Barracuda Networks, Inc. (NYSE:CUDA)
Q4 2016 Earnings Conference Call
April 26, 2016 05:00 PM ET
Adam Carson - IR
BJ Jenkins - CEO
David Faugno - CFO
Gur Talpaz - Stifel
Ryan Hutchinson - Guggenheim
Michael Kim - Imperial Capital
Srini Nandury - Summit Research
Good afternoon, and welcome to the Barracuda Networks Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]
Please note this event is being recorded. I would now like to turn the conference over to Adam Carson, VP of Finance and Investor Relations. Please go ahead.
Good afternoon and welcome to our fourth quarter fiscal year earnings conference call. Today's call will begin with our President and CEO, BJ Jenkins, who will provide comments on our performance for the 2016 fourth quarter and year that ended on February 29th, 2016. Then our CFO, David Faugno, will review the financial results in more details, and provide guidance for our fiscal 2017 first quarter and year. 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 fourth quarter ended February 29th, 2016. A copy of this release and supporting financial materials are available in the Investor Relations section of the Company's website at barracuda.com.
During the call, we will make forward-looking statements such as those containing the words may, expects, believes or similar phrases to provide information, which is not historical in nature. These statements involve risks, assumptions and uncertainties.
For a more detailed description of these risks, assumptions and uncertainties, please refer to the Company's filings with the Securities and Exchange Commission, including the risk factors contained in our most recent quarterly report on Form 10-Q. For information on risks and uncertainties that may cause actual results to differ materially from those described in the forward-looking statements.
And with that, I’ll now turn the call over to BJ Jenkins, President and CEO of Barracuda.
Thank you, Adam. Good afternoon and thank you for joining us today to discuss our fourth quarter and fiscal year 2016 results. On today’s call I will discuss three subjects: first, our fourth quarter financial results; second, the trends that have evolved in our markets over the course of the most recent fiscal year; and finally, our strategic plan which we believe will best position Barracuda to capitalize on these trends.
Let’s begin with a summary of our results for the quarter. Total Q4 revenue grew 16% year-over-year to $83.7 million, above our guidance range of $80 million to $82 million. Gross billings came in at $95.8 million and the dollar base renewal rate was 96%.
In Q4 billings continue to shift more toward readable subscription form factors and away from upfront appliance billings. Subscription annual recurring revenue or ARR grew 25% year-over-year to $255 million. On the bottom line, we delivered better than expected results for the quarter. We achieved non-GAAP EPS of $0.15 per share, which on a comparative basis is more than double our EPS in the fourth quarter of last year.
As we discussed last quarter we have begun shifting and reducing expenses in non-core product areas and as a result we have been able to accelerate the competitiveness of our core products including our NG Firewall, E-mail security, Data protection and MSP solutions in Q4.
Now let's turn to the trends occurring in our target market and the impact they have on our business. First, more customer's IT infrastructures are expanding to take advantage of the cloud and our customers are in different stages of this migration. Many continue to utilize appliances for simplicity and tighter control. Others are utilizing our virtual or hybrid offerings and we have seen a growing number moving to public cloud or MSP based cloud solutions.
Second, our customers are expanding the number and type of partners they rely upon to implement their IT infrastructure. The advice in services our traditional bars increasingly being supplemented with MSPs and public cloud service providers.
And third, customers increasingly view IT as an operating expense and want the purchasing flexibility of monthly fees and pay as you go options that aligned with current need rather than trading IT as an upfront capital expense. These trends are not unexpected and as we discussed last quarter, the rate at which these trends have accelerated in our markets has increased.
We've been preparing for the shift in IT infrastructure for some time and are well positioned to meet the wider spectrum of customer needs through our virtual solutions, hybrid public cloud, MSP and cloud based services.
Last fiscal year, these shifts impacted us in the following ways. First, a higher than expected decline in appliance purchases as customer is up for readable subscription models, especially for some of our legacy product lines. This is also changing how customers access the market and the partners use to help them make deployment decisions.
