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Carbonite Inc  (NASDAQ:CARB)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Carbonite Fourth Quarter 2018 Full Year Financial Results and Webroot Acquisition Conference Call. At this time, all participants are in a listen-only mode. Later, we conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

I would like to introduce your host for today's conference, Jerry Sisitsky. Sir, you may begin.

Jeremiah Sisitsky -- Vice President of Investor Relations

Thank you, Justin; and good afternoon, everyone. Welcome to our conference call this evening. With me on the call tonight are President and CEO, Mohamad Ali; and CFO, Anthony Folger. Following their prepared remarks, we're going to open up the line for any of your questions.

On the Carbonite website or the transaction website, which is at carbonitewebroot.transactionannouncement.com, you can find the press releases we issued earlier today, the presentation we will walk through on this call and a link to today's webcast.

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 our earnings release and presentation today as well as in the Risk Factors section 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 -- President and Chief Executive Officer

Thank you, Jerry. Good afternoon, everyone. It's a very exciting day for Carbonite and we appreciate you joining us on this call. Today, we announced that Carbonite has entered into an agreement to acquire Webroot, creating a leader in data protection and security.

On today's call, we will provide an overview of this transformative transaction and discuss why we believe this acquisition will support growth and acceleration of our strategy, while creating value for all of our stakeholders. We will also be reviewing our fourth quarter and fiscal year 2018 results, which we announced this afternoon and our guidance numbers for the first quarter and fiscal year 2019.

By combining Carbonite's leading backup and recovery solutions with Webroot's leading endpoint security solutions, we are creating a new approach to protecting one of today's most vulnerable security risks endpoints. Webroot secures those endpoints today and Carbonite can recover those endpoints today. Combined, we can secure the endpoint with a best cloud-based machine learning cybersecurity product, Webroot, and if infiltrated we can recover automatically with the best cloud-based backup and recovery product, Carbonite. Secure and recover is a theme you will hear me repeat throughout this call.

This is a great acquisition, where both companies target the same end customers with a powerful yet simple solutions those customers increasingly demand. Webroot brings with it a very strong and growing channel of managed service providers and Carbonite brings a channel of value-added resellers. There are compelling financial benefits today with a transaction that is immediately accretive and there are benefits longer term as this acquisition opens up another high-growth market with a large TAM.

In short, this transaction will significantly enhance our ability to execute our strategy and helps us accelerate our vision of making Carbonite the undisputed leader in modern cloud-based data protection, protecting businesses in the face of every threat.

Turning to slide six. Here, you can find an overview of the transaction, which is an all-cash deal that is financed through a combination of existing cash on hand and a fully committed term loan. Combined, we will have significant cash flow to finance the debt and we expect to begin delevering quickly. We expect the transaction to close in the first quarter of 2019, subject to regulatory clearance and other customary closing conditions, at which point it will be unique immediately accretive on an earnings and cash flow basis.

For those of you who aren't familiar with Webroot, it's one of the leading cybersecurity platforms. They target very similar customer as Carbonite, serving individuals up to small and medium sized enterprises. They offer an impressive suite of innovative products, including a next generation endpoint security offering as well as a powerful threat intelligence solution powered by fifth generation machine learning. Webroot continuously generates and updates one of the world's most sophisticated threat intelligence databases from millions of connected devices, extracts threat insights through machine learning and leverages that intelligence to protect millions of endpoints. We believe Webroot was one of the very first cybersecurity companies to use machine learning to automatically identify new threats. Today, the company partners with more than 14,000 managed service providers and protect over 300,000 businesses worldwide.

Webroots's business is growing quickly. It's consumer business generates strong profits, while successfully serving a large and growing base of customers. Where we see a significant growth opportunity is in Webroot business segment, which grew non-GAAP revenue, approximately 30% in FY 2018, driven by Webroot's strong product portfolio and great go-to-market end channel.

I believe we have some Webroot employees also listening on the call today and I'd like to express my excitement about welcoming them and the Webroot team to Carbonite when the transaction closes. They have done a wonderful job growing the business, building strong partner relationships and investing in customer success and we truly believe that there will be great opportunities for advancement within this growing organization.

To step back a bit, we've known Webroot for some time now and have been impressed with their products, go-to-market resources and people. We were first introduced to them several years ago and have followed their success from afar. Their vision aligns with ours as do their values. They have built a robust channel of managed service providers and they service a very similar type of customer as we do at Carbonite.

As the security market has evolved, it is becoming increasingly evident that the endpoint is a top vulnerability. Endpoints contain critical business data and they are constantly moving in and out of the network. Businesses want endpoints protected from all fronts, whether that'd be viruses, ransomware, hardware malfunctions or other unplanned downtime. We are leading this evolution, combining backup data and recovery with sophisticated prevention and detection technology, security endpoint, but if something gets through recover as quickly as possible, eventually, in a completely automated fashion.

With this market opportunity in front of us, this differentiated approach, we felt now was the appropriate time to add endpoint security solutions to our suite of offerings and Webroot represented the high yield partner to extend Carbonite's long established vision.

As we've discussed in the past, our growth strategy includes a number of key components, many of which this transaction strengthens. Although we have different products, Carbonite and Webroot look to similar customer basis with very similar buyers for each solution, creating cross-selling, channel expansion and market penetration opportunities.

As we said at our last Analyst Day, M&A has always been an important part of our strategy. Over the past five years, we have made five acquisitions that have supported the growth and expansion of our business. We identified a number of ways that we can deploy capital from enhancing routes to market, to expanding the data protection platform, to adding adjacent solutions. Many of these acquisitions were acquiring a specific piece of technology to help build out our platform or increase our efficiencies of scale by adding a large number of customers to our platform.

