Carbonite's CEO Discusses Q1 2014 Results - Earnings Call Transcript

| About: Carbonite Inc. (CARB)

Start Time: 08:30

End Time: 08:55

Carbonite Inc. (NASDAQ:CARB)

Q1 2014 Earnings Conference Call

April 29, 2014, 08:30 AM ET

Executives

David Friend - Chairman, President and CEO

Anthony Folger - CFO and Treasurer

Emily Walt - IR

Analysts

Ben Rose - Battle Road Research Ltd.

Tim Klasell - Northland Capital Markets

Brian Schwartz - Oppenheimer & Co. Inc.

Ben McFadden - Pacific Crest Securities, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Carbonite First Quarter 2014 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

I would now like to introduce your host for today's conference call, Ms. Emily Walt, Director of Investor Relations.

Emily Walt

Thank you, operator. Good morning, and thank you for joining us today to review Carbonite's first quarter 2014 financial results.

With me on the call today are David Friend, Chief Executive Officer; and Anthony Folger, Chief Financial Officer. After our 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, should, believe, target, goal, estimate, may, might, 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.

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 reference our annual report on Form 10-K for the fiscal year ended December 31, 2013. This report is filed with the SEC which is available on www.sec.gov 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, 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. I'd like to start by thanking all of you for joining us today. In the first quarter of 2014, I'm pleased to say that we again achieved record revenues and free cash flow. Total bookings for the first quarter grew 11% with consumer growing 5% consistent with our expectations and SMB bookings increasing approximately 30% year-over-year.

The growth in SMB bookings was primarily driven by the outstanding performance of our hybrid Carbonite server backup product which we launched as a standalone product on January 8. Sales of server backup came in at more than double our internal projections and accelerated throughout the quarter. Carbonite server backup is an important new product for Carbonite, so I'd like to spend a few minutes telling you more about it.

We acquired a technology that is at the core of Carbonite server backup when we acquired Zmanda in October 2012. Carbonite server backup is based on an open-source Linux backup product called Amanda. We believe that Amanda represents hundreds of man years of development by the open-source community.

Before we acquired Zmanda, we had created a commercial version of this product for Windows and Mac and added support for commercial production databases such as Microsoft SQL Server, Exchange Server, Oracle and so forth. We transformed Zmanda into a hybrid backup system that simultaneously creates both local and cloud backups.

Hybrid backup combines the speed and convenience of local backup with the safety of cloud backups. A local backup is not limited by the speed of the Internet and is therefore extremely fast for both backup and restore. Cloud backup, on the other hand, provides complete protection against disasters like fire, flood and equipment theft, all of which might destroy local backup. Cloud backup also may allow users to remotely access backed up files using their mobile devices or other computers.

In general, when we sell a subscription to Carbonite server backup we are displacing a legacy software backup product that only makes local copies. In that sense, Carbonite server backup competes directly with legacy backup software for companies like Symantec, Acronis, CA and many others. These legacy backup products are designed primarily to create local backups on disc or tape. These backup tapes or discs are then often sent to an offsite storage facility to provide protection against physical disasters.

We believe our new hybrid approach is simpler to maintain, more reliable and less expensive than such manual approaches to backup. Over the coming years, as businesses replace or upgrade their aging servers, we have an opportunity to displace these relatively expensive error-prone backup products with our hybrid approach. We have a large addressable market with over 6 million businesses just in the U.S.

Carbonite server backup also distinguishes itself by its disruptive pricing. Most, if not all, our competitors price their backup solutions on a per server basis. For example, one leading competitor charges a license fee of about $1,300 per server. Carbonite server backup on the other hand backs up an unlimited number of servers for one flat price of $899 for 500 Gigabytes of cloud storage.

For businesses with multiple servers, Carbonite can offer an enormous cost advantage. And as businesses keep more data for longer periods of time, customers buy more storage. We are already seeing a pattern of revenue growth and margin expansion of server backup customers as their backup needs grow.

