Carbonite's (CARB) CEO Mohamad Ali on Q3 2017 Results - Earnings Call Transcript

Carbonite, Inc. (NASDAQ:CARB) Q3 2017 Earnings Conference Call November 2, 2017 5:30 PM ET

Executives

Jeremiah Sisitsky - VP of IR

Mohamad Ali - CEO, President & Director

Anthony Folger - CFO & Treasurer

Analysts

Bhavan Suri - William Blair & Company

Saket Kalia - Barclays PLC

Chad Bennett - Craig-Hallum Capital Group

Ben Rose - Battle Road Research Ltd.

Eric Martinuzzi - Lake Street Capital Markets

Timothy Klasell - Northland Capital Markets

Koji Ikeda - Oppenheimer

Sarkis Sherbetchyan - B. Riley & Co.

Erik Suppiger - JMP Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the Carbonite Third Quarter 2017 Earnings Results Call. [Operator Instructions]. As a reminder, this conference call may be recorded. I would now like to turn the conference over to Jerry Sisitsky. Sir, you may begin.

Jeremiah Sisitsky

Thank you, Ashley, and welcome to our third quarter 2017 financial results conference call. With me on the call today are Mohamad Ali, President and CEO; and Anthony Folger, CFO. After their remarks, we will open up the call to a question-and-answer session. I'd like to remind all participants that during this conference call, any forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, including financial guidance, outlook, anticipated results and similar items, including, without limitation, expressions using the terminology may, will, believe, expects, plans, anticipates and expressions which reflect something other than historical facts, are intended to identify forward-looking statements.

Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors sections of our Form 10-K, 10-Q and other SEC filings the company releases. Actual results may differ materially from any forward-looking statements due to such risk factors and uncertainties. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law.

All of the financial figures discussed in today are non-GAAP financial measures, unless it is stated that the measure is a GAAP number. A reconciliation can be found in a financial results percent is available on our IR website.

With that, I will turn the call over to Mohamad. Mohamad?

Mohamad Ali

Thank you, Jerry. We delivered a very strong third quarter, with good results across the board. Business subscription bookings were up 18% and consumer was down 5% as we continue to execute our One Carbonite initiative, consolidating on one technology platform, one set of internal systems and one unified brand. This quarter, we continued our great progress, hitting several key milestones. We also continued to drive meaningful operational synergies, which resulted in significant increase in profitability in the third quarter, above the high end of our guidance range.

In short, we again delivered another quarter of solid results while continuing our successful transformation, integrating and building the industry's leading data protection platform. We aim to energize our network of thousands of channel partners to accelerate new customer additions and drive cross-sell, delivering growth in excess of market growth rates, combined with a meaningful ramp in profitability.

As part of those plans and our vision for One Carbonite, we have developed one all-encompassing program and launched a new unified portal for our partners to sell, access information and manage their customers, rolled out a new billing platform and brought together our worldwide sales team as well as streamline our G&A organization.

We have already accomplished much with even more initiatives currently underway in the fourth quarter. We continue to rationalize systems, optimize from a headcount perspective and as we enter 2018, there are even further opportunities for data center consolidations. As a result, we expect to drive further operational synergies, resulting in continued expense savings and efficiencies over time.

As I detailed at our inaugural Analyst Day a little over a month ago, we are well on our path to delivering a cloud data protection platform of the future. With recent acquisitions, we have a successfully expanded our data protection portfolio to include products for every use case, from a single laptop being backed up for the cloud, all the way to complex availability scenarios across physical, virtual and cloud workloads.

We have disaster recovery, high availability, mail archiving timing, workload migration solutions and of course, backup offerings for businesses of all sizes. We are integrating those products into a unified platform and leveraging a great technology that we have acquired to improve upon and build new offerings.

With our platform well out its way from a development and integration perspective, I am pleased to say that we have just relaunched carbonite.com and now have a completely integrated and revamped website experience. The site allows visitors to quickly find our data protection solutions and provide a streamlined and simple path to purchase, shaved dramatically fewer clicks for those ready to buy.

The new site is also organized into solution and product agents. There are details about all the Carbonite products that roll up into any solution, whether it's backup and disaster recovery, high availability or migration. We make it very easy to find the right solution and provide lots of new content to help buyers make an informed decision through every stage of the journey.

