Carbonite IPO - Online Backup Companies Can Go Public!

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By now all of you must’ve seen the announcement re: online PC/ laptop backup company Carbonite filing an S-1 pursuing an IPO.  There has been a lot of social media discussion re: whether they can be a profitable and viable business, with a loss of $25.7M on revenues of $38M in 2010 and in light of recent announcements from Iron Mountain re: their digital business.  I decided to investigate and take a deeper look at the S-1 to get a better sense of Carbonite’s business.  

Here’s a summary of my analysis:

• 2010 GAAP loss of $25.7M not as alarming: this figure is misleading for a rapidly growing SaaS business as majority of the revenue is deferred.  When taken into context with bookings of $54M, their net loss is only $9M, not too bad, given their approach to grow as fast as possible.  Read below for a more detailed explanation.
• Good gross margins: Carbonite has 62% gross margins – not bad for a service business.
• Already profitable per customer: Contrary to popular belief, their cost to service a customer is actually not bad and they already make an annual profit of $7.6 per customer when you take out the Sales and Marketing costs.
• High cost of customer acquisition: their cost of customer acquisition is actually quite high: ~$70 per customer.  At their current profit per customer, it will take a long time to recoup this (10 years).  However, this isn’t unusual for a company trying to rapidly grab market share.  I expect them to augment their current offerings to increase the revenue per customer and reduce their customer acquisition cost over the next few years.

Read on for the detailed analysis:

1. 2010 GAAP Loss of $25.7M: this figure has been much bandied about, but is quite misleading because rapidly growing SaaS businesses have large portions of deferred revenues, while expenses are usually incurred upfront.  Bookings are a better indicator for a SaaS business and Carbonite had bookings of $54M in 2010.  Using $54M as a better indicator of what the top line should be, their 2010 loss shrinks to $9M – which is acceptable given their tear-away spend on Sales and Marketing ($33M in 2010!).
2. Great Bookings Growth (indication of new business): $54M in new bookings in 2010 and growing at: 198% CAGR (’06-’10).
3. Decent Gross Margin: 62% gross margin in March 2011: This is one of the biggest indicators of whether they have a sustainable business.  Gross margins have been steadily increasing from 48% to 62% as of March 2011.  This should put to rest speculations about whether they can profitably service whatever customers they can bring on board.
4. Free Cash Flow: This is another important figure, but no clear trends on this one.  FCF was -23% of bookings in 2010, an improvement from -88% in 2008.  Overall as a % of bookings, it’s not out of the realm of possibility that they could turn cash flow positive if they start holding back a bit on Sales and Marketing investments. 

So, those are the conventional metrics, not bad actually.  But, they don’t tell the story at all.  The real story is in their per customer metric, which gives a pretty good idea of the economics of the business and the future potential.

1. Revenue per customer: Carbonite’s annual revenue per customer is increasing: from $22.7 (2007) to $40.6 in 2010.  It’s good, but it needs to increase to $60 - $75 per customer per year to offset their high customer acquisition cost.
2. Cost per customer: If you take out sales and marketing costs, you can figure out what is Carbonite’s cost to serve one customer when one takes into account: COGS, Engineering and G&A.  That number for 2010 is: $33 per customer per year.
3. Profit per customer: Carbonite’s profit per customer is: $7.6/year (revenue/customer – cost/customer).  Not bad, but is it enough to offset their high customer acquisition cost?
4. Cost of customer acquisition: The table below shows trends in Carbonite’s cost of customer acquisition:

This is high and needs to come below $50/customer, which should be within their reach.  At current rate, with an annual profit per customer of ~8 it would take a long time to recoup the cost of customer acquisition, even with the really high retention rates that Carbonite has (97%).  But, I believe that’s temporary when a company is trying to grow really fast.

So, there you have it.  I think it is a solid business that is growing very rapidly and has good fundamentals.  Right now, they are focused on becoming the dominant player in the market and are spending a lot on sales and marketing and that makes some of the numbers unattractive on the surface, but I believe that is all short term.  Moving forward, I’d have to believe that they will come out with new offerings to increase their revenue per customer and their acquisition cost/customer would go down as well.  They could easily reach a point in a couple of years when they can recover their acquisition cost/customer within 18-24 months – which would bode for a really good business.  I for one am rooting for them as that would make a really good Boston tech story – why should Silicon Valley have all the fun!

Disclaimer: opinions expressed in this article are solely my personal opinions and not of my employer.  All data was extracted from the Carbonite S-1 filing here: http://edgar.sec.gov/Archives/edgar/data/1340127/000095012311049041/b86123sv1.htm