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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Absolute Software Corporation's Second Quarter Fiscal 2018 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 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 of 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 sections 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, February 13, at 5 p.m. Eastern time. I would now like to turn the call over to Mr. Steve Munford, Interim Chief Financial Officer. Please go ahead, sir.
Thank you, operator, and good afternoon, everyone. Welcome to our Q2 fiscal 2018 conference call. Joining me is Errol Olsen, our Chief Financial Officer. So I think everyone has seen, I took over as CEO about 4 weeks ago, mid-January. What I wanted to do this afternoon is to cover 4 points: One is go over my background, talk about some comments that I have on the market, initial observations of Absolute, and lastly, some comments on Q2 performance. So my background. I've been in the security industry since 2000, both as a CEO and as a board member. And I've been an adviser with Absolute for the last 2.5 years. Now within the security industry, my primary focus has been endpoint protection. One of the observations I made while in the industry is that key for organizations to properly protect their assets or their laptops or their desktops is not only having top-of-the-line endpoint protection, it is also about having hygiene. Ensuring that you have visibility and control over the assets and technology in your network. Simply put, you cannot secure what you cannot see. You cannot manage what you cannot, essentially, enforce policies. So it was with that basis, that I got involved with Absolute. My decision to come in as interim CEO was driven really by 3 motivations: One is the opportunity in the market. Today, more than ever, companies are suffering from breaches caused by what I'll say is a dark endpoint. And the poor hygiene that exists on those machines are they can't manage or they can't see. The issue is not that they can't -- they don't know what the vulnerabilities are, the issue is they can't implement their policies or their procedures properly. Two is the unique capabilities of Absolute Software. Absolute's key -- core persistent agent is really the critical ingredient to providing a platform that helps companies with the right visibility and control of their assets. Absolute Reach 7 -- or Absolute Reach and Absolute 7 is a really good proof point of the capabilities that can be achieved with the platform. Lastly, the team. I've gotten to know the team over the last few years, and both the team have been here for a long time and the recent additions to teams provide a great foundation, great leadership for the company, and I'm very excited to work alongside them. Now over the last few years at Absolute, there's been tremendous change. The company's gone through a transformation. For those of you outside the company, it's hard to appreciate the level of effort and skill that's required to take a company through this phase of growth and pivot. The results of this effort is what Absolute has today, and that is the ingredients to be the leader in endpoint visibility and control. The momentum is building. We're starting to see the proof points. We have a very strong team, and I'm very pleased to be on board to help continue with the momentum and increase the velocity and help the company execute on its strategy. Now before I turn it over to Errol for a detailed look of the quarter's financial results, there're a few items I'd like to note. First of all, Absolute's focus on enterprise market is materializing. In Q2, enterprise ACV grew by 12% year-over-year. We continue to win new customers across a variety of industries and while expanding our business with existing customers. Our enterprise business now accounts for 52% of ACV, which demonstrates the progress that has been made in diversifying the business from its historical focus on education. In fact, our primary growth markets of enterprise and state and local government now account for 52% of Commercial ACV. The headwinds that have existed for a number of quarters in education segments has receded but still remains. However, we continue to evolve our offering of strategy for the education market in order to deliver increased value to that unique customer group. To that note, we are very excited to launch our new Student Technology Analytics features in our 7.2 release later this month. Lastly, the recent discovery of 2 chip vulnerabilities, Spectre and Meltdown, got a lot of visit -- lot of attention in the early January, highlight a scenario where Absolute's unique Reach technology was able to deliver tremendous value to our customers by allowing for a rapid response across our customers' entire computing population. This really is a great example of how our platform can protect against unforeseen risks, and when unique risks arise, how our platform can help heal and solve the issue. With that, I'd now like to turn it over to Errol.