Second, certain on-premise products in our portfolio that become less relevant such as phones, link balancers and standalone SSL VPN appliances. In many cases, these products have evolved to become features of more comprehensive solutions. At the same time, many of our cloud offerings have become more relevant.
Lastly, in general our customers are taking a longer time to make their buying decisions as they figure out what goes where and they're increasingly distributed IT infrastructure. As we said last quarter, this is lead to longer sales cycles and smaller initial commitments.
We are implementing a strategic plan which we believe will address the implications of these shifts on our business and position Barracuda for long-term growth. As part of this, we are better aligning our resources and investments with the opportunities we see in the market.
Execution of our strategy centers on three areas. One, calibrate our product portfolio and investments with the growth trends we see in the market. Two, optimize our routes to market and align our sales team and channel partners to these opportunities. And three, focus on driving profitability in order to grow our bottom line as our business transitions to a more readable subscription model.
The foundation of our business strategy has not changed since our founding, which is to make IT simple, secure and affordable for our customers. We believe that we are well positioned to lead customers through their IT transitions with our award winning solutions which are available in virtual, hybrid, on-premise, public cloud and private cloud offerings.
Now let's turn to some specific actions we are taking that are aligned to our three strategic areas. From a product perspective, we have increased our focus on security for small and mid-sized organizations. More specifically we are targeting three key areas. Office 365 and email protection, network and application security and data protection which includes backup and cloud archiving. As part of this focus, we are shutting non-core product lines which we believe do not fit into our customer's future security and data protection infrastructure.
For example, in Q4 we announced the discontinuation of our CUDA drive service effective May 1. We are also currently evaluating strategic options for other non-core product lines. Removing the non-core products from our portfolio will reduce revenue by a modest amount. But we believe this is necessary to establish a better base for future growth driven by the increased investment in strategic products.
We believe we will be better positioned for long-term growth by being the leading security company to our customer's for cloud-based security including email security, network and application security and data protection.
We recently released Barracuda essentials for office 365, an easy to deploy and manage suite of cloud services that supplements this security functionality and office 365 with comprehensive multi-layer security compliance and business continuity functionality.
With Barracuda essentials IT administrator can extend the visibility and control across their organization information with a simple per user license. We are particularly excited about the positive customer feedback on our recently released link protection and advance threat detection capabilities.
The link protection service protects against advanced phishing and malformed URLs in real time, by leveraging the vast URL and IP intelligence. The Barracuda is a must over the past 10 years as the content security appliance volume leader.
The Barracuda advanced threat detection is a highly scalable service that leverages a tiered security architecture include heuristics, behavioral analysis and CPU emulation based sand boxing that provides advanced threat scanning efficiency that we believe is unmatched from the market. Our essentials package can also be deployed against any email environment, whether it is hosted or on-premise.
We are also increasing our investments in network and application security and data protection to take advantage of what we believe are growth opportunities in these markets. An example of this is the recently introduced Barracuda vulnerability manager which detects vulnerabilities in websites and applications.
It does this in an on-premise, cloud and hybrid environments and it is already gaining traction with over 2000 scans completed. This new cloud service easily integrates with our vast solution to automatically create and apply mitigation policies. Going forward we expect to introduce optimization of our public cloud vast services targeted to make it easier for customers to protect critical web applications wherever they are deployed.
In fiscal 2016, we introduced a number of virtual appliances and subscriptionally solutions with cloud delivered and pay as you go deployment options. Including the Barracuda back up virtual appliance. In March, we expanded the pricing options for the Barracuda back up BAX to include a per socket subscription for virtual host and a metered Barracuda cloud storage plans.
Moving on to our customer's purchase our products. Let's discuss the second part of our strategic plan which is to optimize our routes to market and focus our sales efforts. As we noted earlier our customers are increasingly supplementing traditional bars with MSP and public cloud ISV's, system integrators and cloud focused partners to make their IT infrastructure decisions.
To support our customers and their expanded team of trusted advisers, we took two primary actions to increase velocity in the sales process. First, we reorganized our sales team to be completely aligned with our product focused area and we have adjusted our distribution model to drive higher engagement with our partners.
