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Carbon Black, Inc.  (NASDAQ:CBLK)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the Carbon Black Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mark Sullivan, Chief Financial Officer.

Mark Sullivan -- Chief Financial Officer

Okay. Thank you. Good afternoon, and thank you for joining us today to review Carbon Black's Fourth Quarter 2018 Financial Results, which we announced in our press release issued after the close of market today.

Joining me on the call today is Patrick Morley, Carbon Black's CEO; and Mike Viscuso, Carbon Black's Co-founder and Chief Strategy Officer. During this call, we may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 including statements related to our financial results, statements regarding management's expectations and future financial and operational performance, operational expenditures, expected growth and business outlook.

Including guidance for the first fiscal quarter and full year 2019, industry and market trends and projections, our go-to-market and growth strategies, our market opportunity and ability to expand our leadership position and extend into adjacent security markets with our platform, the competition that we face in our market, our ability to maintain and up-sell existing customers, our ability to acquire new customers, and the anticipated benefits of our platform.

The words anticipate, continue, estimate, expect, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For a discussion of the material risks and other important factors that could affect our actual results, please refer to those listed in our Form 10-Q for the third quarter of fiscal year 2018. These documents are available in the Investor Relations section of our website at www.carbonblack.com. A replay of this call will also be available there for a limited time.

Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release in the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure.

With that, I'd like to turn the call over to Patrick.

Patrick Morley -- President and Chief Executive Officer

Thanks, Mark, and thanks to all of you for joining us today on our fourth quarter and year-end 2018 earnings call. Looking quickly at our results for the quarter. We generated total revenue of $56.9 million, representing 27% year-over-year growth. Recurring revenue of $52.9 million, representing 32% year-over-year growth. Cloud revenue of $18.8 million, representing 102% year-over-year growth and we ended the quarter with 5,025 total customers and 2,851 cloud customers, which represented 34% and 78% growth respectively.

Our full year results were highlighted by the success of our cloud business, including cloud revenue of $60.4 million, representing a 132% year-over-year growth and cloud ARR of $81.3 million, representing 77% year-over-year growth. While our income statement performance was above guidance, bookings in the quarter were below our plan. We have undertaken a thorough review after the quarter and identified several specific factors that impacted our performance. I will spend a few minutes discussing some of these key takeaways how it will impact our 2019 outlook and what we are doing to improve performance.

Before I go into details, I would like to spend a moment reviewing our strategy and the progress we made executing on it in 2018. We believe that the Endpoint Protection Platform or EPP market is at the very beginning stages of a once-in-a-generation platform shift to the cloud. Our biggest goal in 2018 was transitioning Carbon Black to be a cloud-first company to ensure we capitalized on this trend and we were successful in this effort.

We have built the leading next-generation EPP cloud platform with the CB Predictive Security Cloud, or PSC. The PSC platform introduces a powerful set of technologies delivered from a single agent and a single console that is disrupting the legacy EPP market. And we believe it strongly positions us to consolidate the fragmented next-generation endpoint security market. The cloud is the future of Carbon Black and it is how we judge the success of the company's performance. In a little over two years, we have transitioned from an almost entirely on-premise business to building a $75 million revenue run rate cloud business, that grew 132% year-over-year in 2018.

Our success in the cloud to-date has been driven primarily by our first product on the PSC, CB Defense, which is our next-generation antivirus and EDR solution. CB Defense uses predictive models to analyze complete endpoint data and uncover malicious behavior to stop attacks before they compromise the company's system. We are seeing significant customer demand for CB Defense. And in fact 70% of those customers are replacing AV solutions with it. Over the course of 2018, we expanded on our initial success in the cloud by introducing four new cloud products to the PSC; CB Defense for VMware, CB ThreatSight, CB LiveOps and CB ThreatHunter.

Importantly each of these products are available on the PSC. They are available through a single agent and a single console. Of these new products, the most significant were the recent launches of CB LiveOps in early Q4 and CB ThreatHunter in late Q4. As a reminder, CB LiveOps is our real-time endpoint query and remediation solution that addresses a critical functionality gap for many companies. Security and IT ops teams often have no reliable way to assess in real-time the current state of endpoints across their enterprise, leading to increase risk of breach, inability to make informed remediation decisions and unnecessary spending on infrastructure maintenance.

CB LiveOps real-time query capabilities allows administrators to perform full investigations and remote remediations all from a single cloud-based platform. CB ThreatHunter is our threat hunting and incident response solution built from the ground up on the PSC. CB ThreatHunter is the next-generation of our market-leading offering CB Response. CB ThreatHunter continuously records and essentially stores all activity of an endpoint, providing a unique and valuable view of a customers threat profile across its environment. No other company is able to provide this level of visibility and security at the endpoint.

