Carbonite's (CARB) CEO Mohamad Ali on Q4 2017 Results - Earnings Call Transcript

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About: Carbonite Inc. (CARB)
by: SA Transcripts

Carbonite, Inc. (NASDAQ:CARB) Q4 2017 Results Earnings Conference Call February 13, 2018 5:30 PM ET

Executives

Jeremiah Sisitsky - VP, IR

Mohamad Ali - CEO and President

Anthony Folger - CFO

Analysts

Chad Bennett - Craig-Hallum Capital Group

Ben Rose - Battle Road Research Ltd.

Eric Martinuzzi - Lake Street Capital Markets

Brian Schwartz - Oppenheimer & Co.

Bhavan Suri - William Blair & Company

Timothy Klasell - Northland Capital Markets,

Michael Berg - JMP Securities LLC

Sarkis Sherbetchyan - B. Riley & Co.

Operator

Good day ladies and gentlemen and welcome to the Carbonite Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded.

I would now like to turn the conference over to your host, Mr. Jerry Sisitsky. Sir you may begin.

Jeremiah Sisitsky

Great. Thank you very much Valerie and welcome everyone to our fourth quarter and full year 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'll 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 the financial figures discussed today are non-GAAP financial measures, unless it is stated that the measure is a GAAP number. A reconciliation can be found in our financial results press release which is available on our IR website.

With that, let me turn the call over to Mohamad.

Mohamad Ali

Thank you, Jerry. Before we dive into the results for the quarter, I want to take a few minutes to talk about some very exciting news, our announced acquisition of Mozy, and put it in context of what has been and continues to be a remarkable transformation here at Carbonite.

Today, we announced a definitive agreement to acquire Mozy for $145.8 million from Dell Technologies. Mozy was founded in 2005, has been part of EMC since 2007 and is now part of Dell.

We know them well and they are certainly considered to be a leader in the cloud backup and restore industry. They are similar to Carbonite in many ways, a cloud subscription business focused on the midmarket with excellent customer support.

Mozy has approximately 35,000 business customers and more than 2,000 resellers and partners, both of which are great new audiences for us to cross-sell components of Carbonite's data protection platform.

We expect the transaction to close late in the first quarter subject to customary closing conditions and regulatory approval. As is reflected in our guidance, we think there is an opportunity to drive meaningful synergies and we are very excited about this acquisition.

Just a few years ago, Carbonite was a consumer-focused company generating just over $100 million in revenues in cloud backup services. The market was changing quickly and simply put, we had to change.

Building upon our consumer legacy of efficiently operating cloud infrastructure at scale, we acquired enterprise-quality technologies and developed a robust platform that could serve the complex data protection needs of businesses.

In 2015, we embarked on a mission to build a data protection platform both organically and through acquisitions, in order to shift Carbonite to higher growth markets, dramatically increase our addressable market, and drive greater efficiencies to the bottom-line. As the numbers demonstrate, I'm pleased to say we have done all three.

Today, we have one of the leading data protection platforms for businesses, with solutions that cover all of an organization's most critical data. We have disaster recovery, high availability, mail archiving, workload migration, and, of course, backup solutions for businesses of all sizes.

Depending on the business need, we can recover mission-critical data in seconds and seamlessly move data from any environment to any environment. We can provide this protection across a broader set of systems, across physical, virtual, and cloud workloads.

We approach acquisitions knowing how important integration is to the ultimate success of the transaction. With a timely focus on integration, over the last several years, we brought together multiple sales organizations consolidated on to a unified set of internal systems and built a leading data protection platform for businesses.

We launched a unified website, thoughtful brand architecture and streamlined the business to drive improvements in profitability. We also aggressively invested behind our partners and delivered award-winning support to our customers. We had a plan and in a very disciplined manner, we excluded to that plan.

Pending the close of the Mozy transaction, the plan with Mozy will be very similar, quickly and efficiently integrate, standardizing on the best technology, driving cross-sell across the portfolio, and taking out costs where appropriate.

Our acquisition and integration strategy has proved effective. Since 2014, we have delivered business products bookings with a compound annual growth rate greater than 40%. We successfully transformed from a consumer-centric organization to one that generates approximately 70% of its bookings from businesses.

We more than doubled our revenue. We went from losing money in 2014 to delivering $0.79 in diluted non-GAAP earnings per share in 2017. And in 2018, we expect to deliver well above $1 in non-GAAP earnings per share.

Along the way, we returned cash to shareholders through share repurchase programs, repurchasing approximately $25 million in stock at an average price of around $13 per share, and we saw our market capitalization increase significantly.

As I look ahead, I am truly excited about our product roadmap. In the fourth quarter, the first set of customers began evaluating Carbonite Recover, our exciting new Disaster Recovery as a Service, also known as DRaaS, solution. It's an easy-to-use solution powered by great technology and as a result, we are confident it will be well received by the market.

Carbonite Recover comes from a combination of technology that we acquired as part of the Double-Take acquisition and our own internal development efforts. A small number of customers are already using it and the early feedback has been quite positive. We are rolling it out very thoughtfully, collecting feedback from early customers, working closely with them to make sure it meets and exceeds their expectations.

