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Barracuda Networks, Inc (NYSE:CUDA)

Q1 2014 Earnings Conference Call

April 24, 2014 05:00 PM ET

Executives

Adam Carson - Head of IR

BJ Jenkins - President and CEO

David Faugno - CFO

Analysts

Melissa Gorham - Morgan Stanley

Joel Fishbein - BMO Capital Markets

Sterling Auty - JPMorgan

Tal Leone - Bank of America

Jonathan Ho - William Blair

Eric Suppiger - JMP Securities

Rob Owens - Pacific Crest Securities

Michael Kim - Imperial Capital

Operator

Operator Ladies and gentlemen thank you for standing by. Welcome to the Barracuda Fourth Quarter and Fiscal Year 2014 Earnings Call. (Operator Instructions) This conference is being recorded today, April 24, 2014. I would now like to turn the conference over to Adam Carson; Head of Investor Relations please go ahead.

Adam Carson

Good afternoon, and welcome to our fourth quarter and fiscal year 2014 earnings conference call. As a reminder this call is being recorded, and the recording will be available until May 30, 2014. The recording of this call is copyrighted property of the company, and no other recording reproduction is permitted unless authorized by the company rights.

Today’s call will begin with our President and CEO, BJ Jenkins; providing highlights from the fourth quarter and fiscal year. Then our CFO David Faugno will review the key financial results for the quarter and fiscal year which ended February 28, 2014 and provide guidance for both first quarter and fiscal year 2015. At that point they will open the call for you questions. This afternoon, Barracuda issued a press release announcing the company’s financial results for the fourth quarter and fiscal year 2014. A copy of this release and supporting financial materials are available in the investor relations section of the company’s web site at barracuda.com.

This conference call contains forward-looking statements that involve risks and uncertainties including fluctuations in demands for the company’s products and the company’s effectiveness and controlling expenses. Actual results could differ materially from those projected in the forward-looking statements. These forward-looking statements apply as of today and the company undertakes no obligation to update this information. For more detailed description of potential factors of these risks and uncertainties, please refer to the company’s filings with the Securities and Exchange Commission.

Throughout the conference call we will reference some financial metrics that are derived in accordance with generally accepted accounting principles or GAAP, while other metrics are not in accordance with GAAP. This approach is consistent with how management measures the company’s results internally. A reconciliation of these non-GAAP financial measures to corresponding GAAP financial measures can be found in the financial tables of our press release. Non-GAAP results exclude stock-based compensation acquisition of intangibles and acquisition and other non-recurring charges.

And with that, I’ll now turn the call over to BJ Jenkins, President and CEO of Barracuda.

BJ Jenkins

Thank you Adams and good afternoon everyone. Thank you for joining us today as we report our fourth quarter and fiscal year 2014 results. We’re pleased with our results for the fourth quarter which closed a strong and exciting fiscal 2014 for Barracuda. Billings in the fourth quarter grew 18% year-over-year to $82 million and our revenue grew 15% to $60 million. We also had a very strong cash flow quarter including almost $20 million of cash from operations which David will share further details on shortly.

Geographically, we saw good demand on almost all geographies and had a particularly strong billing quarter in Europe. And in terms of product mix, we continue to see our faster growing categories become a larger piece of our overall mix, a trend that I’ll cover in greater detail. During the year, we grew total revenue by 18% to $234 million and we grew gross billings by 17% to $310 million. That 17% is an acceleration of our billings growth rate from 13% in the prior year. Our performance is the result of the stripes we are making in our mission to provide cloud connected security and storage solutions that simplifies busy lives of IT professionals, or customers.

We remain focused on addressing the security and storage needs of organizations with 100 to under 5000 employees, a segment which according to compass intelligence represents a $9 billion addressable opportunity. We continue to design our business model and products every step of the way to uniquely serve these customers. Looking back at the year, we brought several major new products to market, integrated our acquisition of Sign Now, expanded our global sales and marketing team, and extended our distribution network including the addition of Arrow Enterprise Solutions in North America. As a result of these investments, we significantly expanded our customer base and improved our installed base selling. There are a few key trends that we believe are driving our success.

First, broadly speaking within security, there has been no shortage of headlines security horror stories over the past year. This sophistication of threats and the complexity of how to address and prevent them are driving spend by IT organizations and businesses whose user or customer protection is mission-critical. We released a number of network and web applications security products during the year including the Barracuda firewall. We believe these new products have strongly positioned us to capture spending with our target customers and we began to see some of this in the fourth quarter.