Our new website presents a single cohesive Carbonite. You no longer to access information for EVault and Double-Take in separate websites. Information on Carbonite cloud backup, Carbonite Availability and Carbonite Move are all available on one great-looking website.

In tandem with this website's launch, we launched campaigns designed to educate business leaders about Carbonite's position as the data protection platform company. With our technology portfolio covering the full spectrum of data protection, it is time to ensure that the market knows about our transformation and the robust technology we offer. If you have not already seen it, I am confident that you will see elements of this campaign in the coming days and weeks as we get more aggressive telling our story, further affecting Carbonite's transformation.

We are building and integrating the industry's leading data protection platform. We have simplified product names under a common Carbonite branding architecture. We have unified into a single website. We have made it easier for our partners to sell Carbonite, and we have launched a broad-based campaign to appropriately position Carbonite. In closing, our addressable market is strong and growing, and we continue to expand it by adding new technologies to our data protection platform. We are executing well. We are going to be loud, telling our compelling story to businesses around the world, and we are delivering on our promise of growth while improving margins.

With that, I will hand it over to Anthony to discuss our financials and guidance. Anthony?

Anthony Folger

Thanks, Mohamad. Thanks, Jerry. Q3 was indeed a strong quarter. We had good bookings growth overall, continued momentum on business subscription bookings and solid results from our consumer business. We exceeded our revenue guidance, delivered better-than-expected gross margin and drove net income well above the range of guidance we provided. Highlights from the third quarter include business subscription bookings of $27.6 million, representing an increase of 18% year-over-year. Consumer bookings of $19.5 million are down 5% year-over-year. And I would note that our Q3 consumer performance did not benefit from the strategic referral agreement that we announced with Code42. We expect to see activity under that agreement beginning in Q4.

Revenue of $63.1 million was above the top end of the guidance range that we provided, continuing to benefit from the strong bookings growth we have delivered over the past several quarters. Net income of $7.3 million or $0.25 per diluted share was up approximately 90% year-over-year. I'd also like to highlight our gross margin of 76.3% during Q3, up more than 200 basis points sequentially and up more than 400 basis points year-over-year.

As I mentioned on our last financial results conference call, we successfully completed our East Coast data center consolidation in the second quarter of 2017. This consolidation drove a significant improvement in the efficiency of our data center footprint, reducing our square footage needs and driving efficiencies from a power utilization perspective. As expected, this consolidation drove a meaningful expense savings in the third quarter and will continue to yield benefits over time.

Across the organization, we look for ways to do things more efficiently, drive automation where appropriate, take costs out and invest appropriately to drive growth.

As expected, we saw a sequential reduction in cost of goods sold, sales and marketing and G&A. While there is still work to be done, we saw great progress during the quarter and the team executed quite well. CapEx for the quarter was $1.9 million, consistent with our expectation. The CapEx would come down in the second half of the year. Our adjusted free cash flow was $6 million for the quarter.

Now turning to our outlook. For the fourth quarter, we expect GAAP revenue to be in the range of $61.5 million to $63.5 million. Non-GAAP revenue, which excludes the impact of purchase accounting adjustments on deferred revenue, to be in the range of $63 million to $65 million. And on the bottom line, we expect non-GAAP EPS in the range of $0.27 to $0.31 per share.

For the full year, we now expect business bookings in the range of $163.8 million to $168.8 million, consumer bookings in the range of flat to down 10%, non-GAAP revenue in the range of $246.3 million to $248.3 million, GAAP revenue in the range of $239.2 million to $241.2 million, non-GAAP net income per share in the range of $0.76 to $0.80, non-GAAP gross margin of approximately 75% and adjusted free cash flow in the range of $16 million to $20 million.

Now let's open the conference up to questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Bhavan Suri of William Blair.

Bhavan Suri

Nice job on the numbers there and the execution, especially gross margin. Maybe I'll just, Mohamad, start with you here. Just you talked about broadcasting the message worldwide sort of -- just a great -- a quick update on the partner and go-to-market strategy. Sort of is this a renewal lesser with the partners, my guys like TDW, in Tech Data up to date with it? And then, sort of is there incremental go-to-marketing dollars of expense or is this sort of part of the plan?