Thanks, Steve. Good afternoon, everyone. Overall, our Q2 results reflect continued growth in our enterprise business and expanding adjusted EBITDA and cash flow margins, demonstrating the results of our focused strategy and investment in our product platform. The growth in our enterprise customer ACV base was driven by deployment expansions and product upgrades with existing customers, reflecting the early positive impact of our recently launched Absolute 7 platform. In addition, we have seen ongoing success with the land-and-expand strategy with new customers. On the operations side, our cost base has stabilized after a period of investment in fiscal 2017, leading to the realization of operating margin improvements. Turning now to the numbers. Q2 commercial recurring revenue of $22.1 million grew 5% year-over-year, in line with the recent increases in our Commercial ACV base. Total revenue of $23.2 million grew 3% year-over-year, reflecting the commercial recurring revenue growth, offset by a decline in nonrecurring and other revenue. Our Commercial ACV base was $89.6 million at December 31, representing a 4% increase over December 31 of last year. Sequentially, the ACV base was up 1% from September 30, reflecting a 100% existing customer retention rate and $1.1 million of new customer ACV. In terms of our mix of business, at December 31, enterprise customers represented 52% of our commercial ACV base compared to 48% a year ago. At December 31, 2017, public sector ACV, which accounted for 48% of total ACV, was further broken down into 38% education and 10% government. Looking at ACV performance by vertical. Enterprise ACV increased by 12% year-over-year and was up 3% sequentially. We continue to win and expand customers across a range of end markets with growing concentrations in healthcare, professional services and distributed enterprises. The common use cases across all these markets remains a requirement for continuous visibility and control over off-network endpoints and compliance with organizational security policies and external regulations. The public sector ACV base, which includes both education and state and local government, decreased by 3% year-over-year and was down 1% sequentially. This decrease was primarily attributable to the North American K-12 vertical, as the state and local government portion of our business is growing. As mentioned on previous calls, education -- our education business has been affected by declining ASPs as a result of declining device prices and our historical value proposition in this market, which was centered on device recovery. Our 7.2 release later this month, which is headlined by enhanced Student Device Analytics or STA, aims to shift this value proposition. Specifically, STA enables educators and administrators to understand how, where and when student devices are used. This information can then be correlated with student and school performance, thereby providing a critical link toward understanding the impact and the ROI of school technology investments. Geographically, the mix of our business is consistent with prior quarters. North America accounted for 90% of total ACV and international markets the remainder. Turning to expenditures. Total Q2 adjusted operating expenses, the calculation of which is detailed in our MDA and press release, were $20.8 million, relatively flat from $20.7 million last year. Q2 OpEx reflects the full impact of our fiscal 2017 R&D headcount expansion as well as an impact of approximately $0.5 million due to a stronger Canadian dollar. These increases were offset by lower sales, marketing and contractor expenses in the current year quarter. Total headcount at December 31 was 504, which compares to 448, including offshore development contractors at December 31 of last year. Adjusted EBITDA for Q2 was $2.4 million or 10% of revenue compared to $1.7 million or 8% of revenue in Q2 of last year. Below the operating line, in Q2, we recorded income tax expense of $1.5 million, of which, $1.1 million related to a write-down of our U.S.-based deferred tax assets as a result of the decrease in U.S. corporate income tax rates. Operating cash flow in Q2 was $3.2 million compared to negative cash flow of $400,000 last year, which was after adjusting for one-time severance payments in that year. We have also made changes to our guidance for fiscal 2018. Our revenue guidance range has been reduced by $1 million to $93 million to $95 million, reflecting reduced expectations from nonrecurring services and noncore businesses. We have also adjusted guidance for adjusted EBITDA and cash from operations to reflect market expectations for a stronger Canadian dollar compared to our original forecast assumptions. Adjusted EBITDA is now expected to be in the range of 8% to 10% of revenue compared to our previous expectation of 9% to 11% of revenue, while cash from operating activities is expected to be in the range of 8% to 12% of revenue compared to our previous expectation of 9% to 12% of revenue. This concludes our prepared remarks for today. Operator, please open up the call for questions.
[Operator Instructions] Your first question comes from the line of Doug Taylor with Canaccord Genuity.
Steve, I understand that you're fairly new to the role, but you have been watching Absolute now for sometime. Are there any initial observations or inclinations about what you see within the company that you'd like to do differently than that was done prior to your role as interim CEO?
Differently, no. Not at this stage. I think there's a lot of the right things happening within the company. So I think the strategy of visibility control is strategy of focusing on the enterprise is investment that's made in R&D and the enterprise sales force are all the right things to do and -- given the market opportunity and given the growth opportunity we have.