Our security product continues to receive industry praise, including network computing, security products of the year for the Barracuda NG firewall and SG magazine awards for best web application firewall, best SME security solution for the Barracuda Spam firewall. The second trend is that the explosive growth of data continues to create a need for organizations to store and protect that information. As an evidence of this Barracuda Backup within our storage category has become one of the fastest-growing areas of our business. Our Backup product is designed to address key customer requirement, simplicity, service levels, and manageability; all of which are driving rapid adoption.

Customers are looking for end-to-end easy to employee and easy to manage integrated solutions, which we believe we are uniquely positioned to deliver with our hybrid model that allows for efficiency and rapid scalability. As evidence of our progress here, in IDC’s most recent quarterly purpose-built backup appliance tracker, Barracuda was cited as having shipped the highest volume of integrated systems in calendar Q4 and lead 2013 with a 53% market share.

Lastly, over the past few years many companies have been moving their application and business process to public cloud infrastructure. We have been making progress of becoming a larger participant and benefactor of this trend with our major security products integrated into Microsoft Azure and Amazon Web Services. As our customers evaluate, moving to the public cloud, we’re developing and layering products and functionality on top of these industry-leading infrastructure services. And we are becoming an infrastructure as a service provider ourselves with customers buying security and storage as a service from us and our partners. Whether or customers want on premise solutions, virtualized appliances, or cloud solutions, we have our product available however customers want to deploy them.

We have positioned our business model and engineered our product category to take financial advantage of these major trends. As we have discussed in the past, our total growth rate is an aggregation of an established content security business that historically accounted for over a third of our new sales, combined with our fast-growing storage and networking application security businesses. The mix shift towards our fast-growing categories continued in fiscal 2014. For the first time, we saw content security as a category become less than a third of our new sales for the fiscal year. To give you some perspective on the underlying growth, we are experiencing, in each of our business categories, I would like to share details on the number of new subscription we sold in fiscal 2014. This metric is the count of new energized update, instant replacement and cloud subscriptions that we sold.

Individual solutions, which we call subscribers, are measure of our installed base. Keeping in mind that we can sell more than one subscription with each solution that we sell, for fiscal year 2014 the growth rate in the number of new subscription sold for each of our product categories were as follows. Content security grew 8%. Network and application security grew 25%. Storage grew 34% and at an aggregate level this metric grew 21%. The subscription trends in our new business are representative of the mix shift we saw in total billings in 2014. Combined, our faster growing categories are becoming a larger majority of our total business. Since account of new subscriptions doesn’t factor in ASPs, I would like to note that pricing over the year remained fairly consistent. Our ASPs are typically in the range of the mid 6000s to the low 3000s with our storage products at the high end of this range.

Let me now share some of our more recent developments for each of our product categories. In network and application security, we had strong performance in the quarter where we have a number of relatively new products in the market. We saw increased demand for our NG firewall along with our Barracuda firewall X-100 and X-101 which we announced last quarter. During the quarter, we also announced the availability of our NG firewall for AWS and Microsoft Azure, allowing customers to protect and access their server infrastructures with VPN and security-enhanced remote access. A frequent customer use case for our next generation firewalls in public clouds is to establish the same levels of secured connectivity across multiple locations and manage security across those networks from a single pane of plans via the Barracuda control center.

With our NG firewall solution customers get the advantages of encrypted endpoint-to-endpoint communication, high-performance connectivity to the public cloud and high availability. We also extended the range of appliance versions for our NG firewall with the announcement of our F280 model providing next-generation firewall capabilities and a full gigabit Ethernet throughput to branch offices in remote locations. Also during the quarter we continue to make progress with our web applications firewall with our partners and Microsoft Azure and Amazon Web Services.

In Q3 we signed our first customer with this initiative and exiting the fourth quarter we had over 40 customers using Barracuda services in Microsoft Azure and your AWS. We see continued and growing interest in this initiative manifested by a building pipeline of deals. These deals have been what we would traditionally characterize as enterprise level and provide us an opportunity to expand beyond traditional focus. The customers we signed have recognizable logos, larger average deal sizes and potential for significantly more repeat buying. In storage we continue to build upon the success we have been experiencing in this category. Our Barracuda Backup and message archiver products experienced strong demand from customer during the quarter.

We made several announcements in storage during the quarter including the availability of our Backup as a service plan and the expansion of copy for companies with new features, updates and integration. And our Sign Now mobile e-signature application was adopted by UCLA for National Letter of Intent day, making UCLA one of the first universities to take advantage of this innovation, simplifying the process, applying accurate timestamp, and helping ensure that signed contracts are received as soon as they are executed.