MailStore brought us a strong and growing solution focused on email archiving with a significant presence in Europe. EVault brought us battle hardened server backup technology that catalyze the beginning of our move to serve customers all the way up to small and mid-size enterprises. DoubleTake brought us server high availability technology and Datacastle advance our existing endpoint backup technology. These acquisitions, coupled with our organic development, allowed us to create a complete business data protection platform.

Mozy, the most recent of these acquisitions, provided us the opportunity for meaningful expanse synergy by consolidating customers onto our highly efficient Carbonite data protection platform. To date, about 25,000 customers have been migrated from the Mozy infrastructure to Carbonite. We remain on pace with our original migration timeline and we are confident that over the course of 2019 and beyond, we will be able to realize some very meaningful expense synergies when we fully standardize in Carbonite infrastructure. The Mozy acquisition also brought us a great set of strategic partners. For example, Dell, which is now one of our largest partners and a relationship we continue to build over time. We intend to integrate Webroot with the same disciplined focus and thoughtfulness that has served us well in prior transactions.

Slide 11 summarizes the compelling strategic rationale behind this transaction. The complementary combination of backup and recovery with cybersecurity technology and threat intelligence creates the opportunity to provide customers with an integrated new-to-use cloud-based offering, powerful and simple, a comprehensive offering from one vendor.

Businesses want to secure themselves against cyberattacks and data loss. When customers experience data loss, they want to recover quickly regardless of the cost. We know this as one of the existing leaders in ransomware protection, recovering more than 12,000 customers from ransomware attacks. We believe this transaction creates the first and only company with a comprehensive ransomware solution for SMBs. We believe a comprehensive solution, one that secures and recovers, will deliver better results for customers. That combined with the upgrade cycle from legacy anti-virus software that we're seeing in the market creates potential for accelerated growth.

In addition, both Webroot and Carbonite share a consistent go-to-market focus and strategy that enhances the ability to leverage each other's strengths and relationships. Although we have different products, we target the same segment of the market with very similar buyers for each solution, creating the opportunity for increased scale and market penetration. Combining Webroot with Carbonite directly aligns with the top two needs of MSPs and SMBs we serve today. 84% of them are seeking backup and disaster relief, while 80% are looking for endpoint protection. Perhaps, as important, they are increasingly looking to consolidate these offerings through a single console. In fact, 66% of IT professionals are actively consolidating the number of security vendors with whom they conduct business.

As you can see on slide 13, the competitive landscape today includes a number of key players in data protection and endpoint security. There are many more vendors that target various areas of the market, some with more complex solutions that are difficult to deploy and use, some with solutions so basic they don't meet the needs of their target market. With a powerful yet simple offering, Carbonite can deliver a better more comprehensive solution, serving consumers all the way up to small and mid-size enterprises, which represents a large and growing part of the addressable market for cybersecurity solutions. With more than 14,000 managed service providers as customers and with an estimated 120,000 worldwide, there are lots of exciting opportunities for...

Moving on to slide 14, both Carbonite and Webroot saw impressive growth throughout FY 2018 with total revenue growth of 23% for Carbonite and 14% for Webroot, both with operating margins around 20%. Today, Webroot is a leader in next-gen endpoint security, serving the market from 1 up to 1,000 points. And we are confident we can sell Carbonite's endpoint backup solution into that installed base. There is less distinction between consumers and businesses when it comes to endpoint security. All endpoint devices, whether in the hands of an individual at home or an employee of a small enterprise are subject to many of the same threats from malware, software errors and hardware failures, and are often the same exact devices. Our solutions secure and recover, respectively, and combined creates growth and profitability across the entire spectrum of customers we serve. We expect the transaction to be immediately accretive to earnings and cash flow, following the close of the transaction. At the closing of the transaction, Carbonite's pro forma net leverage is expected to be slightly above 4 times, and over the next three years, we have identified cost synergies of more than $20 million.

Additionally, there is potential for a significant amount of top line synergies over the next five years as we sell Carbonite solutions through Webroot's channel and Webroot solutions through Carbonite's channels and create combined, secure and recover offerings.

Before I turn it over to Anthony to discuss our fourth quarter and full year financial results and guidance, let me put a finer point on why we believe this transaction dramatically accelerates our vision to become the leading data protection company. We are creating a new approach to protecting endpoints at top vulnerability, by combining a leader in endpoint backup and recovery with a leader in endpoint security.

Our product offerings are highly complementary which allows us to target a common customer with powerful yet simple solutions. Carbonite's modern cloud-based platform for data protection will pair seamlessly with Webroot's cloud architected platform to better serve our customers' needs. It meaningfully expands our addressable market by adding a large and growing MSP channel to covenant rolling VAR channel and the transaction is financially compelling, creating a large growing and highly profitable company that will be in a position to quickly delever. This is a great transaction that positions us really well to create value for our customers, partners and shareholders.

Now, let me turn it over to Anthony to review our financial results.

Anthony Folger -- Chief Financial Officer and Treasurer

Thanks, Mohamad; thanks, Jerry; and thanks to everyone joining us on the call tonight. In Q4, we delivered slightly higher bookings compared to what was implied in our last outlook and slightly lower revenue than expected. The primary reason for this dynamic in Q4 of 2018 was a more back-end loaded quarter than what we expected with a bigger percentage of larger deals closing very late in the quarter. As a result, revenue was a bit lower than expected, even though bookings came in slightly higher than expected.

In addition to solid top line performance, we also exceeded expectations for profitability and free cash flow in the quarter. The fourth quarter was yet again a quarter of improving gross margins and with non-GAAP gross margin coming in at 77.9%, up 30 basis points over the prior year. With our West Coast data center consolidation project complete during the fourth quarter, we expect to continue to deliver meaningful efficiencies and (technical difficulty) result.

