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Ladies and gentlemen, thank you for standing by, and welcome to the Absolute Software Corporation First Quarter Results conference call. [Operator Instructions] Please be advised that today's conference is being recorded.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 their current views in respect to the 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 the date hereof, and Absolute does not undertake any obligation to update publicly or to revise any of its 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 related 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 website or SEDAR.I'd like to remind everyone that this conference call is being recorded today, Monday, November 9, 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, everyone, and thank you for joining us for Absolute's Q1 Fiscal 2021 Conference Call. Joining me on this call today is Leigh Ramsden, our Vice President of Finance and Interim Chief Financial Officer.Before I begin, I want to thank Leigh for the tremendous amount of support he has offered in these past few months. As you know, we recently announced that Steven Gatoff will be joining Absolute as our CFO starting tomorrow. We're very excited for his arrival and for his experience, which spans the U.S. public markets from several high-growth SaaS businesses, including Rapid7, PagerDuty and 8x8.Steven is a welcome addition to the Absolute team as we embark on our next chapter. We will be working for Steven as he comes in, and then we'll be moving on to join the executive team of an exciting vocal start-up. We will be available to us for ongoing support and a seamless transition through the end of March. We wish Leigh continued success and thank him for his long tenure at Absolute.Let me also touch briefly on our U.S. -- recent U.S. listing on NASDAQ and the $69 million equity issuance that we completed. Over recent years, we have seen growing investment and significant interest from U.S. shareholders. Our objective in pursuing the cross listing was twofold: increased liquidity for the U.S. investors who make up a sizable portion of our shareholder register; and an enhanced profile and coverage, which should result in greater visibility of Absolute's role in the information security ecosystem over time. With our successful transaction, we believe we have accomplished both of these objectives. On today's call, I'll briefly review our Q1 results, which are consistent with the preliminary figures we announced on October 26. I'll then focus my comments on the trends that have developed in our business and how we believe Absolute is positioned for continued success in the rapidly evolving endpoint security market.Q1 was another strong quarter for Absolute. Our steady focus on accelerating growth while maintaining healthy cash flow has continued to deliver improved business performance. Q1 revenue of $28.5 million was up 11% compared to the prior year period. We added $3.4 million of ARR in Q1 and exited the quarter with a total ARR of $111.7 million, up a record 13% year-over-year. Growth in ARR this quarter was driven by demand from both new and existing customers across the enterprise and government and education sectors. Adjusted EBITDA in Q1 was $8.1 million or 29% of revenue. EBITDA margin was above our full year target due to continued disciplined cost management, and in some, delays in hiring. Cash flow from operations was $14.7 million and was extremely strong, representing a 97% increase from Q1 fiscal 2020. The strong fourth quarter ARR and billings growth as well as an increase in longer-term contracts primarily in education, contributed to those strong level of cash generation. We exited Q1 with $58.2 million of cash and short-term investments with no debt. Including the proceeds from our recent financing, Absolute now has over $120 million of cash to support future growth initiatives. Through the quarter, we continued to see significant increased activations with the number of active devices growing from 9.4 million at the end of Q4 million to 10.6 million at the end of Q1. Additionally, we added a number of new customers, notable among them being CIBC, PetSmart, Lionsgate Entertainment and Cypress SpareBank's independent school district, the third largest school district in Texas, just to name a few. In April, we initially made available 2 COVID-19-related offers to our existing customers, both free of charge until the end of August. Application for assistance for their VPNs as well as Absolute Reach, our library of automated workflows. As that deadline approached, we continued to see new customers relying on these capabilities while also managing budget constraints.In response, we announced that our COVID-19 offers would remain effective until the end of October. And in parallel, for the first time, we also announced separate licensing for application persistence in... [Technical Difficulty] All right, everyone. I apologize, I have no idea how we became disconnected from the audio line. Hopefully, this is not redundant, but I'll start again at -- in April, we initially made available 2 COVID-19-related offers to our existing customers, both free of charge until the end of August. Application persistence for their VPNs as well as Absolute Reach, our library of automated workflows. As that