We are encouraged by the initial response to these products and the early traction we're getting in the market. We signed a number of transactions for both CB LiveOps and CB ThreatHunter in the fourth quarter with smaller customers, which we believe are powerful validation of our strategy with the Predictive Security Cloud. All of these wins were multiproduct sales including multiple customers who purchased four different products from us in a single transaction. We're also encouraged by the early demand in the pipeline from enterprise customers. We expect as we saw with CB Defense that we will get traction first with the mid-market with CB LiveOps and CB ThreatHunter and then enterprise adoption will ramp several quarters after launch. One of the multiproduct customer wins in the quarter was with one of the largest providers of high-quality single family rental homes in United States, who purchased four products, CB Defense, CB ThreatSight, CB LiveOps and CB ThreatHunter.

This customer was drawn to the power of running multiple offerings from a single platform and agent, which will give them the ability to consolidate legacy solutions on to the PSC. In particular, our key differentiators in this win against crowd strike are our ability to prevent sophisticated attacks and provide context and visibility into their environment. Other customer wins during the quarter included a 30,000 endpoint CB Defense deal with one of Europe's largest consumer goods companies in partnership with Secureworks. Following several key -- several security incidents, this customer decided to replace McAfee to move to a managed next-generation EPP offering that will enable them to retain critical brand equity. This customer also needed a flexible platform that would be easy to deploy, expand and operate as they integrate future acquisitions.

We had an exciting multiproduct win for 45,000 endpoints with the Fortune 500 US healthcare company. The CISO was looking to upgrade for McAfee and put in place a set of best-of-breed next-generation EPP solutions. This competitive win against Cylance and SentinelOne was driven by the success the customer had in its initial Carbon Black deployment and the value we saw on being able to consolidate multiple security functions with a single vendor. And we have an important win with one of the world's largest technology companies to expand their 400,000 endpoint footprint by another 80,000 endpoints with CB Response.

This customer needed to enhance the security around its European servers, while remaining GDPR compliant and chose Carbon Black over CrowdStrike to replace existing solution from fireye. This is a great example of the continued opportunities we have with our traditional on-prem products. These wins are indicative of the value Carbon Black is delivering to customers every day. And while we are very pleased with the progress made on our cloud strategy, in the near term it has become evident that the transition to becoming a multiproduct cloud platform company is more challenging than we originally anticipated.

We believe this is a function of the timing of our new product launches, the complexity of reorienting all aspects of our go-to-market business from on-prem to cloud and it's not the result of a change in the competitive environment. We strongly believe that the transition to the cloud is how Carbon Black will maximize our market opportunity and shareholder returns over time.

To provide some context here are some of the complexities we are managing through during this transition. First, the timing of the CB LiveOps and CB ThreatHunter product launches slowed some deal momentum in the fourth quarter. As you all know, the fourth quarter is the largest booking quarter in software and where many of the years largest deals occur. We had multiple enterprise transactions where the introduction of CB LiveOps and CB ThreatHunter caused companies to pause their existing sales cycles to explore the additional functionality. This impacted both PSC deals and CB Response on-premise deals. We expect this dynamic to continue through the first half of the year resulting in extended sales cycles.

Secondly, our sales and channel enablement is taking longer than we anticipated. We introduced an unprecedented number of new products to the market in 2018. The good news is that the incredible pace of innovation we are bringing to the market will provide additional sales opportunities. The challenge was that we never had to train our sales people and our channel partners on so many new capabilities, so quickly. And candidly, we did not do this as quickly and as effectively as we had expected. We learned a lot in the fourth quarter about what we need to focus on to improve sales productivity and enablement as we walk into 2019.

Specifically, we are focused on the following in 2019. Establishing Carbon Black as a preeminent cloud security brand. Carbon Black is known globally for CB Protection and CB Response our on-premise solutions. We are very quickly building a world-class roster of referenceable cloud customers, which we believe will only increase now that we have brought our market leading threat hunting capabilities to the cloud with CB ThreatHunter.

Increasing market awareness of Carbon Black as a cloud security company will be instrumental in increasing our sales velocity. We are revamping our sales enablement efforts. We need to enhance our sales enablement efforts and give our sales people the training and tools they need to be more successful. In the second half of 2018, we built out an enablement team, which is now fully staffed and trained. As part of our enablement process, the enterprise field sales team is now focused on leading with the PSC versus the mix of on-prem and cloud solutions. We want to continue to engage strategically with customers to discuss their long-term endpoint security needs and demonstrate how they can achieve greater efficacy and operational efficiency by standardizing on the PSC.