Lastly, turning to security, the category continue to grow year-over-year. It is important to note that while a slower growing market segment our content security business offers a strong cash flow and our large installed base enables cross selling opportunities. One trend we continue to observe in this category is the choice of customers to increasingly deploy solutions at virtual environments. For example, our virtual solutions in the content security category grew over 30% year-over-year in fiscal 2014. Just after the close of the quarter we also announced that our Barracuda Spam firewall is now available on AWS to support customers migrating their emails to the cloud.

We also announced Threatglass, a free community resource where visitors can browse and analyze real-time web-based malware. Threatglass allows users to browse web site infections that date back to September 2011. In addition to screen captures of the infection, Threatglass displays various representations of anomalous network traffic across multiple protocols in both graphical and textual format. The back end system of Threatglass has been working internally inside Barracuda for a few years.

This system was designed in a large-scale, an automated manner that utilizes a thousands of virtual machines to visit URLs and web browsers to see what will happen to the browsers, their plug-ins and operating systems. This system has catalogued approximately 10,000 live webpage malware attacks, and adds new one each day. We believe that this tool can greatly help users to know which website had been infected, explore how infected websites could damage the browsers and computers and understand that trending volumes and impact of malicious websites on the Internet.

Turning now to customers; each quarter, thousands of IT professionals adopt or continue to deploy our solution in order to take advantage of our cloud connected services. Our number of active subscribers closed the year at over 205,000 up 14% year-over-year. We also continue to cross sell to our customers in our installed base. We saw a year-over-year growth rate acceleration in the number of multi product customers. We closed the year with more than 27,000 multi-product customers, a 26% year-over-year growth rate and a five point acceleration over last year.

As we discussed in the last quarter, when customers expand their portfolio to three or more distinct product lines, we call them Barracuda shops. We closed the year with more than 7800 Barracuda shops, growing 41% year-over-year. The growth in the number of Barracuda shops accelerated six points in fiscal 2014, up from 35% growth last year. Cross selling opportunities such as turning customers into multiple solution purchasers have been a factor in the growth in our storage and networking applications security product categories.

In summary, whether via attracting new customers with our products, cross selling to toward install base are bringing new products to markets, customers are choosing our solutions because they are easy, install, manage and use. And quickly provide value with huge returns on our customer investments.

We are the frontline the major IT trend such as mobile, cloud-computing and information growth. Our positioning within these markets continues to impact our financial performance and we see many exciting opportunities as we move into fiscal 2015. With that I’d like to turn the call over to David to detail some of the financial highlight and fiscal year 2015 guidance.

David Faugno

Thanks, B.J. We are pleased to report a strong fourth quarter to close out the year. Billings in the fourth grew 18% year-over-year to $82 million. As BJ mentioned we continue to grow billing across all of our key geographies and experience particularly strong earning in EMEA.

Our billings growth continues to driven by the shift in the mix of sales in our faster growing market. We are very pleased with billings growth this quarter particularly given the large account refresh activity in the fourth quarter of last year that drove a top Q4 compel.

Our performance in the fourth quarter plans out a solid fiscal 2014 in which we grew billings by 70% to $310 million. As a quick remainder as we move to revenue we recognized revenue per subscriptions over their contractual term but appliance revenues are recognized over a three year period.

Revenue in the quarter grew 15% year-over-year to $60.3 million again ahead of expectation. Appliance revenue in the quarter grew 12% to $18.3 and subscription revenue grew by 16% to $42 million.

Our fiscal year 2014, we grew total revenue by 80% to $234 million, subscription revenue grew 16% to $162 million and appliance revenue in the year grew 21% to $72 million. During the fourth quarter we added 7900 net active subscribers, closing the year with more than 205,000 active subscribers.

Renewal rates which we calculate on a dollar basis were 96.1% in the fourth quarter on a high side of our expectation of low to mid 90. Renewal rates for the year were 96.5% we continue to see adoption of virtual appliance subscriptions and the growth of data and the growth data stored not cloud as drivers for this higher renewal rates.

Gross margins in the fourth quarter were 80.2% up 70 basis points from last quarter primarily due to some rationalization of our datacenter operation; this was a strong gross margin in quarter. As we continue to invest in areas like our cloud service infrastructure we expect fluctuations in our gross margin profile from quarter-to-quarter.

Now moving on expenses, non-GAAP operating expenses in the fourth quarter were $44.1 million with 73.1% of revenue compare to 72% revenue in the fourth quarter of last year. Research and Development expenses for the fourth quarter were $11.2 million or 18.5% of revenue, compare to 15.6% of revenue in the fourth quarter last year and 19.1% in the prior quarter.