Second, we implemented sales program to incent readable purchase models alongside upfront billing models. Along these lines, we have invested in and we continue to invest in our sales coverage for MSP and public cloud. As a result of our focused efforts in the public cloud we grew the number of public cloud opportunities in our pipeline 67% over Q4 of last year and we nearly tripled new public cloud billings year-over-year.
We have also taken steps to capture more the fast growing MSP market as more and more small and medium businesses are turning to manage service providers to handle all of their IT needs opting to pay a monthly fee to have all of their network security and data protection needs taking care of with little to no touch.
Intronis which we acquired in Q3 is meeting our expectations in the MSP market. Over the past six months, we successfully launch backup appliance as a service subscription, added the essential security offering for MSPs and expanded into the United Kingdom. We also plan on adding network security capabilities to the Intronis MSP platform. As we have seen increased demand for next generation firewall capability to be delivered and managed and pay-as-you-go model.
We recognize that it is needs of end customer evolve so too will the businesses of their trusted partners. As the trends in this market change we remain dedicated to the thousands of partners that sell Barracuda.
The third area of our strategy is to heighten the focus on profitability and cost efficiency. Using the flexibility of our business model, we plan to maintain profitability while investing for future growth. Specifically, we are cutting back SG&A expenses to align with our focus areas and preserve margins as we shift towards readable subscription. We are also focused on driving improved sales and marketing efficiencies and productivity.
In R&D, this means shifting resources to our key product lines. At the core of our ability to create affordable, secure and easy-to-use products is our integrated technology platform. Our platform takes advantage of a cloud-based highly scalable microservices architecture. This approach allows us to offer award winning solutions at aggressive prices. This architecture also allows us to quickly develop critical security and data protection capabilities including an area such as DLP, encryption and reporting.
Our strong heritage in making IT simple, secure and affordable for small and mid-sized businesses provides adorable business foundation. Building from the space with targeted product investments and specific actions to align our resources with our strategic focus, we believe Barracuda is well position to retain a leadership position as customer’s transition to hybrid, cloud, and pay-as-you-go infrastructures. We are committed to creating long-term value for our shareholders.
With that, I would like to turn the call over to Dave for a detailed review of our Q4 financial performance and guidance for fiscal 2017.
Thanks, BJ. Revenue in the quarter was $83.7 million, an increase of 16% year-over-year and 5% sequentially. Our total subscription revenue was $62.1 million which accounted for 74% of total revenue. For the full year revenue grew to $320.2 million, an increase of 15% year-over-year and subscription revenue grew 19% to $230.9 million.
On a geographic basis, the Americans were at 76% of total fourth quarter revenue, representing 20% year-over-year growth. Revenue from EMEA was 18% of total revenue and APAC 6% of total revenue.
Turning to billings. Fourth quarter gross billings were $95.8 million, and currency headwinds impacted growth by approximately 1 point. For the full year gross billings were $377.5 million, up 4% over last year and 6% in constant currency.
Our number of active subscribers in the fourth quarter exceeded 278,000 which was an increase of 14% year-over-year. Renewal rates which we calculate on a dollar basis were 96% in Q4. In addition to consistent renewal performance during the fourth quarter some deals that pushed out from the prior quarter were renewed. This result was even more impressive considering the shorter contract links duration we saw in the quarter.
For the overall business, average contract lengths of our subscriptions in the fourth quarter declined by 13% year-over-year. Contract lengths in the fourth quarter dropped sequentially by approximately six weeks. As we transition from FY16 to FY17, I'd like to share some additional top-line related metrics with you.
In FY16, we continue to execute against our cross sale initiatives and saw the number of multi-product customers grow by 20% year-over-year to 42,000. The number of CUDA shops which are customers with three or more products has grown to 14,000. This represents 27% growth in the number of CUDA shop customers.
I'd also like to share some information on the penetration of our readably build form factors. At the end of fiscal 2016, over 40% of our active end customers were either on our MSP platform or had deployed at least one of our SAS virtual or public cloud products.