We remain on track to launch Carbonite Recover in the first half of 2018. And as we move through the year, we plan to continue to roll it out to a broader and broader set of customers, getting it into the hands of more partners, ultimately putting marketing campaigns behind it in the second half of the year.

While 2017 was a very successful year, we still have much to do in 2018. We're going to continue to streamline and simplify the business from a technology, process, and organization perspective. Our bigger focus areas will be on integrating Mozy and ensuring the successful launch of Carbonite Recover.

We will also continue to invest behind partners to drive new customer acquisition and enhance cross-sell efforts. And we will have some other exciting things on the product roadmap for later this year that will be additional catalysts for growth in 2019 and beyond.

In closing, we are well ahead of the plan that I laid out three years ago. Our results for the quarter and for the year set the stage for a strong 2018 and beyond. We're driving balanced growth with significantly expanded profitability. We are executing well and delivering on behalf of all of our stakeholders.

No transformation is complete without challenges. But I wanted to take a moment to thank the entire Carbonite team for their tireless efforts to effect this transformation. I'm incredibly pleased with the teams at Carbonite and their ability to rally together to consistently deliver results and successfully drive a transformation of this magnitude.

With that, I will pass it over to Anthony to discuss the Mozy acquisition in more detail and to provide insights into our financials and guidance. Anthony?

Anthony Folger

Thanks Mohamad and thanks Jerry. First, let me say that we're thrilled to announce the acquisition of Mozy. With approximately 35,000 business and 100,000 consumer subscribers, Mozy presents a truly unique opportunity to accelerate our cross-sell efforts. In addition, the scale of our cloud-based data protection platform allows us to drive an incredible amount of synergies from this deal, making it accretive to earnings.

As Mohamad noted, we expect the transaction to close late in the first quarter of 2018. We're financing the $145.8 million purchase price through a combination of cash on hand and the addition of a $120 million revolving debt facility that we will put in place concurrent with the closing of the transaction.

Mozy has demonstrated a consistent level of profitability and as you will see in our financial guidance, we expect the acquisition to contribute meaningfully to our revenue and profitability.

We're excited about the cross-sell opportunities, the opportunity to expose new partners to the full Carbonite data protection platform, and the strategic relationship that we're establishing with Dell and believe this acquisition can be truly transformative for Carbonite.

Turning to our results. In the fourth quarter, we delivered bookings of $60.2 million, representing 11% growth over the year ago quarter; and business subscription bookings of $30 million, representing 15% growth over the year ago quarter.

Non-GAAP revenue for the quarter was $62.8 million near the low end of our guidance range and was driven by solid subscription bookings and slightly lower than expected perpetual license sales. Overall, it was a good quarter that was punctuated by operating discipline leading to margin expansion across the business.

For the full year 2017, our total business bookings were $164.1 million as compared to our full year guidance of $163.8 million to $168.8 million. And our business subscription bookings were up 16% for the full year 2017.

Our consumer business continues to exhibit signs of stability as improvements in customer retention and some benefits from the customer referral agreement we recently signed with Code42 begin to show in our results.

As Mohamed mentioned, we've done a number of acquisitions over the years. Historically, we've quickly repackaged and looked to convert the acquired installed base to a SaaS deployment model where possible. For new customers, we lead with our subscription offerings.

We know that with our strong customer retention rates, customer lifetime value on our SaaS deployment model is significantly higher and long-term, that is a much better and more profitable model for us.

On the net new side, as we've rolled out new offerings and integrated these solutions to our platform, we've seen a much higher percentage of net new customers on our SaaS deployment model.

There's still lumpiness in the legacy perpetual license business and we saw that in the fourth quarter. Our focus, however, continues to be growing business subscription bookings and when given the opportunity, will always choose these longer term, higher customer lifetime value deals over one-time transactions.

With a continued focus on operational excellence, we've began taking expenses out of the business. In Q4, our non-GAAP gross margin was 77.6%, up 360 basis points year-over-year. And for the full year 2017, non-GAAP gross margin was 75.5%, up 280 basis points.

Our Q4 non-GAAP net income per share of $0.30 represents more than a 160% year-over-year increase. Diluted non-GAAP net income per share for the full year was $0.79, up from $0.60 per share in 2016.

There continues to be room for efficiency in the model and there are still opportunities to see dollar reductions in terms of cost. Some of that opportunity is ongoing in data center consolidation projects. Some of that opportunity is in the back office and in G&A. During the fourth quarter, we restructured components of our engineering, G&A, and sales organizations, taking cost out of the business and realigning headcount.

Shifting gears, CapEx for the quarter was $5.4 million and for the full year it was $17.4 million. As expected, CapEx for the back half of the year was substantially lower than CapEx in the first half.

As we move through 2018, we expect to see a similar trend with CapEx elevated in the first half as we invest in new equipment to drive the consolidation of our West Coast data centers and then a reduction as CapEx normalizes in the second half.

Our adjusted free cash flow was $9.7 million for the quarter and $20.2 million for the full year, which is just above the high end of the guidance we provided for the year.

Now, turning to our outlook. For the first quarter, we expect GAAP revenue to be in the range of $61.7 million to $63.7 million. This includes the impact of purchase accounting adjustments on deferred revenue.