We continue to make investment in our product portfolio in the quarter. Sales and marketing expenses for the fourth quarter were $26.9 million or 44.6% of revenue, compared to 48.9% of revenue in the fourth quarter last year and 46.7% in the prior quarter.

As we’ve indicated sales and marketing expenses will fluctuate from quarter-to-quarter, but we expect to continue to gain leverage share overtime. Demo and administrative expenses for the fourth quarter was $6.1 million or 10% of revenue compared to 7.5% of revenue in the fourth quarter last year and 9.3% in the prior quarter.

Increased cost in this area were primarily driven by related legal compliance and IT infrastructure spending. Now turning to the bottom line, adjusted EBITDA a key metric for us, which adjust for the changes in deferred revenues and costs in the fourth quarter with ahead of outlook at $16.8 million or 28% of revenue compared to 24% revenue or $12.8 million in the same quarter of last year.

Cash flow from operations for the fourth quarter with $90.5 million or 32% of revenue. This is a sequential increase of over 80% and more than double from Q4 of last year. Adjusted free cash flow in the fourth quarter was $18.7 million or 31% of revenue, that is a year-over-year improvement of 84% and 11.7 points better as a percent of revenue.

Non-GAAP operating income in the fourth quarter was $3.3 million driven primarily by higher revenues. The non-GAAP tax provision which adjust the GAAP tax divisions for the non-GAAP expense adjustments was $200,000 in Q4. We anticipate improvement in our effective tax rate over the long term through changes to our corporate structure to more closely align it with our global business. Our non-GAAP net income in the fourth quarter was $3 million or $0.06 of earnings per share on a diluted share count of 53.6 million. This compares to non-GAAP net income of $3 million in the same quarter last year. GAAP net income in the fourth quarter was $3 million or $0.06 of earning per share, this compare to GAAP net loss of $1.8 million or $0.06 loss per share in the same quarter last year. The diluted share count in Q4 of fiscal 2014 was 53.6 million shares. Our Q4 GAAP results reflect a onetime tax benefit of $3.5 million, related to rationalization of our legal entity structure.

Capital expenditures in the fourth quarter were $1.8 million; the primary areas of capital investment continue to be IT infrastructure as well as our data center build out. Adjusted EBITDA for the fiscal year was $52.9 million or 23% of revenue above our prior outlook, cash flow from operations for the year was $42.2 million or 18% of revenue and adjusted free cash flow was 39.4 million or 17% of revenue also above our prior outlook. Our cash flow for the year was backend loaded as we anticipated and consistent with historic pattern.

Accordingly as we’ve indicated, we expect cash flow metrics in the first quarter to be lower due to a number of cash outlays including tax payment, customer and partner activities and other front loaded expenses we typically make in the first quarter. We would expect these quarterly cash flow trends to continue and overall expect to see some leverage of free cash flow in full year fiscal 2015. Now turning to the balance sheet, we closed the fiscal year with cash and equivalents and investments of $135.9 million up from $117.2 million in the third quarter. Finally deferred revenue at the end of the fiscal year was $313.2 million up from $298.8 million at the end of the third quarter, and $261.2 million at the close of the prior year due to a strong billings performance.

Now before I turn to guidance let me quickly share some general trends we see in our business, first we see growth across each of our business categories as well as across our major geography with particular strength in EMEA, the region had its billings quarter in the fourth quarter. Second we continue to see substantial diversity in our customer base. Even as we work through the large account refresh activity from prior period that I mentioned a few minutes ago. Third, ASPs and contract length remain consistent with recent period there’re no major changes there and fourth we continue to see linear results and good visibility due to our subscription model.

And with that let me now turn to our first quarter and full fiscal year 2015 guidance. We expect revenue in the first quarter of fiscal 2015 will be in the range of $63.5 million to $65 million. Guidance for non-GAAP operating income for the first quarter is between $2 million and $3 million. Non-GAAP EPS for the first quarter is expected to be between 2 and 3 times of earnings per share. To help you with your models you could assume a share count range of 54 to 55 million for the first quarter and a non-GAAP tax expense of $0.5 million to $1 million.

For fiscal 2015, we expect revenues to be between $269 million and $273 million. This range represents the year-over-year growth of approximately 15% to 17%. While we won’t be providing quarterly guidance for billings, we do want to give you an idea of where we expect to see billings for fiscal year 2015. We expect fiscal year 2015 billings to be in the range of $350 million to $355 million, reflecting growth of approximately 16 to 18%, we expect non-GAAP operating income for full year fiscal 2015 to be between $9 million and $13 million. Non-GAAP EPS for fiscal 2015 is expected to between $0.11and $0.15 of earnings per share.