As we have discussed in the past, the gross billings metric becomes less of an indicator of business momentum as our billings composition changes. In order to improve visibility into that composition, we intend to provide you with billings detail quarterly across three categories. The first category is the core product area that aligns with our strategic focus. This includes the on-premises deployment, options of our backup and MG Firewall product lines as well as the cloud and MSP delivered components of our security and data protection portfolio.
The billings for our core focus area were $194 million in fiscal 2016 and grew 19% year-over-year on a constant currency basis. The related subscription annual recurring revenue grew 57% year-over-year to $132 million. This category also has the greatest density of subscription billings at over 80% in Q4.
The next category is legacy on-premises. This category consists of appliance based, on-premises solutions outside of the next generation firewall and backup areas. The spam firewalls and load balancers for example. While this category has a significant install base and will find new sales opportunities. We expect the growth here to be less than the core area and to become a smaller percentage of the total billings overtime.
FY16 billings for this category were $166 million, which represents a slight decline. Related subscription ARR was $117 million and grew 1% year-over-year.
The last category is what we called non-core. This category of products includes areas that are not tightly aligned with our go forward strategy and will see some consolidation. We have successfully wind down our copy include the drive offering and have migrated many of our customers to partner file sink and share platforms like Microsoft OneDrives.
We will also be exploring strategic alternatives for several other non-core product offerings. In some cases, standalone product lines will fold into existing platforms as features. In FY16 this category represented about $17 million in billings.
Returning to the P&L, non-GAAP gross margin in the fourth quarter was 80.3% which represents the 10 basis points improvement while sequentially and from the fourth quarter of last year. Non-GAAP operating expenses in the fourth quarter were $53.7 million or 64% of revenue compared with 71% in the fourth quarter of last year and 70% in the prior quarter. The sequential reduction in operating expenses was primarily in sales and marketing as we narrow our focus, reallocate resources and align expenditures.
In terms of people, we ended the fourth quarter with the headcount of 1,520 compared with 1575 at the end of Q3. Research and development expenses in the fourth quarter were $15.4 million or 18% of revenue compared to 20% of revenue in Q4 of last year. Sales and marketing expenses for the fourth quarter were $31.5 million or 38% of revenue compared to 42% of revenue in Q4 of last year. General and administrative expenses for the fourth quarter were $6.8 million or 8% of revenue compared to 9% of revenue in Q4 of last year.
Non-GAAP operating income grew 111% year-over-year and 97% sequentially to reach $11.3 million in the fourth quarter. For the full year operating income grew 49% to $32.5 million or 10% of revenue. We have expanded margins in each of the past two years delivering a cumulative 715 basis point increase in operating profitability.
The non-GAAP tax provision was $3.4 million in Q4. Our non-GAAP net income in the fourth quarter was $7.9 million or $0.15 of earnings per share on a diluted share count of 53.1 million. For the full 2016 fiscal year, we generated non-GAAP net income of $22.7 million or $0.42 per share up 49% from the $0.28 per share generated in fiscal 2015.
Turning to GAAP results, we reported fourth quarter GAAP net earnings per share of $0.06. This compares to GAAP net loss of $0.03 per share in the last quarter and $1.30 per share loss in the same quarter of last year.
Now let's turn to adjusted EBITDA. A non-GAAP measure which adjusted for changes in deferred revenues and costs. In the fourth quarter, we generated $15 million of adjusted EBITDA or 18% of revenue down from $20.2 million in the same quarter of last year as a result of lower deferred revenue growth.
This metric has been and will be impacted similar to the trends in the gross billings by customers opting for subscription only, pay-as-you-go services and recurring monthly invoices. This is due to the fact that pay-as-you-go services has a less substantial effect on deferred revenue and cost as compared to the balance sheet impact of appliance sales.
Cash flow from operations for the fourth quarter was $15.4 million which compares to $21 million generated in the fourth quarter of last year. Capital expenditures in the fourth quarter were $2.3 million. An adjusted free cash flow in the fourth quarter was $16.5 million which compares to $16.2 million in the fourth quarter of last year.