Non-GAAP revenue in the range of $63 million to $65 million and on the bottom-line, we expect non-GAAP earnings per share in the range of $0.20 to $0.24. With the expectation that Mozy will close late in the first quarter, we are anticipating minimal impact from the deal in our first quarter financial results.

For the full year 2018, including the expected impact of the Mozy transaction, which we estimate at nine months of activity, we expect business bookings in the range of $223.8 million to $234.8 million, consumer bookings growth in the range of 5% to 15%, GAAP revenue in the range of $294 million to $304 million, non-GAAP revenue in the range of $302.5 million to $312.5 million, non-GAAP net income per share in the range of $1.45 to $1.55, up approximately 90% year-over-year; non-GAAP gross margin in the range of 76% to 77%; and adjusted free cash flow in the range of $32 million to $38 million.

Included in that guidance, we expect Mozy to contribute approximately $50 million to $55 million of bookings, with approximately 85% coming from business offerings. We also expect Mozy to contribute non-GAAP revenue in the range of $40 million to $45 million and approximately $0.25 per share in non-GAAP net income.

As a reminder, we're also implementing ASC 606 in the first quarter of 2018 on a modified retrospective basis. All contracts after January 1st, 2018 will be accounted for under this new standard. We expect minimal impact to revenue as the majority of our revenue is under our SaaS deployment model.

If there's a small portion of our revenue associated with term licenses and certain MSP arrangements that will be impacted on a go-forward basis. The actual impact of the adoption of ASC 606 on revenue, while expected to be minimal, will depend on the timing and mix of our 2018 bookings.

ASC 606 is expected to have a more significant impact on our operating expenses as commissions and third-party referral fees that would've been expensed in the period are now capitalized and expensed ratably over multiple years. We expect the adoption of ASC 606 to positively impact non-GAAP net income per share for the full year 2018 by approximately $0.30 per share.

Okay, I think we've covered enough. So, let's open the conference call up to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

Our first question comes from Chad Bennett of Craig-Hallum. Your line is open.

Chad Bennett

Great. Thanks for taking my call -- questions. I guess, the first question on Mozy. Can you talk about the trends in the business? Obviously, the businesses went through a lot of change, obviously being acquired by EMC and then Dell and I'm not sure, kind of the focus from Dell on that business. Could it -- was it a growth business? And then, can you talk a little bit more about the synergy potential there and kind of what we can expect 12 months after close? Thanks.

Mohamad Ali

Yes, great. Thanks Chad. I'll take that and Anthony can certainly add anything he'd like to. We are extremely excited about this deal. I don't know if I've shared this before, but this is the first company I wanted to acquire when I got here three years ago and we were patient and we waited three years later, the asset came on the market and we were there, ready to do the deal.

In terms of the synergies that we see, we see a tremendous amount of synergies, both on the topline and the bottom-line. On the topline, they bring 35,000 customers. Now, when Mozy was acquired by EMC, they started moving to the midmarket into larger customers faster than Carbonite did and so 85% of their customers is 35,000. 85% of their revenue is in the midmarket. And these 35,000 customers represented an opportunity for us to sell additional products, server backup, DRaaS migration into that base. It's a tremendous opportunity.

The other opportunity is for us to leverage the 2,000-plus partners, including Dell and EMC, which will continue to resell the product. So, these 2,000 partners to sell the broader Carbonite portfolio.

And then finally on the bottom-line, there's this tremendous synergies because of some similarities to the business. But in one particular area, where we have a lot of experience and we did this before with EVault is, as we leverage the much, much more efficient Carbonite cloud infrastructure and effectively migrate the Mozy infrastructure onto our infrastructure, we expect to drive tremendous profitability and that's something we've done before. We did it very successfully with EVault, and we expect to do it very successfully here. And it's part of why, as we project our EPS, we're looking at just tremendous growth in EPS, sort of 90% year-over-year.

Anthony Folger

And I would just add in terms of the trends in the business, Chad, I think it was a business that really was focused on driving a really solid result around margins, operating margins and EBITDA. And so they've had -- they've consistently generated healthy operating margins certainly north of the margins that Carbonite has today as a business.

But the business was slightly declining, so it wasn't really a growth asset. And that probably was deliberate and by design within a bigger strategic enterprise. You can tell we're thrilled about the deal. We see a ton of potential and a ton of synergy, especially with the customer bases and our ability to cross-sell.

So, I think our perspective is that we can do a lot both topline and from an expense perspective with the business and it's really a value creator.

Chad Bennett

Okay. And then maybe one follow-up for me, if I could on that. So, the nature of the Mozy 35,000 customer base, is it higher end, kind of higher ASP-type customer? Or did I get the wrong impression there?

Mohamad Ali

So, it's -- there's a nice distribution of customers across the midmarket and even a number of enterprise customers. Obviously, EMC was very good at selling into the enterprise, so they tend to go after larger customers.

So, I think the customer base that we are adopting really fits well, the bulk of it, into the sweet spot of where we take -- we're taking Carbonite, which is the heart of the midmarket.

Chad Bennett

Got it. Okay. Thanks guys.

Mohamad Ali

And Chad it looks like I'm going to be spending my birthday with you at your conference.

Chad Bennett

I love it. Perfect. No better way to spend your birthday than in Minneapolis.