We are adjusting our channel strategy to better align with the PSC. We will also transform our relationships with channel partners to focus less on selling point products and to lead with positioning and articulating the value of the -- value proposition of the PSC. We will continue to have a multifaceted channel strategy and we are confident that this new approach will be attracted to partners and drive greater returns for Carbon Black.

And finally, we are expanding and increasing our demand generation efforts. We have tremendous products and world-class referenceable customers. We need to leverage those assets with the more robust demand generation engine that will help drive faster deal velocity. To lead this effort, we are delighted to welcome Brad Rinklin, as our new Chief Marketing Officer last month. Brad has more than 20 years of B2B marketing experience, including most recently as the CMO of EZE Software as well as many years in various leadership roles at Akamai Technologies.

We are confident that as we execute on these initiatives that will lead a greater success for our LAN, expand and migrate strategy with the PSC. Our strategy in 2019 and beyond is straightforward. First, land larger new customer wins. With five products now available on the PSC, we expect our initial LAN deals with new customers will be larger as we sell them multiple products upfront. Second, expand our back to the base sales. We now have the opportunity to cross-sell our new PSC offerings to our 2,300 existing CB Defense customers. We believe this will increase wallet share with existing customers and expand our net retention rates. And third, migrate existing CB Response customers to CB ThreatHunter and cross-sell additional PSC offerings.

We remain committed to supporting our on-prem customers and we have been encouraged by the number of customers that are proactively speaking to us about moving to the PSC to enjoy the benefits of CB ThreatHunter, the next generation of CB Response and other services on the PSC. We will be driving proactive discussions with CB Response customers about the power of CB ThreatHunter and add-on additional PSC services. This will naturally redirect some existing sales capacity toward migration and away from new sales. But we believe it is critical in enabling the larger cloud cross-sell opportunity. And this far outweighs any near-term disruption to our on-prem business and the expected modest headwind to our retention rates. We anticipate that it will take a few quarters to fully work through all the changes we are introducing into the market and the company.

Mark will walk through the specifics later, but from a financial perspective, we're targeting the following in 2019. Mid-teens total revenue growth and we expect more than 70% of our new and add-on bookings for the full year 2019 to come from cloud products, up from 58% in 2018. This outlook takes into account the expected impact of our fourth quarter performance as well as the outlined actions that we are taking to position the company to drive faster growth in 2020 and beyond. We remain highly optimistic that the market opportunity in next-generation endpoint security combined with our strong product portfolio can support faster growth rates than what we are anticipating in 2019.

As a result of our growth outlook for 2019, we expect to moderate the growth of our expense structure to reduce our operating loss and cash burn. We continue to target generating positive free cash flow by the fourth quarter of 2020. Specifically we expect to better align our spend in sales and marketing with the current sale -- scale of the company. We have invested heavily in sales and marketing in the past two years. Our plan is to maintain our current quarter carrying sales rep capacity in 2019, and keep sales and marketing expenses relatively flat on a year-over-year basis. We are confident that we have ample capacity to drive meaningful growth. We will take steps to reduce sales and marketing expenses in the first quarter and anticipate overall operating expenses to then remain relatively flat for the remainder of the year.

These cost reductions will have no impact to our R&D plans and we will be investing additional resources in the product development in 2019. We are committed to being the leading innovator in the EPP market and we're looking forward to deliver on our aggressive product roadmap.

Before I finish, I want to provide an update on our senior leadership team. Mark Sullivan, our CFO for the past 3.5 years will be retiring. Mark has been instrumental and helping lead the company through our cloud migration and preparing us for our IPO last year.

On behalf of myself and everyone at Carbon Black, I want to thank Mark for everything he has done for the company and I wish him the best. Mark will remain with Carbon Black through June 30th to ensure a smooth transition. And we are excited to welcome Steve Webber to Carbon Black as our new CFO effective March 11th. Steve has more than 20 years of technology experience primarily in senior finance leadership roles at EMC. He has also served as CFO of Virtustream and Cynosure and joins Carbon Black after a successful tenure as COO and CFO of BackOffice Associates. We're excited to have Steve join Carbon Black and help lead the company through our next stage of growth.