Mohamad Ali

Yes. So of course, you can probably tell, we're really quite excited about the new brand campaign, the new website. And in some ways, they go hand-in-hand. We couldn't have launched a new brand campaign prior to having a unified website. As you know, we had 2 things going on, on our website. One is the transactional website that gets people come and they buy things on the website. And on the other side, so the mid-market business customer, that's an informational website. And we have to combine those carefully. So we've spent quite a bit of time determining how to do that.

We've launched that and it's great. I mean, it's working really quite well. We're getting much more traffic to the mid-markets than when we had separate websites. But now that we have a single website with -- that's just like a wonderful website, we can launch this mid-market campaign, this branding campaign. As you may have seen, we launched it in The Wall Street Journal and on Wall Street Journal Digital and in a variety of places. But we also now have a -- as I mentioned last quarter, last quarter, we got the single Partner Portal, right? So the partners can go to one portal and see all the products, sell all the products, enable then all the products.

So now we're in a position to actually go out and go out aggressively, whereas before, we didn't really have all the tools in place. So -- and in terms of incremental marketing dollars, I think we -- the campaign that we're launching here, we expect to last for at least 12 months. I mean, we can't do campaigns for a short period of time. They have to be long periods of time. And obviously, we're working closely with Anthony and the finance organization to make sure that we're able to fund that appropriately and stay within the financial profile that we've communicated to you and to The Street and so forth.

Bhavan Suri

Great, great. And then I want to touch on the competitive environment a little bit, especially with the move of markets and the MSPs. I know the MSPs are kind of an interesting area, because they could drive sort of that longer-term growth upside that you sort of laid out in your -- in the 5-year sort of plan. Did you look at the MSPs and you look at where data will fit in that acquisition? Just love to get some sense of how that competitive environment is playing out in that sort of mid-market to slightly larger than small business and especially with the MSP as a channel?

Mohamad Ali

Yes, it's a great question and we're very -- part of the reason we've been building out this platform is because it allows us to serve the MSPs better. And part of this platform is a set of APIs that the MSP could plug into. But if you think about it, today, the MSP has to integrate to 4, 5 different products in order to provide a complete data protection portfolio. We have all those components. We're building out the APIs and we have to serve the MSP. Now as you know, we have -- we already several hundred MSPs that use our technology and we also have thousands of VARs. Many of those VARs converting themselves into MSP. And if that happens, we are now in a position to serve those MSPs. So in terms of the competitive marketplace, of course, you see a lot of competitors heading to that, sort of targeting the MSP at the channel that the market [indiscernible] quite well, got really nice multiple as a result in the acquisition. But that MSP market is a good market. We are well positioned today in that market. And as we bring the full platform to bear, I think we'll be in a better position.

Bhavan Suri

Great, great. And then one quick one to Anthony. When you look at Q4 guidance, then they obviously -- revenue gross margin is solid. EPS just felt a little light. Just trying to understand the dynamics there.

Anthony Folger

Yes. Sure, Bhavan. I think as it relates to EPS, I think we were really, really happy to see Q3 come in where it did certainly ahead of our expectations as the quarters head out. And I think ultimately, we saw good upside on revenue and we saw a lot of the synergies that we had expected and a lot of integration activities sort of getting crossed off the to-do list. That really helped to drive meaningful growth on the bottom line. And I think for the second half of the year, looking at Q3 and Q4, we've got roughly $0.54, which I think is just a dramatic change from where the company had been historically. So I think looking at Q4 with sort of the range that we put out, I think it would be another -- I guess, a third consecutive sequential non-GAAP EPS growth of more than 10%, which I think is pretty impressive. So we're happy with the leverage that we can outlook for Q4. I think we're really happy with how Q3 came in. And honestly, I think it sets us up very well as it relates to our long-term model and frankly, maybe even a little bit better than we had planned.

Operator

Our next question comes from Saket Kalia of Barclays.

Saket Kalia

So first, really a question for both of you. The upfront business bookings were down quarter-over-quarter. Obviously, you've got a very nice result in total business bookings. But the upfront piece, I believe the majority of that is EVault and Double-Take. And so the question is, are you seeing more of that activity transition to subscription? And if so, is there any multiplier effect that we have to keep in mind for comparing maybe an upfront booking to a subscription booking, if that makes sense?

