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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Absolute Software Corporation's First Quarter Fiscal 2020 Conference Call. [Operator Instructions] Before beginning its formal remarks, Absolute would like to remind listeners that certain portions of today's discussion may contain forward-looking statements that reflect current views, which -- with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. Any forward-looking statements contained in today's conference call are made as at the date hereof, and Absolute does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable security laws. For more information on the company's risks and uncertainties relating to these forward-looking statements, please refer to the appropriate section of its quarterly MD&A and quarterly financial statements, both of which are available on Absolute's website or SEDAR. I'd also like to remind everyone that this conference call is being recorded today, Tuesday, November 12 at 5:00 p.m. Eastern Time. I would now like to turn the call over to Christy Wyatt, Chief Executive Officer. Please go ahead.
Good afternoon and thank you all for joining us for Absolute's Q1 Fiscal 2020 Conference Call. Joining me on this call is Errol Olsen, our Chief Financial Officer. Fiscal 2020 is off to a good start. The positive trends in our operating metrics continue to develop, and we reiterate our guidance for the year. A few highlights from the quarter. The profitability of our business was very strong in Q1. We generated EBITDA of $7.1 million or 28% of revenue. Q1 revenue of $25.7 million was up 6% compared to the prior year period. We saw continued double-digit growth in our enterprise and government sectors. The ACV base was $99.1 million, up $6 million or 7% year-over-year. We continue to see strong new customer local acquisition and significant expansions in the quarter, including ARUP, Apria and Asplundh, each of whom will be joining us at our Analyst Day here in New York tomorrow. Going a little deeper into these results. With our core enterprise software products in September 2019, we introduced a significant redesign of the Absolute console with a new visually rich, flexible dashboard that includes customizable widgets, reports and alerts. This UI enhancement enables IT and security teams to detect underutilized devices, quickly spot vulnerabilities and take immediate action to neutralize risks. The customer feedback on this new UI has been overwhelmingly positive, and we have seen a positive uptick in our customer satisfaction metrics and our NPS scores. With our Enterprise Resilience Edition, we launched a number of new key enhancements, simplifying security policy deployments and remote management of device fleets. The new release provides customers with increased operational efficiency, on-demand support through live chat and automated ability to apply and adjust security policies across computing devices. Also within our Enterprise Resilience Edition, we extended the endpoint healing capabilities of application persistence to the latest versions of Ivanti Management Suite, bringing the total number of applications we are healing from within our product to 30. For our education customers, we released a tech preview to the features previously referred to as Student Technology Analytics. This first release focuses on Web usage and reports, for example, the amount of time the user spends on a website, the average use over a period of time, usage on and off of school time. This version also enables you to click on a domain like YouTube, for example, and see all of the web pages that were used from within that domain. These capabilities are available in tech preview for our Chromebook users today and will be extended to Windows before the end of the calendar year. Earlier in the year, we published the first edition of what will be a series of our intelligence reports. We began with our state of the endpoint trends report, which highlighted the gap in security controls resulting from complexity that is escalated across the enterprise. This report leveraged our unique data and insights across millions of devices to demonstrate both the opportunity for and the power of enterprise resilience. Building on that research, we released a new report earlier this fall entitled the Cybersecurity and Education: The State of the Digital District in 2020. This version looked at the state of IT security in the education market, focusing on staff and student safety and endpoint device health in K-12 organizations. This report's findings highlight the crisis the education sector is facing as schools grapple with high levels of risk exposure with students often bypassing critical security controls like Web filtering. And our focus continues to be on helping our education customers detect and mitigate these risks through our resilience offering. In both cases, our intelligence research is being directly applied to our customers' environments to demonstrate how resilience can be used to strengthen endpoint security. The response to this has been very positive, generating a new set of discussions across the industry as well as both with our new and existing customers. Our hard work to deliver value to our customers was once again acknowledged as Absolute was recognized as a leader in the G2 Fall 2019 Grid Report for Endpoint Management Software. This report shows that 