've made to transform ourselves into an SMB-focused company. Q4 will be another quarter of execution as we look to capitalize on the new product introductions, expanded distribution and new marketing campaigns. We expect a strong finish to 2013.

With that, I would like to turn it over to Anthony Folger, Carbonite's CFO. Anthony?

Anthony Folger

Thanks, Dave, and thank you all for joining Carbonite's third quarter 2013 conference call. During Q3, we continue to make excellent progress within our 3 major business themes for 2013: winning the online backup and business continuity market for our SMBs; increasing the scalability of our business by diversifying and growing our indirect distribution channels; and introducing new solutions that address the needs of small businesses.

Our Q3 results reflect our continued efforts on these key themes as bookings from SMB products increased 80% over the same quarter last year and accounted for 27% of total bookings, compared to 17% in the same quarter last year.

Total bookings increased 14% year-over-year to $27.6 million, reflecting the 80% growth in SMB, combined with flat consumer bookings when compared to the same quarter last year.

Revenue for the quarter was $27.7 million, an increase of 28% over the same period last year. Customer retention for the quarter remained strong and in line with our historical average of 96% to 97%, and total customers at the end of the quarter were 1,514,000 compared to 1,384,000 in the same period last year.

While we're very pleased with our early success in the small-business market, we believe that the early results from our Enhanced Server Backup product, the availability of our business continuity appliance and the expansion of our indirect distribution channels position us to address a much larger SMB audience, where we can continue to capture market share.

Let's now turn to cost and margins. All the financial figures I will 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 third quarter was $19 million, resulting in a gross margin of 68.7%, a 140-basis-point improvement over our gross margin of 67.3%, in the same quarter last year. Our gross margin improvement is due to sales growth in higher-margin SMB products, coupled with lower storage costs and operating efficiencies realized in our data centers. We continue to project expansion in our gross margins for the full year 2013, as compared to the full year 2012.

Operating expenses totaled $18.7 million in the third quarter, compared to $16.4 million in the same period last year, primarily due to the investments we're making to support our growth and enhance our position in the SMB market. Research and development expenses were $4.9 million, or 18% of revenue, compared to $4.6 million, or 21% of revenue, in the same period last year. The increased spend reflects our focus on developing new innovative solutions, aimed at keeping small businesses running smoothly.

Sales and marketing expenses were $11.4 million, or 41% of revenue, compared to $9.9 million, or 46% of revenue, in the same period last year. Our increased spend reflects investments made in our SMB go-to-market strategy, including additions to our inside sales team, and the increased spend on marketing activities aimed at SMBs.

General and administrative expenses were $2.4 million, or 9% of revenue, compared to $1.8 million, or 8% of revenue, in the same period last year. Our increase spend largely reflects increased headcount necessary to support our overall growth.

Overall, I'm pleased with our measured approach to expense management in Q3. We were able to deliver new products targeting SMBs, continue repositioning our go-to-market efforts, and at the same time, deliver the first profitable quarter in the company's history.

Non-GAAP net income was $247,000 this quarter, compared to a loss of $1.8 million in the same period last year and was significantly ahead of our expectations. Non-GAAP net earnings excludes $1.2 million of stock-based compensation expense, $37,000 of patent litigation expense and $214,000 from the amortization of intangible assets.

Cash flow provided by operations for the quarter, on a GAAP basis, was $2.4 million, which equaled the cash flow provided by operations in the same period last year. CapEx for the second quarter was $1.6 million, compared to $1.8 million in Q3 of 2012, with reduced spending levels largely reflecting the storage efficiencies I mentioned earlier. Free cash flow was $1.4 million and includes $972,000 of cash paid for patent litigation, which has been expensed in prior periods. This compares to free cash flow of $567,000 in the same period last year.

Our cash, cash equivalents and short-term investments totaled $62.3 million, compared to $55.3 million as of December 31, 2012. Our cash position allows us the flexibility to investigate opportunities when it comes to growing our business either organically or through acquisitions.

