Carbonite Inc. (NASDAQ:CARB)
Q4 2015 Earnings Conference Call
February 4, 2016 8:30 am ET
Emily Walt - Director IR
Mohamad Ali - President, CEO
Anthony Folger - CFO, Treasurer
Eric Martinuzzi - Lake Street Capital
Bhavan Suri - William Blair
Koji Ikeda - Oppenheimer
Tim Klasell - Northland Securities
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Carbonite Fourth Quarter and Full Year 2015 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 be given at that time. As a reminder, this conference is being recorded.
I would now like to hand the conference over to Emily Walt, Director of Investor Relations. Please go ahead.
Thank you, operator. Good morning and thank you for joining us today to review Carbonite's 2015 fourth quarter and full year financial results. With me on the call today are Mohamad Ali, President and Chief Executive Officer; and Anthony Folger, Chief Financial Officer. After prepared remarks, we will open up the call to a question-and-answer session.
During this call, we may make statements related to our business that will contain 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. Statements include but are not limited to statements regarding guidance on our future financial results and other projections or measures of future performance including the expected future results of the EVault acquisition including revenues and growth rates. The company's ability to successfully integrate EVault's business and the company's expectations regarding its future performance.
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, 2014, filed with the SEC, which is available on the SEC's Web site or on our Web site 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.
All the financial figures discussed today are non-GAAP financial measures unless it is stated that a measure is a GAAP number. Reconciliation to the most directly comparable GAAP financial measures can be found in our press release, which is available on our Web site under the Investor Relations section. Also, please note that our webcast and a recording of today's call will be available on our Web site.
With that, I will turn the call over to Mohamad. Mohamad?
Thank you, Emily. Good morning and thank you for joining us to discuss our fourth quarter and full year results for 2015. This morning, I will discuss our performance in 2015; Anthony will review our financial results, and then, I will talk in more detail about our focus areas for 2016. But first, I want to say thank you to all of our Carbonite employees for your hard work this year.
In 2015, we grew total bookings 12% year-over-year, SMB bookings grew 35% consistent with our guidance of greater than 30% and our consumer business performed as expected growing 2% consistent with our expectations of 0% to 5%. Gross margins and earnings per share significantly outperformed expectations for the year.
In the fourth quarter, we delivered record gross margins and earnings per share. Total bookings grew 8% with SMB bookings growing 27% and consumer declining 2%.
Entering 2016, we are very excited about how the EVault acquisition transforms Carbonite. The combination of EVault and Carbonite products positions us as a leader in the SMB data protection and disaster recovery markets.
Now, I will hand it over to Anthony to discuss in more detail, our fourth quarter and full year financial results. Anthony?
Thanks Mohamad. Good morning everyone and thanks for joining us.
This morning, I will take you through our Q4 and full year 2015 results and our 2016 outlook with a specific focus on the EVault acquisition. I would like to start by saying that overall, I'm really pleased with our performance in 2015 and the execution on the initiatives, we outlined at the beginning of the year. Our product portfolio has never looked better. We've seen solid gross margin expansion and continued improvements in customer retention and we made significant progress in building out our go-to-market capabilities.
For the full year 2015, we saw total bookings of $144.1 million, an increase of 12% over 2014; of that SMB bookings were $54.5 million representing year-over-year growth of 35% and comprising 38% of our total bookings as compared to 31% of our total bookings in 2014. And consumer bookings were $89.6 million representing year-over-year growth of 2%.
In Q4, we saw total bookings of $37.4 million, an increase of 8% over the prior year quarter; of that SMB bookings were $15.8 million representing year-over-year growth of 27% and comprising 42% of our total bookings as compared to 36% of our total bookings in the prior year quarter. Consumer bookings were $21.6 million representing a year-over-year decline of 2% and customer retention was strong coming in at the high-end of our historical quarterly range of 96% to 97%.
Now, I would like to talk about a few drivers behind our bookings performance, starting with Carbonite server backup, which performed well again this quarter and represented 22% of total SMB bookings for both the fourth quarter and for the full year 2015. I would also like to note that we ended the year with slight more than 8200 active reseller partners in our indirect channel, an increase of approximately 41% from last year.
