Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CARB > SEC Filings for CARB > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for CARBONITE INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CARBONITE INC


7-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed on March 6, 2013 with the Securities and Exchange Commission.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act.
Forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "will," "plan," "project," "seek," "should," "target," "will," "would," and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in this Quarterly Report on Form 10-Q. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a leading provider of cloud backup solutions for consumers and small businesses. We provide easy-to-use, affordable, and secure cloud backup solutions with anytime, anywhere access to files stored on our servers. We believe that we are the best known brand in the cloud backup market.

In 2005, we began development of our cloud backup solution and raised our first capital from investors. We sold our first Carbonite subscription in 2006. As of March 31, 2013, we had more than 1.4 million customers in more than 100 countries and had total revenue for the quarter of $24.5 million. Most of our customers are based in the U.S. and for the year ended December 31, 2012, customers in the U.S. represented 94% of our total revenue.

We derive our revenue from subscription fees from consumers and small businesses. We charge consumers a $59 flat fee for one year of unlimited cloud backup with our Carbonite Home solution. Our Carbonite HomePlus and Carbonite HomePremier solutions provide consumers with additional features at annual prices of $99 and $149, respectively. The pricing of all of our consumer solutions is discounted for multi-year subscriptions. Our small business solutions, Carbonite Business and Carbonite BusinessPremier, allow for an unlimited number of users, subject to storage limits, and are priced starting at $229 and $599 per year, respectively. We charge customers the full subscription amount at the beginning of each subscription period. We initially record a subscription fee as deferred revenue and then recognize it ratably over the subscription period. The annual or multi-year commitments of our customers enhance management's visibility of our revenue and charging customers at the beginning of the subscription period provides working capital.

In October 2012, we acquired Zmanda, Inc. for $13.4 million, net of cash acquired. We believe this acquisition enhances our small business offering with the ability to backup databases and file systems to the cloud, and enables small businesses to obtain all of the backup solutions that they need from one vendor.

We invest in customer acquisition because we believe that the market for cloud backup is in the early stages of development. Our largest expense is advertising for customer acquisition, which is recorded as sales and marketing expense. This is comprised of television and radio advertising, online display advertising, print advertising, paid search, direct marketing, and other expenses. We generally spend more on advertising in the first and third quarters of each year based on the seasonality of customer purchasing patterns and fluctuations in advertising rates. We also leverage an indirect distribution network to acquire costumers by selling our solutions through our sales channel relationships including major retailers and resellers.

As we grow our business we continue to invest in additional storage and infrastructure. Our operating costs continue to grow as we add more customers, principally as a result of our investment in customer acquisition and research and development. We expect to continue to devote substantial resources to customer acquisition, improving our technologies, and expanding our solutions. In addition, we expect to invest heavily in our operations to support anticipated growth and public company reporting and compliance obligations. We defer revenue over our customers' subscription periods, but expense marketing costs as incurred. As a result of these factors, we expect to continue to incur GAAP operating losses on an annual basis for the foreseeable future.


Table of Contents

Our Business Model

We evaluate the profitability of a customer relationship over its lifecycle because of the nature of our business model. We generally incur customer acquisition costs and capital equipment costs in advance of subscriptions while recognizing revenue ratably over the terms of the subscriptions. As a result, a customer relationship may not be profitable or result in positive cash flow at the beginning of the subscription period, even though it may be profitable or result in positive cash flow over the life of the customer relationship. While we offer both annual and multi-year subscription plans, a significant majority of our customers are currently on annual subscription plans. We typically generate positive cash flow during the first year of a multi-year subscription as we charge the subscription fee for the entire period at the beginning of the subscription.

Key Business Metrics

Our management regularly reviews a number of financial and operating metrics, including the following key metrics, to evaluate our business:

Total customers. We calculate total customers as the number of paid Carbonite Home and Business subscriptions at the end of the relevant period. Each consumer subscription covers a single computer; therefore, a consumer with multiple computers would have multiple subscriptions. Each small business subscription covers all computers, servers, and databases of the small business entity; therefore, a small business with multiple computers, servers, or databases may have one subscription.