Now I would like to turn to our guidance for the full year and fourth quarter. For the full year, we expect revenues to be in the range of $106.7 million to $106.9 million and non-GAAP net loss to be in the range of $0.23 to $0.21 per share. By giving you full year guidance, we know you could back into the Q4 expectations, but we thought we'll make your life a little easier and give you the ranges. For Q4, we expect revenues to be in the range of $28.3 million to $28.5 million and non-GAAP loss to be in the range of $0.04 to $0.02 per share. Thus far in 2013, Carbonite has experienced revenue in bookings growth, particularly with our SMB products, consistently high customer retention rates, expanding gross margins and a growing cash position. Though the current IT environment may be somewhat uncertain, we're very optimistic about our opportunities both short and long term.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Ben Rose with Battle Road Research.

Ben Z. Rose - Battle Road Research Ltd.

In addition to the health science market, what other kinds of vertical market opportunities are you seeing for the SMB market -- for the SMB products, excuse me?

Anthony Folger

Ben, it's Anthony. I think we really haven't been vertically focused, I think because we have got a HIPAA-compliant product. Obviously, medical has been a strong vertical for us, and it has been evident in the SMB results. I think we tend to see success in some of the knowledge industries, so legal and accounting, as well. But beyond that, we're really not vertically focused.

Ben Z. Rose - Battle Road Research Ltd.

Okay. And is it fair to assume that the majority of sales for the SMB market are being made by the channel at this point? Or not yet?

Anthony Folger

No, not yet. I think we're still -- the company's heritage is sort of a direct business and that's how we've built both consumer and SMB, I think the transition to channel is the area where we're seeing the most growth, certainly, but it's not where we were seeing the majority of the sales coming on the SMB side just yet.

Operator

Our next question is from John DiFucci with JPMorgan.

John S. DiFucci - JP Morgan Chase & Co, Research Division

I have 2 questions. The first is on the appliance, which sounds pretty exciting, really interesting here, and it's little bit on the pricing. I guess, will there be an upfront cost to the customer followed by the subscription fees and how are you going to market here?

David Friend

Dave here. No, the -- it'll be $99 a month and we keep title to the appliance, so it will be kind of like the cable box that you get when you have a cable subscription. If you terminate your subscription, you have to send the box back.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Okay. And then so how is that going to have -- what kind of an effect -- I assume that's going to have a negative effect on gross margins, but depending upon the cost of the box to you, I guess it you could have very material negative effect. Can you just at least help us out a little bit in gauging it? Assuming this appliance works well with customers, which it sounds exciting and makes a lot of sense, what kind of effect that we might see going forward?

Anthony Folger

John, it's Anthony here. And the models we've got for the appliance right now show us having at least as strong a margin as we have today, if not slightly better. There is obviously some [indiscernible] a breaking assumption in our model, and we think it's pretty conservative. So we feel confident that the margins will be strong from the appliance. It certainly -- the entry point $99 a month is a low-cost piece of equipment from our perspective and we are leveraging the same supply chain that we've got for our data centers to handle the building and fulfilling appliances. And I think it's going to be pretty efficient and cost-effective to manage that way we were pretty optimistic about what we can do from a the margin standpoint.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Well, that's interesting because it almost sounds like you're distributing Carbonite's data centers to your customers' sites if you're able to keep margins like that. That's great. Also the second question too is on the consumer business. I guess, what should we expect going forward, since it is still about 3/4 of your bookings or a little less? I mean, the flat bookings this quarter, I mean, obviously, is going to affect the overall growth of you. Should we expect that to get a little better or should we just really sort of expect that to be flattish going forward?

David Friend

Yes, I mean, I think our short-term outlook hasn't really done -- or given our guidance for '14, but the short-term outlook is -- that it's likely to be relatively consistent to where we were in Q3. And so, obviously, it does affect the overall growth number because of such a large portion of the business, but I think, we are focused, I think, more strategically on the SMB side of the house. And wanting to do everything we can to continue the growth and continue the capture share on that side.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Well, it makes sense for the long term, but I guess upfront here you're just going to see it a little bit in the aggregate growth numbers.