Anthony Folger

Yes, Saket. It's Anthony. I think we are able to drive more net new customers into a subscription offering certainly than we had in 2016. I think it took us a little bit of time to really drive our strategic objectives around the subscription offerings through our entire go-to-market capability. But I think we're feeling much better about that, particularly in the back half -- I mean, outside Q2 and Q3 of '17. So I don't know that we're converting existing customers. But I think more of the net new business is being driven into that description model. I think certainly, there is a little bit of a multiplier effect on that. If you're comparing to the perpetual models and maybe 3 or 3.5:1 or something to that effect. But I think when we look at the subscription bookings on a year-over-year basis, we saw 18% growth. And I think that really is a reflection of being able to drive more of our net new customers into that model and quite honestly, doing a better job at customer retention and cross-sell, upsell for people on the subscription model. So I think all around on the subscription business, just a good result again in Q3.

Saket Kalia

Got it, got it. And then, for my follow-up, maybe for you, Anthony, I realized we're not ready to give guidance for next year. But conceptually, do you feel like that long-term bookings the range that we talked about at Analyst Day, is -- I guess, how do you sort of think about the -- with perhaps an upfront bookings component that may shift, more subscription -- how can you sort of contemplate it for that shift as part of that long-term kind of bookings growth, if you will?

Anthony Folger

Yes, I think when we laid out the long-term model at Analyst Day, we tried to set a range that was sufficiently wide to handle a variety of different outcomes, one of which -- and we had started to see this in Q2, was, I would say, a little more uptick on the subscription bookings side within the business segment of our company. And so I think I look back at the moderate growth scenario that we laid out. That largely aligned to our guidance for 2017. I certainly think we were still comfortable with that as we move forward. And to the extent that the fundamentals of the business or the dynamics underlying the business improve, I think we'll continue to communicate that in the coming quarters. And if there is upside, so that moderate growth scenario that we outlined, I think we'll certainly communicate that one when we've got it.

Operator

Our next question comes from the line of Chad Bennett of Craig-Hallum.

Chad Bennett

So just not to kind of harp too much on this subscription transition and mix of your business bookings, but I guess, I understand you're seeing more of a mix shift to subscription. I guess, the only pushback I would give is, I don't think, as a percentage of your business bookings mix over last 3 quarters, subscription has really went up meaningfully, unless my math is wrong. So where -- how significant is this transition? And should we expect it to be more significant over the next few quarters?

Anthony Folger

Yes. I think when I look at the bookings composition and how much is subscription, obviously, you got Double-Take that came into the mix this year. So if you're looking at it sort of on a 2017 basis with Double-Take being largely a perpetual business, that I think can maybe weigh on that mix a little bit. And so when I look at the front line there, I think it's certainly been positive. And I think more importantly, it's been -- I guess, with Double-Take coming into the mix, I think our ability to drive more net new subscribers into that model has exceeded our expectations. Coming from where we came from last year, post the EVault acquisition, I think it took us time and it was challenging to drive changes to the business model that had existed prior to the acquisition, and it probably took us 3 full quarters to get there.

I think what you're hearing from us is a positive outlook based on more of the sort of EVault new customers coming in on a subscription model and an ability to drive more Double-Take customers into that subscription model more quickly than we expected. So keeping in mind that Double-Take is still largely a perpetual license business, it's more about how we laid this out coming into the year and how things have shaped up relative to those expectations.

Chad Bennett

Great. And then, Anthony, can -- I don't know if -- I was kind of hopping between calls. I don't know if you gave an update. Is Double-Take on track relative to your expectations when you talked about it when you acquired it earlier in the year?

Anthony Folger

Yes, it is. I think Double-Take certainly is on track to what we expected and may be running slightly ahead. And again, I think the area where we could run slightly ahead is, we -- I think we're able to bring that business and to repackage and reprice very quickly and to immediately start driving more subscription bookings from it. And I think as a result, we're seeing maybe slightly better performance than we would have expected coming into the year.