In addition to the increase in overall active partners, we are also seeing good results with partners sell-through as more partners sold subscriptions during the quarter and partner yield as the average order value on those new subscriptions continue to increase.
Turning now to the income statement, revenue for the fourth quarter was $35.1 million representing an increase of 10% over the same quarter last year and revenue for the full year 2015 was $136.6 million, an increase of 11% from the prior year.
Gross margin expanded for both the fourth quarter and the full year and the primary drivers continue to be our revenue mix shifting toward higher margin SMB products combined with efficiencies in our data centers, the declining cost of storage and operational efficiencies realized in our customer care organization.
As we look across our lines of business, our consumer business generally carries a gross margin profile in the mid-60% range, while our SMB business generally carries a gross margin profile in the mid-80% range. As a mix of our revenue continues to shift toward SMB, we expect gross margin expansion to be an ongoing trend.
Gross profit for the fourth quarter was $26.4 million resulting in a gross margin of 75.3% or 580 basis point increase over the prior year quarter. Gross profit for the full year of 2015 was $99.9 million resulting in a gross margin of 73.1% and an increase of 380 basis points over 2014.
For the fourth quarter, operating expenses were $23.1 million compared to $22.5 million in the prior year quarter an increase of $600,000 or 3%. Cost management within our operating expense lines saw us generate operating leverage from both R&D and sales and marketing, while holding G&A relatively flat us a percentage of revenue. Within sales and marketing, advertising expenses for the quarter were $3.5 million compared to $3.4 million in the prior year quarter or roughly flat.
For the full year 2015, operating expenses were $95.2 million compared to $84.4 million in 2014, an increase of $10.8 million or 13%. Within our full year numbers, advertising expense was approximately $15 million compared to $18 million in 2014, a reduction of $3 million or 17%.
On the bottom line, net income for Q4 was $3.6 million or $0.13 per share compared to a net loss of $900,000 or $0.03 per share in the same period last year. For the full year, net income was $4.1 million or $0.15 per share compared to a net loss of $94,000 or $0 per share in 2014.
CapEx for the fourth quarter was $1.5 million compared to $3.9 million in the year ago quarter. And for the full year 2015, total CapEx was $9.7 million compared to $14.5 million in 2014. It's worth noting that the $14.5 million in 2014 includes $3.9 million in corporate headquarter relocation costs, so on an adjusted basis 2014 CapEx was $10.6 million.
Free cash flow was $7.1 million for the fourth quarter compared to $7.1 million in the year ago quarter and for the full year 2015, free cash flow was $14.3 million compared to $15.1 million in 2014. A lower than expected free cash flow for 2015 was largely the result of Q4 bookings coming in below our expectations.
Total cash and investments as of December 31, 2015 were $64.9 million compared to $61.1 million as of December 31, 2014.
Before giving our business outlook, I would like to provide some more insight into the EVault acquisition. As we mentioned on our December call when we announced the deal, this acquisition doubles our total addressable market, which now covers all of SMB and it also accelerates our product roadmap by years, which is truly exciting.
With North American close now behind us, I think it's safe to say that 2016 will be a transformative year for Carbonite. The addition of EVault comes with more than 200 talented employees and market leading next generation technology that positions us as a leader in the data protection and business continuity market for SMBs.
Our focus will therefore be on integrating the two businesses so that we realize the synergies that make this deal so compelling and positioning ourselves for growth in 2017 and beyond.
I would like to take a minute now and talk about the EVault integration and highlight expected synergies from the deal. The three primary areas that I would like to cover are go-to-market, products and engineering and infrastructure. On go-to-market, our priorities are first to introduce the EVault products to a segment of our partners, we think can sell these solutions immediately.
EVault's go-to-market model hadn't been focused on the reseller market to the same extent as Carbonite's and we think we can provide a lot of leverage and synergy through our channel.
Next, we will implement lead routing across the Carbonite and EVault sales organizations so that both teams can begin to immediately see and close more opportunities and was the case prior to the acquisition. In addition, we will unify our existing partner programs to allow for consistency in operations and partner incentives.