deadline approached, we continued to see customers relying on these capabilities while also managing budget constraints. In response, we announced that our COVID-19 offers would remain effective until the end of October. In parallel, for the first time, we also offered separate licensing for application persistence and Absolute Reach modules. These are limited time offers and they win customers with access to these capabilities, which were previously only available with our top-tier resilient [ edition ].In the quarter, we also continued our successful efforts with our intelligence offerings, leveraging our unique data set to share actionable insights with our customers. As a part of these developments, we published our second annual education endpoint trends report, the insights of which underscore the device and data security complexities on K-12 device health, security and usage in remote and hybrid learning environments.This is also a strong quarter for our partners as a number of our partner-focused investments came to market. In September, we announced the new Absolute partner program, a multi-tier reseller partner program designed to increase revenue opportunities across the company's global network of channel partners, resellers, distributors, managed service providers and systems integrators.We also saw several new market successes with our OEM partners, including strong online promotion and new product bundles with Lenovo; strong growth in emerging markets, specifically Latin America education with Hewlett-Packard; and we launched Blueprint for success program with Dell designed to build pipeline opportunities across K-12 and higher education, a program we will look to scale across all of our partners.In our enterprise and government business, we've established a multiyear track record of double-digit growth and continue to focus on further accelerating this growth. With the near-term macroeconomic environment still uncertain, we've seen small pockets of weakness across some enterprise sectors, such as retail and professional services.We believe we are managing this dynamic well and are positioned to take advantage of the need that organizations have to stay connected and to service their entire endpoint of state. Overall, we're seeing accelerated demand as businesses return to offices and schools and begin to reopen campuses, and we believe these trends will continue to be positive for Absolute.Education as a sector has structurally changed in a way that is aligned with the investments we've been making in this area. Clearly, we have enjoyed a short-term benefit from customers needing to stand up distance and hybrid learning initiatives for students, teachers and administrators.However, our momentum in the education sector slightly predated to pandemic, and we have now had 3 consecutive growth quarters, reversing a multiyear trend. We will continue to focus on driving stability and further growth in this segment as we believe that education settles into a new hybrid learning model post COVID.COVID-19 has caused a massive disruption to the world economy and created a backdrop of uncertainty for several quarters. While no organization is completely immune from this, we believe we have been able to manage the impacts well, and we have also seen a unique set of tailwinds from which our business benefited in the second half of fiscal '20 and into fiscal '21.Though, it is too soon to understand the long-term effects of COVID on enterprise computing, endpoint resilience is emerging as a critical capability as our industry is redefining modern endpoint computing. Being rooted in trust in leveraging our unique persistence technology and our resilience and intelligence capabilities, we enable customers to stay connected, sell-through critical applications and ensure the visibility of -- and control of their endpoint of state no matter where those devices may be.With our massive installed base, leading-edge product platform and with an enhanced balance sheet, we remain confident that we will be able to continue to grow and pursue market opportunities in a nimble and disciplined way across a large and growing market opportunity.Our unique partnerships in our pure SaaS platform have enabled us to capitalize on opportunities and scale the business efficiently with our accelerating ARR and revenue growth as proof points. As already mentioned, we continue to see healthy and strong demand across all segments of our business.Given macroeconomic factors and seasonal patterns across multiple verticals, we remain cautiously optimistic in our outlook. That said, we have seen a strong start to our fiscal year and steady pipeline coverage. And so as a result, we are adjusting our annual FY '21 guidance, as Leigh will outline in his prepared remarks.Our focus in the coming quarters will be on continuing to accelerate top line growth while maintaining our balanced profitability. We've previously discussed some of our ongoing investments to help achieve this growth, including our continued focus on operational efficiency, an expanded focus on international markets and global strategic accounts, broadening our channel and partner program and new product offerings that leverage our rich data platform and secure channel embedded in over 0.5 billion devices.With that, I will now turn the call over to Leigh.