Operator

Thank you. Our next question comes from Ben Rose of Battle Road Research. Your line is open.

Ben Rose

Yes, good afternoon and congratulations on this Mozy acquisition. I remember asking you about this Mohamad a few years ago and you are a very good poker -- you must be a good poker player, because you didn’t want to say much.

Mohamad Ali

Yes, I remember, we met in the [Indiscernible] when you asked me about it.

Ben Rose

Sorry, just one quick clarification. I was writing pretty quickly here. But Anthony, you said of the $50 million to $55 million in bookings expected this year from Mozy, you broke that out between business and consumer. Could you just provide that breakout again? Sorry.

Anthony Folger

Yes, sure, Ben. We are -- our expectation, and this is based on the trend in the business today, is that roughly 85% of their bookings are going to be business offerings. So, of that $50 million to $55 million, 85% is on the business side. And as Mohamed mentioned, there's a good distribution from, let's say, small business, all the way up to enterprise and the balance, 15% or so, is on the consumer side.

Ben Rose

Okay, great. And if you look at this, in terms of it being a product line carve-out, maybe just contrast it a little bit, even on a preliminary basis in terms of contrasting it to EVault in terms of your ability to bring over a set number of employees, set revenue stream, et cetera? Maybe just some context there?

Mohamad Ali

Yes, I mean, Mozy was operated sort of as a separate entity within Dell. And so we're effectively acquiring that entity. Of course, we're limited in what we can say between signing and closing and at closing we'll share our integration plan. But in terms of the technology and the product roadmap, one of the things that we've been able to do over the last three years is build out this the unified data protection architecture, the sort of the block diagram that we shared at the Analyst Meeting.

And if you look at that overall architecture, it has a unifying layer. And below that unifying layer, there's a server backup engine from Evault, there's a replication engine from Double-Take, there's an analytics engine from Datacastle, and our integration plan is to similarly take the best of Mozy, and Mozy has some very interesting pieces of technology that can make that platform even stronger. So, we now sort of have a playbook for how we're doing this and I think we'll just execute to that playbook.

Ben Rose

Okay, great. And then if I can, just one additional question for Anthony on the gross margins trajectory. You were very clear about filling in a lot of the missing pieces for 2018, but just curious to get your thoughts on gross margin and how Mozy in particular might impact it?

Anthony Folger

Yes. That's a very good question Ben. Based on where the Mozy business has been, they've got a gross margin profile that's lower than ours and I think that's the reason in our guide where you see continued leverage and improvement in our gross margin profile, but probably not as much as we would have shown had we not done the Mozy acquisition.

So, I think that their gross margins are probably a little bit dilutive at least initially, but I think that's something we believe we can solve pretty quickly. From a net margin, sort of, operating margin perspective, they're certainly accretive and running the higher level of profitability than we have been.

Mohamad Ali

Yes, we saw the same phenomenon when we acquired EVault, right. It was at a lower gross margin. It was somewhat dilutive. And then very, very quickly, we were able to bring it up to higher gross margins.

Ben Rose

Okay. Thanks very much.

Mohamad Ali

Thank you.

Operator

Thank you. Our next question comes from Eric Martinuzzi of Lake Street Capital. Your line is open.

Eric Martinuzzi

Thanks. Congrats on the announcement of the transaction. I had a question about Q4. I want to be backward looking, just for the first question here and that is this -- basically the business bookings shortfall. Anthony, I think you called out the perpetual sales, that to say then that the recurring -- or the SaaS bookings were on target and it was entirely at the feet of the perpetual that we laid the biz bookings shortfall?

Anthony Folger

Yes, I would say that's probably correct Eric. I think we had, for both the year and the quarter, really good and in fact probably better than we were expecting on subscription bookings growth. And the perpetual deals have been, from time-to-time lumpy and I think we've seen over-performance there at times and we've tried not to get too excited. This quarter was probably a little bit lighter than folks had anticipated and I don't think that's too concerning for us.

Eric Martinuzzi

Okay. And then looking at that 2018 contribution from Mozy, I understand we're looking at basically three quarters of the year. Explain to me why the following assumption might be wrong. If we take $40 million to $45 million contribution over nine months, that would suggest revenue at Mozy of $53 million to $60 million on a full year basis.

Anthony Folger

Yes, I think you could certainly annualize the range that we've got there, from $40 million to $45 million. I mean, if you took at the mid you'd be close to $57 million. And I think when we sort of evaluated this, it was -- at least our expectation in terms of what we could do with the business and this assumes that we're going to take a hard look at packaging and pricing and make sure that we do things quickly and continue to be competitive in the market with the solutions.

But we felt like we could do that level of revenue on an annualized basis. And then even with margins being a little bit lower than what we see in our core business, on the bottom-line, this certainly is a very attractive and accretive opportunity.

Eric Martinuzzi

Okay. Now prior to the acquisition, as you guys came out of the Analyst Day back in September, you talked about a moderate long-term range for bookings growth and you gave us insight there on both the consumer and the business bookings.

I imagine now that you've acquired Mozy; that probably impacted a bit of your pipeline on the business bookings side. But rather than answer the question, let me ask, your old moderate range assumed flat to down 10% consumer and plus 10% to 15% on the business bookings. From an organic perspective, are those long-term moderate ranges still accurate?