For the coming year, we anticipate the trends towards more readable billings and shorter subscription terms to continue. Notwithstanding the impact of these trends, we do anticipate leverage in our free cash flow for the next year after factoring in adjustments due to any one time charges. We also expect the seasonal impact to cash flow on a quarterly basis to be consistent with prior periods.
Turning to the balance sheet, we closed the year with cash, cash equivalents and marketable securities of $155 million. During the fourth quarter, we've repurchased approximately $11.2 million of our common stock under the $50 million share buyback program. We've repurchased the total of 1.073 million shares in the open market at an average weighted cost of $10.45 per share for a total of $11.2 million in consideration, with $30.8 million remaining under our current program.
In total in fiscal 2016, we've repurchased 1.503 million shares of our common stock at an average cost of $12.79. And finally deferred revenue at the end of the quarter was $392.8 million compared with $373.2 million at the end of fiscal 2015.
Before turning to guidance, I want to provide background on some of the assumptions reflected in our outlook for fiscal 2017. In the coming year we are anticipating a more stable foreign currency environment and our guidance reflects the average FX rates of March 2016. Our outlook also reflects the narrowed product focus including the discontinuation of CUDA drive as well as the further reduction in the number of products as we explored strategic alternatives for each core, non-core product line which could be impacted by timing.
We will be providing quarterly billings guidance this year as we move through the transition in our business model. For Q1, we expect the composition of billings across the core, legacy and non-core product categories as well as the trend towards more readable form factors to carry forward from Q4 2016 trends. We will not be providing annual billings guidance.
Now turning to guidance. For Q1 fiscal 2017, we expect billings to be in the range of $94 million to $96 million. We expect revenue to be in the range of $83 million to $85 million. Guidance for non-GAAP operating income for the first quarter is between $8 million and $9 million. Non-GAAP earnings per share for the first quarter is expected to be approximately $0.10 to $0.11 of earnings per share, given an assume share count range of 54 million shares to 55 million shares.
For fiscal year 2017, we expect revenue to be in the range of $337 million to $342 million. Guidance for non-GAAP operating income for the year is between $35 million and $40 million. Non-GAAP EPS for the fiscal year is expected to be approximately $0.45 to $0.50 of earnings per share given an assumed share count range of 54 million shares to 55 million shares.
That concludes our prepared remarks today.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Gur Talpaz of Stifel. Please go ahead.
Great, thanks for taking my question. So you talked a lot about the push to public cloud and the migration to Office 365 on the part of your customers. I was hoping if you talk a bit about your views about Microsoft’s own efforts and security and then Amazon’s own effort and security as well. How you factor those into your forward expectations? Thank you.
Yeah, thanks Gur for the question. We have developed over the two years of our investment in public cloud what it call a leading and deep investment with Microsoft and I think as they have put their down drive towards driving as your consumption and moving customers to Office 365. A real and continued investment in developing partners and helping those partners work with customers to move them to Office 365 in the public cloud.
We believe we have a leading ISP relationship with Microsoft based on the number of wins that we have in the public cloud and the amount of hours that those customers drive for consumption in Azure [ph]. And that partnership has built as we rolled-out our Office 365 essentials, Microsoft has real desire to continue to grow this business I think you saw in their results that came out recently and so they really want to develop this ecosystem.
So the fact that we have been investing in it for over two years now I think has given us a leading position. So they are very active with us in building and monitoring and growing the business. And along with that comes early insight into what they are building and how we can add value on top of that platform for the customers. So the partnership is going very well with Microsoft.
I think Amazon came out from a little different place. Where things were the market place was much more developed first and customers would go and drive demand. But Amazon is making equal investments now to develop their ecosystem. We just got announced into the security confidence new center which is the level up for security partners.
Again they are giving us engineering insight into their platform and I think there is knowledge and desire on both of these parties to grow their ecosystems to win over customers. So I think we are in a very unique position for both public cloud and Office 365 to capture market share.