Server virtualization is also driving the need for hybrid backup solutions. As more and more applications are been virtualized, businesses need backup solutions that can support virtualized environments. Carbonite server backup provides protection for Windows Hyper-V hypervisors.

In addition to backing up the data, it 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 upload applications. This entire process is managed through one central dashboard that embodies the ease-of-use and simplicity that Carbonite is known for.

Server backup is just the first step towards building out a portfolio of products that take a hybrid approach to business continuity and disaster recovery. Last quarter, we talked to you briefly about the Carbonite hybrid backup appliance and we will begin shipments in Q2. The entry-level appliance includes 1 Terabyte of local storage and 500 Gigabytes of cloud storage.

The appliance sits at the customer's location and connects to their network. It is designed to make local bare metal images of all the servers on the network. These images are automatically replicated to the cloud. Installation is as simple as taking the appliance out of the box and plugging in the power cord and the Ethernet.

The $99 per month price point is disruptive and will make hybrid backup available to even the smallest businesses. Our roadmap calls for future release of additional appliance models with increased capacity and expanded feature sets.

Now let me say a few words about Carbonite's exceptional customer support. Customer service is a crucial component why customers choose Carbonite over competitors, and why our quarterly retention rates have stabled in a range of 96% to 97% over the past five years.

We survey our customers after every customer support interaction. In this quarter, we achieved the highest customer satisfaction in our company's history. Our outstanding support center employees in Lewiston, Maine are an enormous asset to the business, and I'd like to take this opportunity to thank them publicly.

Turning now to distribution. We were pleased with the Q1 results of the channel and look forward to the day when most, if not all, of our sales can be handled by our channel partners. During the most recent quarter, our inside channel sales and marketing teams worked with our partners to deliver improved education and enablement tools. The number of productive resellers increased 35% since last year and we continue to establish relationships with large distribution partners, like Tech Data, D&H and Synnex.

To summarize the quarter, our consumer business continues to grow and retention rates remain high. Our server backup product significantly exceeded our internal plan and validated our belief that hybrid backup is what the market is looking for. Finally, we look forward to the introduction of our first hybrid backup appliance in the coming weeks.

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

Anthony Folger

Thanks, Dave. Good morning, everyone, and thanks for joining us. Overall, we're pleased to announce solid Q1 bookings, higher than projected revenues and record free cash flow. In the first quarter, total bookings increased 11% year-over-year to 32.5 million. Small business bookings grew approximately 30% to 9.2 million and consumer bookings grew 5% to 23.3 million.

Small business bookings accounted for 28% of total bookings during the quarter compared to 24% in the first quarter of 2013. The strength in the small business bookings was driven by the better-than-expected launch of our standalone server backup product and stronger-than-expected performance by our reseller channel.

The performance of our standalone server backup product is evidence to us that there is a high demand for cost-effective small business solutions that are easy-to-use and we're encouraged by the results.

Customer retention for the quarter remains strong coming in at the low end of our historical average of 96% to 97%. During the quarter, customer retention was again negatively impacted by one of our partner relationships focused on the consumer business.

Total customers at the end of the quarter were 1,507,000 compared to 1,471,000 in the same period last year. As we continue to push further into the small business market where our bookings will be driven not only by the number of subscriptions sold but also by the amount of cloud storage utilized, we don't believe our total subscriber account will continue to be a key metric for business performance.

Turning now to the income statement. All the financial figures I will discuss today are non-GAAP unless I state that the measure is a GAAP number. The GAAP to non-GAAP reconciliation can be found in the tables of our press release which is available on our Website.

Revenue for the quarter was 29.1 million, representing an increase of 19% over the same quarter last year. Gross profit for the first quarter was 20.1 million, resulting in a gross margin of 69%, a 400 basis point improvement over our gross margin of 65% in the same quarter last year.

Our gross margin improvement continues to be driven by sales growth of higher margin SMB products coupled with lower storage costs, operating efficiencies realized in our data centers and efficiencies realized as we continue to scale our customer service organization.