Chad Bennett

Got it. Good to hear. And then maybe last one, for me, if I could, again, not to -- I guess, thinking too much about next year. But gross margins were up nicely relative to what I thought. And it's good to see the data center expansion kind of behind you largely. Looking in the next year, I guess, conceptually, the levers or the leverage we can get in the model next year, gross margin versus op margin or OpEx kind of -- can we just kind of conceptually get a sense of how much lift we get from each or what the expectation should be?

Anthony Folger

Yes. I think I would still lean on the gross margin as continuing to the biggest opportunity we've got. I think we'll start to see more contribution at the operating margin line as we start to see some synergies really materialize in G&A. And I think we're seeing a little more efficiency from a go-to-market perspective. And especially, Mohamad talked about -- we've now got one website, we've got a unified Partner Portal. We're able to run a brand campaign and drive people to one place to make a purchase. And so I think there's more efficiency just inherent in our model that should start to be reflected in the results next year at the operating income margin. So I still think gross margin is the bigger opportunity, but I think op margin and OpEx leverage starts to contribute a little bit more next year than it has in the past.

Mohamad Ali

And Chad, I would just add, I'm just tremendously pleased with the progress the team's made on gross margins to be up 410 bps year-over-year. This is lots of hard work and getting it done as the -- data center consolidation, customer support efficiency, it's just nuts and bolts and they are doing it, and they continue to be on a good trajectory.

Chad Bennett

No, I agree, the sequential EPS was fantastic. So nice job, guys.

Operator

Our next question comes from the line of Ben Rose of Battle Road Research.

Ben Rose

Congratulations on getting the new website up and running. It's very impressive. I'm sure it was a lot of work behind the scenes.

Mohamad Ali

Thank you, Ben. I should just encourage everybody on the call to go check out the website because it's beautiful and I'm super excited about that.

Ben Rose

One of the topics discussed at the Analyst Meeting was this -- was the preliminary progress, I guess, you've made in terms of cross-selling the products Double-Take into EVault and vice versa and realize there's not much time that's lapsed since the Analyst Meeting. But perhaps, Mohamad, just looking out to 2018, can you just talk about some of the prospects there for kind of improving that cross-sell opportunity?

Mohamad Ali

Yes. As you've said, we just had the Analyst Day. We took folks through some examples of how those cross-sells work. I mean, I think this is a tremendous opportunity for us. We have 4 or 5 products depending on how you look at it, and our customers can use multiple products. We know that. They buy multiple products. And so we are now heavily focused on filling that engine. And that engine is not going to be 100% functional tomorrow, but it's a journey. And getting that across, the engine running really well is, I think, at the heart of strong companies. And so we're going to continue to kind of invest in the tools, the IT, the trading of the partners. This is part of why we've invested so much in the single Partner Portal. So I mean, we're seeing good progress. Like I'm seeing, on a regular basis, deals come in that are crossed out deals. We just had a partner webinar today where we actually went over 4 different actual cross-sell sales and dissected it so that the partners can understand how to use the cross-sell.

Ben Rose

Okay. And realized it's early on in the Iron Mountain digital initiative that you became a part of not too long ago. Could you perhaps talk about how the pipeline is building in terms of opportunities for you looking out to the coming year?

Mohamad Ali

Sure. I mean, I don't have the exact specifics on it, Ben, but it's a good relationship. The pipeline is healthy. The bookings that we're getting out of it are strong. And Iron Mountain is one of our partners. One of the things about our company is that we don't have any single partner that sort of dominates the bookings. It's a lot of partners, but they're a wonderful partner.

Ben Rose

Okay. Just a couple more here. In terms of international, was there much of a contribution from international in the quarter? And would you expect that to change perhaps moving forward?

Mohamad Ali

Yes. The spend is increasing somewhat consistently, and we're probably 14%, 15% international in the business now. And Double-Take certainly has more of a global footprint than we did coming into this year. So I think that contribution has helped, and we're roughly 85% U.S. and 15% rest of the world and most of that is concentrated in Europe.

Ben Rose

Okay. Just maybe perhaps final question in terms of the gross margin expansion potential. I recall a while back that you were working on consolidating some of the data centers for EVault and didn't know if that kind of consolidation was complete or whether as you look ahead to the opportunity for a gross margin expansion in the coming year, whether that may be part of it as well?