We are modeling share count to be between 55 million and 56 million for fiscal 2015 and a non-GAAP tax rate range of 30% to 35%. That concludes our prepared remarks and now we’ll be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, sir, (Operator Instructions) first question is from the line of Keith Weiss with Morgan Stanley, please go ahead.

Melissa Gorham - Morgan Stanley

Hi. This is Melissa Gorham calling in for Keith. Thanks for taking my question. First question I had was on the net subscriber ads, you all had very solid net ads this quarter. I was just wondering if you could provide more color on whether you think that is related mostly to the ramping distribution partnerships or do you think it is more related to investments that you all have made internally in sales and marketing?

BJ Jenkins

Thanks Melissa, this is BJ. I will start off with that one. I think the reflection you see in net subscriber growth has really come about from the investments we made both in sales and marketing. The products and the differentiation and the architecture they have in the marketplace right now, and that customer acceptance are that, so specifically in storage with a 34% growth, it’s really the end-to-end solution, the differentiated product in that; transition is going on in the market to this type of solution, same in network and application security. I think our ability to bring next-generation firewall down to a market in a easily use and implement manner has been trying that growth. When we look at things like Arrow and the public cloud and what we are doing there that is just starting to take hold and really not impacting these numbers yet. So it’s really the result of the investments we have made over the last 18 months.

Melissa Gorham - Morgan Stanley

Okay, that makes sense. Then just a follow-up to your last point, in terms of deploying your solutions in the cloud based environments like Azure and AWS, could you maybe help us sort of baseline our expectations in terms of how quickly you expect that to ramp and how big you think that opportunity could be over time?

BJ Jenkins

I think, as we said this is the early days, one deal in Q3, 13 deals in Azure in Q4, and now you look where we are today? We have got to customers running Barracuda service in public cloud. So we are seeing a nice ramp. And the thing that gets us excited is these are large enterprise names that we haven’t typically dealt with, with higher ASPs. But with that said, it’s still small number of transactions in our overall business. But we cede scaling rapidly, given those numbers and we have got a healthy pipeline behind us and really good engagement with both Microsoft and Amazon. So we think there is a lot of potential there for us.

Operator

On expressiveness from the line of Joel Fishbein with BMO Capital Markets; please go ahead.

Joel Fishbein - BMO Capital Markets

Just a quick one for you on the distribution side of the equation. It looks like you guys added Arrow, started to kick in a little bit. I would love to hear, BJ, a little bit more color on how some of the distribution partners are going and where you are going to go from here.

BJ Jenkins

Yes, thank Joe, good to hear from you. On the Arrow side, I think when you enter into strategic long-term distribution arrangements it usually takes 12 to 18 months to fully ramp up. With that said, with Arrow we’re ahead of the internal plans we set. Again, to maybe give you a little more color, we on-board and in-house, fully operational 10 net new partners with them, we have another 18 partners that are well down the path and in-flight, and the number behind that, that were getting ready. A large part of this getting to scale, is signing of those partners and getting them operational. The number of quarter coming in has been great. We’re been -- for the ones that we have got enabled, what we see in terms of the business has been good. And as we thought it has been incremental business for us. I think if you look forward, we believe, we have those same type opportunities in Europe to expand distribution and it’s something what we’re looking at for the coming year.

Joel Fishbein - BMO Capital Markets

Just one follow-up for you, real quick. On the -- obviously the new products, looks like you brought adoption across the board. Is there any one that stood out for you that is doing better, or is it -- like it looks like across-the-board good adoption from some of the newer emerging areas?

BJ Jenkins

I think, the thing that we are really excited about is the next-generation firewall space. If you look, the new subscriber growth for us was 25%. But if you - underneath that, because some of the new products we offered in that segment, they’re growing substantially faster than that. And we look at that viz-a-viz, some of our peers who we compete within the marketplace and we feel like there is a real market willingness for this. They like the package Barracuda has put together and we are seeing a really strong growth there.

Operator

Our next question is from the line of Sterling Auty with JPMorgan; please go ahead.

Sterling Auty - JPMorgan

I wanted to drill in a little bit more on the storage side. Can you talk through little bit the competitive landscape that you are seeing and specifically what you are seeing at the different strata, at the very lowest end of where you approach the market all the way up to the higher portions, what differences are you seeing and what differences are you seeing from the different vendors?