Okay. And is there anything that you can provide about the ongoing permanent CEO search process? And what you have been able to attract so far?
Yes. So we have not kicked off the process as of yet. My mandate from the board has really been to come in, work with the team, assess really what the requirements are for the CEO, and then to chart a strategy for hiring the right person. My role as interim is not a defined period of time. It's really -- I'm here for the right length of time to find the right person. So it's really a little premature to comment on any candidates or initial results in the search process.
Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets.
Steve, as someone who has watched the company for a number of years, it seems to me that Absolute hasn't been able to grow the type of rates that one would hope for, given the size of the market opportunity and given the strength of the company's technology. Would you agree with that? In your view, what are the key or main challenges that might need to be addressed in order to drive the kind of growth that Absolute should be able to chase?
Yes. So I would concur with the view that the company should be able to grow at a much faster rate than it is today. As far as what's happened historically, I guess, overall, I would say there's been a lot of investments in building up the platform, and really I would say, fixing some tech debt and ensuring that we have the right platform in which we can introduce features and introduce capabilities into the market. Secondly, when you go into the security space, it does take time. And we have Reach -- Absolute 7 Reach that was introduced last fall. It's a fantastic product, but it's early in the market. And it takes a while to build the momentum with the product and get the recognition. So I think, when Absolute levers in the size of the market and the opportunity, I think, we've done a lot of the heavy lifting to get us to where we are today. And I think from here, it's just about what can we do to build the momentum and accelerate the pace of the business.
Great. And in terms of education, Errol alluded to the new features that are coming in, in the 7.2 release. Maybe to expand a little, I mean, are these analytics entirely brand new? Were there any sort of analytics previously? And maybe help us to better understand how this can drive a bigger market opportunity in education for you?
Yes. So the data that we're taking advantage, has been data that we've collected and seen for quite some time. I think in the past, you've had specific customers, if you will, on the manual way kind of leveraging this data to do specifics in analytics. What we've done here is we've packaged it. So we've made it consumable by the average person, if you will, and really start to market and talk about it. I will say that I've been very impressed that these features and these capabilities have not been built in isolation of the company. They really have been borne out of the real tight relationship that we have within the education market and the long-term relationships that we have with some of the leading K-12 institutions in the U.S. So is this all new? Not completely. Is the new is in how we package it and how we position it? Yes. And given the early feedback, we're very hopeful.
Your next question comes from the line of David Kwan with PI Financial.
I guess, touching on just the last comment. Sounds like there's some early -- positive early feedback in terms of the go-to-market strategy for the education vertical. Is that being driven by these new analytics? I know you guys have also talked about the more flexible pricing, because this is something that customers historically been fairly price-sensitive in hardware cost that they expect the prices to come down.
I'm going to turn that to Errol to come in.
Sure, David. So we're seeing a couple of dynamics at play in education, which causes us to have some optimism about our prospects for the future within that market. And one is through the product that we have talked about, and Student Technology Analytics was initially unveiled at quite an early stage in June of last year. And as Steve just talked about, it's really been packaged up in a way that's far more consumable and arguably compelling as well for both teachers and administrators. And that release is happening later this month in our 7.2 release. And then the second, as you've just mentioned is, we have opened up new licensing models for education and, specifically, this is around enterprise license agreements that, historically, we've been doing ELAs within the enterprise verticals, and we haven't closed any within education. But we are seeing an appetite for that. And especially it becomes more compelling when you combine it with the technology analytics as well, enabling a school or a district to be able to measure the usage across their entire device populations is a lot more valuable to them than just measuring the use of a subset of devices or a fleet of new devices. The other thing it does is it enables us to take advantage of lower per unit pricing by expanding the volume to cover that entire device population. So we're very optimistic that between those 2 things of the functionality and the licensing models that we'll able to make some positive improvements to the education business.
Would you expect there could be, I guess, from a revenue perspective, how do you see a potential shift to ELA model? Increase volumes, lower price, within that be neutral. But I guess from a commercial perspective, it could be negative if you don't have these guys signing up for a 3-year contracts.