Anthony Folger

Yes, very good question and I will be as clear as I can. What is -- what's contemplated in our guide for 2018 would be an improvement. And remember when we were at the Analyst Day, we talked about a number of factors that could move us from sort of the moderate growth scenario to the accelerated growth scenario.

One of them was improvement in the consumer business. Now we're projecting 5% of 15% growth in consumer this year. Obviously, a portion of that is from Mozy. When we strip out the Mozy contribution on the consumer side, our expectation would be that consumer is improving this year and on an organic basis, we would have moved our range up. So, instead of flat to down 10%, I think we would have been in the range of down 5% to up 5%. And so that starts to move us towards the accelerated growth case. Doesn't get us completely there yet.

On the business side, if you sort of run the map on Mozy and strip out contribution, you -- I think you'll sort of back into that 10% to 15% growth rate again. So, I think our outlook has improved on the consumer side. I think we feel good on the business side, but we're still holding in that 10% to 15% range on the business bookings.

Eric Martinuzzi

Okay, that's very helpful. Congrats again on the transaction. And good luck [Indiscernible] it up your -- by the end of the quarter.

Eric Martinuzzi

Great. Thank you Eric.

Anthony Folger

Thanks Eric.

Operator

Thank you. Our next question comes from Shawn [ph] Swartz of Oppenheimer. Your line is open.

Brian Schwartz

Yes, hi, it's Brian Schwartz over at Oppenheimer. Thanks for taking my questions this afternoon.

Brian Schwartz

Hey Brian.

Brian Schwartz

Hi. Congratulations on the acquisition too. One question on the quarter, on the Q4, I thought I heard, I think it was in Anthony's comments that you guys did some business optimization strategies or kind of right-size some of the operations. Can you talk about some of the savings that you achieved or what you took out the run rate with what you did during the quarter make sense of that?

Mohamad Ali

Let me frame the context and then Anthony can provide you with the details. So, one of the things that we've been doing throughout 2017 is to bring the products together into one platform, bring the sales organization together into a unified go-to-market, have a single partner program for all the partners, regardless of which acquisition it came from, have a single unified portal for the partners, et cetera, et cetera.

So, as we've been bringing the various components of the company together, they've become -- they're becoming more and more efficient. And as a result, we had some opportunity to effectively get some cost savings.

And so Anthony can provide you the details on that cost savings, but it's part of the plan that we've been executing to unify the various parts of the company.

Anthony Folger

Yes, and I can add to that Mohamad. I think when we look at total spend and sort of look at it sequentially from Q3 to Q4 and this would be our cost of goods and our operating expense. So, overall, the spend was down about $1.8 million, which I think is a combination of some reductions in headcount, where we've finished integration activities and felt like there was -- that was the right transition to make. And I think there was also a lot of non-headcount-related activities, whether it's just various aspects of the business where we could get more efficient and do things a little bit more efficiently.

So, I think it was a combination. It wasn't just a headcount reduction, but I think there was certainly some redundancy we took out. I think there was some efficiency that we were able to get in other areas of the business, where we do things like continue to consolidate in our data centers, continue to get more efficient in customer care, and so all of those things have contributed.

Overall, when we look at the restructuring, we probably would have expected it to take $55 million out of our cost base in 2018. Now, it doesn't mean our total costs are going to be down by $6 million or $7 million. It's sort of allowed us to invest in other areas, but I think that was the, sort of, the focus of what we did in the fourth quarter.

Brian Schwartz

Good color. And moving on to the future on Mozy, just a couple of questions. I apologize if you did touch upon them, and I missed that. First question was just on the competitive presence of Mozy in the market, really just the intensity of Carbonite seeing them in deal engagements. Do you have any sort of sense of what that was? And if that's, can hopefully lighten up here with them?

Mohamad Ali

Yes, I mean, in the midmarket, there are a lot of competitors in the space, right? And so an endpoint there is half a dozen participants. And so we see them from time-to-time, but as you will recall, until very recently, we didn't have an endpoint product that could participate in sort of midmarket and beyond. Now, we've addressed that. And then on the server backup side, there's a whole other set of participants.

So, I mean, we do see them from time-to-time, but it is a pretty big field of people that have endpoint backup technologies from HP Connected, which is now part of MyFocus to us. I mean, there just actually a reasonably long list, so it is a pretty --

Jeremiah Sisitsky

Great. Valerie, maybe move onto the next caller.

Operator

Thank you. Our next question comes from Bhavan Suri of William Blair. Your line is open.

Bhavan Suri

Hey guys, can you hear me okay?

Bhavan Suri

Yes, we sure can hear you Bhavan.

Bhavan Suri

Hey good. Thanks. And yes, again, just echoing everybody else. Congrats on closing Mozy. I've been waiting for that for a couple of years, so.

Mohamad Ali

Just to be clear, we signed the deal. We haven't closed it yet. That's another several weeks here before we close it.