98% of reviewers gave either 4- or 5-star ratings for the Absolute platform, and 93% of the total reviewers said they were likely to recommend Absolute. Since we last spoke, there have been a number of internal developments I'd like to highlight. We strengthened our Board of Directors with the addition of Lynn Atchison. As the former CFO of Spredfast and HomeAway, Lynn has multiple decades of operational and financial leadership expertise. She also currently serves on the boards of Q2 Software, Convey and RealMassive. We are thrilled to have Lynn on board. Before I discuss recent additions to our senior management team, I'd like to take a moment to thank Errol Olsen for the support he has provided me since I've joined Absolute. As you know, Errol is stepping down as CFO later this year. Errol has been the CFO and a valued member of the Absolute leadership team for 9 years. Our search for Errol's replacement is underway, and we hope to complete the search early in 2020. We recently announced 2 significant additions to our management team. William Morris joined as Executive Vice President of Engineering. Will brings a wealth of experience delivering world-class solutions across cloud, mobile and desktop computing at some of the biggest brands in the world, which include BlackBerry, McAfee, AOL and NetScape. Ameer Karim also joined as Executive Vice President of Product Management. Ameer brings 20 years of product experience in innovation management and product marketing, having held senior roles at Symantec, HP and several Silicon Valley start-ups. Looking beyond the quarter, Absolute remains the industry-defining leader in endpoint security markets focused on resilience. We believe our differentiated product enables our customers in key markets, including government, health care, financial services and business services to manage the risks associated with the complexity of the modern enterprise. The Absolute platform provides our customers a flexible and automated solution that includes the ability to see a holistic view of the enterprise, to manage devices from the BIOS, to detect the failure of critical controls on the endpoint and to heal those controls. We believe that after decades of investment and billions of dollars being spent on endpoint security across the industry, that what is needed is a foundational element to ensure that those controls are replaced and effective. It is our belief that adding resilience to an enterprise endpoint strategy can accelerate the customers' return on investment for their security controls and increase the efficacy of security overall. Our execution model remains focused on 4 key pillars. First, we continue to strengthen our relationship with OEM partners that drive value through our patented Persistence technology, ultimately growing our installed base both directly and indirectly. Second, we are accelerating our go-to-market efforts with our enterprise software offerings, including resilience supporting 12,000-plus enterprise customers worldwide. Third, our Intelligence initiative, we are enabling both the security and the IT teams within our customers with meaningful, actionable insights about the true state of their enterprise. And finally, we are reestablishing our strength in the education business by honing in on the unique product needs and requirements of this market through our unique analytics and insights married with our core capabilities. I look forward to seeing many of you here tomorrow at our Analyst Day in New York. Our team will provide more color on our strategy and how we are executing. For those of you unable to join in person, a link to the event webcast can be found on the Investor Relations section of our website. With that, I'll now turn the call over to Errol to go through the detailed quarterly results.
Thank you, Christy, and hello, everyone. I will now walk through our fiscal 2020 1st quarter financial results. Q1 of fiscal 2020 was highlighted by continued double-digit ACV growth in the enterprise and government verticals, accompanied by strong cash generation. Q1 revenue of $25.7 million was up 6% compared to the prior year period and was relatively in line with trailing growth in the ACV base. Adjusted EBITDA for Q1 was $7.1 million or 28% of revenue. As a reminder, the company implemented IFRS 16 for leases beginning July 1, 2019, which resulted in an increase in calculated adjusted EBITDA for Q1 of just under $500,000 or 2% of revenue. Further details concerning the definition of adjusted EBITDA, ACV and the impact of IFRS 16 are included in our financial statements and MD&A. On a pre-IFRS 16 basis, Q1 adjusted EBITDA would have been $6.6 million or 26% of revenue, representing a substantial increase over adjusted EBITDA of $4.1 million or 17% of revenue in the prior year period. The improvement in profitability reflects continued revenue growth, coupled with a lower expense base year-over-year, with the expense reduction being a function of a nonrecurring $700,000 positive true-up to R&D investment tax credit accruals, lower average head count and a slightly lower Canadian dollar. With the anticipated filling of budgeted head count positions, we do expect adjusted EBITDA margins to trend downward during the year in line with our annual guidance. Gross margin in Q1 was 87% compared to 86% in Q4 and is in line with our expectations for the year. Total head count at September 30 was 470 compared