David Friend

I guess I would say if you take your pencil to that one you will see that with the growth numbers in the SMB side of the business that after not too long a period it's not going to have much impact.

Operator

And we will take our next question from Richard Davis with Canaccord.

David E. Hynes - Canaccord Genuity, Research Division

This is D.J., and I'm calling in for Richard. So just kind of on the bookings conversation here. As we think about Q4, I think it's historically been a large renewal period for kind of your legacy SMB product. Is that the case for what you're seeing in this coming Q4 and I guess what's the kind of incremental contribution we could expect from renewals on the SMB side as we think about modeling bookings in Q4?

Anthony Folger

Well, we don't really guide on those specifics, DJ, but I think to answer your question, yes, we do expect to see the same sort of contribution from the SMB legacy renewals that we've seen in the past. And so we expect SMB as a percentage of total bookings certainly they come in higher. And as we said earlier in the year, when we close 2013, we expect that roughly half of the new bookings are going to be coming from the SMB as well. So I think those are 2 things that we'll be keeping an eye on in Q4.

David E. Hynes - Canaccord Genuity, Research Division

Okay. Got it. And then maybe strategically, I guess, as you kind of transition to a largely channel business, where do you see sales and marketing settling as a percent of revenues and kind of a target operating model? I mean, is it 20%? Is it higher than that? I mean, how do you think about this long term?

Anthony Folger

Yes, I mean, I wouldn't want to peg into a specific number right now. It's -- I would say -- I'll tell you it's 20% and probably something more in line what you would see in the industry for high-growth SaaS companies sort of in our peer group. So I think -- the other point is, it's an area where we expect that we will continue to get leverage in the model.

Operator

And we'll take our next question from Rob Owens with Pacific Crest Securities.

Ben McFadden

This is Ben for Rob. I just had a -- first question. First question was just kind of -- I think you just mentioned, so are you still expecting the SMB to be close to 50% as you close the year because it's still 27% in Q3? Just kind help me understand exactly how that is going to ramp over the next 2 quarters or so?

Anthony Folger

Sure Ben, it's Anthony here, and I think the metric we're looking at is roughly half of the new bookings. So 27% is the total bookings number.

Ben McFadden

Okay. And are you guys willing to disclose an updated SMB subscriber count at this point in time?

Anthony Folger

No, we are not putting out the number right now. It's -- we mentioned, I think, at the end of Q1 that it was over 50,000 and it continues to run over 50,000 and were adding new SMB subs at a pretty healthy clip each quarter. So I think when we hit another milestone, we may consider putting something out.

Operator

[Operator Instructions] We will go next to Kash Rangan with Merrill Lynch.

Kash G. Rangan - BofA Merrill Lynch, Research Division

One with respect to the appliance. I'm a little bit torn there. You guys have been 100% cloud, but how do you think philosophically that putting a box in the customer premise still makes backup as a cloud-based service a marketable concept within the broader industry? And also associated with that, have you given thought to how you depreciate the useful life of the appliance and how does the accounting work from a cost perspective? And then I have a follow-up question.

David Friend

Well, let me answer the first part. This is Dave here. The biggest objection that people raise to online backup in general is speed and that's -- the limiting factor there is the speed of people's Internet connections. And that's probably the biggest deterrent to people adopting cloud backup. It is pretty clear to us that having a hybrid approach is really the right way to go because if I have an appliance sitting next to my server, I can have that server backed up in, literally, in minutes, and if the server fails, not only can I restore the data in minutes, where it might be hours or days to restore from the cloud, but with the way we're architecting the appliance, it's the appliance itself that can actually pinch hit for the dead server by spinning up a virtual machine on the appliance and allowing people to run -- continue to run their business off of the appliance. So you get the best of both worlds. You get the speed of a local backup, but you still have a copy of your data in the cloud because in the background, the appliance is streaming all your data up to the cloud. So if the whole building burns down, or if you have a flood, or some kind of disaster of that sort, where the appliance is also destroyed, you still not out of business because you have the copy in the cloud. And also because you have a copy in the cloud, you can also pull out your iPhone and access any of your files remotely, which is an increasingly popular feature. So I think the appliance by itself, if it didn't have a cloud component, would be short. I think cloud only is short in a number of respects relative to local backup. So I think this hybrid approach is really the cat's meow and it's going to be -- reaction to it, initially, has been extremely positive both with the customers, our beta program, and also the buyers [ph] and resellers who we have been talking to, who were anxious to get their hands on it.