On a full year basis, we delivered consumer bookings growth of 20% and business bookings growth of 27%, both at the higher end of the guidance ranges we provided. We delivered revenue growth of 23%, putting us just below the low end of our full-year range. Non-GAAP net income per share was $1.66, up 110% year-over-year and ahead of guidance. Non-GAAP gross margin was also at the high-end of the guidance range we have provided and adjusted free cash flow was another highlight coming in at $50.1 million for the year, well above the guidance that we had raised multiple times during the course of 2018. We drove strong operating cash flow in the fourth quarter, which enabled us to aggressively execute on the share repurchase program that we announced in November, repurchasing approximately $21.5 million worth of stock at an average price of $26.55 per share.

As you'll see on slide 20 of the investor deck, we delivered $78.8 million in total bookings, up 31% year-over-year. With our previously discussed consumer price increase holding strong and retention rates relatively unchanged, consumer bookings were up 23% year-over-year. We also saw a seasonal uptick in our business, non-subscription bookings has better-than-expected support and maintenance renewal rates at the end of the quarter positively impacted bookings.

As we move into the new year and begin working through our integration plans for the Webroot business, we plan to report on total revenue and to provide some insight on the components, namely consumer revenue and business revenue. Our goal is to up level the conversation to the metrics that we're focused on, the ones that Mohamad and I are running the business on and the ones we're going to use to measure the success of our soon to be combined business. As a result, we expect to focus most on revenue and adjusted EBITDA, and overtime we'll consider the potential to add metrics such as ARR or bookings. We will be sure to update you as our thinking evolves on this.

Moving to slide 21. Clearly, we've had a successful track record, driving a combination of organic and inorganic revenue growth with the revenue CAGR of about 20% since 2012, an impressive and repeatable model that has served us well for many years.

From a profitability perspective, gross margin efficiencies have been the most significant source of leverage over the past several years and we continue to expect that we'll have some opportunity there. Sales and marketing has come down as a percentage of revenue and, as mentioned on our prior calls, now that we have the product portfolio, there may be opportunities where we can benefit from incremental investments in certain sales and marketing channels to drive some incremental growth.

R&D has been an area where we've invested faster than the pace of revenue growth, as we've been building out our product portfolio and investing in our unified platform. We expect that much of that investment has been made and through the course of 2019 we'll start to realize some benefit from those investments. G&A has been and continues to be a source of opportunity for more efficiencies both on the stand-alone Carbonite side and when thinking about Carbonite and Webroot together.

Lastly, as I think about our balance sheet, we ended 2018 with a $198 million in cash and an outstanding convertible note with a face value of approximately $144 million.

At time of closing the Webroot transaction and our new term loan, I expect we'll have between $90 million and $100 million of cash on hand and total debt of approximately $694 million. This equates to a pro forma net leverage ratio slightly more than 4, but with a combination of Carbonite and Webroot, both of which have very strong cash flow characteristics, we believe that we will quickly delever from this 4 times pro forma net leverage level.

As we think about the first quarter of 2019, we're not modeling any impact from Webroot, as we expect the transaction to close very late in the first quarter. So for Q1 2019, we expect GAAP revenue in the range of $76.5 million to $77.5 million, non-GAAP revenue in the range of $77 million to $78 million and adjusted EBITDA in the range of $20 million to $21.5 million.

For the full year, we expect approximately nine months of contribution from Webroot, which equates to non-GAAP revenue of between $175 million and $180 million, with an adjusted EBITDA margin of approximately 27%, which is very similar to that of Carbonite. Again, these amounts are contemplated in our full year 2019 guidance. So, all in, we expect GAAP revenue in the range of $468 million to $482 million, non-GAAP revenue in the range of $488 million to $502 million, non-GAAP gross margin in the range of 80.5% to 81.5% and adjusted EBITDA in the range of $129 million to $134 million.

For the combined company, we're assuming a tax rate of 22% and 36.6 million shares outstanding. We are assuming an annual interest rate of approximately 6.5% on our new term loan, which we expect to price at approximately L plus 3.75%. This is in addition to the cash and non-cash interest expense associated with our existing convertible note for the full year 2019.

Heading into 2019, we've clearly adjusted the metrics that we provide. And as I'm sure everyone can appreciate, our motivation is to align to the metrics we expect to manage to internally and to provide a more transparent and comparable view into our operations considering the impact of Webroot acquisition is expected to have on our combined effective tax rate and the amount of interest will pay annually.

In closing, I hope you'll all agree that this is an incredibly exciting and transformative acquisition for Carbonite. Many investors will recall our comments from Analyst Day, approximately 16 months ago, about getting to $1 billion in revenue and this acquisition clearly puts us on that path. We have a strong and consistent track record of driving both organic and inorganic growth, while increasing profitability. We've been very successful acquiring and integrating businesses and have delivered real value over several years by executing against our strategy and it's one that we'll continue to pursue.

With that, I'd like to open the call up to Q&A.

Questions and Answers:

Operator

Thank you, sir. At this time, we'll start Q&A. (Operator Instructions) And our first question is going to come from Matt Hedberg from RBC Capital Markets. Your line is now open.

Matt Hedberg -- RBC Capital Markets -- Analyst

Thanks, guys. One question. Maybe I'll have a multi-part question kind of all somewhat related here. But just sort of curious from the transaction. What kind of enterprise customer overlap is there today? And then I'm sort of curious, was Webroot's business, was that a 100% subscription-based?

Mohamad Ali -- President and Chief Executive Officer

Yeah. Hey, Matt. This is Mohamad. So, yes, it's a 100% subscription base, it is a great business. We have known this business for two years now and spend a fair amount of time with them. So, it's all subscription. And in terms of the business customers, as I mentioned earlier, they had 300,000 business customers, just to give you a sense as to how that relates to us, we have just over 100,000 business customers. We believe that, for the most part, the separate sets of customers and a key reason for that is that most of these 300,000 business customers buy through MSPs, managed service providers, of which Webroot works with about 40,000 of them, whereas most of our 100,000 business customers buy through VARs and we have several thousand VARs. And so, we believe that these channels to a very similar type of customer are quite complementary and we should be able to sell the Webroot products through our channel -- through our very large product channel and the Carbonite products through the Webroot MSP channel. Does that help?