Mohamad Ali

I think the biggest element of that consolidation was done at the end of Q2. I think there's a little bit more to go as we sort of finish the year and move into the first half of 2018. But our goal is by the second half of 2018, we will likely be down to 2 data centers, potentially 3 in the U.S. that are either Carbonite-operated, Carbonite-managed data centers, which essentially gets us back to where we were before any of these acquisitions started. And so we took on a lot with the EVault acquisition. I think we have been working furiously to right-size the footprint. And I think if this is a ballgame, we're probably in the seventh inning right now, and I think we got a little bit more to go first half of 2018.

Operator

Our next question comes from the line of Eric Martinuzzi of Lake Street.

Eric Martinuzzi

Terrific quarter, guys. My question has to do with the consumer side. Obviously, bookings down 5% there. I know there's a lot of levers that you guys pull throughout the quarter. Specifically on renewals, I'm wondering, any pricing changes there? Any -- you didn't have to -- you were able to retain with less incentives or less discounting? Just looking for some insight on the consumer renewal side.

Anthony Folger

Yes. This is Anthony, Eric. I think we saw from a pure subscriber renewal perspective. I think it's good result that we've seen in years. We continue to see that the renewal rate drive up. I don't think that there was anything outside the ordinary. And to your point, there may have been less activity from a promotional standpoint than maybe we've done in years past. And that goes back to the -- some of the commentary we had around Analyst Day was that the fundamentals in the consumer business just seem to be pretty strong and they've been pretty stable this year. So really nothing unusual to drive to a 5% number. It just felt like business as usual. And we continue to see these slight improvements in renewal rate that really delivers a big value on a big benefit to the business.

Eric Martinuzzi

Okay. At Analyst Day, you guys kind of teased your DRaaS product coming soon here. Deepak was talking about it. Are you at a point where you're beta-ing that maybe with customers? So what can tell us about that product that's coming here in 2018?

Mohamad Ali

Yes. So we've had some -- yes, other than -- more than teased, but I think Jerry wants me to not go too far. I'm very, very excited about that product. And in the early 2018, we will launch that product. I mean, we have it up and running in sort of alpha, beta, and we have a few partners sort of looking at it. And we're going to move as aggressively as we can there. But in terms of launching the product, that's a sort of 1 half '18, hopefully earlier, side of 1 half. And it is a wonderful product. I mean, we actually just did a demo on this partner call that we had earlier today, and we had a great feedback from the partner.

Operator

And our next question comes from Tim Klasell of Northland Securities.

Timothy Klasell

Yes. Just a quick question. I think on the Analyst Day, you're going to mention maybe sort of tracking the renewal rates. Sorry, I have been jumping back and forth myself. Did you mention those? And can you repeat that if you had or [indiscernible]?

Mohamad Ali

Yes. I'm going to pass this one over to Anthony.

Anthony Folger

Yes. I think when we tease this up at Analyst Day, we had talked about $1 renewal rate on the business side that was, let's say, in the low 90% range, 92% to 93%. We didn't call it out explicitly, but I think we're probably half that level or maybe tracking a little better in the third quarter. I think we will start to put metric out with consistency beginning with Q1 of '18.

Timothy Klasell

Okay, okay. Then I think in the past, you also recently mentioned the hurricanes and the ransomware attacks sort of brought up -- I'd say, began to get you more acquire rate and maybe filling up your pipeline. Have you seen any of those convert or they've tapered off? Or was that just -- like I said just a lot of questions, but no real movement as far as changes, as far as the sales patterns are concerned?

Mohamad Ali

So ransomware is interesting in that when you have ransomware on the consumer side, it's going to be -- it's like with -- an hour, there's a spike, and we can see it, like it's such a website e-commerce transactional business. Businesses take a lot -- much longer to respond. They think about it and then [indiscernible] or they may forget about it. Hurricanes, same sort of thing. It's -- we don't get that immediate response. So I assume that from the ransomware activity and from the hurricanes that there may be some benefits, but we have not yet seen that. And part of this might be, it takes a while to get this really on the business side.

Timothy Klasell

Okay. And then one final quick one. The consumer business came in line with what you guys are talking about, maybe a little bit weaker than I have thought. But did you guys change your strategy or anything or make any changes towards the end of the quarter with code once you realize the Code42 relationship was signed? Were there any changes there in anticipation of going to market here probably in Q4 with the Q3 go-to-markets on the consumer side?