Anthony Folger

And I guess, to answer the second part of the question from an accounting standpoint, fundamentally, we look at the appliance as taking a slice of our data center and putting it on front [ph], and we will depreciate the assets the same way that we appreciate the assets that we've got in our data centers right now.

Kash G. Rangan - BofA Merrill Lynch, Research Division

Okay. And would that, I guess, not create much of a change to gross margins, I suppose, going forward?

Anthony Folger

Correct.

Kash G. Rangan - BofA Merrill Lynch, Research Division

Okay. And the second and final question is, with respect to your bookings growth rate, I know that you guys have talked about the bookings growth rate is not a meaningful indicator, but at the same time, I just looked at the bookings growth rate is slowing down in the past few quarters. Can you talk to the strength of your bookings that may be not apparent on the balance sheet itself, and how should -- why could we be wrong at interpreting the slowing bookings as a sign that revenues are going to be slow down. I'm sure there's a good answer from your end, and I wanted to make sure that I'm not completely off base here.

David Friend

So I think in terms of bookings growth, we saw an acceleration in both Q1 and Q2 to 20% and 24% year-over-year. And that was really comprised of some level of growth in our consumer bookings, so in both quarters, we had sort of that high single-digit to low double-digit growth on our consumer business line. And I think because of the size of that business line, when you take 5 or 6 or 7 points of growth away, you end up with an overall growth rate in the mid-teens. Now combine that with, I would say exceptionally high growth on the small business side, 80%, roughly 80% this quarter, I think that's really the underlying story and that's where a lot of the incremental investments for the business are focused right now. And strategically, it's a lot of our focus as well. So we think that over time, as the SMB segment makes up a larger and larger portion of the business, obviously, any effect from consumer will have less of an impact. When we think about projecting growth out in terms of revenue and how the bookings will translate into revenue, we've got an average subscription term of just about 1.2. So that's 14 to 15 months. So generally speaking, bookings will be a leading indicator of revenue growth. And that dynamic can change, but generally speaking over the course of our average subscription term, the bookings will be recognized into revenue. And potentially if we're -- if our terms change or if our average order value changes significantly, then we can move the dial on revenue, so that it doesn't map exactly to bookings. But I think when we think of the dynamic, that's how we look at it.

Operator

And we'll take our next question from Brian Schwartz with Oppenheimer.

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

One just quick follow-up on the bookings question. I think you gave us the bookings growth for the SMB business in the third quarter, the 80% number. Do you happen to have that number year-to-date, since you're kind of indicating that, that's a material directional number for the business?

Anthony Folger

Yes, I mean, year-to-date, Brian, overall, SMB is up about 94%.

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

And then, David, a question on the channel strategy here. Just wondering to date how many products in the suite are currently being sold by the reseller ecosystem and then kind of the follow-up question to that one is, what is the timeline that you foresee in terms of introducing the newer products into your channel?

David Friend

So the resellers are now selling all our products and that's fairly recent. But -- and the appliance will be launched exclusively through the channel. So we don't intend to sell the appliance direct until next year because we think that's the way we're going to get the fastest introduction.

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

And then, David, I did want to ask you, I noticed that during the quarter you did announce a business associates agreement with the health-care industry regarding a HIPAA compliance. I was wondering if you could share with us details on the potential impact of that announcement and the compliance of your solutions for the health-care industry?