Matt Hedberg -- RBC Capital Markets -- Analyst

Yeah. That's super helpful. And actually as a related question then, when you think about the $50 million of revenue synergies over a five-year period, can you put a little bit more color on that? I mean, I assume it's a lot of cross-selling. But I'm wondering, is there any sort of product integration, you guys have the single console today, I mean, is there any sort of longer term assumptions around integration that could help that number?

Mohamad Ali -- President and Chief Executive Officer

So, I will answer briefly and then turn it over to Anthony. Yes, I think there are multiple phases to this in the beginning, I think we can just cross-sell the product that we have, but there is a tremendous opportunity to combine the products. I mean, imagine a product that not only secure your endpoints, but if something gets through, automatically recovers it by going back to an older version of your environment or older version of the affected files. Nobody does this today, we have the opportunity to create a whole new way of securing and recovery. And so, I actually think there is tremendous upside in the revenue synergies. Anthony, you want to add to that?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah, I think you're spot on Mohamad. I think the real opportunity while we both have large installed bases, we're well north of 100,000, Webroot is about 300,000 protected businesses. The complementary nature of our routes to market, them being very strong with MSPs and also with VARs, I think if we can sort of even starting with marketing bundles and eventually working into real integrated solutions with products like Mohamad described, there is an opportunity in the install base and I think there is a big opportunity in terms of net new customers that we can bring into the business.

Matt Hedberg -- RBC Capital Markets -- Analyst

Thanks, guys.

Mohamad Ali -- President and Chief Executive Officer

Thank you, Matt.

Operator

Thank you. And our next question is going to come from John DiFucci from Jefferies. Your line of now open.

Joseph Gallo -- Jefferies -- Analyst

Hey, guys. This is Joe on for John. Thanks for the question. Congrats on the acquisition, but I just wanted to focus on the core business for my questions. You guys had a strong quarter on the bottom line, but we're short again on the top line and I appreciate the color on the large deals being more back-end loaded, but the guide was also at least a little bit below what we were expecting. Has anything changed in the business to kind of make it more difficult to forecast?

Anthony Folger -- Chief Financial Officer and Treasurer

No -- this is Anthony. Thanks, Joe. I don't think -- I wouldn't say there's anything that makes it more difficult to forecast. We've certainly seen more of a mix on larger deals and I think in the fourth quarter, for sure, we saw more deals later in the quarter. I think those would be the two elements that we've -- that have started to evolve and certainly were prevalent in the fourth quarter.

Joseph Gallo -- Jefferies -- Analyst

Okay. Thanks for the color. And then, if I subtract the $175 million for Webroot from the midpoint of your non-GAAP guidance, I come up a little bit short of where the Street was, but that's fine. I'm just trying to parse through how to get there like on an organic basis from Carbonite? I know you don't want to talk about bookings anymore, but it's 5% for consumer and maybe double digits for business above, correct? And then what is the implied perpetual business expectation in that number?

Anthony Folger -- Chief Financial Officer and Treasurer

Yes. I think, as we sort of looked at the guide, I think we've got some low single-digit expectations on consumer growth. I think we've got an expectation that the perpetual business will continue to decline and so maybe there is a 10% or so decline on that line of business. And I think what that's going to net out is, on the Carbonite business subscription line, you're likely to be at 10% or slightly lower than 10% when you sort of strip out the Webroot contribution. That's what's baked into the outlook.

Joseph Gallo -- Jefferies -- Analyst

Okay. That's really helpful. I appreciate that. And if I can get one quick one in, just on retention rates, what was the quarterly retention rate for you guys this quarter? And then, given Webroot is more of a legacy endpoint security, that's typically a little bit lower especially on the consumer side, do you have a retention rate for them?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah. For us on the business side, we are about 90% in terms of our dollar retention. The consumer side, because of the price increases, still running well north of 90%, not quite of 100% but sort of mid-90s. And when it comes to Webroot, I think what we have seen is, a net retention rate that is -- I don't want to get too granular on it, we're still getting our arms around the business, but a net retention rate that is, let's say, 5 to 7 points better than ours on the business side and in some cases maybe even higher than that and you're right on the consumer side, you may have a dollar retention rate more around 80%, high-70s to 80%.

Mohamad Ali -- President and Chief Executive Officer

Yeah. And hey, Joe, I want to clarify something. So, one of the things that we were very, very impressed with Webroot was actually their technology and you mentioned the word legacy endpoint security, I don't think it's that at all. Webroot was actually one of the very first companies that started using a cloud-based threat intelligence approach to an artificial intelligence way of identifying threats that they didn't know about. And they started doing this in 2011 and just to give you a sense, CrowdStrike was started in 2012, right. So they started doing this before most -- if you were to look at the top 10 endpoint security companies, I think before almost any of them, and they've actually build out a sizable business in sort of the SMB world, Gartner doesn't right about SMBs, so you don't really see this stuff, but from a technology point of view, I mean, I believe that they are comparable to some of the best and modern endpoint security companies out there. And you hear this term EDR, right. And so, modern EDR with enterprises is a lot of sort of alerts that somebody has to watch.

But wherever it's done is it started automated some of the responses to those alerts, and one of those automated response could actually be when you combine it with Carbonite could actually be to recover the endpoint to replace the sort of infected files with the files from an hour ago that weren't. And we actually do that today at Carbonite. When a customer calls in and says, we've been -- they've been infected with ransomware, we help them do that. And so, we've actually had 12 -- over 12,000 customers call into our contact center, saying I've been affected with ransomware and we help them do that manually. With Webroot and this cloud-based is sort of automated EDR approach that they are taking, we can combine that with what we're doing at Carbonite and have something that SMBs can consume, which is not enterprise grade EDR, but SMB grade automated EDR. That's where we're going with it and it's actually super exciting.