Thanks, Christy, and good afternoon, everyone. Q1 was another strong quarter for Absolute, highlighted by the continued rebound in the education vertical, sustained double-digit ARR growth in the combined enterprise and government verticals and continued healthy EBITDA margins.At September 30, total ARR was $111.7 million, which represents record growth of 13% over the prior year and an increase of $3.4 million or 3% in the first quarter. The growth we experienced in the first quarter is the second highest quarterly growth we have experienced since we began measuring the business in this way, trailing only our preceding record fiscal 2020 fourth quarter. We saw continued strength in both the up-sell and expansion of existing customers as well as initial sales to new customers, particularly in the education vertical. In Q1, net ARR retention from existing customers was 102%, up from 100% in the first quarter of the prior year. In addition, we added $1.8 million of ARR from new customers, up from $1.1 million in the prior year but down from $3.5 million in the fourth quarter. The sequential decrease in ARR from new customers was due primarily to seasonal factors as the first quarter of our fiscal year has historically been the softest for our enterprise and government verticals.In the first quarter, we continued to experience increased demand for our solutions and services, resulting in part from the shift to remote work and distance learning. Speaking generally, the macroeconomic disruption being experienced globally is yet to have any significant negative impact broadly across our business. However, the potential future impact on our customers remains unknown.The combined enterprise and government portion of total ARR increased 12% year-over-year with these customer segments representing 67% of total ARR at September 30. We achieved ARR from new customers of $0.9 million in these segments compared to $2.5 million in the fourth quarter and $1.0 million in the first quarter of fiscal 2020.The overall trends we are seeing in enterprise and government remain positive with IT and security professionals increasingly and effectively having to manage and secure devices on and off of corporate networks. However, we have also seen some headwinds in particular sectors, such as professional services and retail. The enterprise and government portion of our total ARR remains well diversified, which we believe will help us withstand any particular sector or seasonal weaknesses.The education vertical, which represented 33% of total ARR at September 30, was up 14% year-over-year and increased 7% from the fourth quarter. The acceleration we saw in this market in the fourth quarter continued throughout the summer months. As Christy mentioned, while we have enjoyed a short-term benefit from educational organizations that have had to quickly stand up distance and hybrid learning initiatives, we believe that our targeted product and other investments in this market will also drive further growth in this segment.In the first quarter, we achieved ARR from new customers of $1.0 million in education compared to $1.1 million in the fourth quarter and $0.2 million in the first quarter of fiscal 2020. The $2.4 million sequential increase in total ARR in the first quarter represents only the fourth quarter in which we have experienced a sequential increase in education in the past 4 fiscal years.Turning to our geographical performance. International total ARR was up 34% year-over-year and 13% from June 30. Our performance in the quarter was bolstered by continued large customer expansion in the Latin American theater. The year-over-year growth in international total ARR of $4.2 million is a record for us, and it's the first time it has been greater than $3 million since we began measuring total ARR. In North America, the increase in total ARR was also strong at 10% year-over-year, also a company record and accounted for 85% of total ARR at June 30.Revenue in Q1 fiscal 2021 was $28.5 million, up 11% compared to Q1 fiscal 2020, which represents the highest year-over-year increase in our commercial recurring revenue since we began reporting that revenue amount separately in fiscal 2017. Our revenue growth is primarily driven by trailing year-over-year growth in total ARR, which was also 11% as we entered the quarter at June 30.Adjusted EBITDA, which is defined in our press release and MD&A, was $8.1 million or 29% of revenue in the first quarter. The continued strength in EBITDA is a result of consistent revenue and gross margin growth, coupled with the impact of smaller increases in our expense base as compared to the prior year. Our gross margins remained strong at 89% in the first quarter compared to 87% in the prior year.Compared with the first quarter of fiscal 2020, our expense base reflected the impact of increased headcount expenses throughout the business, partially offset by lower travel and entertainment expenses. In addition, the first quarter in the prior year included a $700,000 positive benefit to our R&D expenses, resulting from an adjustment to our SR&ED input tax credits, which occurred upon the successful assessment of historical