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Barracuda Networks, Inc. (NYSE:CUDA)

Q1 2015 Earnings Conference Call

July 10, 2014 5:00 p.m. ET

Executives

Adam Carson – VP of IR and Financial Planning

BJ Jenkins – President and CEO

David Faugno – CFO

Analysts

Sterling Auty – JPMorgan

Keith Weiss – Morgan Stanley

Erik Suppiger – JMP Securities

Jason Ader – William Blair

Michael Kim – Imperial Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Barracuda First Quarter Fiscal 2015 Earnings Call.

[Operator Instructions]

This conference is being recorded today, July 10th, 2014.

I would now like to turn the conference over to Adam Carson, Vice President of Investor Relations and Financial Planning. Please go ahead.

Adam Carson

Good afternoon and welcome to our first quarter fiscal 2015 earnings conference call. As a reminder, this call is being recorded and the recording will be available until July 15th, 2014. The recording of this call is copyrighted property of the company and no other recording or reproduction is permitted unless authorized by the company in writing.

Today's call will begin with our President and CEO, BJ Jenkins, providing highlights from the first quarter. Then our CFO, David Faugno, will review the key financial results for the quarter which ended May 31st, 2014, and provide guidance. At that point we will open the call for your questions.

This afternoon Barracuda issued a press release announcing the company's financial results for the first quarter of fiscal 2015. A copy of this release and supporting financial materials are available in the Investor Relations section of the company's website at barracuda.com.

This conference call contains forward-looking statements that involve risks and uncertainties, including fluctuations in demand for the company's products, plans for future product offerings, and the company's expectations regarding future results. 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 a 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 measures can be found in the financial tables of our press release. Non-GAAP results exclude stock-based compensation, amortization of intangibles and acquisition-related 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, Adam. Good afternoon everyone. Thank you for joining us today as we report our first quarter fiscal 2015 results.

We continue to be pleased with our results across all of our markets and product categories. With this now being our third quarter to report as a public company, we believe our results for the first quarter reflect the progress we've made in strengthening our position as a leading provider of security and storage solutions to simplify the lives of IT professionals.

Billings in the first quarter grew 17% year over year to $87.6 million, an acceleration from 15% growth in the same quarter last year and an increase of 7% sequentially over Q4. Revenue grew 18% year over year to $66.2 million, an increase of 10% sequentially. We also had strong adjusted EBITA performance.

Geographically, we saw good demand across all of our markets. Increased billings growth was driven primarily by the Americas. We also saw APAC grow nicely despite some currency headwinds with Southeast Asia and Korea performing particularly well, and EMEA showed good year-over-year growth following the strong prior quarter, with particular strength in Austria, Eastern Europe, and the Middle East.

We also grew active subscribers to over 214,000, up 16% year over year.

For our storage category, billings growth was generally in line with the trends we discussed last quarter. We are excited about the evolution of our storage portfolio which includes our backup, archiving, copy, and sign-now products. Over the coming quarters, we plan to implement significant enhancements to our storage portfolio, including new features and enhanced usability. As you know, we sell our products on a subscription basis, meaning that all Barracuda storage customers within the active Energize Update subscription can benefit from these enhancements once they are released.

Some of these updates are in response to customer demand for a simpler way to not only protect company information but also to enhance worker productivity. Some examples include significantly reducing the impact on performance of backing up data, increasing user's ability to access files from mobile devices, or something many users experience, eliminating the inability to send email due to mailbox size limitations. Our portfolio of cloud-connected, mobile-enabled technology is designed to provide access anytime, anywhere, and under any circumstance. And we look forward to sharing more of the details on these product enhancements over the coming quarters.

Backup continues to drive growth in our storage category. After the close of the quarter, we activated our 20,000th Barracuda backup appliance, a Barracuda Backup 890 purchased by Armada Hoffler [ph], a longtime Barracuda shop who made their first purchase of Spam Firewall in 2004. We recently received our VMware Technology Alliance Partner Certification and VMware Ready Achievement further demonstrating Barracuda Backup's compatibility with virtualized environments.

We saw a strong representation in third-party analyst reports on backup software and integrated appliances. We again for the ninth consecutive quarter ranked number one in IDC's tracker for purpose-built backup appliances for total integrated systems shipped worldwide with 40% market share for the first quarter of calendar year 2014. Barracuda also ranked in IDC's top five vendors for worldwide purpose-built backup appliance factory revenue, with 29.8% year-over-year revenue growth.