Joseph Gallo -- Jefferies -- Analyst

Guys, thanks for the color. It's great to hear about the synergy and congrats again on the acquisition.

Mohamad Ali -- President and Chief Executive Officer

Thank you, Joe.

Operator

Thank you. Our next question is going to come from Ben Rose from Battle Road Research. Your line is now open.

Ben Rose -- Battle Road Research -- Analyst

Yes, good evening, gentlemen. Just wanted to start with...

Mohamad Ali -- President and Chief Executive Officer

Good evening, Ben.

Ben Rose -- Battle Road Research -- Analyst

What percentage of the Webroot business is cloud-based?

Mohamad Ali -- President and Chief Executive Officer

100%.

Ben Rose -- Battle Road Research -- Analyst

Sorry. And just kind of a follow-up to that, what is the typical veins of a customer contract on the business side?

Mohamad Ali -- President and Chief Executive Officer

So, it's a 100% cloud-based, it's a 100% subscription, it all uses machine learning and artificial intelligence. It is a really free business. So, I'll stop there and let Anthony answer the other question.

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah. Hey, Ben. On the contract term, it is varied within their base and because they've got a much heavier concentration of managed service providers, there tends to be a lot more month-to-month. So, monthly recurring revenue becomes, I think, much more of an important metric than say bookings. And that's -- in terms of the guide that we're talking about and our focus on revenue, I mentioned adding metrics as we go, potentially ARR or others. That's really the driver behind it is. I think, we're starting to see a lot more focus in MSP, clearly the Webroot team is focused on the MSP channel and is executing very well. And so, that tends to be a sort of monthly billing cycle with those managed service providers.

Ben Rose -- Battle Road Research -- Analyst

Okay. And, sorry, just a follow-up question for -- a follow-up question for Mohamad. There's been obviously tremendous growth in the endpoint security market on the business side in the last couple of years and just -- it looks like there are quite a few initial players that maybe weren't on the slide, such as Palo Alto Networks and companies like Carbon Black, and there are lots of companies talking about threat intelligence.

Mohamad Ali -- President and Chief Executive Officer

Yeah.

Ben Rose -- Battle Road Research -- Analyst

So, maybe just to kind of repeat or maybe not so much to repeat, but perhaps elaborate a little bit on the differentiator for Webroot, so that we can just better understand the differentiation? Thank you.

Mohamad Ali -- President and Chief Executive Officer

Yeah, no, Ben. Actually, thank you for giving me that opportunity. So, if you look at companies like Carbon Black and SciLands and CrowdStrike, they focus on the enterprise and they are -- I think several of them are utilize the machine learning and AI approaches. Some of them more traditional endpoint security companies use the sort of list of signatures, right. These list of signatures don't really work well anymore. So, you have to have an AI and ML approach to this.

These large -- these companies are focused on the enterprise. One of the things that they have is they also generate a massive quantity of alerts. And so, if you're Citibank, you have somebody sitting there and can watch all these alerts and they're great products. If you are a small business, you really don't know what to do with all these alerts. So, what you need is an AI and machine learning based endpoint security product, which Webroot was one of the original creators of, but you needed to handle those alerts in sort of an automated fashion.

And so, that's what Webroot has been doing. And, I mean, they've done a really great job at it, that's why their business segment is growing at 30%. I mean, it's a fabulous business and what we've realized and what they realized was that, in case if you have a great product like Webroot, it's going to catch a lot of these viruses and so forth. But whenever there is a case that it doesn't, like if there is a ransomware or phishing attack where somebody -- it's a human being that causes it to get through, because they accept the phishing attack and it's on your computer, really the best way and, in some cases, the only way to recover is with a product like Carbonite. And by putting these together for small business, you can effectively have what we're going to start calling automated EDR. It just happens, it just does it for you, you don't need a sock, you don't need a whole bunch of people sitting there. And so, I think that's the one of the key differences between some of these new players that you hear about out there, like CrowdStrike and SciLands and so forth and Webroot.

Ben Rose -- Battle Road Research -- Analyst

Okay.

Mohamad Ali -- President and Chief Executive Officer

Does that helpful, Ben?

Ben Rose -- Battle Road Research -- Analyst

Yes, that was very helpful. Thank you.

Mohamad Ali -- President and Chief Executive Officer

Thank you. Yup.

Operator

Thank you. Our next question is going to come from Erik Suppiger from JMP Securities. Your line is now open.

Erik Suppiger -- JMP Securities -- Analyst

Yeah, thanks. First off, on the Webroot business, I think they had a sizable retail presence and some OEMs, will you be able to leverage either of those channels very effectively with the traditional Carbonite products?

Mohamad Ali -- President and Chief Executive Officer

We think so, Erik. We will have to -- in some of these synergy analysis that we've done, we haven't assumed that at all. We focus on the direct consumers and the businesses behind the MSPs. Those are kind of the core of it, but I think you're right, there is actually a tremendous opportunity on both of those fronts and I think one of the things that is really, really special at Webroot is this OEM business that you mentioned, right. So they have about 80 partners and you agree these partners has, like an example, would be a networking box and I won't say any names here, but you can kind of pick a network, your favorite networking box and there are about 80 of these OEM partners who license Webroot's threat intelligence database and effectively connect it to that box, so when that router sees, say, a questionable URL, it flags it and that technology actually comes from Webroot and through those relationships, with those 80 OEM vendors, those routers and switches and so forth are connected to millions upon millions of endpoints out there and there is sort of a feedback loop, which then makes the Webroot threat intelligence database even smarter. So, at this point, we haven't built any Carbonite synergies associated with those types of partners, there could be, but when we just look at the core customers outside of the OEM and retail, we see a tremendous amount of synergies just in that and retail and OEM could be additional.