Well, while we don't expect any wholesale shifts over to an annual licensing model in education, but we certainly are seeing interest in that ELA model. And I think that overall what it means is on a per customer basis, is a higher ASP or ACV per customer. But you're right that an ELA model is typically an annual payment. So there'll be volume increases, it's not a multi-year prepay. So there could be, in short term, an impact on cash flow. It should be higher cash flow over the course of 3 years, because of the way that we price our annual payments versus through a prepay -- 3-year prepay. So net-net, there could be a small impact on cash flow, but we don't expect it to be material in the near term.
Thanks, Errol. And can you provide any color on the pipeline? I know on large deals has been I guess [indiscernible] last couple of quarters here. Can you comment on whether you did sign any large deals kind of north of $0.5 million in Q2? And how the pipeline looks?
So we didn't close any deals that were individually greater than $0.5 million ACV in the quarter. The pipeline, it's interesting, the pipeline continues to grow and it continues to mature. I think, the one variable that we're just too early to have a strong handle on is the rate of throughput and the close rate on that pipeline. But we continue to progress those deals. I mean, having said that, we are seeing customers who are ticking up over the $500,000 ACV mark. But it's not through a single deal, it really is through land-and-expand place.
Great. One last question, which is the EBITDA margins came in just a bit over 10% this quarter. How sustainable do you see that going forward? Is it going to be kind of choppy in the coming quarters here? Or do you think this is settling where we could -- which should be able to see sustainable EBITDA margins north of 10%?
It's -- I mean, I would just -- to answer that, I would refer to the guidance that we've given for the year. And I think the implication in that guidance is that we -- so in Q1, we are at 6% EBITDA and 10% in Q2. In order to hit that range, we've got to stay pretty close to double digits to average out within the guidance range.
Your next question comes from Blair Abernethy with Industrial Alliance.
Errol, could you clarify, I just missed, you said. You're talking a little bit about the large deals in the quarter. Did you have any deals over $500,000 and any deals over $1 million in Q2?
No. No, we didn't, Blair.
Okay. And do you have an average deal size in the quarter?
We don't give out average deal sizes. The reason that we don't is because of the volume of our business. Just to provide a little context around this. Because of our attach volume, our deal volume is very high. We do close to 10,000 orders per month. So it becomes very difficult to provide an average deal size.
Okay, fair enough. And then on the education market with the Student Tech Analytics piece coming out in the next month or so. Is this a part -- would it be part of a renewal, and maybe with a price increase? Or is it separate? How are you pricing it in the market?
Sure. It's -- first to clarify the last answer. It's not difficult to calculate an average. It's difficult to provide a meaningful average.
Meaningful, understood, yes.
Anyway, on STA. STA is provided in the resilience or what you speak, call the premium version of our product. So the goal there is to upsell customers to the top tier. It's not an add on to somebody who's already in there. But we do expect an ASP increase from upgrades.
Okay, great. Last question for me. Just on the government vertical. You mentioned state and local, and said that you've been growing the business there, and it's now up 10% of your overall business. What about federal, particularly, U.S. federal, what's happening there for Absolute?
So federal is included in that government figure that I provided, the 10%. Federal has not been a focus area for us. It's a lot of investment in order to really make inroads in federal. And specifically, that's around certifications and that sort of thing. So we do, do business in federal. And we do have some prominent client names in the federal sector. But it's not an investment focus for us at the moment.
Your next question comes from the line of Kevin Krishnaratne with Paradigm Capital.
Steven, question for you. With your experience in the information security industry, I'm just wondering about your views on the importance of partnerships. And with respect to partners, I'm thinking about over the past few years, there's been signings with the guys like RSA and Splunk via the SIEM connectors. Could you just chat about the importance of that going forward. And potentially, any other vendors that Absolute may look to partner with? And the importance of that -- those partners as a sales channel?