Bhavan Suri

I'm not jinxing it, don't worry. You touched a little bit on the accelerated growth story or the opportunity. You talked about consumer being better as a potential incremental positive for the accelerated growth story, but the other part was sort of something about, sort of going with partners and sort of using the platform, sort of the one Carbonite vision, sales teams, the Carbonite sites. I guess how is that going? How is the new platform gaining traction? Are you seeing cross-sell? And then how is stuff going with the MSPs? Maybe we start off there.

Mohamad Ali

Yes, no, that's a great question. And I'm actually going to read a comment from the Rosenblatt report -- am I not allowed to do that?

Bhavan Suri

Mohamad [Indiscernible] call.

Mohamad Ali

Isn’t that a probably -- or is it not, okay. Then I will not do that. But generally, our partners have been viewing fairly positively, the sort of a unified programs that we bring -- been bringing to market, whether it's the Partner Portal or the Partner Program or it's the broader platform.

Before, it was very difficult if you are selling -- if you wanted to sell multiple Carbonite products, to sell them. I used to -- I had this analogy where we had apples and oranges and pears, but they were in different corners of the store.

And now, we're bringing that together sort of in fruit baskets and so the partners are more able to sell the multiple products. We're starting to see some good traction there, especially former EVault customers and partners, able to sell Double-Take and high availability and looking forward to the DRaaS into that space and so we've seen that.

The MSP business continue to be a great business and one of the things that we've talked about at the Analyst Meeting is building out the set of APIs for the MSP market. And at the end of last year, we released the first set of APIs and there's additional APIs that are coming, those are very important to the MSP.

Bhavan Suri

Got it. Okay. I guess, as you think about the DRaaS offering, and the orchestration layer and sort of that sort of opportunity I guess, how much of that is built into 2018 guidance because it's obviously still very early. You even haven't -- I don't think it's been officially released so. Is there anything built in 2018 or is that more of a 2019 story? And then given that, that's software, maybe Anthony, just a little color on what that does for gross margin? Thank you.

Mohamad Ali

Yes, so Bhavan, the way I describe how we're going to roll it out, so I would say that given that, which is exactly our plan, it's the plan we communicated last August at the Analyst Day, I would expect to see revenues and bookings contribution in the fourth quarter and then into 2019. But that's the plan that we've had all along.

Anthony Folger

Yes, I would just add to that, Bhavan. I think there is some contribution in the back half of the year on the bookings side, as we sort of get that offering really lit up in the market, a little less so on the revenue side, because it really is going to be a subscription-based SaaS deployment model.

And from a margin perspective, we expect it to be in line with our business margins. So, this should be a product that's north of 80% in terms of gross margin when all sort of netted out. And so ultimately, I think it's a good and hopefully accretive offering that we have a lot of success with this year.

Bhavan Suri

Got it. That's really helpful guys. Thanks and congrats on -- at least close to signing up Mozy.

Mohamad Ali

All right. Thanks Bhavan.

Operator

Thank you. Our next question is from Brian Schwartz for Oppenheimer. Your line is open.

Brian Schwartz

Yes, hi. I just had a follow-up question just on the deal again. Anthony, is there anything that you can share at least directionally or qualitative way, in talking about the customer lifetime trends at Mozy, versus the customer lifetime trends for the Carbonite SMB customers? And then the follow-up question on that, is just thinking about the conversion opportunity over time. What is the typical duration of this type of exercise? Thanks.

Anthony Folger

Sure. So, it's interesting, Brian, to see very similar characteristics in their installed base on both the business and the personal side, as we do with our own offerings. And that's not surprising. It's a good technology, and they've certainly been successful in the market for a lot of years.

So, we're seeing relatively consistent retention rates, which would tell you that it's probably a six to seven-year customer life, probably a slightly higher ASP on the business side and a slightly lower gross margin.

And historically, probably a gross margin that was meaningfully lower than the Carbonite business margins. But I think our focus, as we bring the business over to really drive more lifetime value is going to be on driving that gross margin profile up as quickly as we can, continuing our focus on retention so we can just continue to extend the customer lifetime, and then just making sure we've got offerings priced right, so we drive the right lifetime value.

But I -- just looking at the customers and the business overall, it looks a lot like ours, in terms of how the installed base acted and what the value there was.

Brian Schwartz

Thank you very much.

Mohamad Ali

Sure. Thank you.

Operator

Thank you. Our next question comes from Tim Klasell of Northland Securities. Your line is open.

Timothy Klasell

Congrats on the acquisition. Just some quick questions here. On the reacceleration or the acceleration of the growth on the consumer business, is that -- do you think, was that sort of organic, and beginning to see more activity in your user base? Or between Mozy -- the acquisition of Mozy, and now prior to that, Code42 last fall, do you think that's something that maybe you -- as we look all past 2018, that maybe that will go down to maybe the moderate case that you sort of guided to on -- at the Analyst Day? Thank you.

Anthony Folger

Yes, hey, Tim, it's Anthony. When we look at the consumer business, we're certainly getting or we expect to get some improvement from the Mozy deal and we see that adding incremental growth this year.

I would say in our core business, if we sort of strip Mozy away, we were, I think, out looking a better, sort of a better bookings year than we had in years past. And so we were moving to that, down 5% to up 5% type of outlook anyways.

So, I think, we'll see how we do in terms of getting the Mozy deal closed. And if we're successful there, we'll see how well we can execute with the business. But maybe as we get back to a steady-state, what that would imply is, we're probably in the down 5% to up 5% range.