claims. Total headcount at September 30 was 520 compared to 470 at the end of Q1 fiscal 2020 and 499 at June 30, 2020.Now turning to cash flow. The first quarter saw a continuation of the strong cash generation from operating activities we have been experiencing in the past few quarters. We generated record cash from operations of $14.7 million, up 97% from $7.5 million in the prior year. Our operating cash flows were positively impacted in the quarter by increased billings in the fourth quarter of fiscal 2020, in addition to the impact of improved operating results and working capital changes, which will fluctuate based on collection and payment cycles. Our average prepaid contract term in the first quarter was 19 months, in line with our trailing 4-quarter average. Finally, I'd like to shift to our updated financial expectations for fiscal 2021. Please be reminded that the following expectations constitute forward-looking information and financial outlook and are qualified in their entirety by the cautionary statements contained in today's press release and MD&A. We are updating our expectations for fiscal 2021 as follows. We are narrowing our expectations for revenue and now expect it to be between $116 million and $118 million, representing 11% to 13% annual growth, from $112 million and $118 million or 7% to 13% annual growth previously. The narrowing of our expected range of revenue results in a similar narrowing of our expectations for adjusted EBITDA, which is now expected to be 21% to 24% of revenue compared to 20% to 24% of revenue previously. In addition, we are similarly narrowing the range of our expectations for cash from operating activities to 25% to 34% of revenue, previously 22% to 34% of revenue. Finally, we continue to expect capital expenditures to be between $3.0 million and $4.0 million. This concludes our prepared remarks for today. Operator, please open up the call for questions.
[Operator Instructions] And your first question comes from Mike Walkley, Canaccord Genuity.
Congratulations on the strong quarter execution and the raised guidance. Christy, I thought I'd start with you just on the education segment. Now that we're well into the school year, do you believe school boards have deployed CARES Act funds and have what they need for remote learning? Or do you think the positive trends can continue? I guess what I'm trying to get at is just determine if education might return to kind of low single-digit declines post COVID? Or some of the tailwinds you're talking about on the call can continue longer term?
Mike, it's a great question. So I think what we believe is or what we see is that the pipeline in education continues. So I don't believe that we're all the way through education institutions kind of preparing themselves for this new reality and new normal.The other thing I would say is that a lot of our conversations with those customers are really long-term focused. So you shouldn't view these as sort of a large splurge in hardware and then we revert back to the old way. I think that there's a lot of learnings and a lot of infrastructure that's getting deployed into these environments. That's going to have a long-standing effect.Where and when we see that start to settle out, I do think that we will see it normalize at some point in time, but I don't think we've seen that moment yet. And from what we can see in the pipeline, I think that this continues to be a lot of demand.
Great. And a follow-up question. Just congratulations on the NASDAQ listing. Can you just kind of update us on the thoughts for the timing of the process? And with the increased capital, I think you said over $120 million in cash now, just what are some of the priorities in terms of fostering growth of headcount additions, M&A? Just how do you plan to use the capital to help the growth profile of the company?
No problem. I think that's a great question. So I think as we've touched on before, we don't have an immediate target or identifiable investment. I don't think -- nothing has really shifted in our annual operating plan or our priorities or the way we're executing the business.As we said when we started going down this path, we really had 2 objectives, really. One was being more available and accessible in -- across the U.S. market to our U.S. shareholders. And some connected coverage as a part of that to help folks understand who Absolute is and what we're doing.And I think the second is really just to position ourselves to be able to respond to opportunities as we see them. We do see a lot of demand in endpoint resilience. We see it emerging as a category and a set of core capabilities, and there may be some interesting ways to accelerate our plans. But we have no -- there's no, sort of, immediate project sitting right in front of us as we speak today.
Great. Last question for me, and I'll pass it on. Just with the record ARR growth at 13%, are there any areas just concerning you on the guidance tightened up to the high end? Are there any areas -- it sounds like you have a very good pipeline creating, but are there any areas of caution built into that guidance just given some uncertainty still from the pandemic?