to 477 at the end of Q4 and 471 at September 30 of last year. Our commercial ACV base at September 30 was $99.1 million, representing an increase of 7% over the prior year and an increase of $1.1 million or 1% over the Q4 closing balance. ACV acquired from new customers in Q1 was $1.1 million compared to $1 million in Q1 of fiscal '19. And existing customer net ACV retention in Q1 was 100% compared to 101% in the prior year period. The enterprise portion of the ACV base, which represented 56% of the base at September 30, increased 11% year-over-year and was up 3% sequentially. Q1 enterprise performance was steady across all horizontal sales teams. The government vertical, which includes state, local and federal government customers, represented 12% of the ACV base at September 30 and increased by 13% year-over-year and by 3% sequentially. Together, the enterprise and government verticals now represent 68% of the ACV base and were up a combined 11% year-over-year. The mix of our business continues to shift toward these higher-growth segments. The education vertical, which represented 32% of the ACV base at September 30, was down 2% year-over-year and also down by 2% sequentially. The Q1 performance in the education sector was impacted by lower renewal rates in Latin America and generally lower expansion activity. Looking now at performance by geography. Our international ACV base was up 24% year-over-year and up 1% sequentially. Performance during the quarter remained strong in the EMEA region but was soft in other international theaters. The North American ACV base was up 4% year-over-year and was up 1% sequentially. North American customers accounted for 87% of the ACV base at September 30. Turning to cash flow. Cash from operating activities in Q1 was $7.5 million or $7.1 million prior to the implementation of IFRS 16. This compares to cash from operating activities of $4 million in Q1 of last year. The significant increase in fiscal 2020 operating cash flow was primarily attributable to higher year-over-year billings in Q4 and improved working capital metrics. Moving now to our expectations for fiscal 2020. I'll start by reminding listeners that the following expectations constitute forward-looking information and financial outlook and are qualified in their entirety by the cautionary statements contained in our MD&A. Our expectations for fiscal 2020 remain unchanged and are as follows. Revenue is expected to be between $103 million and $106 million, representing 4% to 7% annual growth. Adjusted EBITDA is expected to be between 18% and 22% of revenue, which includes the impact of IFRS 16 equal to approximately 2% of revenue. Cash from operating activities is expected to be between 16% and 22% of revenue. This also includes the impact of IFRS 16 equal to approximately 2% of revenue. And finally, capital expenditures are expected to be between $3.5 million and $4 million. This concludes our prepared remarks for today. Operator, please open up the call for questions.
[Operator Instructions]. Your first question comes from Thanos Moschopoulos with BMO Capital Markets.
In terms of the OpEx increase embedded in your guidance, should we be looking for a pretty linear trajectory? Or are there any nuances that you would call out as far as the quarterly progression?
No, you're correct. You should be looking for a linear increase in OpEx, with most of it hitting through in Q2 and Q3, and we expect we'll be pretty close to budget as we exit Q4.
Okay. I noticed in the financials, the contract acquisition costs that were capitalized were lower year-over-year even though new ACV was up year-over-year. Can you just explain the dynamics? Is that a timing difference? Or not a big number obviously, but just curious as to the discrepancy.
Sure. No, it's a good observation. So the addition to contract acquisition costs, that's really a function of improved productivity in the sales team where our average variable compensation is coming down as a percentage of billings.
Okay. And maybe on a related note, Christy, can you update us in terms of what's been happening on the sales staffing in the sales force?
Absolutely. So we've continued to fill a number of the key roles that we had open as we came into the quarter. Clearly, those folks coming on board take some time to ramp. We have still more roles that we're actively working to fill. We're working aggressively as we go through this quarter to get ourselves lined up nicely as we go into the second half of the year.
Okay. And then finally, education dipped sequentially this quarter. It had been stable sequentially the prior quarter. Any change to your outlook there? Or I guess just some volatility in the growth rates?
I think it's exactly that. It's volatility in the growth rate. There's no change in our outlook for education, which as we've said in the last couple of quarters, we characterized as cautionary optimism. So we do believe that some of the improvements that we're making and the changes in the product, together with site licenses, will have an impact on education. But until we see those results materialize, we remain cautious.
[Operator Instructions] There are no further questions queued up at this time. I'll turn the call back over to Christy Wyatt.
All right. Well, thank you all for joining us this afternoon. We look forward to updating you next at the end of Q2.
This concludes today's conference call. You may now disconnect.