To summarize. In 2018, we successfully transitioned Carbon Black to a cloud-first company. The pioneering innovation we launched during the year has established the Predictive Security Cloud as the leading next-generation EPP cloud platform. The success of Carbon Black will be driven by the performance of our cloud business. And based on the growth, we've seen thus far, we are confident in our ability to be one of the primary winners in the next-generation EPP market. Our focus in 2019 will be on aligning all aspects of our go-to-market efforts to drive faster adoption of the PSC. We believe the changes we're making this year will position the company for faster growth over time.

With that, let me turn the call back over to Mark.

Mark Sullivan -- Chief Financial Officer

Thanks, Patrick, and thanks for the kind words. Now let me turn to our fourth quarter results. Total revenue in the quarter was $56.9 million, up 27% year-over-year. Subscription license and support revenue was $54.4 million, up 31% year-over-year and services revenue was $2.5 million, down 17% year-over-year. Decline in services revenue is directly attributable to the growing mix of cloud solutions in our business. Recurring revenue which excludes our services and perpetual revenue was $52.9 million, up 32% year-over-year. Recurring revenue comprised 93% of total revenue in the quarter as compared to 90% in the same quarter last year.

Cloud-based subscription revenue was $18.8 million, which was up 102% year-over-year. Revenue from our on-premise products was $35.6 million, up 10% year-over-year. With the expansion of our products on the PSC, we expect the mix-shift to cloud to continue. We also focused on annual recurring revenue or ARR and short-term billings as indicators of our business momentum. ARR at the end of the fourth quarter was $217 million, up 25% year-over-year. Short-term billings were $70.9 million in Q4, up 8% year-over-year. Short-term billings on a trailing 12-month basis, which factors out the impact of invoice timing in the given quarter was $232.1 million, up 20% year-over-year.

As of December 31st, our cloud ARR was $81.3 million or 37% of total ARR and on-prem ARR was $135.7 million. Our fourth quarter short-term billings performance was impacted by the transition to our multiproduct cloud platform selling motion that Patrick discussed earlier. In addition, we had approximately $2 million of expected bookings slip out of the quarter due to IBM's announcement of the sale of its BigFix business in December. Growing our customer base is a key priority for the company.

During the fourth quarter, we grew our customer base by 400 customers, bringing our total customer count to 5,025. This is up from 3,739 in a year ago period, a 34% increase and 4,625 at the end of last quarter. The number of customers who have deployed at least one cloud product was 2,851 at the end of the fourth quarter compared to 1,605 in the year ago period, a 78% increase and up from 2,450 at the end of last quarter. Please note that existing on-premise customers who subsequently purchase a cloud product are included in the cloud customer count and a cloud customers may also have on-premise solutions as well.

In the fourth quarter, our gross retention rate which we calculate by comparing the annual recurring subscription and support revenue from our customers in the current quarter with the annual recurring subscription and support revenue from those same customers at the end of the fourth quarter of 2017 was 87%. Gross retention was below our historic levels and reflects a modest increase and churn from on-premise customers. We currently expect gross retention to be at a similar level in 2019. Please note, this retention rate calculation does not take into account the impact of any up-sell activity.

As we are successful with a Predictive Security Cloud, we expect our net retention rates to be begin trending higher. And in fact, we are already starting to see positive net retention momentum when we track the buying patterns of customers who are on the PSC platform at the end of the fourth quarter of 2017.

Moving down to P&L. Please note that I will be discussing our quarterly results on a non-GAAP basis, unless otherwise noted. Gross profit in the fourth quarter was $44.9 million, representing a gross margin of 79%. We were pleased with the gross margin performance in the quarter, particularly in light of our rapidly growing mix of cloud revenue, which was more than 30% of total revenue in the fourth quarter, up from 21% in the fourth quarter of 2017. Focusing on the unit scale economics of our cloud platform has been a high priority for us as we move to deliver our intellectual property on the PSC. We do continue to expect the modest decrease in gross margin over time as our percentage of cloud business continues to grow due to the associated hosting and infrastructure cost of delivering cloud products.

Sales and marketing expense was $36.8 million, which represented 65% of revenue. As Patrick mentioned, in 2019, we will be moderating the growth of our sales and marketing investments to better align the spend with our current growth expectations. We've made substantial investments in our sales capacity in recent years and our focus in 2019 will be to successfully enable and ramp the productivity of our sales force.