Annual retention rate. We calculate annual retention rate as the percentage of customers on the last day of the prior year who remain customers on the last day of the current year, or for quarterly presentations, the percentage of customers on the last day of the comparable quarter in the prior year who remain customers on the last day of the current quarter. Our management uses these measures to determine the stability of our customer base and to evaluate the lifetime value of our customer relationships.

Renewal rate. We define renewal rate for a period as the percentage of customers who renew annual or multi-year subscriptions that expire during the period presented. Our management uses this measure to monitor trends in customer renewal activity.

Bookings. We calculate bookings as revenue recognized during a particular period plus the change in total deferred revenue (excluding deferred revenue recorded in connection with acquisitions) during the same period. Our management uses this measure as a proxy for cash receipts. Bookings represent the aggregate dollar value of customer subscriptions received by us during a period. We initially record a subscription fee as deferred revenue and then recognize it ratably, on a daily basis, over the life of the subscription period.

Free cash flow. We calculate free cash flow as net cash provided by (used in) operating activities, less purchases of property and equipment, and adjusted for the cash portion of the lease exit charge, which is classified as restructuring charges. Our management uses this measure to evaluate our operating results.

Subscription renewals may vary during the year based on the date of our customers' original subscriptions. As we recognize subscription revenue ratably over the subscription period, this generally has not resulted in a material seasonal impact on our revenue, but may result in material monthly and quarterly variances in one or more of the key business metrics described above.

Performance Highlights

The following table presents our performance highlights for the three months
ended March 31, 2013 and 2012:



                                             Three Months Ended
                                                  March 31,
                                      2013                         2012
                                   (in thousands, except percentage data)
       Total customers                       1,471                       1,279
       Annual retention rate                    85 %                        81 %
       Renewal rate                             82 %                        82 %
       Bookings                $            29,327           $          24,494
       Free cash flow          $               654           $          (4,624 )

Our total customers and bookings increased over the periods presented and we continue to invest in customer acquisition in an effort to drive continued growth in total customers and bookings. While we expect our total customers to continue to increase on an absolute basis, we expect that our annual percentage increase in total customers will decline as our customer base grows.

In June 2010, we decided to cease distribution of our consumer solutions through certain third-party distribution channels, and we terminated most of those distribution agreements at that time. Our renewal and retention rates were therefore impacted by the termination of these agreements from June 2010 through December 2012.


Table of Contents

Our free cash flow over the periods presented has improved due to improved efficiencies in our business model, management of working capital accounts, and reduced purchases or property and equipment. Free cash flow for the three months ended March 31, 2013 improved by $5.3 million compared to the three months ended March 31, 2012.

Key Components of our Consolidated Statements of Operations

Revenue

We derive our revenue principally from subscription fees related to our service solutions. We typically charge a customer's credit card the full price of the subscription at the commencement of the subscription period and at each renewal date, unless the customer decides not to renew the subscription. We initially record a customer subscription fee as deferred revenue and then recognize it ratably, on a daily basis, over the life of the subscription period.

Cost of revenue

Cost of revenue consists primarily of costs associated with our data center operations and customer support centers, including wages and benefits for personnel, depreciation of equipment, amortization of developed technology, rent, utilities and broadband, equipment maintenance, software license fees, and allocated overhead. The expenses related to hosting our services and supporting our customers are related to the number of customers and the complexity of our services and hosting infrastructure. On a per customer basis, our costs have been decreasing as we purchase equipment and services in larger quantities and our customer support personnel become more efficient in supporting our customers. We have also experienced a downward trend in the cost of storage equipment and broadband service, which we expect will continue in the future. We expect these expenses to increase in absolute dollars as we continue to increase our number of customers, but decrease as a percentage of revenue due to increased efficiencies in supporting customers.

Gross profit and gross margin

Our gross margins have historically expanded due to price increases for our consumer solutions, the introduction of higher priced solutions targeting both consumers and small businesses, a downward trend in the cost of storage equipment and services, and efficiencies of our customer support personnel in supporting our customers. We expect these trends to continue.