Also, we will now be included in eight Gartner Magic Quadrants this year, up from four in the prior calendar year. For the first time, Barracuda Backup has been included in Gartner's Magic Quadrant for enterprise backup software and integrated appliances. Overall, inclusion in this report illustrates how we design our products and bring them to market with what we believe is the right set of features to help information technology professionals who oversee complex IT environments similar to those of large enterprises and often with limited resources. Our products make managing their IT infrastructures easier with our common management cloud for a single pane of glass to control their physical, cloud, and virtual solutions.

Turning to our security category, we continued to make strong progress with our public cloud initiatives in Microsoft Azure and Amazon Web Services. Towards the beginning of the quarter, we began closing our first deals with our Barracuda NG Firewall on Azure and saw a growing interest for that product throughout the quarter.

We saw a similar interest in the Barracuda Web Application Firewall, which remains the only WAF available on Azure. Both of these products are also available for AWS.

Also during the quarter, our Barracuda Spam Firewall became available in AWS, the first dedicated email security solution available on the platform. We believe the public cloud delivery model is creating new opportunities for our content security solutions. To date, we have more than 100 total customers with products deployed in the Azure or AWS public cloud environment.

We are excited to be participating in the Microsoft Worldwide Partner Conference in Washington, D.C. next week where we'll have a number of announcements related to our offerings available in Azure, including a new version of our Web Application Firewall, a use case with a well-known global customer, and an extension of the work we're doing with Microsoft.

Lastly, this week, we announced Virtual License Portability, which will give customers investment protection and greater deployment flexibility. Barracuda is all about giving our customers choices and helping them simplify their IT infrastructure. Virtual License Portability offers customers the ability to transfer virtual solutions from a public cloud to the private cloud environment, or between public cloud services at no additional cost. We believe this new Virtual License Portability further simplifies this migration by enabling hybrid cloud deployments across private and public cloud environments.

Our network and application security category had billings growth roughly consistent with the trends we discussed last quarter. Just a few weeks ago, we announced an updated version of our Barracuda NG Firewall at the Gartner Security Conference, which expands our capabilities for Windows remote desktop services, Microsoft Hyper-V virtualization, and Microsoft Azure, enabling our customers to further capitalize on their Microsoft investments.

With our Web Application Firewall, we are pleased to have placed very well on Gartner's first WAF Magic Quadrant. We believe customers are choosing our WAF solution for its high performance in areas like IP reputation, while also enjoying the variety of models for scalability and performance.

We also continue to build on our Barracuda Load Balancer ADC platform. During the quarter we added advanced application security to a number of our models, available at no additional cost to our customers with active Energize Update subscriptions. In typical Barracuda fashion, we've evaluated this market, leveraged feedback and use cases from our broad client base to better understand the customer requirements, and are bringing this functionality down to the midmarket at an affordable price.

Customers should not have to choose between performance and security and we believe that this tightly integrated, advanced application security on our ADC platform makes the decision easier for customers to trust Barracuda for their application delivery needs.

Also, in the last few weeks we announced the latest release of the Barracuda Firewall, our next-generation firewall for the midmarket. Barracuda Firewall version 6.5 gives customers access to our enterprise-grade application control, and we believe makes it easier to use than any other firewall on the market. The new release also provides intuitive drill-down capabilities into application traffic and automated reporting, increasing the ease of use and improving productivity for the Barracuda firewall in a customer environment.

Expanding on our developments in mobile environments, during the quarter we launched an update to our SSL VPN solution, extending private cloud access to mobile devices by offering employees improved remote access to internal web applications and files.

We continue to see progress in our content security offerings. While this is a more mature fluctuating market, we grew this portion of our business faster than the overall market based on the most recent analyst reports, with our growth for the quarter in the low to mid single digits. Once again Barracuda was ranked by IDC in the first calendar quarter of 2014 as the number one volume leader in content security appliance market share, which includes both email and web security appliances, and was also ranked the individual leader in each market for email and web security, showing our commitment and leadership in both of these fragmented markets.

Recently we announced the Barracuda Mobile Device Manager, a free cloud-based MDM service for Barracuda customers. With Barracuda Mobile Device Manager, K-12 education institutions can more easily manage one-to-one mobility initiatives by centrally administering and monitoring iOS phones and tablets through Barracuda Cloud Control. The service can set device security policies, deploy and manage applications, and remotely manage and monitor mobile devices.

We view the Barracuda MDM as an enabler to our entire security suite, with the ability to integrate with multiple Barracuda products and bring that functionality down to the mobile user. We plan to further expand our mobility infrastructure with Android and Windows functionality on the near-term roadmap.