BJ Jenkins

Thanks Sterling, and it’s great to hear from you. In storage we are in the right place with the right architecture, right pricing, right miles for the customers and then we are just benefiting from the fact that you’ve got competitors to that part of the market; like Symantec who has a lot of internal disruption going on. And in my opinion, it’s missed some product cycles. IBM, not performing well. We’re doing very well against them in our target market, and Dell also. We have seen a lot of disruption there. So I think we’re benefiting from that from type of competitive environment. We’ve got really differentiated solution with some competitors who are going through a lot of disruption. At the higher end, as we’ve rolled out larger appliances we’re at in backup now. We have an appliance it’s over 100 terabyte, so we’re starting run to and compete with some of the larger players and we do very well there. Again, for the same reasons, the end-to-end architecture simplicity and pricing matter and the ability to offer hybrid cloud in a really nice package where a lot of these larger players need to offer three or four of their products and stitched them together with services, puts them at a cost disadvantage. So we feel like we can keep pushing up as we expand the products capabilities and we really feel like in that sweets spot of the market, our competitors are really having a tough time right now.

Sterling Auty - JPMorgan

Great. Just one follow-up. The web application firewall market, people are nervous given the preannouncement by Imperva, but since they have both WAF and database, it’s kind of hard to tell until they report where the issues were. Can you just give us a little clarification in what you guys are seeing in the web application firewall market?

BJ Jenkins

We feel very good about that market and had a strong quarter with the product. Sterling, where customers are in their requirements looking for security first reverse proxy, architecture where a solution they’re choosing, and we feel good because we feel that market place has got room to growth not only on premise but in the public cloud, and we’re seeing it on both sides. So feel like we’re well positioned there, had a good quarter with the product and feel good about the market opportunity going forward.

Operator

Thank you. Our next question is from the line of Tal Leone with Bank of America. Please go ahead.

Tal Leone - Bank of America

How much of the quarter growth; and again, maybe you can’t quantify it, but talk about it -- how much of the quarter growth is attributed to new products? And how much of it is just general better execution, better focus, and etc? Second, typically how long do you benefit from an initial ramp because of a new product? How long does it take new products to kind of flatten out or get to slower growth rates? The second part of my question is about the financial to David. When I look at your sequential trends in operating expenses, I am just trying to open my spreadsheet here -- when I look at the sequential trends, you had some nice declines actually sequentially, almost throughout the OpEx lines. I am wondering, can you explain why did you have declines, and then what is the outlook because when I look at your guidance for next quarter, it looks like you are not predicting the same kind of declines the next quarter just trying to calculate the implied OpEx from what you said. Thanks.

BJ Jenkins

Thank Tal. And now I’ll hit on that first part and then I’ll have Dave jump in on the second part. We don’t look at new products versus products that are out, but I think pertaining to the question, we would tell you we feel like we’ve had better execution against all the products that we have out there. We have made investments over the past 18 to 24 months in sale resources and in covering the partners that we had. And I thought like our team has done a really good job of taking the differentiation we have in those products and going after the right opportunity and that’s really been across our product offerings. So, our feel is that it’s really been about execution for us in the marketing and in the sales and channel to reach those customers and close deals. And then Dave maybe you want to hit on the OpEx part.

David Faugno

Sure. Hi, Tal, this is Dave. So we did have a strong operating expense fourth quarter for sure primarily in the areas of sales and marketing. I think what one of the things dovetails would be just set of execution as we started to get some productivity out of the sales investment we have made in some areas. And as we’ve indicated as it relates to kind of guidance going forward, we believe we’ve got sustainable opportunity and we see some things that are working where we’re going to make the investment to support sustainable growth. So that’s built into what our guidance is bout at the quarter and annual level.

Operator

Thank you. Our next question is from the line of Jonathan Ho with William Blair. Please go ahead.

Jonathan Ho - William Blair

I just wanted to ask a little bit about the EMEA region, you talked about some strength that you expect to see there. Can you maybe give us a little bit more color as to what is driving that strength and maybe sort of rank order what those major drivers are?

BJ Jenkins

I think point out maybe a couple territories and where we’ve been doing well. In the Middle East region, we’ve been performing well and really there we’ve seen strong growth in west and in ADC and…** in Germany and Austria we continued to do very well with networks security, next-gen firewall and one of -- I think things we were very happy about we made some investments in some particular areas one that was really good for us to see was in Switzerland we had really strong storage performance and we worked really hard to develop partners in Switzerland that could offer a local service and backup to our customers and has worked very well for us.

So it’s varied by geography and opportunity but again I think this goes back to we’ve got our sales resources in a good position to capitalize no matter which of the opportunities presents themselves in the market they are in.

Jonathan Ho - William Blair

Got it. And just as a follow up to your discussion around the multi-product sales and the Barracuda customers, Barracuda shops rather. Can you give us a sense, when somebody buys two or three products are they then more likely to just potentially buy four or five products down the road? Is there sort of a network effect where once they go with a few products they are likely to go with an even broader sweet over time? Just want to get a sense if you guys have seen any sort of indications around that?