Anthony Folger

Yes. That's a good question, Tim, and it's something we have been tracking really closely. I mean, that's a good partnership. I think we're really happy with how it's shaping up. It won't really start to generate bookings for us until the fourth quarter. And so we have sort of a pipeline of visibility, which looks good. And so I think we've started to, I think, reallocate as appropriate, meaning whether we've got a provision, more storage for a lot of net new customers coming in or whether we have the opportunity to maybe take some of our direct advertising spend down and focus more on the brand campaign that Mohamad talked about in his prepared remarks. I think it gives us the opportunity to make some maybe different resource allocation decisions and really put some more wood behind the arrow on the business side. So it's -- I think we're -- we have multiple plans in place. We want to see how that pipeline converts during the quarter, but I think we're optimistic for sure.

Operator

Our next question comes from Brian Swartz of Oppenheimer.

Koji Ikeda

This is Koji Ikeda sitting in for Brian Swartz. Just a quite -- wanted to build -- just wanted to build upon -- I just wanted to touch on the recent question about -- or previous question on the competitive dynamics out there. Now given the recent market consolidation activity that's been going on, and maybe this question is a bit early, but have you seen any -- no, just thinking about the partner network, have you seen any increased interest in the partner network from maybe any of those large bars or NSPs that might not have been ready to bring on Carbonite yet, but there's now renewed interest because of the consolidation activity?

Mohamad Ali

Absolutely. I would take -- 3 years ago, when I joined the company, getting some of these larger partners interested was difficult because we just had that endpoint backup product and a sort of a server backup products just for simple, low complexity environments. And so it was hard to get their attention. I mean, if you scroll forward to today, we have a solid midmarket endpoint product, we have a solid midmarket server product, we have a solid DRaaS product, we have a solid high availability product, we have a solid migration product, we have a solid archiving product. And so it's a much more interesting discussion both for us and for those partners

Koji Ikeda

Great. And maybe a question for Anthony. Looking at the full year guide here, it looks like the range was narrowed a little bit with the top end coming down but the midpoint going up almost $3 million. I think this is the second quarter in a row where the top end was brought in a little bit but the midpoint went up. Maybe if you could remind us or walk through some of -- sort of the mechanics that are playing into that top end coming down a bit.

Anthony Folger

Yes, are you talking on the revenue side, Koji?

Koji Ikeda

Yes, yes, on the revenue side.

Anthony Folger

So I think again, a lot for us depends on the mix between subscription and nonsubscription. And I think we saw in Q2 and certainly, again, in Q3 good performance on the subscription side, probably a little bit better than we expected. And I think somebody had asked a question earlier, whether there's potentially a multiplier effect that people aren't seeing as a result of that, and I think the answer is yes. If a lot of these net new subs were coming in on a perpetual deal, the deal size may be 2 or 3 or 4 times what we're seeing in the results today, and a lot of that translates into revenue more quickly. And so we guided and tried to give ourselves latitude for a pretty broad range of outcomes. And frankly, to the extent that we were really taking our top end up because we were doing more perpetual deals, I think that -- while people optically may have looked at it and felt good about it, I don't think that, that's the best value-creating opportunity for the business. I think what we're seeing is an ability to move our midpoint up consistently based on subscription bookings that are better than we expected coming into the year.

Operator

Our next question comes from Sarkis Sherbetchyan of B. Riley.

Sarkis Sherbetchyan

So real quick one for me. I know we have talked about the subscription side, bookings for the business end market being better than expected. I guess, the one question that I have related to that would be if you're getting better subscription bookings, what does that mean for earnings distribution over time? Does it become much more evenly distributed as we kind of look in the first half versus the second half? I mean, any kind of color around there?

Anthony Folger

Yes, I think it probably does allow for a little more even distribution on earnings. At least it starts to take some of volatility out if we're seeing fewer of these big perpetual deals. So I think that certainly is a part of it, Sarkis. And frankly, I think when we run the math and think about customer lifetime value, getting somebody into a subscription offering where we have the ability to either attach them to our platform or to continue to go back to them with more of our offerings to sell, it's -- we know that we keep them longer and we know that we have a lot more opportunity to land and expand and get more share of wallet. So overall, I just think it's a much better proposition for the business. It gives us better visibility over time into revenue and to your point, probably starts to smooth out some of the earnings distribution over time.