Erik Suppiger -- JMP Securities -- Analyst

Okay. And then, Anthony, can you just clarify a little bit more why the -- it looks like the Carbonite guidance implies a lower fiscal '19 estimate for revenues for Carbonite stand-alone?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah, sure, Erik. I think the expected contribution from Webroot is $175 million to $180 million. And so, I think as we -- if you remove that from the overall guide, I think you end up with something that sort of mid to high single digits in terms of the growth rate. And I mentioned there is an assumption there from a revenue standpoint that will see low single-digit growth on consumer. We will see sort of a continued decline in the perpetual business and that the business subscription line will be closer to the low end of our range. We have been talking about 10% to 15%, we could be at the low or slightly below that. I think that's sort of what's baked into the outlook for 2019 and how we arrived at the numbers.

Erik Suppiger -- JMP Securities -- Analyst

Did the outlook for the business subscription, is that incrementally down from where we were three months ago, when you reported the September quarter?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah, I think it's down slightly from where things had been at that point.

Erik Suppiger -- JMP Securities -- Analyst

Okay. Very good. Thank you.

Anthony Folger -- Chief Financial Officer and Treasurer

Yup.

Mohamad Ali -- President and Chief Executive Officer

Thank you, Erik.

Operator

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

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Yeah. I wanted to try and back into a valuation here. I know you've given us nine months of a contribution for Webroot, if I do my math on that, I'm coming up with around $237 million for Webroot on a 12-month basis. And then I wanted to delve into that $618.5 million acquisition price, are we talking kind of a net cash zero there? Are you assuming any debt? I just want to be able to do the simple math of $618.5 million divided by $237 million equals $2.6 million. You do the rest?

Anthony Folger -- Chief Financial Officer and Treasurer

Yes, that's the calculus we're doing, Eric, and the deal is ultimately a cash-free, debt-free deal.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Okay. And then one more, if I could. The percent -- the combined business now, the percent recurring versus non-recurring, I can't recall your perpetual business, I want to say it was like $40 million or $50 million, is that correct for 2019 assumption?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah. I think roughly that $40 million range is probably where things shake out. Keep in mind, on the perpetual side, a portion of that is maintenance and support, probably as much as 60%. And so, I think the reality on the nonrecurring as we move forward with our soon to be combined business will be -- it will be nominal in terms of what's nonrecurring?

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Understood. Okay. Thanks for taking my questions.

Mohamad Ali -- President and Chief Executive Officer

Great. Thanks, Eric.

Anthony Folger -- Chief Financial Officer and Treasurer

Thank you.

Operator

Next question comes from Brian Schwartz from Oppenheimer. Your line is now open.

Brian Schwartz -- Oppenheimer & Co. -- Analyst

Yeah. Hi. Thanks for taking my questions this afternoon. I just want to circle back again on kind of your answer, the downtake of the kind of pace of the subscription growth for the core business. Maybe I'll kind of try to get out of that in another way. Are you achieving the revenue synergies that you are expecting with Mozy or with some of the prior acquisitions?

Mohamad Ali -- President and Chief Executive Officer

Yeah. Brian, that's a -- it's a good question, and yes, I think Mozy from a -- in terms of what it delivered in 2018, I think, it was largely on plan. We still are completing the customer migrations, but we have migrated more than 25,000 customers onto our platform at this point. So I think the rate and pace of the customer transitions has accelerated. And so, I think we've seen Mozy perform pretty well from an integration perspective.

Brian Schwartz -- Oppenheimer & Co. -- Analyst

Thank you for that color. Is there anything that you can kind of help us parse on kind of what's going on with the core business of the downtake, I'm just confused that you talked about the bookings outperforming the pace here in Q4, but yet the year guide is below where the Street was expecting there? It's not like these invoices are more than 12 months. It's just kind of a head scratcher, I think we're all trying to figure out what's the driver up, kind of what looks to be a downtake in the core business? Thanks.

Anthony Folger -- Chief Financial Officer and Treasurer

So, I think one of the things I mentioned was, from a seasonal perspective, we saw better maintenance renewal activity in the fourth quarter and that's sort of on the perpetual side. So, we saw that maintenance renewal come in slightly better than we expected. And so, from a total bookings perspective, I think we ship out on the business side, probably a little bit better than where we planned and we did see some larger subscription deals come in more toward the end of the quarter, but I think it was really that dynamic that drove the upside from a total business bookings standpoint.

Brian Schwartz -- Oppenheimer & Co. -- Analyst

Thank you. And then I just had one question on Webroot, because I'm not too familiar with the business. And what percentage of the business is endpoint security versus networking security? Thanks.

Mohamad Ali -- President and Chief Executive Officer

Most of it is endpoint security. The networking business is a small proportion, but in some ways, Brian, one of the exciting things about this is that the OEM business, the networking business that I talked about really gives Webroot a significant advantage in that. It provides an incredible amount of threat intelligence to feed Webroot's threat intelligence database, which then allows it to have a far superior endpoint security capability. And so, we can look it up and figure out the exact numbers, but the bulk of the business is endpoint security.

Brian Schwartz -- Oppenheimer & Co. -- Analyst

(multiple speakers)

Mohamad Ali -- President and Chief Executive Officer

He's going to say (multiple speakers).

Anthony Folger -- Chief Financial Officer and Treasurer

North of 80% is endpoint security.

Brian Schwartz -- Oppenheimer & Co. -- Analyst

Thanks, Anthony and Mohamad. Maybe just last one I had.

Mohamad Ali -- President and Chief Executive Officer

Sure.

Brian Schwartz -- Oppenheimer & Co. -- Analyst

Should we assume that maybe the stock buybacks are now on hold considering the Webroot's acquisition? Thanks.