Not as I sit here today. I think that we -- in our comments, we touched on across enterprise, we do see pockets of vertical markets that have been affected more than others. And we talked about specifically this quarter, retail and professional services. I think last quarter, we talked about some pockets within health care, although we didn't see that in Q1. So I think this is a place where the diversity of our customer base really serves us well. I think we are going to continue to see some of the ebb and flow of customers are managing budgets to get through this fiscal year. But I think overall, we believe the trend is positive. We tend to view these last couple of months really more as a focusing event for our capabilities. We don't think that what customers, again, are setting up a sort of long-term plans for how they're going to manage their endpoint of state. So in some cases, they may be taking shorter-term contracts and moving those licenses around. But overall, we see the long-term commitment continue to be strong.
Your next question comes from Thanos Moschopoulos with BMO Capital Markets.
I'd like to -- congrats on the U.S. listing and the recent financing. Christy, could you maybe dig into the strength in the international market? It sounds like Latin American education was a key part of that. Anything else you'd call out? And maybe more specifically within Latin America, you mentioned the HP partnership. Has that been the key driver? Or are there other things you'd point to in that region?
Thanos, so we've talked quite a bit about international expansion as we've come into this fiscal year. I think this past quarter, we did see a fair amount of activity in a number of international theaters, I think we commented specifically on education within Latin America. I think we're continuing to see strong demand in that region, and I would say even education more broadly. But even within the enterprise space, I think we continue to see a nice trajectory and nice momentum within India as well. And we've talked quite a bit about -- as we come into this fiscal year, EMEA growth and international expansion is one of our focus areas as we go forward.
Okay. And you briefly touched on it, but can you expand a bit further on health care. So you mentioned that this quarter held up better than the weakness you saw last quarter. So what does that market look like right now?
Health care actually has done quite well this past quarter, and we continue to see strong demand across our health care customers, both new and existing. I think last quarter, we commented a little bit, we had seen some softening around some specific sectors within health care, so things like hospitals or areas where they were really, sort of, managing budget impact of the pandemic as they went through. I don't think we saw a lot of that. In fact, this was a pretty good quarter for health care, and we're continuing to see strong demand as we go through. I think it's just some of the seasonality in both the different vertical markets adjusting to the pandemic and working their way through it. But as we sit here today, I think health care looks like it's going in a good direction.
Great. And then finally, can you expand a little bit on your hiring plans? I think I heard you say that you're a little bit behind. So in what areas are you behind where you would have hoped to be? And as we look at your guidance, it implies a pretty significant OpEx ramp through to the balance of the year. What will be the targeted areas of investment for that?
So we touched on some of the targeted areas in the earlier comments that we talked about: international expansion, strategic accounts. We've talked about some of the investment we're making in the product, some of the new product introductions we're working on for later in the year around data and intelligence. We've touched on some of our move to the cloud and the work we're embarking with our onshore FedRAMP and reaching more broadly with our public cloud initiatives. In terms of this previous quarter, I don't think there was a specific area where I think it's relatively -- I will just say not unusual within the first quarter of the fiscal year. I think folks had pretty ambitious goals for where they were bringing in headcount to launch some of the new initiatives. And I think -- I don't actually attribute it very much to the pandemic. I don't think hiring for us has slowed too much as a result of the pandemic. We're still doing a pretty good job of bringing in new talent and on-boarding folks and ramping them up. I would say, in sales, we've filled -- we're almost at complete capacity. So we filled almost all of our selling headcount, which positions us well for the second half of the year.
I think one other item just to note. Yes, sorry to chime in there. One other item to note is just on the G&A side. We do have some increased costs with the U.S. listing, so those are reflected in the back half of the year.
Would you be able to quantify those? Sorry, would you be able to quantify those?
Yes, they're in the mid-hundred thousands of dollars range per quarter. It's primarily insurance expenses.
[Operator Instructions] Your last question comes from David Kwan, PI Financial.