Great, thanks BJ, that's great color. And then for David, your renewal rate spikes pretty meaningfully sequentially from the high 80 of last quarter to above the mid-90’s this quarter. You laid out some drivers in the call. But I was hoping you could maybe dive in a little bit further in what you are seeing from a renewal rate perspective, is it being pushed up by is that deals getting pushed in the quarter or is it more a function of companies or customers shifting more towards broader subscriptions committing more deeply to your ecosystem. Thank you.
Yeah, thanks, Gur. So I think you know as we pointed out last quarter, there were some transactions that we anticipated that would close, that had closed in the window. And it's when you do random math on the pool versus the renewal orders, we got a lower number than we anticipated.
But we did reiterated last quarter that we didn't see our fundamental trends of the satisfaction of our customer base. And so as we anticipated we saw some of that come back this quarter. And we also saw good on time performance consistent with our expectations for the business that came in the fourth quarter.
So the combination of those two things did push us to a higher rate. What was really interesting this quarter about renewal rate though was we did see a shortening of contract line. So some of that has moved to more ratable monthly billing and some contractors and some of it is just the way that kind of the markets moved and BJ alluded to some of that.
And so if you annualized and one last quarter we provided annualized view of renewal rates which is higher than the aggregate new [ph] rate. That same factor came to past this quarter as well. In fact, that's four and five points higher on an annualized basis was our renewal rate this quarter relative to the natural renewal rate.
So we feel really good about the loyalty and kind of the installed base and our relevance to our customers. Both with respect to have renewal risk played out and also continued positive trends and across all initiatives, number of CUDA shops continues to grow at a very health rate. And just customer satisfaction in general it continues to be high.
Great thank you very much.
Our next question is from Rob Owens of Pacific Crest Securities. Please go ahead.
Hi, guys. This is actually Liz on for Rob. Thanks for taking my question. First, I just had a quick question on obviously seeing a big shift to short term billings and kind a how we should think about that tracking for the year. How long that kind of sharp sequential decrease in duration should go. And then just some early color on kind of initial reaction to the change in sales force incentivization. Thank you.
Okay. Liz, it's BJ. I'll start out. And I think the short and as the reduction in contracts lengths really started accelerating Q3 and Q4. Some of this comes about because we have more monthly offerings now. And so we have our essentials package can come on a monthly basis. We have the Intronis platform, we're now a lot of things monthly.
So I think the rise that we're seeing should continue through the year, because we're offering more and it's something that customers are demanding. There won't be a variability in that and I think historically you can look and see there is been variations in demand for our virtual appliances that it moves up and down, but the trend line is always been up into the right. And I would expect from a contract duration as we sell more monthly offerings, you can continue to see the trend move in that direction.
And that's one of the drivers why we believe we'll give quarterly billings guidance. But ARR becomes a much more important measurement for our business and that's why we're breaking that into three categories and we'll give that to you on a quarterly basis. So I think you should expect the contract trend to continue.
While we'll give quarterly billings guidance, I think you can look to the three categories and the ARR in those categories as good measurements for how the business is moving. As far as the sales force, this is something that we started in Q4 and had ready and rolled-out at the start of Q1. And the whole goal has been really to drive velocity, more velocity, faster sales in the process and better customer engagement. And we're very happy with how that's turned out and the progress we're seeing in that. And changing the compensation system also has made our sales force more aggressive in driving things like the office 365 package which are monthly. And so we're very happy with the progress with that out of the gate.
Yeah. Liz, this is David. The only other thing I'd add to BJ is that provide some context around the contract shortening or some sizing if you will. The impact was about $2.5 million in Q4 and what billings would have been higher with the consistent contract length. So it's not an immaterial impact.
But as BJ alluded to it does not damage ARR, and in fact in many cases it improves at a shorter terms often carry premiums in the pricing. So life time value and ARR remain intact when those contract terms shorten and in fact they're improved in many cases as a result of that. So that just kind of gives you a little scope of the size.
Thanks guys, that's really helpful.
[Operator Instructions] Our next question is from Melissa Gorham of Morgan Stanley please go ahead.
Melissa, are you there?