Lastly, we also launched our new Barracuda Web Filter version 8.0, adding new features such as wireless access point integration to enforce user base policies on wireless networks, extended web application monitoring, phone book support for one-to-one initiatives in K-12 organizations, and customizable dashboards to summarize web traffic and user activity.

We continue to build a technology ecosystem with leading companies across a variety of areas. Recently we began integrating Lastline into our security product line. Lastline is a provider of advanced malware defense technology for enterprise networks and now supplements our historical practice of developing our own sandboxing technology to prevent APT and zero-day attacks.

With the commercialization of advanced malware technologies that extend to CPU emulation and other techniques, our relationship with Lastline expands our layered security approach to APT and zero-day attacks and allows us to deliver enhanced protection to the midmarket in a simplified and affordable way.

Additionally, our recently announced technology alliance with Ruckus Wireless, a global supplier of advanced wireless systems, brings the powerful functionality of our Barracuda Web Filter down to the wireless user, making it easier for organizations to apply user-base content filtering policies for wireless users.

We also recently signed an agreement with NetSTAR, a leading global URL filter database and web analysis provider. This relationship expands Barracuda Central's capabilities for content categorization, reputation data and malicious and compromised website analysis.

We spent some time this quarter discussing the many enhancements we have made and will continue to make across our product portfolio, from new features and technologies, to integrations and partnerships. We're committed to making the right investments in R&D for which spending ran at 18% of revenue this past quarter. As we invest and make these product enhancements, we have developed our model for fast response. With our Energize Update subscriptions, our installed base of active subscribers can benefit immediately from these capabilities.

In summary, as our highly diverse set of customers look for IT solutions that are easy to buy, install, manage and use, Barracuda offers a broad product portfolio and a variety of delivery models designed to simplify their lives. And our customers are there for us, providing us with critical product feedback, early technology trends, market indications, and a strong word-of-mouth reputation.

Accordingly, we remain focused on growing this customer base, providing additional solutions to existing customers and bringing innovative products to our markets. We continue to invest in our technology and our business and we do so with financial stewardship, balancing growth with profitability. All of these elements we believe combine to underpin the strength and resilience of our business model.

With that, I'd like to turn the call over to David to detail the financial highlights from the quarter and provide guidance.

David Faugno

Thank you, BJ. We are pleased to report a strong first quarter fiscal 2015.

Billings in the first quarter were $87.6 million, up 17% year over year and 7% sequentially. Our faster-growing categories continued to become a larger piece of our overall mix.

Revenue in the first quarter was $66.2 million, up 18% year over year. To break revenue in the quarter down by geography, Americas represented 74% of total revenue, EMEA 19% and APAC 7%.

Appliance revenue in the quarter grew 19% year over year to $20.8 million, and subscription revenue grew 17% year over year to $45.4 million. Strength in appliance revenue was driven in the quarter mainly by the timing of activations in the period.

During the first quarter we added over 8,900 net active subscribers to a total of 214,000 active subscribers. Renewal rates, which we calculate on a dollars basis, were 93.6%, which is at the high end of our expectations, although down modestly from a few exceptionally strong periods.

Gross margins in the first quarter were again strong at 80.4%, up from 79.5% in the first quarter last year and from 80.2% in the prior quarter. We expect fluctuations in our gross margins from quarter to quarter as we continue to invest in our cloud service infrastructure and other strategic growth areas.

Moving to operating expenses, non-GAAP operating expenses were $46.8 million or 70.7% of revenue, compared to 76.3% of revenue in the first quarter of last year. Operating expenses on a percentage basis were lower this quarter, predominantly due to sales and marketing, which I will speak to in a moment.

Research and development expenses for the first quarter were $11.7 million or 18% of revenue, compared to 18% of revenue in the first quarter of last year and 18.5% of revenue in the prior quarter. We continue to make investments in our product portfolio in the quarter as evidenced by the number of product announcements you have seen from us over the last few weeks and will see more of in the coming quarters.

Sales and marketing expenses for the first quarter were $28.6 million or 43% of revenue, compared to 50% of revenue in the first quarter of last year and 44.6% of revenue in the prior quarter. We continue to be opportunistic about how we spend in this area. As a result, we often experience fluctuations in this line item. We saw this in Q1 as we aligned marketing spend with sales rep capacity and product initiatives. But to be clear, we expect to continue spending in this area. As our business scales, we expect to see some sustained leverage here.

General and administrative expenses for the first quarter were $6.6 million or 10% of revenue, compared to 9% of revenue in the first quarter last year and 10% of revenue in the prior quarter.