Timothy Klasell

Okay, good, good. And then, if we take a look at all the puts and takes, you guys are going to be pretty busy this year digesting Mozy. Obviously, they have a different gross margin and operating margin structure than you do. But as we sort of build our models out, you guys aren't guiding to 2019, but we certainly build models, all of us probably build models out further than that.

Do you still think there will be improvement on the margin side as we go into 2019? Or do you think you'll have the sort of, all digested by the end of 2018? So, just sort of what does your roadmap tell you?

Anthony Folger

Yes, I think, if we can execute well and if we're able to get Mozy closed and do a good job integrating, our expectation is that we would continue to see expansion in the model in 2018 and then into 2019. I don't think that the acquisition disrupts our long-term model in any way. Perhaps it may accelerate it a bit, because as I mentioned, from an operating margin standpoint, Mozy has been at a higher level than Carbonite for some time now.

So, I think there's really opportunity to bring on a meaningful number of customers, to be able to cross-sell to those customers and then to basically accelerate the expansion in our operating margin as we go. So, that really is the thesis for the deal.

Timothy Klasell

Okay, great, great. And then, sort of, going into that, you guys have done a really good job on retention and working with your customers. What had Mozy seen there? And is that an opportunity for you? Thank you.

Anthony Folger

Yes, I think we're probably limited a little bit in terms of what we can say until the deal's closed, but I would say that their business, in terms of the unit economics and retention looked very similar to Carbonite. So, I wouldn't expect any meaningful difference, and certainly not a degradation in terms of customer retention on the Mozy side.

Timothy Klasell

Okay. And then one final one, guys. Your capital structure's changing, but you're throwing off a lot more cash, you should be throwing off a lot more cash now. How should we think about that going forward? Will it be debt pay down? Will you want to be building capacity and building dry powder for maybe future activities? Can you walk us through a little bit of that?

Anthony Folger

Sure. So, we took down a credit line, a revolver to close the Mozy deal. It's $120 million revolver. I think our expectation is that we'll draw down less than the full amount and take some cash off the balance sheet. I think that will give us room to continue to invest in the business as we need to.

We'll still retain, certainly enough cash on hand to invest in the business as we need to. And I would expect in pretty short order, we're able to accumulate enough dry powder to be active out in the market again, from an M&A perspective.

So, I think our focus is still going to be investing in the total opportunity in the market, and so that means investments in our technology and looking to M&A to continue to accelerate our roadmap.

Timothy Klasell

Great. Thanks guys.

Timothy Klasell

Thank you, Tim.

Operator

Thank you. Our next question comes from Erik Suppiger of JMP Securities. Your line is open.

Michael Berg

This is actually Michael Berg on for Eric. Congratulations on the acquisitions guys.

Mohamad Ali

Thank you.

Michael Berg

I have two quick questions around that. When I back out the Mozy acquisition from both billings and revenue, it seems that the organic growth for the entire organization is up 8% to 9%. Is that the right way to think about it?

Anthony Folger

Yes, I think you're in the right ZIP code.

Michael Berg

And is that the function of both negative -- is that mostly a function of consumer, or would you just a relative slow down on that SMB side or from organic perspective?

Anthony Folger

No, I think we continue to see that 10% to 15% range on the business side, sort of organic and we see a little bit of improvement on the consumer side and so I think that's really what drives to a slightly better outlook.

Michael Berg

Okay. And then a quick question on specifics, just want to get some clarity on that. You said it has a $0.03 or $0.30 impact to the bottom-line?

Anthony Folger

$0.30. So, 3-0, yes.

Michael Berg

3-0, okay. And one last question, if I can get one in. I think someone -- you mentioned something earlier around the technology from Mozy, but what type of technology can they add to your platform? Or is it a lot of overlapping technology?

Mohamad Ali

It's an excellent technology. Mozy, as I mentioned, because they were acquired by EMC in 2007, started this pivot to the business market, well before Carbonite did, right? Really, Carbonite didn't start moving to the business market until maybe 2012 or so and really in earnest in 2014.

So, they developed a lot of the components required for midmarket and some enterprises, and those components we will -- and I'm not going to get into the details of what the components are, but those components we will look to leverage as we build out our unified platform. So, I would say, those are the kinds of things we'd be looking for, from -- as we'll -- nuggets out of the platform.

Michael Berg

Got it. And one last question off of that. Would you say this gives you better capacity to move slightly upmarket?

Mohamad Ali

Absolutely. Absolutely. I mean, like I said, Mozy started moving up market in 2007. And so the 2,000 partners that they have out there, a lot of them are further upmarket.

Michael Berg

Got it. Thank you all. I'll sweep [ph] the floor.

Mohamad Ali

Thank you.

Anthony Folger

Thank you.

Operator

Thank you. Our final question comes from Sarkis Sherbetchyan of B. Riley. Your line is open.

Sarkis Sherbetchyan

Yes, thanks for taking my question here and congrats on a quarter and the acquisition.

Mohamad Ali

Thank you, Sarkis.

