Carbonite Shows Online Storage Risks In IPO Filing

Online backup storage technology provider Carbonite has filed for an initial public offering, hoping to raise $100 million which would be used to invest in the company's operations and in possible acquisitions of other technologies or businesses.

However, while the IPO filing shows that Carbonite is enjoying a strong growth in its online backup service business, it also shows just how risky this business can be thanks to intense competition, data center issues, and intellectul property disputes.

Boston-based Carbonite on Wednesday filed its S-1 statement with the Securities and Exchange Commission in which the company claimed that since its founding in 2005 it has already acquired over 1 million consumer and SMB customers of its online backup and recovery service in over 100 countries.

Carbonite also said it has backed up over 100 billion files, and successfully restored over 7 billion of them for its customers.

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Revenue from those customers has grown significantly, reaching $38.6 million for all of 2010, up from $8.2 million in 2008. Revenue for the first three months of 2011 of $12.8 million is up significantly from the $7.6 million it recorded for the same period last year.

However, the company has yet to show a profit. Carbonite said in the filing that it had net losses of $17.4 million for 2008, $19.2 million for 2009, $25.8 million for 2010, and $5.3 million for the three months ended March 31. It also said it has yet to see a positive cash flow from its operations and that it does not expect to be profitable for the foreseeable future.

"We expect to continue making significant expenditures to develop and expand our business, including for advertising, customer acquisition, technology infrastructure, storage capacity, product development, and international expansion, in an effort to increase and service our customer base. In 2011, we also expect to incur increased expenses associated with expanding to a new data center facility, including relocation of certain of our existing servers, and with relocating our customer service operations from India to the U.S.," the company wrote.

While the Carbonite S-1 filing shows the growth potential of online data protection and cloud storage, it also provides a detailed look at some of the risk factors that impact a company like Carbonite.

The company wrote that it faces a very competitive market, with competition coming from both online backup providers and providers of traditional hardware-based backup systems, including Prosoftnet, CrashPlan, EMC's and VMware's Mozy, Symantec’s Norton Online Backup, McAfee Online Backup, SOS Online Backup, and others.

Certain features such as Carbonite's remote access service compete with current or potential services offered by Apple, Google, Microsoft, Amazon, and others, while certain planned features such as the ability to share data with third parties also compete with current or potential services offered by DropBox, Mozy, SugarSync, and others, Carbonite wrote.

Carbonite also listed as potential risks to its business the possibility that a disruption of service or the loss or misuse of customer data could harm its business. "Our data centers are vulnerable to damage or interruption from human error, intentional bad acts, computer viruses or hackers, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures, and similar events, any of which could limit our customers’ ability to access their files and could prevent us from being able to continuously back up our customers’ files," the company wrote.

Developing an online backup service for a customer base increasingly relying on a variety of mobile device is also difficult, Carbonite. The company has developed applications that allow iPad, iPhone, BlackBerry, and Android smartphone users access files stored on its systems, but those applications have yet to achieve widespread adoption. In addition, Carbonite wrote that it has yet to develop applications to back up the data on those devices, and could suffer harm if a competitor were to do so first.

Next: SMB, Lawsuit Risks

The SMB market is also risky for Carbonite. The company wrote that it has recently introduced a version of its solution specifically targeting SMBs. However, SMB customers are expected to be more difficult and expensive to attract and retain than consumers because of their more complex requirements, the fact that SMBs often fail, and the expensive in marketing to that part of the market.

The company also cited customer security and privacy issues, especially the increasing number of regulations, as well as the close proximity of its two existing data centers to each other as risk issues.

Carbonite disclosed that it is currently being sued by Oasis Research about possible infringements of that company's intellectual property, in particular patent number 5,771,354, titled "Internet Online Backup System Provides Remote Storage for Customers Using IDs and Passwords which were Interactively Established When Signing Up For Backup Services."

Oasis also sued such Carbonite competitors as AT&T, EMC, Iron Mountain, Nirvanix, Rackspace, and several smaller companies in the lawsuit.

Carbonite declined to further discuss the S-1 due to the quiet period imposed as part of the IPO process.

Andrew Hickey and Ed Moltzen contributed to this article.