R&D expense was $16.4 million, which represented 29% of revenue. Investing in the R&D organization is an ongoing focus area for us, as we continue to build out the PSC platform. This is the area in which we intend to increase investment in 2019. G&A expense was $6.7 million or 12% of revenue. Scaling G&A has been an area of focus for us to provide additional resources to invest in other areas of the business. Our operating loss was $15 million or a negative 26% operating margin compared to negative 25% in the year ago period. Net loss in the fourth quarter was $14.1 million or $0.20 per share, based on 68.8 million weighted average shares outstanding. On a GAAP basis gross profit was $44.3 million, operating loss was $19.5 million and net loss was $18.6 million.

Turning to the balance sheet and cash flow. We ended the quarter with $160.6 million in cash and short-term investments and no debt. Operating cash flow in the fourth quarter was negative $9.2 million after taking into consideration $1.1 million of capital expenditures and capitalized software development costs, free cash flow was negative $10.3 million in the quarter.

Now let me quickly summarize the full year. Total revenue for the year was $209.7 million, up 30% year-over-year. Recurring revenue was $192.2 million, up 35% year-over-year. Cloud-based subscription revenue was $60.4 million, which was up 132% year-over-year. Our operating loss was $55.5 million or a negative 26% operating margin. Net loss for the year was $54.2 million or $1.12 per share based on 48.4 million weighted average shares outstanding.

Now I'd like to turn to our outlook for the first quarter and full year 2019. For the full year 2019, we expect revenue to be in the range of $240 million to $244 million, which equates to 15% growth at the midpoint. We expect professional services revenue to be approximately $8.5 million.

Non-GAAP loss from operations is expected to be in the range of $45 million to $43 million and non-GAAP net loss per share to be in the range of $0.64 to $0.61 per share based on 69.4 million weighted average shares outstanding.

Now turning to the first quarter. We expect revenue to be in the range of $56.5 million to $57.5 million. Non-GAAP loss from operations is expected to be in the range of $16 million to $15.5 million and non-GAAP net loss per share in the range of $0.23 to $0.22 based on 69.2 million weighted average shares outstanding.

To wrap up our progress toward transitioning to a multiproduct cloud company was a major achievement for Carbon Black in 2018. We believe we are developing -- have developed the leading next-generation EPP cloud platform that can address many of the most challenging security issues facing customers. Our outlook for 2019 reflects the impact of managing through the changes and our go-to-market efforts to capitalize on our broader market offering. We're confident as we complete this process Carbon Black will be positioned to deliver faster growth over time.

And with that, I would like to open up to questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Sterling Auty from JP Morgan. Your line is open.

Sterling Auty -- JP Morgan -- Analyst

Yes. Thanks. Hi, guys. I apologize bouncing between calls here, so if this was asked, I do apologize. In light of the transition that you're kind of managing through, what you're going to do on the cost price in terms of -- is there any rightsizing that we should expect as you move through 2019?

Patrick Morley -- President and Chief Executive Officer

Hey, Sterling, it's Patrick. As we said on the call, I mean one of the things we're certainly focused on is making sure we're running the right-size business. We think the opportunity in the market with the changes happening with EPP and the opportunity that we have to go-to-grab share means we got to still invest in a big way in R&D and we're doing that. On the sales and marketing side over the last couple of years, we've invested aggressively on the sales and marketing side. And so what you will see us do and as we said on the call is we're going to keep that side of the business relatively flat on a year-over-year basis. No change in quarter bearing reps. So we're still got a lot of capacity to go drive growth. But we're trying to be smart about modulating the size of the expense in light of the size of the company.

Sterling Auty -- JP Morgan -- Analyst

Okay. And then one follow-up, and again, I apologize if this was asked. But do you think on the EPP side, there the competitive dynamics have changed? I know you talked about lengthening sales cycles given what's happened with the new product introductions, et cetera, but win-loss rates and any other competitive dynamics changed at all?

Patrick Morley -- President and Chief Executive Officer

We did not see a change in competitive win rates, loss rates, was pretty straight in Q4. And again, I think the biggest change we saw in Q4 was what I articulated, which was one, the introduction of so many new products in the year on the PSC and making sure we're enabling all of our teams and our channel partners. And number two, the introduction specifically of Q4 of LiveOps and ThreatHunter definitely had an impact on some deals because of valuation cycles.

Mark Sullivan -- Chief Financial Officer

And Sterling, this is Mike Viscuso. I did want to add to LiveOps and ThreatHunter are both very differentiated in the marketplace especially compared to other nex-gen EPP vendors. So from a competitive perspective although, there was a question about whether we should introduce these two new products in Q4 given the size of Q4, we thought that getting these products into market would best advantage us for not just the near term, but the long term.