Next on products and engineering, our first priority is to combine the resources and experience of our engineering teams taking the best from both so that we can bring next generation products to market with more quality and velocity. In addition, we are conducting a review of the packaging and pricing for EVault's offerings and plan to rollout any changes during the second half of 2016, so that our sales organizations and partners can have competitively priced offerings that are packaged in a way that makes us easy to do business with.
Finally, on infrastructure, I would like to mention two areas, first is data centers. The EVault business has historically had a lower gross margin profile than Carbonite. With our experience in managing cloud infrastructure at scale, we see this gross margin disparity is a great opportunity and we will focus our data center integration efforts on reducing the overall data center footprint for the combined business, increasing the level of automation in EVault's data center operations and moving new EVault data center hardware purchases on to a lower cost hardware stack.
Next is our corporate infrastructure and we expect to take all of 2016 and at least the first half of 2017 to migrate our billing CRM and ERP systems on to common platforms that are most appropriate for the combined business. All other customary back office integration will take place throughout 2016.
We will continue to update you on our thoughts and progress throughout the year because we expect this to be an area of integration investment throughout 2016 and meaningful savings in 2017.
With our integration priorities covered, let's turn to our financial guidance for 2016. Before getting into specifics, I would like to highlight the fact that the EVault acquisition was a strategic decision to position ourselves as a leader in the data protection and business continuity market for SMBs. As a result, we will continue to invest in growth outline of business and we will curb some investments in our consumer business in order to preserve and maximize cash flow.
For the first quarter of 2016, we expect non-GAAP revenue which excludes purchase accounting adjustments associated with deferred revenue to be in the range of $40 million to $45 million and on the bottom line, we expect to be in the range of a non-GAAP net loss of $0.07 to $0.05 per share.
For the full year 2016, we expect our SMB bookings to be in a range of $100 million to $110 million representing growth ranging from just north of 80% to approximately 100% compared to 2015.
Overall, we feel comfortable that we can deliver strong organic growth along with a $40 million to $45 million bookings contribution from the EVault acquisition in 2016. Because we made the decision to maximize cash flow from our consumer business, we expect consumer bookings to be in a range of flat to a decline of 10% as compared to 2015. While the quarterly distribution of bookings and growth maybe a bit lumpy, we believe that for the year will hold to a range of flat to a 10% decline.
This is an obvious change in how we recently managed our consumer business but with SMB now making up more than 50% of our overall bookings, we feel this is the right strategic bet. On future calls, we will continue to share details around bookings and we will also share details on the cash contribution from the consumer line of business. We expect non-GAAP revenue for the full year, which excludes purchase accounting adjustments associated with deferred revenue to be in the range of $175 million to $190 million and non-GAAP earnings to be between $0.09 and $0.15 per share.
Our non-GAAP gross margin is expected to be in the range of 68% to 70% on a combined basis, and I would like to note that our gross margin profile will consist of Carbonite's organic gross margins which we expect to expand by roughly 100 basis points in 2016 combined with EVault's gross margins.
With all of the data center integration work that we are doing in 2016, this is an area where we expect meaningful upside in 2017.
Free cash flow is expected to be in the range of $9 million to $13 million as we will make some investments in the business in order to integrate as quickly as possible.
Now, I will turn it back to Mohamad.
Thank you, Anthony.
As Anthony as outlined, our acquisition of EVault transforms Carbonite. We are focused on execution in three key areas. First, leverage channel partners to improve go-to-market; second, bring new capabilities to small and mid-size businesses; and third, drive operational synergies through integration with EVault.
First, we will offer EVault products to a portion of our over 8200 Carbonite resellers expanding the reach of these products dramatically. We also gained strategic partners like Iron Mountain and SunGard. Finally, because of EVault's scalability and features, we can now approach MSDs, opening up new opportunities to service new segments within the SMB market.
Second, with EVault, Carbonite now has a full range of products that positions us to gain share in the cloud-based backup and disaster recovery market. A market in which Gartner expects the number of companies backing up to the cloud will double the 24% by 2017 and positions us to enter the disaster recovery as a service market which analysts expect will grow at an accelerated CAGR of 30% through 2018.
Along with the larger market trends of explosive data growth and rapid cloud adoption particularly in SMBs, we estimate the total addressable market opportunity for Carbonite is $40 billion worldwide. Prior to our acquisition of EVault, our product portfolio primarily addressed the backup and recovery needs of consumers and very small businesses but was not able to offer the features and functionalities that mid-size businesses require. With EVault, we can now address the full data protection in disaster recovery need of businesses larger than 100 employees.