Sarkis Sherbetchyan

Okay, that's helpful. And would that be contingent upon -- so I mean, would you anticipate a different type of spend from a marketing perspective or sales perspective for -- to get this [indiscernible] things versus perpetual and -- or -- and do you still anticipate like a Q4 build for perpetual business? I don't know if that kind of makes sense, but...

Anthony Folger

Yes. I think on the spend side, we don't really have a difference in the model. Our outreach to customers and potential customers is the same. And currently, when it comes to things like commissions, we don't defer any of that in our subscription offering. So I think that's another element of the upside we're seeing. Especially on EPS is, we're driving more subscription bookings and we're still able to take enough costs out of the business to beat on the earnings line. What really is -- I think it's a tough thing to do, and I think there's -- that's why we're really pleased with the results this quarter. So there's no difference in how we recognize costs. So fundamentally, if we had started out the year and thought we are going to do this level of subscription bookings, I think people maybe could have had a potentially lower outlook from an EPS perspective. I mean, the fact that we've been able to deliver what we had committed to earlier in the year is really a benefit and I think a testament to the discipline we've had around delivering numbers and just trying to drive real efficiency on the model.

Sarkis Sherbetchyan

That's really helpful. And then you mentioned in the prepared remarks, right, you have even more initiatives underway in the fourth quarter here. You mentioned rationalizing systems. How is that maybe different from some of the opportunities for data center consolidation? I mean, is there something that you can maybe comment on now for us to kind of understand from a milestones perspective?

Anthony Folger

Yes, I think one of the last elements that we're working through right now, we've done the data center consolidation. We have consolidated our ERP system on one platform. Really, from a CRM perspective, I think that's one of the last large projects that we've got that is live right now. So we'll consolidate our CRM onto a single instance, and we will also finish rolling out our new billing system, probably early 2018 for both of those. And I think with those two coming off the list, I think we start to get more efficient not only from a cost perspective, but also just in terms of our ability to transact easily and just to be a company and a partner that's easy to do business with. I think we start to become much more attracted to our customers and our partners and we just become more efficient as a business.

Operator

And our next question is from Erik Suppiger of JMP.

Erik Suppiger

Most of my questions have been asked. But can you remind us what the contribution from Code42 will be turning in the fourth quarter? How are you looking at that in terms of your growth rate?

Mohamad Ali

Yes. Sure, Erik. I'll pass that one to Anthony.

Anthony Folger

Yes, Erik. I think with Code42, we've got a pipeline. We honestly just don't know yet how that plays out in Q4 or came to 2018. I would think of the contribution as being something that will be -- it should be a steady contribution once it starts up. It's something that will run pretty much all the way through 2018 just based on the nature and the duration of the agreement. Based on some of the press that I've seen up that, I expect it to be a reasonable mix of consumer and business subscribers. And the business subscribers are likely to be very small businesses. And on the consumer side, I think these are folks who are -- who see the benefit and the value of a service like ours, and we're able to retain customers for a pretty long period of time and build good and profitable relationships. And I think we expect to see the same from the customers that come over and convert. So the jury's out yet on exactly what that contribution looks like. I think we'll have more as we close out Q4. And then, as we look into 2018, we'll see if that has an impact on either on our consumer outlook for next year or even the business outlook.

Erik Suppiger

All right, very good. And then, have you seen any change competitively with the competitors do Double-Take?

Mohamad Ali

No, no. I mean, the competitive landscape I don't think had changed significantly since last quarter. Really, I think the big news is that of the acquisition by Vista. But other than that, I think the competitive landscape is similar. Every company continues to make incremental progress in their portfolio as do we. And I think on the Double-Take side, we have not seen anything that's dramatic quarter-to-quarter.

Operator

And I'm showing no further questions. I'd like to turn the call back to Mohamad for any closing remarks.

Mohamad Ali

Great. Thank you. And thank you all for joining tonight, and I look forward to seeing you guys on the road. Take care.

Operator

Ladies and gentlemen, this does conclude the program. You may all disconnect. Everyone, have a great day.