Non-GAAP operating income in the first quarter was $5.3 million or 7.9% of revenue, above our outlook last quarter. Non-GAAP tax provision in the first quarter was $1.5 million or an effective tax rate of 30%.

Non-GAAP net income in the first quarter was $3.6 million or $0.07 of earnings per share based on a diluted share count of 53.6 million. This compares to non-GAAP net income of $700,000 in the same quarter last year, an increase of over 400%. GAAP net income in the first quarter was $200,000 or breakeven on a per share basis. This compares to GAAP net loss of $2.4 million or a $0.09 loss per share in the same quarter last year.

Adjusted EBITDA, which adjusts for changes in deferred revenues and costs, was up substantially in the first quarter at $19.4 million or 29% of revenue, compared to $12.1 million or 21% of revenue in the same quarter last year, and up sequentially from $16.8 million or 28% of revenue.

Cash flow from operations for the first quarter was $5.4 million or 8.2% of revenue, compared to $200,000 in the same quarter last year. Capital expenditures for the first quarter were $1.6 million, down slightly from $1.8 million last quarter. The primary areas of capital investment continue to be our data center and operating infrastructure.

Adjusted free cash flow in the quarter was $4.2 million or 6.3% of revenue, up from $1.6 million or 2.9% of revenue in the same period last year. As we have indicated previously, we have some seasonality in the first quarter related to tax payments as well as sales team, customer and partner activities, and other front-loaded payments. To provide you with a sense of how our cash flow is trending on a broader time horizon, our 12-month adjusted free cash flow was $42 million or 28% year over year.

Turning now to the balance sheet, we closed the first quarter with cash and cash equivalents of $141.6 million, up from $135.9 million in the fourth quarter. Deferred revenue at the end of the first quarter was $328.5 million, up from $274.4 million at the end of the first quarter last year and up from $313.2 million at the end of the fourth quarter, due to our continued billings growth.

With that, let me now turn to our fiscal second quarter and full year 2015 guidance. We expect revenue in the second quarter of fiscal year '15 to be in the range of $66 million to $67 million. We expect non-GAAP operating income for the second quarter to be between $2.5 million and $3.5 million. Non-GAAP earnings per share for the second quarter is expected to be between $0.03 and $0.04 of earnings per share. To help you with your models, you can assume a share count range of 54 million to 55 million shares for the second quarter, and a non-GAAP tax rate range of 30% to 35%.

For fiscal year 2015, given the performance in Q1, we are increasing our revenue guidance to be between $270 million and $274 million. This range represents year-over-year growth of approximately 15% to 17%. We are also increasing the range on non-GAAP operating income for full year fiscal '15 to be between $11 million and $15 million. While we outperformed on the bottom line in the first quarter, we do expect to continue to make investments during the year. We are also increasing the range for fiscal year 2015 on non-GAAP EPS, now expecting this to be between $0.14 and $0.18 per share. We're modeling the share count to be between 55 million and 56 million for fiscal year '15, and a non-GAAP tax rate range of 30% to 35%.

That concludes our prepared remarks, we'll now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Your first question is from the line of Sterling Auty with JPMorgan. Your line is open.

Sterling Auty – JPMorgan

Thanks. Hi guys.

BJ Jenkins

Hey, Sterling. How are you?

Sterling Auty – JPMorgan

Good, good. Let me ask two questions. The first one is on, you know, the comments that you made on the cloud side, both Azure and AWS. I just want to make sure I'm clear. Can you give us a sense of how many of those customers that are now in that environment actually purchased new licenses versus transferred kind of existing licenses maybe they had on premise and brought them into the cloud?

BJ Jenkins

Okay. So all of those are new licenses that the customers have bought, Sterling. So we just announced Portability -- Vx Portability this week. And so every -- those 100-plus users that we've talked about are all net new licenses for us.

Sterling Auty – JPMorgan

Okay. I guess I was confused. I thought the portability was, if I wanted to go between Azure to AWS, I could do that rather than I thought you announced last quarter the ability to take on-premise into the cloud. So thanks for the clarification.

BJ Jenkins

Yes. Sterling, just to be clear, we -- what we're trying to drive here is choice for our customers, and we think it's important. So now with the new announcement, when you buy a Virtual License, you could deploy it on-prem in your virtual infrastructure, and then if you make a decision down the road to move into AWS or to Microsoft Azure, you can take that license and bring it with you to those clouds, and then if you made a choice to move from one public cloud to another, you could again move it, so we view this as really important for customer choice and investment protection and flexibility for them.