Operating expenses totaled 19.5 million in the first quarter compared to 20.6 million in the same period last year. The decrease in spending is primarily due to a reduction in marketing costs, as we accelerate our transition from a consumer-focused direct model to an SMB-focused channel led with a market model.

Research and development expenses were 5.2 million or 18% of revenue compared to 5.2 million or 21% of revenue in the same period last year. Despite a relatively flat spend in absolute dollars, our research and development focus has shifted toward our new SMB products, most notably Carbonite server backup and development of our business continuity appliance.

Sales and marketing expenses were 11.6 million or 40% of revenue compared to 12.3 million or 50% of revenue in the same period last year. The decrease spend is comprised of reductions in our traditional radio and TV advertising, somewhat offset by increase in channel marketing activities and investments made in our inside and channel sales organizations.

General and administrative expenses were relatively flat at 2.8 million or 10% of revenue compared to 2.9 million or 12% of revenue in the same period last year. Overall, I'm pleased that we have continued to see increasing leverage in our operating model over the last several quarters.

Our transition from the direct-to-consumer to an indirect channel led SMB model is beginning to accelerate and I expect that the investments we made will position us well in the second half of 2014 and beyond.

On the bottom line, non-GAAP net income was $525,000 this quarter or $0.02 per share compared to a loss of $4.7 million or $0.18 per share in the same period last year. Non-GAAP net earnings for the first quarter excludes 1.3 million of stock-based compensation expense and 233,000 from the amortization of intangible assets.

Cash flow provided by operations for the quarter on a GAAP basis was 7.3 million, an increase from 3.8 million in the year-ago quarter. CapEx for the first quarter was 3.1 million compared to 3.1 million in the year-ago quarter. Free cash flow was 4.2 million compared to 654,000 in the year-ago quarter. Our cash, cash equivalents and short-term investments totaled 70 million compared to 56.5 million as of March 31, 2013.

Now turning to our business outlook for 2014. In the second quarter we expect revenue to be in the range of 30 million to 30.2 million and non-GAAP net loss to be in the range of $0.05 to $0.03 per share. Based on our performance in Q1, we are revising our full year guidance for revenue and profitability. We now expect revenues to be in the range of 121.7 million to 123.4 million and non-GAAP net loss to be in the range of $0.10 to $0.04 per share.

We still expect gross margin for the full year to be relatively flat compared to 2013 and free cash flow in the range of 12 million to 14 million for our one-time items associated with the relocation of our corporate headquarters in Boston and one of our data centers.

In addition, we continue to expect the growth rate on SMB bookings to be in the range of 40% to 50% for the full year and consumer bookings to remain in a range of flat to low single-digit growth. Overall, we continue to build on the transformation started last year.

From a product standpoint, our server backup solution is seeing a strong response from customers and we're excited to launch our first business continuity appliance in Q2. The success of these new products will be driven primarily by our growing presence in the channel and we believe we are well positioned to continue to support the growth of the business long term.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Ben Rose with Battle Road Research.

Ben Rose - Battle Road Research Ltd.

Good morning, gentlemen, and congratulations on the quarter. Realized that the data is fairly sparse at this point, but could you comment at all on the renewal rates that you are seeing for your small business backup software?

Anthony Folger

Hi, Ben. It's Anthony here. The renewal rates still on the small business side are a couple of percentage points higher than they are on the consumer side and that's a trend we've seen for several quarters now. We've been a little bit cautious with it, but the trend still holds that we got retention in renewal rates that are better in the small business space than they are on the consumer space.

Ben Rose - Battle Road Research Ltd.

Okay. Thank you.

Operator

Our next question comes from Tim Klasell with Northland.

Tim Klasell - Northland Capital Markets

Hi, guys. One question on the appliance. Can you give us sort of an update when the appliance will be available and is that $99 a month price point still something you're targeting?

David Friend

Hi. Dave Friend here. The appliances are on target to ship this quarter. It will be in the latter half of the quarter. And the $99 price point is still what the price that it will be at.

Tim Klasell - Northland Capital Markets

Great, thanks.

Operator

Our next question comes from Brian Schwartz with Oppenheimer.