Operating expenses

Research and development. Research and development expenses consist primarily of wages and benefits for development personnel, consulting fees, rent, and depreciation. We have focused our research and development efforts on both improving ease of use and functionality of our existing solutions and developing new solutions. The majority of our research and development employees are located at our corporate headquarters in the U.S. We expect that research and development expenses will increase in absolute dollars on an annual basis as we continue to enhance and expand our services, but decrease as a percentage of revenue over time, as we expect to grow our revenue at a faster rate.

General and administrative. General and administrative expenses consist primarily of wages and benefits for management, finance, accounting, human resources, legal and other administrative personnel, legal and accounting fees, insurance, and other corporate expenses. We expect that general and administrative expenses will increase in absolute dollars on an annual basis as we continue to add personnel and enhance our internal information systems in connection with the anticipated growth of our business and incur costs related to operating as a public company, but decrease as a percentage of revenue.

Sales and marketing. Sales and marketing expenses consist primarily of advertising costs, wages and benefits for sales and marketing personnel, creative expenses for advertising programs, credit card fees, commissions paid to third-party partners and affiliates, and the cost of providing free trials. The largest component of sales and marketing expense is advertising for customer acquisition, principally television, radio, online, and print advertisements. Online search costs consist primarily of pay-per-click payments to search engine operators. Advertising costs are expensed as incurred. To date, marketing and advertising costs have been incurred principally in the U.S., but we may increase our marketing and advertising expenditures in other countries. We expect that we will continue to commit significant resources to our sales and marketing efforts to grow our business and awareness of our brand and solutions. We expect that sales and marketing expenses will continue to increase in absolute dollars on an annual basis, but decrease as a percentage of revenue.

Restructuring charges. Restructuring charges consists of the accrual of future remaining lease payments associated with the March 2012 closure of our Boston, Massachusetts data center, the moving expenses to relocate equipment formerly hosted in that facility and the charges incurred related to the restructuring of our Carbonite China operations.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the U.S., or GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions, and judgments that affect


Table of Contents

the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances, but all such estimates and assumptions are inherently uncertain and unpredictable. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result in material changes to our operating results and financial condition. Our most critical accounting policies are summarized below.

We consider the assumptions and estimates associated with revenue recognition, business combinations, goodwill and acquired intangible assets, income taxes and stock-based compensation to be our critical accounting policies and estimates. There have been no material changes to our critical accounting policies since December 31, 2012. For further information on our critical and other significant accounting policies, see the notes to the condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K, as filed on March 6, 2013 with the Securities and Exchange Commission.


Table of Contents

Results of Operations

The following table sets forth, for the periods presented, data from our consolidated statements of operations as well as the percentage of revenue that each line item represents. The period-to-period comparison of financial results is not necessarily indicative of future results. The information contained in the table below should be read in conjunction with financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

                                                       Three Months Ended
                                                            March 31,
                                                       2013           2012
       Consolidated statements of operations data:
       Revenue                                           100.0 %       100.0 %
       Cost of revenue                                    36.1          36.6

       Gross profit                                       63.9          63.4
       Operating expenses:
       Research and development                           22.3          26.1
       General and administrative                         19.5          12.1
       Sales and marketing                                51.8          68.0
       Restructuring charges                               0.6           6.3

       Total operating expenses                           94.2         112.5

       Loss from operations                              (30.3 )       (49.1 )
       Interest and other income (expense), net             -             -

       Loss before income taxes                          (30.3 )       (49.1 )

       Provision for income taxes                           -           (0.1 )

       Net loss                                          (30.3 )%      (49.2 )%

Comparison of the Three Months Ended March 31, 2013 and 2012

Revenue

Three Months Ended
March 31,
2013 2012 Change
(Dollars in thousands)

Revenue $ 24,508 $ 18,547 32.1 %

Revenue increased by $6.0 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to increases in the average selling prices for our consumer and small business solutions, and also due to a 15% increase in the number of total customers.