Sterling Auty – JPMorgan

Got you. Got you. Moving over to the sales and marketing commentary that you made, the investment in the quarter, the area where maybe you got more leverage, was that on not hiring as many sales people versus marketing spend versus variable competition? Can you give us just maybe a layer deeper in terms of the source of where that leverage came from?

BJ Jenkins

Yes, and why don't -- I'll start on this one and I'll have Dave jump in. You know, over the quarter for the company we added 55 heads, and the vast majority of those heads went into sales and marketing and R&D. The hiring for that sales capacity actually happened throughout the quarter with more of it probably being towards the tail-end of the quarter, which is going to carry through the full year. So, you know, we got some leverage there because more of it came in the back of the quarter.

On the marketing side, we have always continued to work to find ways to be more efficient in how we spend that money, and particularly in the online, we are finding we believe good ways to become more efficient there and we got leverage. But with that said, we continue to look for ways to reach more of the market via marketing investments, and we think we have some good opportunities out there in front of us. I don’t know Dave, if you want to add anything.

David Faugno

No. Sterling, I would just add that we have the history of really aligning our marketing spend with the capacity and with kind of product initiatives. And as BJ mentioned, we've got a lot going on, on the product side. Some things that have just been announced and some things that will be announced shortly, and so there'll be marketing programs that go behind that, as well as driving to the expanded capacity that BJ just mentioned.

So I think this first -- this quarter demonstrates the kind of leverage that the model can provide,. but we're not backing off in terms of investing behind it.

Sterling Auty – JPMorgan

But given the better-than-expected activations in the quarter, could we read into this that maybe your cost of customer acquisition actually went down, you're getting more bang for your buck?

BJ Jenkins

I think if you look at the activation, Sterling, there are some dynamics going on there, where we've had some really strong success in the network and application security space, and we get customers who will buy a large central unit, and then many small units for the remote offices, branch offices, and retail shops. And you get those small units activating. As they roll that out, you're going to, you know, we're seeing some increase in the number of active subscribers there, so I think that's what's driving that.

Sterling Auty – JPMorgan

Got it. Thank you guys.

BJ Jenkins

Thanks, Sterling.

Operator

Your next question is from Keith Weiss with Morgan Stanley.

Keith Weiss – Morgan Stanley

Excellent. Thank you guys for taking the question. I was wondering if you could give us an update on the sort of cross-sell initiatives, how you guys are doing that, and anything programmatic or anything special we should be expecting in that regard going through FY15 to kind of up the number of Barracuda shops or up the number of products per customer that you're seeing?

BJ Jenkins

Yes, thanks, Keith. You know, we, once a year, annually, give a view into that. What I can tell you is that we're pleased with the progress we made in Q1 in those activities, and really underneath the cross-sell activities, there's a number of things that we're doing. First and foremost, we did have our sales kickoff and partner conferences in this first quarter where we did a lot of training across all the products and the use cases just to get both our sales capacity and our partner capacity in a better position to sell more of the portfolio.

Underneath that, we have put incentive structures in place and they've been running now for more than a couple of quarters where our customer support people, our renewal sales teams, and our sales teams all have incentives to sell that customer a second or third product. Partners obviously get more of an annuity and more of a footprint on account when they do that, so we feel those take time to take hold, but we feel really good about the progress we're making on cross-sell.

I think on top of that, the R&D machine continues to give us more products to put into that customer base too, and that gives us more opportunities to do that cross-sell and create Barracuda shops. So we feel good -- very good about the progress we made in Q1 in terms of creating more two-product shops and more Barracuda shops.

Keith Weiss – Morgan Stanley

Excellent. And maybe if I could throw in for Dave, on the income statement, when we're thinking about the gross margin going on throughout this year, it does seem like more and more you're getting a lot of good traction with virtual products, a lot of good traction in the cloud. How should we think about the gross margin impacts there and potential of any sort of gross margin pressure from more and more stuff running on your guys' own infrastructure?

David Faugno

I think we've had a strong couple of quarters here from a gross margin perspective. I think as we've tried to indicate in the past, we're going to see fluctuations from period to period. I think some of what we're seeing in kind of the expansion of gross margin is a little bit about some reorganization we've done and kind of setting our data center operations up for the next level of growth. But we'll continue to provide, you know, make investments in that infrastructure. And so we think that gross margins are going to vary a little bit from period to period, but kind of stay in the zone that we've provided guidance on or talked about and we've seen in kind of the last 12 months or so.

So, you know, as we've also mentioned in the past, I think the mix of products, cloud, virtual and physical, has kind of given us this blended rate that we enjoy, and I think we see that being reasonably consistent going forward.