Brian Schwartz - Oppenheimer & Co. Inc.

Hi. Thanks for taking my questions here today. Anthony, I had one question here in respect to the bookings growth. I did notice that spend on the total operating expense, it did decline year-over-year. I think you made comments about that in your introductory commentary. I was just wondering if you were able to allocate all the investments that you had planned during the quarter.

Anthony Folger

That's a good question, Brian. It's really a total part of in terms of our P&L. I think we see it as sort of the traditional advertising that we've done on radio and television has declined during the quarter and declined by probably $2 million year-over-year or pretty close to that number. And we reallocated most of those reductions back into our inside sales organization, channel sales organization and really back into channel marketing activities. I think from our perspective we were able to pretty much make all of the investments that we wanted to make during the quarter. I think in all honestly, we've got a few more hires to make on the marketing side and the sales side, but I think we're still, especially in sales, I think we're very well positioned right now. So we feel good about the investments we made and where we sit right now.

Brian Schwartz - Oppenheimer & Co. Inc.

Thank you for that color. And then one follow-up. I did notice that there was a slight downtime event during the end of the quarter. It obviously didn't affect the historical uptime here. I appreciate the color on that. But I'm just wondering if you want to quantify if there was any impact at all with the revenue or subscriber trends from that event, or if there's anything technical that might require additional investments on your side? Thanks.

Anthony Folger

I don't think there was anything sort of out of the ordinary. I mean we've got normal maintenance windows and from time-to-time we may have a service of each. But in terms of the business running and how it's just having an impact on our operations, I don't think there was anything out of the ordinary in Q1.

Brian Schwartz - Oppenheimer & Co. Inc.

Okay. And then last question from me and I'll pass it along. I was just wondering if you guys wanted to comment or give any update on the current CEO search that's going on? Thanks again.

David Friend

Sure. Well, the search is underway and we're seeing good candidates and we expect to keep moving on that and we'll let you know as soon as we have anything more to report.

Brian Schwartz - Oppenheimer & Co. Inc.

Fair enough. Good job on the quarter and thanks again for taking my questions.

David Friend

Thanks, Brian.

Operator

(Operator Instructions). Our next question comes from Rob Owens with Pacific Crest Securities.

Ben McFadden - Pacific Crest Securities, Inc.

This is Ben on for Rob. Thanks for taking my call. I was just wondering if you could give an update on the number of resellers that you now have, and maybe where you're seeing the best traction with resellers.

Anthony Folger

Sure, Ben. This is Anthony here. When we ended Q1 we were just under 400,000 some under resellers and I think that's up from maybe 3,300-3,400 at this time last year. So we're still continuing to see good traction. And I guess I would say that the reseller channels are evolving and that we're starting to move maybe from the sort of [bright fix] (ph) jobs, as we refer to them, as the places where you're bringing your PC for service and we're starting to see more and more traction in the sort of regional value-added reseller type of community. So I think we're moving up the stack a little bit in terms of the reseller channels and we feel pretty good about that.

Ben McFadden - Pacific Crest Securities, Inc.

And then you mentioned on the call that you've seen a – I believe it was a 35% increase in productive resellers. Just thoughts on kind of how you're measuring that and also what's driving that increase in productivity? I mean what education measures you've had or…?

David Friend

Yes. I think we have seen an increase in productive resellers and we only disclosed the number of productive resellers and those are resellers who have active subscriptions with us. So it's not just – we have many more who are registered in our portal but may not have an active subscription with us. So when we talk about the number of resellers we've got, it's generally or I'd say it's always those that have an active supplier (indiscernible) Carbonite subscription.

Ben McFadden - Pacific Crest Securities, Inc.

Great. Thank you.

Operator

I'm not showing any further questions at this time. I will return the call back over to CEO, David Friend, for closing remarks.

David Friend

Thank you. I guess with that, I'd like to thank everyone for attending our conference call today and I'd like to thank all the employees who helped us turn in another good quarter and we look forward to speaking to you next quarter.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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