Hey this is Tom. Actually I'm on for Melissa. Sorry my line was on mute. I actually wanted to ask about the new segments that you've disclosed. Can you talk about sort of qualitatively what sort of growth rates are you looking for, for each of those new segments for next year?
Hi, Tom. This is Dave, I'll take this one. I think we look at the trends that we've got in the most recent periods that we disclosed. And we feel those trends have momentum behind them for continuation. I think we're seeing ARR in both and particularly in the core area of that without facing the absolute billings growth rate for all the factors that we described. And we believe that sustained extrapolation of the trends we've seen are reasonable and thinking about those categories moving forward. Our intention is quarterly to give you breakout on that so you can see how those sectors are tracking in the composition of the overall aggregate billings.
Great. And then just the quick follow up. Were there any areas geographically that you would highlight for the quarter that were strong or weak?
Yeah I think, Tom, it's BJ. We had over the past fiscal year Europe and Asia did not performed overall well. But we saw improvement in Q4 which we thought was good progress. So we saw both Europe and Asia form up in terms of demand and execution. The Americas was the consistent performer for us all the year and performed well in the quarter. We didn't see really a change there.
And Tom this is David, I just wanted to add one more point to the first part of your question. Within those categories as what the sub-categories like we called non-core. And these areas that are not tightly aligned with our kind of go forward strategy. What we talked about earlier in the prepared remarks was that we will be seeking some strategic alternatives for the components of that.
I just wanted to be clear that we have assumption to that timing of various conclusions of that that lead us to believe. You can think somewhere in the order kind of half of that category kind of going in the way as we evaluate those strategic alternatives. Of course that's very subjective relative to the timing of each of those alternatives and the execution. But once it layout like a base line assumption for that category that we can then update you on as things transpire.
Great thank you.
Our next question is from Ryan Hutchinson of Guggenheim. Please go ahead.
Okay great. Just as a follow up maybe to that last question. So on the guidance as we think about that, when you talk about a narrowed product focus, what exactly are you excluding and including in guidance?
Yeah I'll start Ryan and I'll let Dave starting. We in guidance if you think about the three categories. On the non-core we have a set of assumptions on how we'll proceed with those businesses and we have overall a little bit more than half of that business in next year's guidance. So you can think about half of that remaining in the next year. What the rest of the results obviously being driven out of our core focus and legacy on-prem areas.
Okay that's helpful. And then a little bit more detail on the cost realignment initiatives discussed in the prepared remarks. Specifically what impact do you think that will have on the long-term model. And then as part of that how should we think about cash flow given the shift to more subscription revenue next year?
Yeah. So I think what we've done is try to drive a lot of what I would call sales and marketing efficiencies given where the customer demand has gone, how the channel continues to evolve and where we see growth coming from in the core focus areas. So overall we were able to reduce our sales and marketing spend. But within that there is investment in areas such as public cloud and Intronis and on the R&D side there is investments and our e-mail security, NG and backup and some examples I can give you of that is we were able to reduce overall hedge within that as we discontinued to the drive we took 13 engineers from that and have redeployed them in the backup and our cloud operations to events what we are doing there. In these reductions we were able to create some room and acquired a company called Sookasa that was focused on DLP and advanced cloud security services and they are now helping us move forward in SaaS and cloud security.
So overall, I think, we have realigned investment, we are able to reduce especially on the sales and marketing to meet where we saw demand today and going forward we are committed to driving profitability and we will see how the growth continues in our core focus areas and invest appropriately to capitalize on that.
And just to add kind of specifically to your question around cash flows. Certainly the shift to a more ratable billings profile does have as any SaaS business has experience a near-term impact on cash based profitability. That said early on a February-March, we did say we anticipate standing that pressure expanding our cash flows leverage in the next year.
Really our objective here is to target our investments into the high growth areas really drive productivity in the other areas and as we manage our way through the rest of this transition continue to expand probability and set ourselves up to get into that long-term model consistently with what we saw before. So that definitely can be a part of the DNA of the business from the outset and continues to be part of our DNA to balance profitability with the right levels of investment for growth.
The next question is from Michael Kim of Imperial Capital. Please go ahead.