Mohamad Ali -- President and Chief Executive Officer

I would assume so, but I would defer to our CFO.

Anthony Folger -- Chief Financial Officer and Treasurer

Brian, I think that's a good assumption. I think we're going to be focused on integrating the businesses and delevering as we go through 2019.

Brian Schwartz -- Oppenheimer & Co. -- Analyst

Thank you very much.

Mohamad Ali -- President and Chief Executive Officer

Thank you.

Operator

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

Timothy Klasell -- Northland Securities -- Analyst

Yeah. Two quick questions. First has to do with the margin structures of MSPs versus VARs. As you start to do the cross-selling, is there any real difference as far as the incremental margin of a sales through one channel to the other? Thank you.

Mohamad Ali -- President and Chief Executive Officer

Yeah. I guess, Tim. They are really two fundamentally different channels. And so, from an overall margin structure, I think there is probably not going to be a dramatic difference in margin, but the two channels tend to operate somewhat differently where the VAR channel looks almost more like our legacy direct business and that MSP channel, you're really dealing with the MSP as your customer, there could be thousands of businesses behind each MSP and they are already aggregating services and billing them out monthly. And so, it ends up looking like a different model and different set of transactions, but I think at the end of the day from a margin standpoint, we're not going to end up in a very different place.

Timothy Klasell -- Northland Securities -- Analyst

Okay, good. That's helpful. And then you mentioned, I think, on one of the slides, you had $20 million in cost synergies over the next three years, can use just -- obviously, you've identified a few areas, maybe you can sort of share with us data centers or what have you, where some of those costs will come from? Thank you.

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah, sure. So I think the interesting part of the deal is that both companies have got very similar profitability profile in terms of EBITDA and cash flow, so both very profitable and driving good free cash flow conversion. I think with some incremental synergies, we're really going to be focused on redundancy in some of the corporate areas, so that could be back office G&A type functions where we'll ultimately have redundant systems as we start to consolidate, they'll be software savings and redundancies to go along with that. So, it's largely corporate functions, back office G&A and system consolidation work.

Timothy Klasell -- Northland Securities -- Analyst

Okay, great. Thank you.

Anthony Folger -- Chief Financial Officer and Treasurer

Yup.

Mohamad Ali -- President and Chief Executive Officer

Thank you, Tim.

Operator

Thank you. Our next question comes from Jason Ader from William Blair. Your line is now open.

Jason Ader -- William Blair -- Analyst

Thank you. Anthony, could you give us the calendar '18 Webroot revenue for the calendar year?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah. I don't know that we've got that for disclosure right now. They were a June 30th year end company and so we've been running some -- running our models based on certain assumptions, but I think we -- ultimately we're going to have to file audited financials and Stub period financials for the business in the next 75 days. So, I think we'll be able to give you finer detail as we get closer to that filing.

Jason Ader -- William Blair -- Analyst

Okay. And was the growth rate for the calendar year similar to the growth rate for the fiscal year?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah. I think it was roughly similar. The business overall has been double-digit growth.

Jason Ader -- William Blair -- Analyst

Okay, great.

Anthony Folger -- Chief Financial Officer and Treasurer

Low double digits.

Jason Ader -- William Blair -- Analyst

Okay. And has that been the case for the last several years, just trying to get a sense of the revenue growth trajectory, let's say, for the last three fiscal years?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah. I think for the last three fiscal years, I think, it's been at least at that level.

Jason Ader -- William Blair -- Analyst

Okay, perfect. And then last one for me. Just for modeling purposes, Anthony, what should we be modeling for other income and expense for fiscal ' 19?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah. So the -- from a tax perspective, I think, we've gotten a roughly 22%; in terms of the interest, we've got a $550 million term loan that will close on at the end of March and roughly 6.5% per year on that $550 million. That'll be what the incremental below the line items are as part of the deal. So for '19, you'll pick up three quarters of that interest expense.

Jason Ader -- William Blair -- Analyst

Okay. Excellent. Thank you.

Anthony Folger -- Chief Financial Officer and Treasurer

Yup. Thank you.

Operator

Thank you. Our next question comes from Chad Bennett from Craig-Hallum. Your line is now open.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Great. Thanks for taking my questions, guys. So just maybe a clarification for Anthony regarding Mozy revenue contribution last year. So I think when you guided for that transaction, you kind of talked about mid-50s, maybe $55 million in revenues, so you're effectively saying that was where it ended up in the year?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah, that was bookings. So on a bookings standpoint, I think we were $50 million, low-50s type of a number.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Okay. And I don't believe, again, to get back to when you -- when you guided for that, you weren't baking in really much of any revenue synergies in that number. So, I guess, have we realized much revenue synergies from that transaction. Is that still ahead of us? And then the '19 guidance that you gave, obviously backing out Webroot, there's a couple of things, I mean you still -- I think, you closed Mozy, kind of, mid February, maybe late February, so you get kind of a month and a half of that revenue kind of layered on to the core business. And then if you look at Webroot, I think in your presentation they are June 30th fiscal year end, it was about $215 million. So the $175 million for nine months doesn't imply a lot of growth on that $215 million for Webroot looking forward a year, just can you comment on all of that? Thank you.

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah. Sure. So I think with Mozy, as I mentioned, we're still in the process of transitioning customers over. I think we've made a really good progress on it and we're north of 25,000 customers transitioned. I think we can start to drive some top line synergy with that. But we have been, I would say, conservative in terms of baking any of that into our model. So it's really not baked into our 2019 model. And as it relates to the Webroot business, like I said, they were -- as I sort of look at their numbers, call them roughly a, like, double-digit growth business. So, low double-digits, 10 to low-teens is where they have been historically. I think from an outlook standpoint, we would expect something similar. And so, we do have to convert from fiscal June to a calendar year-end, but there's really not a lot that's going to, I think, drive a dramatically different change in our outlook for that business. We may be conservative in terms of our assumption as we bring that business over and there is lot of integration work to do, but that's effectively what's baked into our outlook.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from Sarkis Sherbetchyan from B.Riley FBR, Inc. Your line is now open.

