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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Absolute Software Corporation's Second Quarter Fiscal 2019 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 statement 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, Monday, February 4, 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 on my first conference call as the CEO of Absolute. Before I get started, I would like to share what most excited me about Absolute. I've had the honor of working in Silicon Valley for over 2 decades with companies such as Apple, Citigroup, Motorola, Good Technology, Palm, Sun and most recently Dtex Systems. I also had the privilege of working with great technology companies, such as Silicon Labs, Quotient and previously Centrify as an Independent Director. During my career, I had seen firsthand the positive impact of technology across the enterprise. And the resulting acceleration of investments in security teams as they respond to the rapidly changing landscape. However, despite this increase in investment in security, many companies struggle as the extensive security capabilities they deploy fail to protect the enterprise when they're disabled by end users, misconfigured, outdated or modified by that actors. From this experience, I see a significant growth opportunity for Absolute, as the only provider of our patents and cross-vendor Persistence platform embedded in the bios of hundreds of millions of devices in the market today. After just 60 days on the job, I'm happy to say that the strength of my conviction and the opportunity is growing. I've spent much of my time in my first 2 months at Absolute in discussion with many customers as well as employees and our strategic OEM partners. Many of these customers have affirmed for me the important role that Absolute plays in securing their environments and their data. Our unique ability to get Persistence, visibility and control to their endpoints, making existing endpoint controls more resilient and to provide intelligence about what is happening across their environment, ensures that they're maximizing the valuable investments that they're making in data security. Now let's talk about our Q2 performance.Improving execution in the field drove solid results this quarter delivering $24.4 million in total revenue, up 5% over Q2 last year. Our success comes from both new and existing customers, leveraging our premium product tiers and our student analytics capabilities. At the same time, we've continued to focus on investing in our business efficiently, which has resulted in our expected EBITDA margin expanding to 18% of revenue as opposed to 10% a year ago. Absolute's growth strategy is to deliver products that address the dark endpoint by leveraging our unique persistence and resilience capabilities to drive value for our strategic OEM partners and to focus our skilled execution on the customers and market segments that most strongly resonate with our value proposition. With respect to product delivery, over the past year, our R&D efforts have focused on key new capabilities within the Absolute 7 platform, like which the ability to remotely execute scripts from the endpoint and Application Persistence the ability to self-heal other third-party agents within our resilient data systems. We have continued to deliver additional features around these offerings, such as a growing library of new scripts and a broadening ecosystem of third-party solutions persisted through resilience. We continue to see strong customer adoption of these resilient features.With our OEM partners, we remain focused on the enablement of Persistence and resilience across their portfolios and driving value in our combined go-to-market efforts. During Q2, we announced a new strategic partnership with VAIO, where we have integrated our patented Absolute Persistence capabilities within the new VAIO Pro PA and VAIO A12 laptops. We also continued to invest in our strategic partnerships with Dell, HP and Lenovo. This quarter, we integrated Application Persistence with the Dell Data Guardian and Dell Endpoint Security Suite. We saw continued momentum across the HP portfolio as well as with Lenovo and our ThinkShield Endpoint Security portfolio launch. Lenovo ThinkShield improved their newly integrated Lenovo patch solution that adds resilience and intelligence to the Lenovo SCCM patching application.In previous calls, the team shared with you our strategy for increasing the return on our go-to-market investments by focusing on segments where we feel our solution is particularly strong, such as health care, financial services, professional services and education. We also remain focused on growing our international business. As a result of our focused plan, our business is becoming increasingly well diversified. This can be seen in the mix of this quarter's ACV, 65% of which came from enterprise and government customers and 35% from education. We were pleased to see our education business growing 1% versus last quarter and included a significant win with one of the top U.S. school districts. This customer educates several thousand students and needed to have both visibility and control of their entire endpoint to stay as well as access to valuable intelligence and insights about asset usage and trends in the school district in order to help assess the impact of the technology investments they're making with students and learnings. With Absolute 7 Resilience and Student Technology Analytics, we were able to deliver against both the visibility and control requirements for this customer as well as the critical intelligence platform to deliver rich insights. Looking forward, while my thinking will evolve in the coming months, I'm certain that we will remain focused on our execution across these 3 areas, delivering full solutions that address the challenges with the dark endpoint through Persistence, Resilience and Intelligence, working closely with our OEM partners to solve customer problems and remaining committed to efficient execution. In summary, this has been a strong quarter for the company, and I remain excited about joining Absolute and having the opportunity to define the next chapter of the company's evolution.With that, I'll now turn the call over to Errol, who will review our second quarter results.