For example, a large well-known multinational hotel company with over $2 billion in revenue uses EVault's cloud backup and recovery appliance to support 13 global call centers and approximately 18,000 sales people worldwide.
Another example is NuCompass Mobility, a global relocation services company providing services in 150 countries. EVault provides disaster recovery as a service as part of their risk mitigation strategy. Through an integrated solution of EVault cloud backup, NuCompass as a simplest scalable answer to their disaster recovery needs.
With EVault, Carbonite is the only vendor in the market that offers multiple cloud backup products for different types of data supports the widest array of operating platforms and applications and provides a comprehensive and scalable DRaaS solution. Third, Carbonite will improve operations by consolidating EVault's data centers and migrating back office automation to improve efficiency and reduce costs. Our data center integration plan will be focused on reducing the EVault footprint through our experience with low cost data center management, an increasing data center automation and efficiency company wide.
In conclusion, we believe that Carbonite can now, one, capitalize on the large and fast growing SMB cloud backup and disaster recovery market. Two, offer the industries most comprehensive products for SMB with substantial customers already relying on those products 24/7. Three, delivery our products and services even more cost efficiently. Finally, Carbonite is a growth company with new management, new products and a lot to be excited about.
With that, I want to thank our team and open up the call for questions. Operator?
Thank you. [Operator Instructions] Our first question comes from the line of Eric Martinuzzi from Lake Street Capital.
Thanks. And congratulations on the finish to 2015 given those consumer and SMB booking targets, it's a good accomplishment for the year.
Curious to know, you announced the EVault deal back on December 16, at that time it was $200 million, you've now more kind of -- more narrowly, I would say the midpoint of what you just talked about on the call is $190 million. What did you learn between then and now that's got you a little bit more conservative on 2016?
Good morning, Eric. It's Mohamad. I'm going to have Anthony pick up that one.
Yes, Eric. I think we sort of laid out a pretty broad range from a bookings perspective, which is GAAP both consumer and SMB growth baked in there. And the range I think will sort of fall-off between maybe $180 million and $200 million, $190 million being the midpoint. So I think generally speaking, we are consistent with where we were back in December. I think there a couple of dynamics that have changed and one of them is, we closed on the 13 of January, which is a little bit later than we expected. And I don't think that has really material impact on results. But, I think overall, we feel like we are still consistent with where we are in December.
And the European portion of the deal will close in March. So with the assumption, we're going to close everything in early January and that's not the case, which is fine. But that will let to that adjustment. But I got to say Eric, I mean we are so, so super excited about this deal. It's a great deal, economically it's a great deal from a technology perspective, I mean these guys have some of the best technology [indiscernible] 100s of millions of dollars in R&D, we are getting and [indiscernible].
Okay. And just on the product side, I want to make sure I understand, again, your existing product for the SMB the Carbonite server backup as well as some of the other ones. But I know that's the main one. Can you juxtapose that versus DRaaS, how is the difference between your existing SMB offering and this DRaaS opportunity?
Oh, yes, absolutely. So DRaaS is an interesting thing right. It stands for disaster recovery as a service. It's probably one of the trickiest services you can sell. And what's this means is that, our [CSD] [ph] product will backup your server to the cloud -- to the Carbonite cloud, while the EVault does the same thing. They backup your server to the Carbonite cloud. They are able to handle more servers, more complex environment.
But the other thing that it does is -- they -- when you set it up initially, they reconfigure that server that's in the cloud that backup of your server in the cloud. So look like its part of your network. So they get all the IP connections and so forth set-up.
So should server at the Lake Street office go down within a short period of time, let's -- it's under an hour, they have that backup server up and running and functioning like it's inside your company. And so that disaster recovery as a service and when those things are pre-configured, Carbonite doesn't do that today, right? We call that [indiscernible] cloud failover and we talked about how we wanted to develop that technology. Here we get -- and how we get it, EVault as one of the largest installed base of this service. It's ranked very, very highly. This is a market. And this is a market that's growing very strongly. Gartner says its $1.3 billion today and it's growing at 30% and with this deal we are smack in the middle of it as a leader right away as supposed to taking two to three years for the engineering and developed it organically at Carbonite and then go build the customer base. I mean this is actually a pretty incredible opportunity for the company.