Sterling Auty -- JP Morgan -- Analyst

Got it. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Melissa Franchi from Morgan Stanley. Your line is open.

Melissa Franchi -- Morgan Stanley -- Analyst

Great. Thank you for taking my question and thank you, Patrick for all the detail around, some of the challenges you looking to. And so I understand the potential disruption from the new product launches and how that could maybe elongate the sales cycle. But I'm wondering if you could elaborate a little bit further on the challenges from the sales enablement perspective in what you're seeing? I know that may be the new product launches may be caused some confusion or may be a little bit distracting. But could you make any other changes as far as that caused any for transitions in the quarter? And then maybe a little bit more details on what you are planning to do to remedidate those challenges?

Patrick Morley -- President and Chief Executive Officer

Yes, yes. Thanks. So if you look at the -- if we look at the year when we walk into the year of 2018, the company had two primary on-prem products CB Protection and CB Response and we've told the market and the world that we were taking out intellectual property and moving it to a multi-tenant SaaS platform with one console, one agent. And the the first offering on that was CB Defense. So if you think about our selling motion, the way our sales teams are operating, they have the on-prem offering, they had the cloud offering CB Defense. And they would talk to customers about where customers needs in resided regards to on-prem versus cloud. They would use that as a driving factor and then they would go down that path on-prem cloud. If we look at what happened in 2018, we did a lot of new product introductions essentially one new product every single quarter. And there is an amount of capacity that can kind of be absorbed there by the sellers. Again, in Q4, we saw our sellers selling four products and some transactions like the one I talked about on the call. But in general especially at an enterprise level, the ability for our direct sellers and our channel partners and we're heavy channel business, for our channel partners to be able to articulate the full value of the PSC and the full value of each one of the new services, definitely took longer than we anticipated. And from an execution standpoint on the enablement side, one of the things, one of the changes we have made is we've put a lot more focus in enablement both for our direct sellers as well as for our channel partners on a global basis. And it just takes them a bit -- it's going to take them a bit to absorb all of that. Exiting the year, we've built the foundation for a very strong channel business $75 million run rate business, grew a 100% year-over-year. And so we're very focused on enabling both our sellers and our channel partners on that. But no, and I guess the only thing I would add Melissa, is no -- there is not a material change that -- of something that happened from a sales strategy in the quarter.

Melissa Franchi -- Morgan Stanley -- Analyst

Okay. That's helpful. And then the question for Mark was, as you go, well, best of luck on your future. So my question for you is just, you mentioned a higher churn rate with some impact from the on-premise solution, have you seen a little bit of higher churn in the quarter. Can you provide some detail on what is driving that higher churn rate? Are they moving to competitive solutions and you expect that to normalize in '19?

Mark Sullivan -- Chief Financial Officer

Yes. We had three sort of unusual transactions in the quarter -- sorry, in the full year, that I think contributed. And obviously, you can do this what-if analysis. But if we would add back those three large transactions, we would have been in a normal range. And as a story with every one of those transactions in one case it was not a competitive situation. Literally -- actually in two cases, the customer lost funding for the initiative and had to either abandon or greatly scale back the effort. And in one other case, it was a competitive, it was a switch out. But I would say if you took those three sort of unusual transactions, we don't see anything. As we sit here today of that nature, as we look into 2019, we would have a more normal retention rate relative to recent history.

Melissa Franchi -- Morgan Stanley -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Jonathan Ho with William Blair. Your line is open.

Jonathan Ho -- William Blair -- Analyst

Hi, good afternoon. I just wanted to may be dig a little bit into your 2019 guide. And can you just give us a little bit more color relative to, starting with the revenue side of things, your growth coming from the cloud versus the on-prem business. That was a little bit of a haircut, I think, relative to what the Street was expecting on the revenue side. And so is that going to come evenly distributed across both of those businesses or does it impact one side more than the other?

Patrick Morley -- President and Chief Executive Officer

Hey, Jonathan, it's Patrick. So I'll start and then I'll let Mark weigh in as well with additional detail. The way you should think about it is first, the cloud business, we have a high growth cloud business and walking into '19, inside the company, I think we feel very bullish about the offerings that we now have on the PSC walking into the year. And so when we look at the growth for the year, the PSC will have an impact -- it will have an impact in the enterprise more in the second half, right? The buying cycle for enterprise customers tends to be in the calendar year in the second half. And so we're not going to see the benefit of large multiproduct deals. We don't think in the first half. We will see it more in the second half. And so from a revenue standpoint, the revenue was really driven by Q4 of '18 and then the first half of '19. And so that some of the impact that we're seeing. If you pull apart the two businesses the on-prem and the cloud, I've just described the cloud business and you -- we certainly have talked about an on-prem business that's growing much slower than the cloud business. And so when you -- and that business is actually larger than the cloud business. That will change over time, but right now, when you look at our overall ARR with $81 million ARR business in cloud and on-prem was a remainder, which was in the 130s. And so you've got a business that's going through this transition where you got a high grower and you've got a slow grower and that some of what you're seeing as well in the revenue guidance. And if you want to add anything to that Mark?