Sure. So a couple of partnerships that the company does have. So first of all is with our OEMs, so with the Dell's, Lenovo's, HP's of the world, which has been a long-term platform partners and routes to market. And those will remain important. And we continue to expand the number of platforms that we're on and people that're taking us to market from that side. Secondly, it's the bar relationships, so the security bar is at -- or, if you will, the consultants to the purchasers in many cases. I'm sure that we have clear visibility into those folks, and we have programs in place so that we can sell through those bars. Again I think those are very important when we're taking security products to market. And as you mentioned, we fit broadly in this ecosystem. So we collect a lot of information on what's happening on the endpoint. We can implement policies controls with those endpoints, and there's a lot of visibility what's happening in the corporate network. So to the extent, which we can partner with organizations that either consume that information or help us, I guess, in the holistic approach to security, those can be really helpful. So the SIEM integrations like with the RSAs and others make a lot of sense, right. So we've got all this data and people want to correlate with other security information. So the SIEM partnerships are good and really been driven out of that customer saying "Hey listen, we'd like you to do this" And that kind of causes to pursue those. I think as we look further in kind of implementing our visibility and control strategies, I can see areas like many security providers. So those that are actually managing the security on behalf of the customers being very good partnership opportunities for us. We've got a couple today. And there's -- it's a growing trend in the off market, I think that could be very helpful and an interesting route to market. And beyond that, what other security products should we play nicely with and what other security companies we can draft behind, still thinking about it. I think there's a few but still thinking about it.
Right. And maybe another way to also ask the question. Is there a way to think about the new ACV that was won in the quarter? Or maybe the pipeline to think about sales related to partnerships like with the SIEM integration, like those deals that might be won as part of an ecosystem sale?
Yes, I would say -- so having a partnership on the SIEM side, those companies aren't necessarily selling our products or taking us into customers. It's, essentially -- it's compatibility, if you look at it. So organizations that they want their security products to talk together, they want them to work together. So it's important that we have a technology partnership with them, so we have that capability. And that's not a barrier to sales. So I would kind of characterize the SIEM integration as really as developing an ecosystem and reducing the friction in enterprise sales, and allowing our customers -- and getting stickier with our customers by being able to integrating with our infrastructure versus someone who is actually out selling our product like our OEM channel or like the bar channel.
Maybe just the final question. Any change that you're seeing with regards to the device deployments, thinking more mobile versus laptop? Any notable wins that may have been skewing more towards mobile versus laptop?
I would say, the biggest point of value for us is in the laptops and desktops. I think, mobile will continue to be part of our strategy. But we're just seeing a lot of security vulnerabilities and issues with those, if you will, the thicker clients that are out there, and our ability to kind of remediate control and implement policies on them.
Your next question comes from the line of Richard Tse with National Bank Financial.
Steve, just wondering if you could maybe give us a bit of color or update on the competitive landscape. Who you're seeing the most to winning against the most? And just wanted some perspective on that.
Sure. So if I kind of step back and look at the folks that are on the endpoints, on the laptop or desktop, and providing some kind of protection from organizations, you really have the traditional, or call it, antivirus vendors. Your next GEN endpoint vendors like a Cylance or a CrowdStrike. And then on the other side, when you move over to the hygiene side, you have everything from a mobile device management company to the standard kind of task management and system management tool. So really we're -- and then there's some new players like Tanium, which is a private company that is really, I would call, the closest it can to what we do. So in every deal, there's no, if you will, one competitor that we run into the most. We have people essentially, either leveraging functionality from various different pieces of the stack to do what we do, or people completely not having anything at all doing what we do. So in some cases, it's we're competing for budget where there is no budget, but we clearly provide a lot of value. Or in other cases where we're doing a better job than components of multiple different products. But again, if I had to pick a main competitor or the one most like us, it would be Tanium, which is a very large private company.
Okay. I guess ,related to that, as part of this ongoing search for a permanent CEO, would you add to that concern how the strategic options here as well?
So, I am interim CEO. With that, some people can read it in that if there's interest in the company, people may approach the company. And if that happens, the board and others will look at that. That's our duty to the shareholders. But I would say the focus for the company right now is executing on its growth strategy, its organic growth strategy and its independent growth strategy and building the momentum.
There are no further questions at this time. I will now turn the call back over to Steve Munford.
Thank you. Just to reiterate, I'm very pleased to be here, be part of the team. I think there's some great capabilities here and look forward to continue to build the momentum and talking to everyone in the next call. Thanks very much.
This concludes today's conference call. You may now disconnect.