Solid Start to the Year for Carbonite

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Carbonite reported solid first-quarter results and exceeded consensus expectations by $500,000 on the top line and $0.06 on the bottom line. The outperformance in the quarter was driven by the company’s SMB hybrid server backup product, which contributed more than double what the company had projected. We believe the solution has the potential to drive meaningful growth for the company, as it provides a high value proposition when compared with legacy on-premise backup solutions. We were also pleased to hear that the company’s channel partners performed ahead of expectations and that the company saw a 35% year-over-year increase the number of productive resellers. The company’s bookings increased 11% year-over-year, which was in line with our expectations.

The growth was once again driven by the SMB business, which saw its bookings increase 30% and accounted for 28% of the total (up from 24% in the prior year). Management still expects SMB bookings to increase 40%-50% for the full year. We believe this guidance is reasonable and expect the portion of bookings from SMB to continue to increase and grow at a healthy clip as the company plans to continue to increase its investments within its SMB sales and marketing initiatives, as well as research and development. This is the right long-term move for the company, in our opinion, as the SMB business is “stickier” and has higher margins than the consumer business. Further, we believe that the company’s results show that its investments in the VAR/reseller channel are bearing fruit.

We were also pleased to hear that the company is on track to release its hybrid backup appliance in the second quarter, and we believe that this could be a meaningful driver to the SMB segment over the longer term. Management increased its 2014 revenue guidance and now expects revenue to be $121.7 million-$123.4 million, better than previous guidance of $120.8 million-$122.8 million. Non-GAAP loss per share expectations are now $0.10 to $0.04, better than previous guidance of $0.16 to $0.10. The Street had been projecting revenue of $121.7 million and non-GAAP loss per share of $0.13.

We believe continued traction with resellers, the addition of new products, and increased adoption in the SMB segment should drive upside to estimates. Carbonite is the leading provider within the large and growing online backup market, in our view. Given the traction and expansion of the reseller program, SMB uptake, and roll out of additional SMB offerings (e.g., hybrid server backup and hybrid backup appliance), we believe that over 12-24 months, the company will outperform the broader technology market.

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