Sarkis Sherbetchyan -- B.Riley FBR, Inc. -- Analyst

Afternoon, and thanks for taking my question here. So, pretty big acquisition, obviously the leverage ratio you mentioned is going to be a little over four times net, that assumes the cost synergies of $20 million or it doesn't?

Anthony Folger -- Chief Financial Officer and Treasurer

Not of $20 million, I think that is just the year one synergies that we've identified, which are fairly nominal in all honesty.

Sarkis Sherbetchyan -- B.Riley FBR, Inc. -- Analyst

Understood. And if I think about kind of the expense allocation between R&D, G&A and sales and marketing for Webroot, is it fairly comparable to your existing structure or is there any kind of material delta that we should think about baking in?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah. I would think the delta, the primary delta, would be in R&D. I think generally you're going to see probably R&D as a percentage of revenue of north of 20% for Webroot, maybe 21% 22% type range. And I think we understand why and I think it's appropriate in terms of the space. I think the other side of that coin is that from a gross margin perspective, they come in with a higher gross margin, probably 85% or better sort of out of the gate. And so, they're able to drive a better gross margin, they've got a slightly higher OpEx burden because of R&D, but when you sort of get down to the operating income line and the adjusted EBITDA line, you end up in the same place.

Sarkis Sherbetchyan -- B.Riley FBR, Inc. -- Analyst

That's helpful. And if we were to think about just kind of your financial algorithm of getting about 100 to 150 basis points of operating leverage, would you still expect that for kind of core Carbonite excluding Webroot for fiscal '19?

Anthony Folger -- Chief Financial Officer and Treasurer

Yeah. We would still be expecting some margin expansion at the gross margin line. We've, like I mentioned, we have completed the West Coast data center consolidation, which is great to get that behind us in the fourth quarter, so we certainly see some efficiency going forward.

Sarkis Sherbetchyan -- B.Riley FBR, Inc. -- Analyst

I'll stop there, and take the rest offline. Thank you.

Anthony Folger -- Chief Financial Officer and Treasurer

Thank you, Sarkis.

Mohamad Ali -- President and Chief Executive Officer

Thank you, Sarkis.

Operator

Thank you. Our next question comes from Brad Reback from Stifel. Your line is now open.

Brad Reback -- Stifel -- Analyst

Great. Thanks very much. Mohamad, maybe a quick question for you. Obviously, software multiples are pretty robust. You've in essence stolen this asset at less than 3 times, run, given the growth rate and the profitability, how that happened?

Mohamad Ali -- President and Chief Executive Officer

I'm not sure how exactly to respond for that. So this is a great asset. And as I mentioned earlier, there is some things unique about the asset that fits us extremely well and I think it's tough for other buyers. So, first of all, I view this as a premium asset with premium technology, it's 100% cloud, it's 100% recurring SaaS and the thing that fits so well with us is that, this business has a consumer side and has a business segment. And similar to us, we have a consumer side and a business segment. As a result, we can get synergies from both halves. Whereas if somebody is buying this and only has a business segment, they can only get synergies from one half of the business and vice versa. So it actually put us in a quite unique position to get a -- to get great economics on this deal. And, as a result, we are very excited about driving both parties of the business. And as you know, Brad, I mean, we try to be very disciplined with the dollars that we put to work out there and we look for transaction that brings tremendous value to our shareholders and we think that this unique situation where Webroot looks so similar to us is a kind of an unusual case that allows us to get great value, because of this particular asset. Does that help?

Brad Reback -- Stifel -- Analyst

That does. Was it a competitive process?

Mohamad Ali -- President and Chief Executive Officer

Yes, it was.

Brad Reback -- Stifel -- Analyst

And was this VC-owned?

Mohamad Ali -- President and Chief Executive Officer

Yes.

Brad Reback -- Stifel -- Analyst

Okay. Thank you.

Mohamad Ali -- President and Chief Executive Officer

Great. Thank you.

Operator

Thank you. I'm showing no further questions. I would now like to turn the call back to Mohamad Ali for any further remarks.

Mohamad Ali -- President and Chief Executive Officer

Great. Thank you. Well, I hope you can all tell I'm very excited about this transaction and thrilled to get to work, executing on making this transaction an overwhelming success. Let me leave you a few parting thoughts. We have a strong and growing data protection business. This acquisition makes a lot of strategic and financial sense. It opens us up to a target -- to target an even larger addressable market and the combination of data protection and endpoint security will produce better and differentiated outcomes for our customers. Also, we are well positioned to drive continued growth and profitability with a business -- with a run rate of -- that will generate more than $500 million of non-GAAP revenue and more than a $130 million in adjusted EBITDA in 2019 with strong and growing free cash flow. So, hopefully, you can see why I'm excited. So, with that, thank you, and good night to everyone.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. And, everyone, have a great day.

Duration: 66 minutes

Call participants:

Jeremiah Sisitsky -- Vice President of Investor Relations

Mohamad Ali -- President and Chief Executive Officer

Anthony Folger -- Chief Financial Officer and Treasurer

Matt Hedberg -- RBC Capital Markets -- Analyst

Joseph Gallo -- Jefferies -- Analyst

Ben Rose -- Battle Road Research -- Analyst

Erik Suppiger -- JMP Securities -- Analyst

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Brian Schwartz -- Oppenheimer & Co. -- Analyst

Timothy Klasell -- Northland Securities -- Analyst

Jason Ader -- William Blair -- Analyst

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Sarkis Sherbetchyan -- B.Riley FBR, Inc. -- Analyst

Brad Reback -- Stifel -- Analyst

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