Table of Contents

Cost of revenue, gross profit, and gross margin

                                                           Three Months Ended
                                                                March 31,
                                                          2013               2012          Change
                                                         (Dollars in thousands)
Cost of revenue                                       $      8,838         $  6,785           30.3 %
Percent of revenue                                            36.1 %           36.6 %

Components of cost of revenue:
Personnel related costs                               $      2,775         $  2,064           34.4 %
Hosting and depreciation costs                               5,073            4,241           19.6 %
Third-party outsourcing costs, software and other              990              480          106.3 %

Total cost of revenue:                                $      8,838         $  6,785           30.3 %

Gross profit                                          $     15,670         $ 11,762           33.2 %
Gross margin                                                  63.9 %           63.4 %

Cost of revenue increased by $2.1 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily due to an increase in personnel related and storage costs associated with supporting a larger number of customers and storing a larger volume of customer data. Personnel costs for our customer support teams increased as we added new employees to support customer growth and to replace support operations that were formerly staffed with outsourced personnel. Personnel costs include $0.2 million of employee benefit expenses related to 2012. The hosting and depreciation costs increase was attributable to the scaling of our infrastructure to support the growth in the amount of customer data stored.

Operating expenses

Research and development.

                                                 Three Months Ended
                                                      March 31,
                                                 2013             2012        Change
                                               (Dollars in thousands)
   Research and development                  $      5,476        $ 4,840         13.1 %
   Percent of revenue                                22.3 %         26.1 %

   Components of research and development:
   Personnel related costs                   $      4,408        $ 4,108          7.3 %
   Third-party outsourcing costs                      423            239         77.0 %
   Hosting, consulting and other                      645            493         30.8 %

   Total research and development:           $      5,476        $ 4,840         13.1 %

Research and development expenses increases of $0.6 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 were primarily due to an increase in personnel related and third-party outsourcing costs, attributable to additional personnel being hired to enhance the functionality of our solutions and to develop new solutions. Personnel costs include $0.1 million of employee benefit expenses related to 2012.


Table of Contents

General and administrative.

                                                  Three Months Ended
                                                       March 31,
                                                  2013             2012        Change
                                                (Dollars in thousands)
  General and administrative                  $      4,777        $ 2,236        113.6 %
  Percent of revenue                                  19.5 %         12.1 %

  Components of general and administrative:
  Personnel related costs                     $      1,967        $ 1,150         71.0 %
  Professional fees                                  2,027            788        157.2 %
  Sales tax, consulting and other                      783            298        162.8 %

  Total general and administrative:           $      4,777        $ 2,236        113.6 %

General and administrative expenses increased by $2.5 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. General and administrative expenses increases were primarily due to a $1.2 million increase in professional fees primarily related to legal costs associated with our Oasis Research litigation. Personnel related costs also increased as a result of additional employees to support our overall growth and increased administrative requirements as we operate as a public company. Sales tax, consulting and other increased primarily due to a $0.3 million state sales tax accrual for uncollected sales taxes.

Sales and marketing.

                                                          Three Months Ended
                                                               March 31,
                                                         2013               2012          Change
                                                        (Dollars in thousands)
Sales and marketing                                  $     12,682         $ 12,615            0.5 %
Percent of revenue                                           51.8 %           68.0 %

Components of sales and marketing:
Personnel related costs                              $      2,430         $  1,522           59.7 %
Advertising costs                                           7,334            7,684           (4.6 )%
Costs of credit card transactions and offering
free trials                                                 1,449            1,409            2.8 %
Outside commissions, consulting and other                   1,469            2,000          (26.6 )%

Total sales and marketing                            $     12,682         $ 12,615            0.5 %

Sales and marketing expenses increased by $0.1 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, primarily driven by an increase in personnel related costs due to increased headcount from our acquisition of Zmanda, Inc. in October 2012. This increase was partially offset by a decrease in advertising costs and other marketing expenses due to increased efficiencies in our customer acquisition efforts.

Restructuring charges. We recorded a lease exit charge of $1.2 million in the first quarter of 2012, as we relocated our equipment formerly hosted in a Boston, Massachusetts data center in March 2012. In the first quarter of 2013, we recorded a $0.1 million charge for the restructuring of our China operations, primarily related to the termination of our Beijing, China lease and associated legal and accounting fees.

. . .

  Add CARB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CARB - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.