Keith Weiss – Morgan Stanley

Got it. And then on the CapEx side of the equation, do you think Q1 is reflective of kind of the quarterly run rate or do you expect that to pick up a little bit into the back half of the year.

David Faugno

Again I think it's reasonably consistent with where the trends have been and I don't think there's any major variations in the other direction that we'd see in the near term.

Keith Weiss – Morgan Stanley

Okay, excellent. Thank you.

Operator

Your next question is from Erik Suppiger with JMP Securities.

Erik Suppiger – JMP Securities

Yes, good afternoon. Congratulations on a good quarter.

BJ Jenkins

Thanks, Erik.

Erik Suppiger – JMP Securities

One, just for Dave, on the outlook for the next quarter, Q2 revenues. You're not - the midpoint of your guidance is a pretty modest sequential growth. I think typically we've seen some seasonal pickup going into Q2. Is there any trend or any dynamic that's anything different than what you've seen in the past? And should we assume that that would also be consistent with kind of a relatively flat billings sequential growth going into Q2?

David Faugno

Hey. Thanks, Erik. So first, we're not going to comment on kind of quarterly -- quarter to quarter from a billings perspective. We'll provide a kind of perspective on that on an annual basis.

But what I'd say from a revenue perspective is that we did see a bit more appliance revenue growth in Q1 relative to Q4 as we saw some of this activation kind of linearity that we mentioned before. And so I think that that would be the thing that's a little bit different than the seasonal pattern. We did see a little bit of an acceleration in the appliance revenue in our Q1. And therefore, I think that factors into our thinking about guidance for Q2, really not banking on the same kind of activation linearity that we saw in Q1.

Erik Suppiger – JMP Securities

Okay. You had talked about the cloud -- I think you had said you have 100 cloud deployments at this point. Is that correct?

BJ Jenkins

Well over 100, yes.

Erik Suppiger – JMP Securities

Well over 100. Can you give us a frame of reference, was that all pretty much in the May quarter, or give us a frame of reference of how the -- what kind of technology you had there?

BJ Jenkins

Yes. If we walk through really, I think we've talked about this over the last three quarters as we rolled out the products in November. I think in Q3 we got our first deal, so our first customer, and then in Q4 we had the products deployed in Microsoft and we got 13 deals in Azure in Q4. And then when we did the earnings call for the annual, we were up to 40 customers using the service. And now well over 100.

So we're real excited how this has scaled, but I think we keep in mind it's early days and as a company we have over 150,000 customers. So it's still relatively small. But it's been a nice progression. And we're -- we believe this is, you know, this trend can continue.

Between the two services, we see more of, with Amazon, the hourly user right now. And those are consistent and that grows, but they're, you know, paying for the service hourly or monthly.

The Microsoft customers have tended to be larger, more enterprise focused and they're buying a license, an annual license, and bringing it to Azure. So it's been -- the buying patterns have been a little bit different between the two services, but we're really happy with that one, 13, 40, and now well over 100 progression of customers using the service.

Erik Suppiger – JMP Securities

And is that biased towards Azure still in light of the fact that you got some exclusivity in terms of your WAF and some of the other products there?

BJ Jenkins

We actually have more customers now in Amazon at a lower ASP. You know, the customers we have in Azure are buying annual licenses, so it tends to be a higher ASP and a little bit longer sales cycle where the AWS customers are just coming to the storefront and downloading it, trying and buying.

Erik Suppiger – JMP Securities

Okay. The last question, in terms of the partnership, technology alliance with Ruckus, just curious, how did that come about? How did you select Ruckus of the various WiFi providers?

BJ Jenkins

We've actually signed two. We signed Ruckus and also working with Mareau [ph] right now. So it's not exclusive. But Ruckus, we got -- I got to know Selina through the common investor of Sequoia Capital who made the introduction. We actually had customers though who were asking about bringing solutions like this together. They have strengths in some markets that are interesting to us, hospitality where we think they can help us make inroads, and we had a very strong cross-segment small and medium business penetration that they were interested in.

So this has come together very nicely for us. I think customers appreciate the integration work we do there, and it creates a better end-to-end solution for them.

Erik Suppiger – JMP Securities

Very good. Thank you very much.

BJ Jenkins

Thanks, Erik.

Operator

Your next question is from Rob Owens with Pacific Crest Securities.

Unidentified Participant

This is Ben [ph] on the phone for Rob. Thanks for taking my call.