BJ Jenkins

We believe that is the case and the factors that go into that is when the customer has brought two or three products from us they begin to understand the ease of the powerfulness on the solution that it solves the customer problem. And then the really great support that they get. They also start getting the benefits of a single pane of glass management for multiple solutions, so they are getting more productive use out of their resources. And when we see that happen it’s like a snow ball and it’s just when does that next opportunity come up for us in a particular product area. So we see in those cross sell numbers that type of activity happening.

David Faugno

And Jonathon I’d just say some of that bears out, some of the numbers that we have disclosed in that you see the two products, the multi-product the branded multi-product customer growth from last year kind of 21% accelerate to 26%. But what we call at Barracuda shops, those that are adopting many solutions, that’s larger and growing even faster, I mean the growth rate is larger and growing and accelerating even more from 35% to 41%. So it’s absolutely what we see and I think what we have been starting to get better at and we’ll continue to work on is getting more and more customers into that mode, have been stickier and get more hand value out of that installed base.

Operator

Thank you. Our next question is from the line of Eric Suppiger with JMP Securities. Please go ahead.

Eric Suppiger - JMP Securities

Couple of questions, first off you talked about good traction in the firewall. Who are you seeing most in terms of your application firewall?

BJ Jenkins

In terms of our next-gen firewall Eric or our web applications firewall?

Eric Suppiger - JMP Securities

Next-gen firewall.

BJ Jenkins

Yeah, the folks we see frequently are Cisco, Check Point, WatchGuard, SonicWall would probably be the primary competitors we see in that marketplace.

Eric Suppiger - JMP Securities

Are there any competitors you’re displacing more than others?

BJ Jenkins

I’d say it’s been kind of equal across the board; there has been one that stood out more than others. I would say we do well against Cisco and some of the legacy products that are out there we have also done well against some of the smaller players.

Eric Suppiger - JMP Securities

And then you had said that your content the security subscriptions, number of subscriptions grew 8%, you were saying that your ASPs is held up. Can we assume that the content security revenue grew 80% range or is the mark on that not correct?

BJ Jenkins

Well I think you can look at growth in new subscribers. It’s historically aligned for the billings the total billings done which is going to vary from revenue a little bit. But I would tell that the ASPs have stayed stable. And then when you have to move to virtual, we’ve experienced over the last two or three years there is a little bit of headwind to billings because of you don’t have the physical appliance but then the subscription overall subscriptions grow over time and that’s been a benefit.

So that growth in virtual for us in the content security space is a good thing overall for us.

Eric Suppiger - JMP Securities

Then lastly you touched on the virtual appliances across the broader product lines, can you give us a general feel for what kind of contribution you’re getting from your virtual solutions versus the traditional physical appliances?

David Faugno

Eric this is Dave, I’ll address that one. We’ve historically probably the last couple of years seen decent penetration primarily into the email security but also into the rest of the content security portfolio of this virtual appliance form factor. We’re actually starting to see a pretty good ramp in the networking applications security of product categories, and we think that that has more and more opportunity to accelerate. Overall we’re seeing something that’s going to be in the range of 10% of total new billings on where you’re going to see the virtual appliance adoption with a heavier concentration in the constant security, but again there is faster growth in the other area of security. We don’t tend to see it very much in the stores category where we’re cashing lot of desks, cashing stores using just little bit more in the solution, but certainly in that security component of the business we’re seeing that kind of adoption.

Eric Suppiger - JMP Securities

In the current implementation for that -- the bulk of those virtual solutions, those are on-premise virtual deployments. It’s still the AWS is still a very small component to the virtual solutions; is that correct?

BJ Jenkins

Yes, that’s absolutely correct, Eric. It’s primarily on-premise right now with Azure and AWS stuff just really starting ramp now.

David Faugno

Yes, I would just add to that too Eric. Some of it is actually a partner deploying virtual and providing MSP services as well and there is the on-premise, there is the public could and there is semiprivate cloud where partners are effectively providing services and utilizing some of that virtual appliance of the structure.

Operator

And our last question is from the line of Rob Owens with Pacific Crest Securities. Please go ahead.

Rob Owens - Pacific Crest Securities

I would like to drill down a little bit into the seasonality of revenue. If I look at Q1 and the midpoint of guidance, it’s a nice uptick from a net dollar standpoint and from a quarter-over-quarter sequential standpoint. Looking back historically, it seems like Q1 is always the strongest. Is that new product-centric in typical cycles or is there something else that plays into that? And how should we think about seasonality for your business throughout the year?