Hi, good afternoon, guys. You talked a little about optimizing going to market strategy earlier in our prepared comments and could you explain a little bit on the contribution in Intronis and MSP channel in the opportunity drive the entire security portfolio and as well as this storage portfolio.
I will start with that, Intronis we feel very good about last in Q4 it was a little over 6 million in billings for us and that primarily came from the traditional offerings that they had. During the end of quarter we were able to accelerate a number of offerings under the platform. A backup appliance as a service, but you can monthly using the Barracuda appliances which is a new offering.
At the end of February, early March, we release the Office 365 essential package which you can now buy the Intronis also and then just the end of March, early April we rolled out the offering in the United Kingdom. And then in the next couple of months we anticipate offering the network security appliances on a monthly basis also and so we think about Intronis, we talked a little bit about this on the last call. We see 25% plus growth on Intronis in the coming year and feel like that, that is on track and the team have been doing a great, great job.
Great. And then just more broadly on the legacy on-prem appliances, are you seeing may be a shift may be taking some of the existing content security appliances or spam firewall appliances out of service and replacing that with a cloud base solution or they primarily continuing with their existing restructure?
Yeah, so in the content security side we definitely see an acceleration to hosted our cloud based offerings and what we are seeing so far is the majority of those on-prem are going to a hosted and cloud base solution, they are not moving to another solution, they are moving into cloud and hosted and in the early phase of our Office 365 offering. What I would say I think why we feel really good about the progress is we not only see our existing customer base moving from on-prem and then using our protection in the cloud. But we see just net new customers coming in, customer we've never dealt with before, who are deciding to move to Office 365 and then either for our own advertising efforts or partners or be a Microsoft they are getting push to us for advance protection and then we are starting to see some competitive wins for customers already in Office 365 environments using a competitor. We have aggressive pricing as we always have at Barracuda with great feature parity or differentiation and we are seeing competitive wins also. So the demand for hosted and Office 365 e-mail protection is coming not only from our install base but we see it coming from that new and from competitive which is got us feeling very good about the focus in that area.
Great, thank you very much.
We have time for one more question which comes from Srini Nandury of Summit Research. Please go ahead.
All right, thank you for taking my question. BJ, I know you went through some of the detailed trends in the industry. Can you take me through some of your trends in the store within your customer base? What is happening with the backup in the SMB space and how are you position with respect to secular trends there? And finally what is your outlook for the security versus spending this year?
Yeah, thanks for the question Srini. On the backup side, I think one of the big trends has been the rise of software based solutions and so we have seen a rise in opportunities against companies like [indiscernible] in our market place and if you look at where we were at competitively last year, we did not have a virtual offering and always have to compete with an end to end physical solution. So I think the biggest change for us is the launching the Barracuda VX module, moving to a pricing module focused on not on capacity but on cores and then also having metered cloud plan. I think all of those can help us in the coming year as customers have worked to move from perhaps toward your own to more easy to use solutions with pay-as-you-go options. So on backup we have seen great demand through the Intronis platform for pay-as-you-go and then I think overall we certainly see more demand for simple to use software solutions and I think we are in a much better position this year.
On the archiving side, we definitely continue to see the impact and opportunity in cloud base archiving and in areas like Office 365, we see a lot of our initial Office 365 deployments come with archiving and compliance future as we added direct achieve into the cloud, we saw a lot of or on-prem customers take advantage of this and so what I would say as we see more of the achieved market moving into the cloud faster than the backup market and again, I think the primary reason there is backup, you need recoverability and then you are continue to need some onsite type of either virtual appliance or physical appliance. So overall demand last year was challenged we see a more stabilizing demand environment between what happened in Q4 and what we see happening this year.
All right, thank you gentlemen.
This concludes our question-and-answer session. I would like to turn the conference back to BJ Jenkins for any closing remarks.
Thank you. And I just want to thanks to all of Barracuda’s employees, our partners, and our customers for your support and for everyone on the call thanks for your interest and support and we look forward to talking to all of you very soon. Thanks.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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