Mark Sullivan -- Chief Financial Officer

Yes. I mean, I would just say as we're looking at the business and obviously there is a lot of moving parts and there is bit of uncertainty in terms of how exactly things will play out because as we go into this year and we're -- yes, for the first time going to actively as Patrick said in the script try to move on-prem customers on to the PSC platform at this Response customers, on to ThreatHunter, that dynamic is very new at this point of the year. But the way we are thinking about the business is essentially the on-prem business being roughly flat and all of the growth coming from the cloud business. That's how I would think about modeling due to course of '19.

Jonathan Ho -- William Blair -- Analyst

Thanks, that's helpful. And then just as a follow-up, we look at sort of the trajectory of the business when it comes to the new products. What are some actions that you can take to help us understand how to -- how you expect to drive I guess more of the multiproduct sales as well as your ability to I guess maybe get these going a little bit faster than previously?

Patrick Morley -- President and Chief Executive Officer

Yes. So the strategy for the year, and as I said and what we talked about at CB Inspire, which is our sales kickoff event, and certainly the way the commission plans are done, we're very, very focused on the land, expand strategy. So landing larger deals with the PSC and going back into that cloud base of customers and expanding, getting them to buy additional products that will help them be more secure, help the security posture of their organization. That's absolutely the focus. We saw some of that in Q4. We had multiple customers who bought multiple products, three or four products in one transaction. That's the first time we've seen that. And so we're very encouraged by that. But the customers that did that tended to be smaller customers. And so again, what we anticipate is that we will see that scale over the year, but the biggest impact will be in the second half of the year. And part of what we're going on Jonathan is also just the experience that we have with CB Defense and other new offerings, which takes a couple of quarters after introduction for the prospects to be able to consume that new offering. And trust me, we're doing everything we can to pull that forward, but we're looking a little bit at prior history on what it took for new product introductions.

Jonathan Ho -- William Blair -- Analyst

Great, thank you. And congrats Mark on the retirement.

Mark Sullivan -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Michael Turits from Raymond James. Your line is open.

Eric Heath -- Raymond James -- Analyst

Hi, guys. This is Eric Heath on for Michael. Question for Mark. Can you help bridge the 9% growth and current billings excluding professional services this quarter versus the 15% revenue guide for the full year? And whether you're expecting contribution from sales force productivity improvements, retention rates or any new products had to be introduced in the back half of this year?

Mark Sullivan -- Chief Financial Officer

Yes. I mean, I think, you have to look at -- when you compare a quarterly billings number, like 8% or 9% to a full year revenue guide, you're comparing a little bit of apples and oranges. So I talked in the script about the fact that this year we had ARR growth of 25% and we had short-term billings growth of 20% on a trailing 12-month basis. Those numbers are more comparable, right, if you think about an ARR number as sort of a balance sheet type of a concept and the billings is more of income statement kind of concept that some of your billings sort of adds up to your ARR. So clearly, we will not be able to deliver the guidance on the revenue number if we were to persist an 8% quarterly growth rate on short-term billings, so that is not our plan. And so what we're -- but I think what you expect if you're doing the modeling is that, within reason the growth rate over the full year on average for '19 of short-term billings is going to somewhat approximate the revenue guidance we gave.

Eric Heath -- Raymond James -- Analyst

Got it. That's helpful. And then, in addition to the churn on the on-premise customers, was there any general weakness to call out in either Response or CB Protect?

Mark Sullivan -- Chief Financial Officer

From a retention/churn perspective?

Eric Heath -- Raymond James -- Analyst

I guess, just overall demand instead of the churn aspect?