Sarkis Sherbetchyan

So, a lot of my questions have been answered, but I just wanted to kind of understand given your unified Carbonite platform, given the integration that you've done from your previous acquisitions and obviously, now the goal assuming Mozy closes, would be to integrate Mozy, right?

I mean, would you be able to, number one, integrate quickly than in the past acquisitions? And also, would that then lend to kind of dropping it into a unified, kind of Carbonite sales model and then thus having that cross-sell opportunity come in quicker? Can you maybe give us some thoughts around that?

Mohamad Ali

Yes, no, it's a good question. I've always, on all of these calls, I've talked about the integration process being sort of 12 to 18 months and some elements take longer, some elements, a little bit shorter.

I view this very similarly in that timeframe and I think earlier someone asked about the margin expansion as to the 12-month gain or is it over two years. And with EVault, we saw the data center consolidation take, probably 18 months or a little bit longer and so effectively, a two year transition. But that's sort of what we're targeting in terms of the integration and obviously, you need to do these things carefully.

But one of the things we're blessed with is just an incredibly strong M&A team and also a strong integration team. I mean, this is a team I've worked with for 15 years since back when we were at IBM, building IBM's analytics platform and so forth. So, this is a really solid integration team, and I expect that they will do what they did on the EVault deal and the Double-Take deal, here on the Mozy deal.

Sarkis Sherbetchyan

That's helpful. And then if I think about the non-GAAP net income contribution and also the non-GAAP revenue contribution that you're expecting for fiscal 2018, assuming you get the bulk of, kind of the nine months outside of the first quarter, what would the cadence look like, both for revenues and kind of the earnings distribution? If you can kind of help us, so that we can kind of think about factoring that into our modeling assumptions?

Anthony Folger

Yes, that's a good question Sarkis. And I think as we looked and in particular on EPS, I think the trend is going to be similar to last year in terms of a little more second half, in terms of our earnings capacity and expectation. Maybe not as, not quite as severe as it was in 2017, but I would expect the distribution smooths out a little bit, but still remains weighted towards the back end.

I would say certainly from an EPS standpoint, that's our expectation. From a bookings perspective, again, I would expect also to have a heavier Q4 and probably slightly heavier back half of the year overall. And revenue tends to be a little bit more linear, just because of the nature of our model and so may be subject to a little less seasonality.

Sarkis Sherbetchyan

Understood. And then one more if I could. If I were to kind of think about the changes announced to the consumer bookings segment. I mean, it sounds like, some improvements in the business. Can you maybe give us some more comments on what you're seeing, with regards to your Code42 agreement?

Maybe if you're seeing some more efficient spend, relative to what you've historically done on that side of the business for consumer, right? I mean, it sounds like that was more of a "commission-based model" right, if it were successful, you'd pay out. And it sounded like it for more an efficient kind of spend. Can you maybe talk about how Code42 is contributing, especially for your kind of FY 2018 expectations, as well as what you plan to do with regards to some of the savings efficiency gained?

Anthony Folger

Sure, sure. And I think, first of all, the partnership's been a great one and I think Code42's been great to work with. I think it's worked out well for both. We're certainly starting to see contribution come from the partnership.

As we look at 2018, and even a little bit in the fourth quarter of 2017, we do see a slightly more efficient cost of acquisition with the Code42, call it, commissions that we pay out, because the deal is entirely success-based.

And so as folks convert, we pay a commission back to Code42. So, I think that's been more efficient than we had been in recent history. And to the extent we can save those dollars from a marketing spend perspective and redeploy some of that back into the midmarket and the business side, I think that's really been our intent.

It may potentially drive a little more upside from a bookings perspective, which is why, we're sort of at the down 5% to up 5% range this year on an organic basis. We'll see how the year progresses, but I think there's certainly opportunity there. But for now, we're thinking of it as slightly more efficient than we had been in the past, allowing us to stabilize the consumer segment even further and an opportunity that's going to be there for us, for at least all of 2018, and one we think is a great one.

Sarkis Sherbetchyan

Got it. And just to sneak in one final one, right. Looking at the free cash guidance for fiscal 2018, it sounded like you were doing a -- another data center kind of consolidation. What type of capital spending are you planning to do that? And is it over and above kind of your typical "maintenance CapEx levels"? You can maybe share some color around that?

Anthony Folger

Yes, I think we've got, let's say, $4.5 million to $5 million that we're targeting for the first half of 2018 for that consolidation project. If you recall last year, when we did the East Coast, it was more like $6 million, so this is not in the same -- on the same level, in terms of the spend and the capital required. But it certainly is going to drive a somewhat similar result and we're going to see a lot of operating cost come out of the business maybe late in 2018.

So, I think, if you were looking at it on a year-over-year basis, a lot of our normal run rate stuff will be generally consistent and I think the fact that we did East Coast in 2017 and we're doing West Coast in 2018, it should make things largely comparable.

Sarkis Sherbetchyan

Thank you. That's all for me.

Mohamad Ali

Great. Thank you, Sarkis.

Operator

Thank you. I'm showing no further questions, so I'll turn the conference back over to Mohamad for any closing remarks.

Mohamad Ali

Great. Thanks, everyone. I know this is a very busy night, lots of companies reporting financial results, very condensed period of time. We appreciate your time, your attention as always, and we are available for follow-ups. Thank you and good night.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.