Company’s Profile: Carbonite

Just filed $100 million IPO. Any chance?
This is a Press Release edited by on 2011.05.16

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Carbonite, Inc. has filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission relating to a proposed initial public offering of shares of its common stock.

The shares of common stock to be sold in the offering are proposed to be sold by Carbonite and certain stockholders. The number of shares to be offered and the price range for the offering have not yet been determined.

The bookrunning managers of the proposed offering will be BofA Merrill Lynch and J.P. Morgan Securities LLC. Co-managers will be William Blair & Company, LLC, Canaccord Genuity Inc., Oppenheimer & Co. Inc. and Pacific Crest Securities Inc.

To read the complete registration statement on Form S-1

Our Comments

in US$ millions
 2008 2009
 1Q10  1Q11
Revenues  8.3  19.1  38.6  7.6  12.8
Growth    130%  102%    68%
Net loss
 (17.4)  (19.2)  (25.8)  (8.2)  (5.3)
Total customers*  281  590  951  698  1,043
Growth    110%  61%    49%
Average revenue by customer
 $29.5 $32.4
Quarterly retention rate
 97%  96%  97%  97%  96%
 14.1  32.9  54.1  12.4  19.0
Growth    133%  64%    53%
 Years ended December 31, Q ended March 31
 * in thousands

Carbonite has just decided to propose an IPO to raise $100 million. Is there a chance to succeed?

As we already wrote in the past, Wall Street is not a big fan of storage. Since 1995, we have counted no more than 21 successful IPOs in the storage industry.

The company is one of the 1,841 online backup providers we have counted in the world, and there is no reason that this list will diminish in the coming months even if we will probably see some consolidation. All of them compete against all the other ones as their respective service is generally available from any computer in the world with the possibility to easily migrate from one to another.

The start-up is probably one of the oldest and one of the leader in online backup, but it's impossible to prove it because about no one publishes financial figures on this precise activity only, often being part of another main one (Web hosting, MSPs, telecom companies, etc). According to Carbonite, "we directly compete with Prosoftnet, CrashPlan, Mozy (division of EMC), Symantec's Norton Online Backup, McAfee Online Backup, SOS Online Backup, and others. Certain of our features, including our remote access service, also compete with current or potential services offered by Apple, Google, Microsoft, Amazon, and others. Certain of our planned features, including the ability to share data with third parties, also compete with current or potential services offered by DropBox, Mozy, SugarSync, and others."

The potential financial investors will have to wait before getting return of their money. For sure, it's a growing company with revenues increasing at a CAGR of 117% per year from 2008 to 2010, but the continuing growth in percentage is going down for sales, in number of customers and bookings (see table). Since its inception, it has an accumulated deficit of $83.2 million as of March 31, 2011 but believes that its cash and short-term investments totaling approximately $21.1 million are sufficient to fund operations "through at least the next 12 months."

Carbonite never was profitable since its inception and is not going to come back to profit in the next future. Its strategy was always to spend a lot for promotion campaign to get market shares. The past two years it included advertising endorsements from 49 U.S. radio talk show personalities, and also a presence in television, online display and print advertising, print advertising, paid and natural search, and an affiliate network. Furthermore, it also expects to incur increased expenses associated with expanding to a new data center facility, including relocation of certain of existing servers, and with relocating customer service operations from India to the U.S.

Online backup is sensitive to price. Basic Carbonite's service costs $59 per year, $109 for two years and $139 for three years for unlimited storage. Pro version for SMBs varies between $10 per month for 20GB to $250 for $499GB. It could be difficult to keep this low pricing without capacity restriction for basic services with the higher and higher capacity used by customers associated with increasing bandwidth offered globally in the world by the Internet providers.

Its services are based on proprietary communication and file system, the firm having 13 patent pending applications that cover technical infrastructure, key usability and design concepts.

You can remark the loyalty of Carbonite's customers. The quarterly retention rate is 96% to 97% and the average revenue by customer is growing spectacularly.

Clients are mainly in the U.S. where substantially all revenues are generated, with over 200 million broadband subscriptions in this country according to the OECD. As of April 30, 2011, Carbonite had more 1.043 million consumer and SMB subscribers in 100 countries. Since 2005 it has backed up over 100 billion files and restored over seven billion. It currently backups more than 200 million files each day.

All these data are stored in two facilities in Boston metropolitan area. Redundancy is provided at the disk level only as the firm doesn't keep separate, redundant copies of backuped customer files. That's a risk for the subscribers. Carbonite also recognized that "we have experienced interruptions in these systems in the past, including server failures that temporarily slowed down our websites' performance and our customers' ability to access their stored files, or made our websites and infrastructure inaccessible, and we may experience interruptions in the future." In March 2009, Carbonite lost data of 7,500 customers and sues disk array manufacturer Promise for $3 million for breach of contract, fraud, and unfair and deceptive acts and practices.

The Carbonite's roadmap includes broadened SMB and consumer offerings with the addition of a series of features, such as external hard drive backup, tailored to appeal to market segments that the firm doesn't not serve.