Got it. Understand. Thank you for taking my questions.
Absolutely, Eric, great to hear you.
Thank you. And our next question comes from the line of Bhavan Suri from William Blair.
Hey, guys. Thanks for taking my question and its exciting guidance for 2016 there. Just a couple of questions on EVault. The first I guess is, if you look at the core business that you guys bought, it would be great sort of understand, how you sort of drive growth in that and add to the sales momentum there because today you sold to the smaller businesses sort of some sense and how you are building out the sales team to sell into the -- greater than 100 employee base and sort of how you thinking about changing your model to approach that opportunity?
Yes. Good morning, Bhavan. Great question. And I think it's a [great exciting] [ph] opportunity for us. So one of the things that we were trying to deal with the Carbonite products that it sort of move upstream, I think you remember in the second half of last year, we launched these product that address larger customers, right? And we were putting those through existing channel partners that we have, right, sort of like CDW and we have 8200 retailers not all of them are tiny, right? I mean we give a lot of them that are very small. But we have some of them that are substantial in size. And those larger partners can actually sell the EVault product and as these 100s of them out of our 8200 that can start selling the EVault product. And so one of the things that we were doing is instead of trying to move the Carbonite product upstream to larger customers, we're going to sort of continue to focus them where they are really, really good at those very small customers and now that we have EVault. We are going to take EVault and put it through 100s of these channel partners and significantly expand the go-to-market reach of these products.
Okay. Okay. And then, just as I look at sort of the guidance for next year and sort of a little bit what we saw in the quarter, obviously, the consumer bookings numbers come down a little bit from what I guess, our expectations might have been say the start of 2015 or even mid-2015. Just help me understand sort of why those sort of headed down that trajectory. Strategically, I know we deemphasize -- deemphasize a little bit, but just seems a pretty rapid sort of decline even if you weren't investing given churn rates, it feels like it's just churn there. So help me understand that a little bit for 2016? And then, maybe as you're doing that just I guess, you sort of said you might see bookings approximately $200 million this year, is that still the case?
Yes. So I'm going to answer the first part of that. And Anthony will pass through it. So thanks for asking about the consumer -- key for the business. So at the end of the day, almost every call I get on -- every it says right on to, they say, hey, when did you get started growing as a company greater than 20%. Well, a big part of being here was to grow at 20% is, did not have a huge business that is essentially flat. And so we've indicated before that as a point where the SMB business is much -- is the majority of the company, we will start treating the consumer business differently. And the extent with -- mathematically we have a smaller consumer business and a larger SMB business going into 2017, you will see just mathematically better growth. And so, we are now starting to treat that business differently. And that's sort of consistent with how we have been thinking about approaching this at the point where the SMB business becomes to majority of the company which is now is.
So Anthony, you want to add to that?
Yes. I think that's right Mohamad. We -- for us when we look -- when you look forward on the consumer business and I think we said for some time the cost of customer acquisition in that market is just prohibitively high. And we have been spending a little bit to maintain a growth rate there. And frankly, I think now the dynamic has changed and we are seeing greater than 50% of the business coming from SMB. We think it's the right strategic bet to deemphasize the spend in the consumer space and push more into SMB. And as a result, I think we just expect that business may contract a little bit here in 2016. But I don't think it's a reflection of churn rates, frankly our retention rates have improved pretty steadily throughout the year, we are pretty happy -- very happy I would say with where those are at. So it's more about optimizing cash flow from the consumer business. So I think that's really where we are headed in 2016. We want that business to generate cash for us.
And your second question Bhavan about overall bookings for the year, in December, we said we thought it would be approximately $200 million with the addition of EVault. The range that we guided today was roughly $180 million to $200 million. So I feel like we are consistent with that range. And I agree, I think the guidance for 2016 is pretty exciting for us.
And Bhavan just to add, Eric asked the same question, right? So the guidance $180 million to $200 million -- $200 million is part of that. But the other thing is, the deal did not close on January 1, North American piece they closed few weeks later and then the European piece of it, it's going to be in March. That's an [effective build up] [ph].