BJ Jenkins

Yes, some of it is where historical cycles have come and then therefore the renewals than graduating class effect, and so you’ll see kind of step function up each year because of such renewal rate and such high return of a graduating class in that much of which some of which by intense, some of which by coincidence over the year kind of landed in that Q1 period. So we have that pattern kind of built into the business, and I think from an overall seasonality perspective, I would say we expect this year to be reasonably consistent with what we’ve seen we historically including the most recent year.

Rob Owens - Pacific Crest Securities

And then, I believe, appliance revenue normalizes for the accounting effect change of a couple of years ago, so how should we think about that in fiscal 15 in modeling it?

BJ Jenkins

So we’re about a quarter or two away from kind of working our ways through the old waterfall conversion, so you’ll see this quarter for example we disclosed our appliance revenues were about 12% and this has two factors in it, that’s, one of it is that’s why I referred to you in the past as this DNA strand effect of the two waterfalls conversing and the other is that we’ve actually seen some of that appliance sales foreign factors shift to virtual, which eliminated appliance revenue in favor of subscription revenue, so that second factor is one that just ongoing and we’ll continue work its way in that’s more of line item geography shift. The second factor I think you’ll see the appliance revenue start to reaccelerate a bit back to where billings have in the most recent periods. And probably about one or two quarters will be no longer referring back to that tale.

Rob Owens - Pacific Crest Securities

Lastly on the security side of your business, I am curious to what you are seeing relative to all of the increased media awareness out there, RSA showing all-time record attendance. Are you seeing an uptick in interest levels and inquiries there? And are there any statistics that you have them support that?

BJ Jenkins

I don’t have statistics to give you but I would certainly say there has been an increased amount of inbound questions for us whether it’s been some of the breaches, Heartbleed, this all drives activity for us and creates opportunities for us. So we have definitely -- since that Christmas area on have seen an uptick in activity in terms of customer inquiries, partner inquires, and I think overall that’s created good opportunities for us specifically in that work in application security. We’ve definitely see and probably going back a little bit to Sterling’s question, this is why we felt also very good about the WAF opportunity in front of us because our lead differentiation has always been about security, it’s definitely created more opportunity for us in the web application firewall space.

Operator

Thank you, ladies and gentlemen. And we have time for one more question and that comes from the line of Michael Kim with Imperial Capital. Please go ahead.

Michael Kim - Imperial Capital

Hi, good afternoon. The first just on content security, with the expansion of adoption of virtual appliances, is that primarily driven by growth in the installed base or are you actually seeing competitive displacement and opportunities for market share gains?

David Faugno

Historically, it’s been pretty good mix of both installed base kind of upgrading or converting into a virtual form factor if they want to take advantage of that and new acquisition that come and basically customer wants to start off working this on a virtual basis. So there has been a pretty good mix between the two, it’ll vary back and forth between the two categories but we’re winning in both capacities.

Michael Kim - Imperial Capital

Great. And then on the multi-product customers and the acceleration in Barracuda shops, what are you seeing as the most frequent cross sell, is it content security customer going to network security or application security or it is storage that is typically the strongest cross sale?

BJ Jenkins

Well, I think historically, Michael this is BJ, thanks for the question. Historically, it’s been seen we have our heritage in content security it’s been the spam and virus firewall customer moving into another category and giving us an opportunity and given some of the growth rates we talked about and subscription rates you can see where storage, it’s not unusual for backup and archives to be sold together where you’ve got a Barracuda shop formed right there. So I think historically it’s been spam and virus firewall customer trying products in those other categories, what we are starting to see though is something we call instant Barracuda shops, it’s not unusual for us now to get a customer buying three products in one purchase order and that could be across all the segments, it’s not unusual for us to see that. So I think historically it’s been off the spam base, but now we’re getting leading products from each of the categories.

Operator

And that does conclude our question and answer session, at this time I’d like to turn the call back over to BJ Jenkins, President and CEO of Barracuda, for closing remarks, please go ahead sir.

BJ Jenkins

Thank you and thanks again everyone for joining the call today and for your support of Barracuda, specifically to our employees around the globe, thank you again for all you’re doing to take care of our customers, and to our customers and partners worldwide thank you for trusting Barracuda as your IT partner. We’re incredibly excited about the new fiscal year and we look forward to keeping you updated as we continue to grow the business. Thanks again for joining us today and we’ll talk with you soon.

Operator

And ladies and gentlemen that does conclude our conference for today if you’d like to listen to a replay of today’s conference please dial 303-590-3030, or 800-406-7325 and enter the access code 467-5013. We’d like to thank you for your participation and you may now disconnect.

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