I just had a question on your subscribers in the quarter. Q1 has typically been a little bit slower from a subscriber standpoint, but you put up a fairly large number this quarter. I wonder if you can just kind of expand on what's driving that and why it was just so much different.

BJ Jenkins

Yes. Thanks, Ben [ph], for the question. This goes back to, you know, we think the trends have been pretty consistent over the last three years. We had a jump this quarter, and again it was primarily driven, we've had some real nice success in the NG Firewall market, with customers who want to take advantage of central management but have a lot of remote locations. And when you do that, you're selling a large central unit with a large number of smaller units, and so all of those units are coming on, they're smaller units, smaller dollars, but they're active subscribers for us as each one of those locations gets activated. And so we saw more of those lower-end firewall units getting activated in the quarter which drove the number of active subscribers out.

Underneath that, I think we felt the same kind of linear growth in the active subscribers we had across the product lines.

Unidentified Participant

And you've clearly seen some pretty solid growth in storage in some of these emerging segments. I wonder if you could talk a little bit more on just the content security portion of the business and kind of how that grew in the quarter relative to kind of what you saw last year with the high single digits.

BJ Jenkins

Yes. It's, as we said, it's a mature market that fluctuates, and we've seen periods when it's gone in the high single digits, and we've seen periods when, like this, when it's gone into low single digits or negative.

What I would say, within that, we believe we're in a really good position whether it's in that high position or low position to take share from our competitors. And the reason we believe that is because more of that market's going virtual, and we think we have a very strong virtual product offering. Some of that is going to the public cloud, and we've announced the Spam and Virus Firewall availability in AWS, and coming soon you're going to see that in other public clouds. And so we think as customers make choices, the move to virtual or the move to public cloud, we're in a real good position to capture more of that business.

Also I think this will be a big thing for us, this Virtual License Portability. I think we're one of the only ones if not the only one who offers customers that choice. You can buy that license now today for your email system that you have on premise. And then if you decide you want to move into Office365 or you want to run Gmail or run email in AWS, you can take advantage of the license you've already bought and move that to the public cloud.

And so I think all of that, whether that market's accelerating or decelerating to the particular position, I think we're in a good position to take share on the market. This was definitely a quarter, when you look at the outside analysts though where they felt content security was at a lower point.

Unidentified Participant

Great. Thanks for taking my question.

BJ Jenkins

Thanks, Ben [ph].

Operator

Your next question is from Jason Ader with William Blair.

Jason Ader – William Blair

Yes, thank you. A couple of questions. First, BJ, you talked about the impressive list of enhancement and new features on the current products that you guys are offering. Can we -- or should we expect some new product areas, kind of areas that you haven't been in in the past to launch here in the next 12 months or so?

BJ Jenkins

A couple of ways I think to think about that, Jason. First is, especially in our high-growth markets, we've been on a rapid pace of innovation and I feel like we have the best lineup of product feature enhancements that we've had in a long time. And so when I think over the next two to three quarters, I'm really excited about the offerings we're going to put out there. And those are enhancements to our existing product lines.

We are doing -- I really feel good about the R&D machine right now, and MDM is an example of a new category we moved into. And we're moving into it in maybe a different way than you see other players in the market. Most of the folks -- and the feedback we got from our customer base around the MDM players was that they were very complex to manage, very complex to implement, and expensive. And so as we developed ours, we really went after those key use cases for our customer base. And then we made a decision to offer it for free.

And the belief there is, having that work with all of our security products is going to lift our entire security portfolio. And we've done this before. This is something we're doing in the ADC category where for a number of modules we just added the security features to the ADC with no additional cost. So we think it drives value for our customers and, in doing that, we think we can lift our overall sales.

I do think you'll see us, organically, we have a couple of announcements coming up which I would consider new areas for us to move into. And as always, as part of our model, we've looked to make acquisitions that will expand the number of offerings we have in either security or storage. And for us it's, you know, unlike others, I think instead of just doing an acquisition, we want to make the right acquisition, it needs to fit in our business model, and it needs to bring value to our customers in a particular way. And we're certainly out there looking for those.

So I think you can expect some organic R&D that will lead us into new areas like MDM and some others to follow, and we'll try and balance that with acquisitions also.

Jason Ader – William Blair

Great. And then the second question, in the backup space, we're definitely seeing a lot of change I'll call it, and on the SMB segment in particular, obviously you guys are doing well and you're a relatively new player, but there's certainly a lot of movement to public cloud models for backup for the SMB customers out there. Is that something you're seeing at all as, you know, is this something that you worry about as you look over the next few years, or how do you kind of reconcile the shift to the public cloud, you know, pure cloud type of model with your offering?