Got you. All right, guys. Thanks for taking my questions.
Thank you. [Operator Instructions] Our next question comes from the line of Brian Schwartz of Oppenheimer.
Hi. This is Koji Ikeda for Brian Schwartz. And thank you for taking my question. I just got a quick question on EVault. I was wondering, if could talk a bit about the booking seasonality going forward, historically I know you guys, the summer months have always been a bit lighter in bookings and now with the acquisition of EVault and the addition of channel partners more sales capacity and with the shift to SMB and the change and the focus on consumer, do you think the bookings seasonality is going to become less pronounced here. And maybe follow a more linear pattern with a stronger 4Q?
Yes. So Koji, good to hear your voice, its Mohamad. So first of all, I would say that we own the business for two weeks now. I can't tell, I think we are learning about the patterns and seasonality and so forth. But, Anthony, I don't know if you have a strong perspective on this one way or the other.
Yes. I think Koji, it's -- I wouldn't expect material change in the seasonality of our business. I still would look at Q3 as probably being the lightest quarter. And I think for a lot of reasons I think just the general summer slowdown. And I think as it's historically been the case with Carbonite, we tend to have a strong Q4. So I would expect roughly the same dynamic and the same -- or similar type distribution.
Okay, great. And then just a quick question on product bundles. I know this maybe -- could be a little bit early, but could you maybe talk about product bundles or how you're -- how many products your customers are adopting say maybe on a smaller SMB versus the larger SMBs out there. Or are you beginning to see customer buying multiple products at one-time now?
Yes. I think certainly within the core Carbonite business that low end of the SMB market, we have a lot of success bundling our server backup in our pro-product which is the endpoint back-up. And we've also -- when we launched our appliance line up back in 4Q of 2015, we also had, I would say good attach of our endpoint backup product, the appliance as well. So I think our ability to attach and to bundle has been a bright spot for us internally. And frankly, our ability to cross-sell and up-sell with the new products that we got in the portfolio has been something that's been driving growth as well.
So short answer is, yes. I think we've seen good success at the low-end of SMB with that type of a strategy.
Great. Thank you for taking my questions this morning.
Thank you. And our next question comes from the line of Tim Klasell from Northland Securities.
Yes. Hey, good morning everybody. Congrats on what looks the exciting 2016.
One question, I believe on the when you had o call on the -- going over the EVault acquisition, you mentioned that was going to be accretive for the year. And it looks like really -- your guides were a little bit below the street, was it just the timing of the close or is there something else going on that we should be aware of?
You want to take that?
Hey, Tim. It's Anthony. We still do expect, I would say a slightly accretive deal in year one with EVault. I think fundamentally what we're doing is making investments back in the business on the Carbonite side. When you think about this deal, I think that the single biggest synergy is being able to take the EVault product and drive it through our channel or I should say a segment of our channel. We got a good segment of our partners, who really are able to sell their products immediately. And so we are investing there. We are investing, I would say a little more in sort of the infrastructure and the capabilities of our channel because we just think it's a -- it's going to be the future growth driver for the business. So we do still expect to see slight accretion from the EVault deal meaning it's going to be positive from a non-GAAP EPS perspective in year one. I think the -- if you are seeing compression or things are slightly lower than expected from an EPS standpoint, it's investments that we are making back here in our core infrastructure and go-to-market in order to really accelerate growth.
Okay. Good. Good. And that $40 million to $45 million in EVault bookings; how does that come -- what's the growth rate in that compared to last year?
Yes. That's a tough question to answer because we are craving the business out. EVault was growing within Seagate. And there were a lot of different product lines some of which we didn't take. So it was -- I would say a strong grower with EVault. Our view is we can accelerate what they were doing and drive them up to the type of growth rates that we have been seeing in our core Carbonite business.
Okay. Good. Good. And then just jumping over to the consumer business, obviously, this is maturing; you guys are turning that into a source of cash. Is the -- beginning to see the downturn, is it new customers not coming on as fast as they used to or is there, obviously, there is always the concern about pricing pressure. Maybe you can walk us through that balance?