Patrick Morley -- President and Chief Executive Officer

Yes. Hey, Eric, it's Patrick. I would just -- I would restate what I said earlier, which is if you look at the way that when we entered the year and kind of when we exited the year and the amount of innovation on the new products that we offered on the PSC, certainly we've got the go-to-market team and our channel leading today with the PSC. Now we talked about what -- about getting them enabled -- fully enabled to be able to do that effectively as you walk into '19. But that focus on the PSC, it certainly has some impact on our on-prem customers because we're leaving -- but the first conversation we're having with them is a cloud-based EPP solution conversation. Now the cool thing -- the beneficial thing walking into the year is now, in '19, compared to where we were at the beginning of '18, the company truly is in a position to be a cloud-first company, where you've got all of these offerings on the PSC. And so that is quite different than the way we entered 2018.

Eric Keith -- Raymond James -- Analyst

Right. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Rob Owens with KeyBanc Capital Markets. Your line is open.

Rob Owens -- KeyBanc Capital Markets -- Analyst

Great and thanks for taking my question. You mentioned in your prepared remarks the loss of I think $2 million in billings, bookings from the IBM partnership and the sale of BigFix. Does that put any further pressure on 2019 expectations either from a billings and/or revenue perspective other than that $2 million?

Patrick Morley -- President and Chief Executive Officer

So Rob, it's Patrick. Look, we -- IBM is a good partner for Carbon Black and we've worked together on a number of deals over the years. And so when we model out the year for 2019, we do look at channel contribution. If you'll remember, we have three different integrations with IBM. We integrate with QRadar, one of their products -- another one of their products and the BigFix product. The BigFix one pulls away -- pulled away some deals in Q4. We have not modeled out a dramatic change in the contribution of IBM as we walk into 2019. But having said that, I think our expectations walking into the year without having BigFix there in front of us from a partnering standpoint, will change the way that the numbers actually flow in through the year.

Rob Owens -- KeyBanc Capital Markets -- Analyst

Great. And Patrick, obviously some changes within the competitive dynamic given Cylance's acquisition, other competitors rumored to potentially go public soon. Any changes in behavior from some of your closest next-generation competitors either to the detriment or the better of the marketplace?

Patrick Morley -- President and Chief Executive Officer

No. We did not see any significant changes in Q4 from the competitive environment. And again, as we walk into '19, with what we have on the PSC, I think we're in a really good position to continue to compete very effectively in the market and in fact in a better position to compete.

Rob Owens -- KeyBanc Capital Markets -- Analyst

Great. Thanks.

Patrick Morley -- President and Chief Executive Officer

Thanks, Rob.

Operator

Our next question comes from the line of Sterling Auty with JP Morgan. Your line is open.

Sterling Auty -- JP Morgan -- Analyst

Yes, thanks guys for allowing the follow-up. Mark, my bad in terms of, I should have led with congratulations on just a great career, and I'll be interesting to see what's next if there's more to it. But one housekeeping follow-up question. What was the US international split and was there any difference in terms of the total business in either the international market or the US market?

Mark Sullivan -- Chief Financial Officer

Sterling, I apologize. I don't have that number here with the international mix, ordinarily we would have filed the 10-K, but we're going to be doing that a little later. And so don't have that number sort of rolled up. But I know we did see reasonable growth over the course of the year. I think leaving 2017, entering '18, we were only around 12% plus or minus international. And I want to say that, that international mix may not have made it to 20, but I think it's getting up into the 18, 19 range. But I'm sorry, I don't have the exact numbers here in front of me. But we have seen decent growth internationally, and most of that growth this year came from the EMEA region, which had a very solid year for us.

Sterling Auty -- JP Morgan -- Analyst

That makes sense. Thank you.

Patrick Morley -- President and Chief Executive Officer

Thanks, Sterling.

Operator

I'm showing no further questions at this time. I would now like to turn the conference back to Patrick Morley, CEO.

Patrick Morley -- President and Chief Executive Officer

I want to again thank, everyone for joining us for our fourth quarter call. And just to summarize one more time, in 2018, we successfully transitioned Carbon Black to a cloud-first company. And the success of Carbon Black will be driven by the performance of our cloud business. And our focus in 2019 is on aligning all the aspects of our go-to-market efforts to drive faster adoption of the PSC. And we believe that the changes that we're implementing this year walking into '19 are going to position us for faster growth as we exit the year. And that's it. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may now disconnect.

Duration: 51 minutes

Call participants:

Mark Sullivan -- Chief Financial Officer

Patrick Morley -- President and Chief Executive Officer

Sterling Auty -- JP Morgan -- Analyst

Melissa Franchi -- Morgan Stanley -- Analyst

Jonathan Ho -- William Blair -- Analyst

Eric Heath -- Raymond James -- Analyst

Eric Keith -- Raymond James -- Analyst

Rob Owens -- KeyBanc Capital Markets -- Analyst

More CBLK analysis

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