David Friend

Yes, it's a new regulations and we were on it pretty quick and I think we benefited by getting some very good -- certainly some very good PR by being one of the very first cloud companies to comply with the new regulations and that's, I think, helped to sort of put us on the map with regard to health-care firms. And that's traditionally been a strong market for us anyway. And since we announced our early support for the new HIPAA requirements, so I think it's only accelerated or enhanced our image in that marketplace as a vendor that's serious about medical.

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

And then last question for me. David, I think you alluded to this a little bit in your introductory comments, you kind of piqued some interest about a potential international strategy on the horizon here over the next couple of years. Can you update us in terms of your thoughts there in the international? It sounds like you may follow your channel ecosystem that you're building out and to enter new geographies, but can you help us in terms of timeline? Is this something that could be an initiative next year? Or are we thinking 2015 or beyond?

David Friend

I have actually -- Anthony and our SVP of Sales and Marketing, Pete Lamson, are charged with working on that, so I'm going to let Anthony answer that question.

Anthony Folger

I think it's a 2014 initiative for us, Brian. And I think when we put out guidance next year, I think we'll address it a little bit more directly. But we are starting now with our planning and with some of the structuring that we need to do to support international operations. We're looking to higher folks on the ground likely as soon as possible and get our partnerships in place and we will leverage some channel relationships we have here in the U.S. for what we can do internationally and that's both on the go-to market side and in terms of our supply chain. I think many of those partners can be very helpful in terms of the international distribution. So I would say the plans are under way now. It's clearly a 2014 initiative for the company and we'll likely give you guys more specifics when we put out our 2014 guidance.

David Friend

Yes, I would just like to add that when we are purely a consumer business, we didn't see an easy path into the international market because, as you know, our marketing strategy in the U.S. was talk radio and TV and so forth. And that didn't translate very well to any international markets that we could find. Now with the SMB business being our primary focus a virus in the U.K., Germany and Japan, around the world are all very similar to a virus that we have here. So we think that we found, with the SMB product, a much, much similar path into the international market.

Operator

And we'll take our next question from Tim Klasell with Northland Capital Markets.

Mark J. Zgutowicz - Northland Capital Markets, Research Division

This is Mark Zgutowicz for Tim Klasell. Just wanted to ask a quick question. For the small business markets, are there plans on introducing any major new functionality, particularly those served by the MSPs, like such as image backup or DG [ph] applications, anything like that?

David Friend

The appliance does image backup, so that is new functionality. So we do a bare metal -- in fact that's how the appliance works. So we do a complete image of your server. And if your server dies, we can restore that image to a virtual machine on the appliance and so it works -- it will look and work exactly like your appliance did.

Mark J. Zgutowicz - Northland Capital Markets, Research Division

Okay. And then just a quick follow-up question. On the Web, your back service for 500 gigabytes looks to be around $1,800 for 3 years versus the Enhance Server Backup appliance for about $928. How did the margins compare for each of those on a 3-year time frame?

Anthony Folger

I'm sorry, could you just repeat that one again, Mark?

Mark J. Zgutowicz - Northland Capital Markets, Research Division

Yes, you got a -- the 2 offerings for the 500-gigabyte service of $1,800 over the 3 years or the Enhanced Service Backup appliance cost of $928 for 3 years. How does those margins compare over that time frame?

Anthony Folger

Well, right now the Enhanced Server Backup is sold as an add-on to the premier offering. So the premier offering is 500 gigs and that's really for endpoint and file servers. Enhanced Server Backup is an add-on to that product. And that's going to cover production databases. It's going to be Siebel, Exchange, Oracle, and functionality like that. So I wouldn't think of them at this point as mutually exclusive. They're generally sold together.

Operator

And, Mr. Friend, there are no further questions in the queue. I'd like to turn the call back over to you for any closing remarks.

David Friend

Okay, well, thank you all for joining us today on our earnings call and we look forward to speaking with you all again very soon.

Operator

Ladies and gentleman, this does conclude today's conference. We appreciate your participation.

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