I think for us the challenge in the consumer business is for a couple of years now have been new subscribe acquisition. And just the cause of our model to acquire a new sub that's really what we did -- where we have been challenged. And so I think this year with the EVault deal in the books and the outlook that we got for the SMB business going forward, to us, it just felt like the right strategic move. And it was a cautious move to curb some of the investments on the consumer side as it relates to go-to-market and frankly to allow that business to decline slightly in 2016. We think we can probably manage cash flow better. We can yield more from that line of business with this strategy and with the SMB business and the shape that it's in right now, we think that's the right thing to do.
Okay, good. And then, one final one here. You mentioned something about being able to get greater efficiencies out of the EVault data centers. Is there a potential to consolidate some of the data centers, do they have some that are physically located not maybe too distant from some of yours or vice versa?
Absolutely. Like a huge opportunity. It's so big, you wouldn't believe it.
Yes. That's a really big opportunity and we talk a lot about the data center consolidation that we have been running here at Carbonite. We finished it in early 2015 and we've seen really good expansion in gross margins as a result. So we've got a team here that is not only experienced in doing it but it's fresh off of doing this for the Carbonite business. And honestly, the EVault data center team through the diligence process and now through the close, we think it's a really good, really talented team. We think there is a lot that we are going to get from them. And we think we can bring a lot to the table especially in areas like data center consolidation. So, I think there is a very large opportunity to really gain a lot of efficiency and get that consolidated business down to a very small number of data centers.
Okay, great. Thank you very much guys.
I just want to --
-- draw your attention to one of the charts that we have in this deck. And for everybody on the call, if you haven't looked at that chart, I would recommend that you do because let's say, we have provided fair amount of insight as to how we are transforming the business. But if you look at chart 8, right? A year ago, our gross margins were 59% and the 2011, our gross margin was 62%, so that was 62, Q4 we ended -- Q4 2015 we ended 75%. That is a 13 point increase. A huge part of that came from making our own data centers far more efficient that we now run probably one of the world's no deficient data center.
And just to give you a sense, it's a -- around let's say 150 center, three times than Netflix sort of master copies of all their video. The huge data center and we have a team here that knows how to run these things extremely efficiently. And so if you look what we have versus what EVault had, there is a really significant opportunity for us to bring this data center cost management capability to their assets. Today their data centers -- actually one of the key reason that deal made so much sense for us. So I don't know if that's how clear that is then we have another chart in the deck that that specifically talks about the data center consolidation. So I would urge everybody on the call to look at the deck, because I think it's pretty insightful.
I do want to -- maybe just sort of add a few thoughts Tim that that I first thought you were asking few questions. The way I think about the company is, when I joined 13 months ago, 14 months ago, actually we sort of like the fairly pleased play and that had these server [adapter] [ph] engine.
And we are going to [indiscernible] I think in 2014 we grew 11% and in 2015 we grew 12%, so grew a little bit faster. So what we have been doing is, we have sort of been changing engines and explain how it's been going, right? Replacing with jet engines what do I mean by that? We are doing a pretty much a complete overhaul of the underlying IT infrastructure that CRM system, the ERP system, the general ledger system to make it much, much more nimble, scalable, ability to combine that -- we are renovating the whole data center infrastructure, sort of the lower cost. We've added four very strong -- very strong executives to the executive team that gotten stronger. We transformed this all in 18 months, right? I'm sorry in 14 months. We transformed the business from primarily consumer which is a tough market to primarily SMB, which is a great market and we are entering new markets like the DRaaS market which is growing at 30%. It's a very different business.
When I joined, we had eight patents, today we have 27 patents and 20 pending that's almost 50, if they are all issued. It is very, very different business in 14 months. And hopefully, folks are recognizing the transformation. I'm super excited to be here and I think 2016 is going to be a great year. And that will set us up I think incredibly well for 2017 and 2018. So I thought that I sort of provide a little bit for that perspective.
No. That's very helpful. Thank you, Mohamad.
Thank you. And that concludes our question-and-answer session. I would like to turn the conference back to our host for any closing comments.
Great. Well, thank you all for joining. Like I said, we are very excited about 2016. And I look forward to seeing you all as we get on the road in the next few weeks and throughout the year. Thank you.
Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.
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