I was wondering if you could talk about -- I guess when looking at the number of devices that you activated in over the last quarter, it looks like it's up quite sharply, but my number is roughly 15% quarter-over-quarter, which is much stronger than what we've seen, I think, in a few years now, especially when you look at just came in the net adds over the entire year. And you look at that relative to, say, where the revenues growth is and the ARR growth is. So is it fair to say that you're seeing a lot more increased interest in ELAs and site-wide licenses? And/or maybe there was some -- a lot of sales towards the back end of the quarter?
David, it's a great question. So one of the things we track very closely is license overhang. So I think we're -- we do pretty well in, sort of, ensuring that what is being sold out is pretty closely connected to what is being deployed. So I think that increase we've seen over the past couple of quarters in activations growing is a function of both. It's a function of the accelerating ARR, but it's also -- customers are using more broadly the licenses that they already have. So we've talked in previous calls about them mobilizing devices and getting more devices out into the hands of users. And so some of that is connected to new licenses and some of that is connected to licenses they already have. I don't think that there was any significant change in enterprise licensing activity this past quarter. So I don't think we're -- we don't have a lot of, what would I call, all-you-can-eat kind of plans out there that have untapped activations connected to them. So I think it's more closely connected to the growth in ARR that you've been seeing from the business.
Okay. That's helpful, Christy. And then I guess when you look at your PC OEM partners, just seeing some of the commentary coming out of them as it relates to, I guess, some of the shortages that they've had and challenges they've had getting devices into customers' hands. Is that consistent with what you're hearing from them and also maybe some of your customers? Like, are there a lot of customers that are still having trouble trying to get a hold of devices, particularly, I guess, maybe on the education side?
I think it varies a lot by vendor, and it varies a lot by region. So I think that what we've seen on our own forecast and our own pipeline is demand continues to be strong, and a lot of that is in conjunction with our OEM partners. But remember, a lot of our sales are not directly connected to new hardware. So where we see that strong correlation isn't a lot of net-new logo attached, but a lot of our up-sell and expansion happens with existing devices that are already within the enterprise.
Okay. And have you seen -- I guess with -- I think in the past, typically, like these upfront sales account for a much smaller portion of overall opportunity. Have you seen that pace accelerate? I think you kind of talked about that last quarter, but any color you could provide there would be great.
Sorry. Leigh, you've made some comments about the new ARR in this quarter. Maybe you want to respond to them.
I'm sorry, David, can you repeat the question?
Yes. I guess when you look at -- in the past, a lot of the upfront sales were a relatively small proportion of the total opportunity with the customer. And I think in last quarter, you kind of talked about, in particular, given the pandemic, that you've kind of seen some maybe larger upfront deployments and customers in general just kind of accelerating their plans as opposed to waiting for the annual or multiyear refresh cycle that they would have on their devices. Just curious to get an update or commentary on that.
Right. Yes. Sorry, I misinterpreted it the first time you asked it. Yes. So last quarter, we did comment on some of the significant new customers that we had achieved, and there was no similar commentary. None of the new customers we acquired this quarter were more than approximately $0.5 million. So there's still a lot of really solid new customer acquisition activity, but nothing individually significant. So to your point, we would expect to see that provide a larger expansion opportunity looking forward.
That's helpful. I guess just the last question. Maybe you can update on the service source partnership. I know that one of the things was to help free up your sales reps to go after new business. So I'm kind of curious how that's ramping up and how you might have seen some benefit this quarter.
So I think, as we've touched on before, Q4 of fiscal '20 was the first quarter we started to move some of our renewals out into a ServiceSource. I think Q1 was really -- was a slightly larger part of that. I think we're seeing the program come online. I think it's -- I think they're doing well. I think as we've talked about the better or the greater impact for us is really getting that time back for our direct sellers to really go focus on up-sell and expansion, and I think we are seeing that in the results.
There are no further questions at this time. I will now turn the call back over to Christy Wyatt.
All right. Well, thank you all for joining us and for being patient through our audio glitch there. Thanks for taking the time, and we will look forward to speaking with all of you on our next quarterly call.
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