BJ Jenkins

Yes. I think, first of all, I think we're in a very good position around traditional backup activities with the hybrid model. Recoverability from a local device is still key for small and medium business, and so that ability to have the local device but have the Barracuda cloud for DR and business continuity, that end-to-end solution I still think is very viable and where a lot of the market's going.

I do see the emergence of public cloud as an opportunity for us in data protection. And some of the ways I think we can take advantage of that is we have copy, we have archive and we have backup. We are integrating features and functions, copy the backup, so you'll be able to protect endpoint devices via copy, so, via public cloud service. And we think that's an enhancement to what we do.

We think there are ways for us to work with public clouds, either to move data between them or provide services within areas like Office365 or applications running in public clouds to protect data. And so I think you'll, you know, you're going to see part of that roadmap for us is, how do we help those users in those public clouds protect their data, have data mobility between public clouds? That's a big part of how we're thinking. So I view that as it's definitely a trend we see. We feel good about the IP we have and the assets we have to go solve the problems for customers. So we view it as a way to make more incremental inroads into the TAM that's out there for us.

Jason Ader – William Blair

Very good. Thanks.

Operator

[Operator Instructions]

The next question is from Michael Kim with Imperial Capital.

Michael Kim – Imperial Capital

Hey, good afternoon guys. Yes, hoping you could talk a little bit more about the integration with Lastline and the level of interest you're seeing in the midmarket for protection against APTs and zero-day exploits. And if you could frame that opportunity and how you see that position competitively. Thanks.

BJ Jenkins

Thanks, Michael. It's BJ. I think it's interesting, there's a growing awareness in the SMB and midmarkets to APT and zero-day threats. And so we do see customers asking about it. I think the challenge those customers have always had is that the solutions that are out there or were out there available to them, again, complex, they involve a lot of human resources to deal with, false positives and system changes to try and deal with what's coming out of those systems. And we -- our approach is we've done sandboxing in our cloud for a number of years to help identify and prevent these threats. We wanted to be so that it's automated as possible for the customers so they don't have to have a lot of resources or are burdened with dealing with a lot of decisions they have to make to deal with these things.

So we've had it in our cloud. We see some customer demand.

The Lastline relationship, we evaluated a number of companies, and really this was about adding another layer to the IP we already had. And in doing that, again doing it in a way that doesn't overburden the end-user customer. And to the companies we talked with and about, integrating with Lastline was the best way for us to do that, to get the best solution to the customer and again not to have to over-burden them, to keep it simple but provide a more powerful solution.

So we see growing interest. I think certainly given all the press there's more awareness in the market, and we view this as a way to increase again the services we're offering to that customer.

Michael Kim – Imperial Capital

Okay, great. And then just one quick one, with the renewal rates here in the 94% range, is it your expectation that it sort of hovers around here, or do you see an opportunity to maybe bring it back to kind of the levels we saw in the last two, three quarters? Thanks.

David Faugno

Hey, Michael, thanks for the question. Yes, this is Dave. As we've indicated before, we're really pleased with kind of where we've fallen here and the prior quarters, really beyond what our expectations were, a little bit of an anomaly where the maths came on a number of kind of variables.

That said, the other thing to bear in mind here is the pool is significantly larger, gets a lot larger in Q1, and so the dollars, both in terms of the pool and what we're actually billing go kind of as a step function when you get into this this first quarter, it's a function of kind of the graduating class of subscribers coming back and being added to the very sticky classes before them.

And so we're very pleased with where the number is in terms of the range of expectations. And we, again, we expect it to be in that range moving forward.

Michael Kim – Imperial Capital

Okay, great. Thank you very much.

BJ Jenkins

Thanks, Michael.

Operator

There are no further questions at this time. We will now turn the call back over to BJ Jenkins.

BJ Jenkins

Well, I just want to thank everyone for joining us today and for your support of Barracuda. And to our employees worldwide, we appreciate the work you do for our customers. And to our customers and partners, thank you for continuing to trust Barracuda as your IT partner.

Thanks again for joining us today and we look forward to keeping you updated as we continue to grow the business. Thanks everyone.

Operator

Thank you for participating in today's Barracuda first quarter fiscal 2015 earnings call.

This call will be available for replay beginning at 8:00 p.m. Eastern today through 11:59 p.m. Eastern on July 15th, 2014. The conference ID number for the replay is 58575538. Again the conference ID number for the replay is 58575538. The number to dial for the replay is 1-800-585-8367.

This concludes today's conference call. You may now disconnect.

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