Thanks, Christy, and good afternoon, everyone. I'll now walk through our Q2 financial results, which were headlined by double-digit growth in the enterprise and government verticals, improved performance in the education vertical and continuing adjusted EBITDA margin expansion.Q2 total revenue of $24.4 million grew 5% year-over-year with commercial recurring revenue up 6% over the prior year. The growth in recurring revenue reflects the recent growth in our Commercial ACV Base and improved sales linearity through the quarter.Our Commercial ACV Base at December 31 was $95.3 million, representing an increase of 6% year-over-year and an increase of 2% over September 30. The $2.2 million sequential increase is the largest quarterly increase that we've seen in 10 quarters. Existing customer ACV retention during the quarter was 101% compared to 100% in Q2 of fiscal '18. ACV from new customers in Q2 this year was $1 million, relatively flat with $1.1 million in Q2 of last year. As discussed on previous calls, our most common selling motion is a land-and-expand model, where new customer wins start with the small deployment and expand over time. Therefore, the new customer ACV in the quarter is representative of a more meaningful revenue opportunity over time.The Enterprise portion of the ACV Base, which represented 53% of the base at December 31, increased 12% year-over-year and 3% sequentially. The growth in enterprise continues to be strongest in health care, professional services and financial services markets. The government vertical, which includes state, local and federal government customers, represented 12% of the ACV Base at December 31 and increased by 17% year-over-year and by 4% sequentially. Together, the Enterprise and government verticals represent 65% of the ACV Base and are up a combined 13% year-over-year.We were also very pleased with the performance of our education business in the quarter. As Christy mentioned, in Q2, we closed our first site license agreement with a large U.S. school district. This site license with an annual value north of $1 million provides the district with the ability to track, secure and collect usage analytics over roughly 300,000 laptop, desktop and tablet computers. We think there is a good opportunity for more deals of this nature over time, where an existing or new customer can have full access to our education-focused solutions at a compelling cost per endpoint. We can see the impact of this site license in our Q2 results, where education ACV grew 1% sequentially, the first sequential increase in education in 8 quarters. On a year-over-year basis, education was down 4% versus negative 8% and negative 7% reported in the previous 2 quarters, respectively. Education represented 35% of the December 31 ACV Base.Looking now at performance by geography. Our North American ACV Base was up 6% year-over-year and up 2% sequentially. Internationally, the ACV Base was up 15% year-over-year and up 4% sequentially, with international growth continuing to be strongest in the European region. North American customers continue to account for 89% of the ACV Base.I'll now turn to our expenditures in the quarter. Q2 adjusted operating expenses, the calculation of which is detailed in our MD&A and press release, were $20 million, down 4% from $20.8 million in the prior year. The decrease was driven by lower headcount across all departments, lower marketing program spend and a weaker Canadian dollar. However, we did experience a year-over-year increase in G&A expense, with the increase being attributable to onetime expenses associated with the CEO transition as well as to nonrecurring professional fees. We expect G&A expenses to return to recent historical levels going forward.Total headcount at December 31 was 479 compared to 495 at June 30 and 504 at December 31, 2017.Adjusted EBITDA for Q2 was $4.5 million or 18% of revenue, up 88% from $2.4 million or 10% of revenue in Q2 of fiscal '18. Q2 operating income was $2.4 million or 10% of revenue, up from $1.2 million or 5% of revenue in Q2 of fiscal '18.The improvement in profitability reflects our continuing eye on cost control as we pursue accelerated revenue growth.Operating cash flow in Q2 was $1.9 million compared to $3.2 million in Q2 of last year. The decrease in operating cash flow was attributable to lower billings in the quarter related to the shorter average prepaid contract terms as well as to working capital fluctuations. For the year-to-date period of fiscal 2019, cash from operating activities was $5.9 million, up from $5.3 million in the prior year period. Looking now at our expectations for the remainder of fiscal 2019, we expect fiscal '19 total revenue to be between $96 million and $99 million. We are increasing our expectations for adjusted EBITDA from between 14% and 17% of revenue to between 16% and 19% of revenue. We are maintaining our expectations for cash from operations of between 10% and 14% of revenue, and we expect the capital expenditures for the year of 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 Doug Taylor with Canaccord Genuity.
Welcome, Christy. I'll start with a question for you up here first couple of months there at Absolute. The company does have a bit of momentum going, particularly on the bottom line right now. But I love your perspective in this form about whether you potentially see opportunities for -- or areas for improvement with respect to Absolute strategy here, be that go-to-market, product or otherwise?
Doug, nice to meet you, and that's a great question. I think that as I laid out in my comments, our strategy is 3 components, and one of those is clearly focusing on efficiency, and so you shouldn't expect to see that change. I think the journey for me over the past 2 months has really been taking that customer view, understanding what that implies in terms of gaps in our products or how we're functioning as a company and then building a plan around that. I'd say we're still in the early days on that, so my thinking will continue to evolve. But the bottom line is I'm very impressed with both the technical capability we're finding here and go-to-market execution that we have at Absolute. So I guess, my headline would be, for now, at least, no sudden changes, we're going to continue to execute the plan.
That's very helpful. This is a second consecutive quarter where you raised EBITDA guidance. I know you're -- you just mentioned that efficiency is certainly a focus item. Last quarter, you talked a little bit, Errol, about being behind on your -- some of your hiring targets. Is that same phenomenon still at work here? And do you expect to catch up with some of those? Or is there -- have you made some changes to your projected cost structure, which will result in higher sustained margins throughout the forecast?
Sure. So the change in our EBITDA guidance was really related to 2 things. I mean, one being, just to look back at our experience over the first half of the year and then look forward, of course, and there are 2 components to that. So one, as you pointed out, Doug, is certainly headcount. We exited the quarter with 479 employees, and our plan for the year, which is -- it has been consistent through most of the year, is roughly 500, although it remains to be seen whether we'll fill the entire 500. I mean, it's pretty rare that we're fully staffed. There's always a certain amount of turnover in the organization. But certainly, having had open headcount for the first half of the year, and I would say, throughout the organization, I think, that everyone is just being very, very thoughtful about when to open up budgeted headcount. Let's say, we're being a lot more prudent about it than we might have been in the past. So I do expect we'll end the year with the headcount slightly below that budgeted amount of 500. And then, the second piece of it, of course, is the Canadian dollar, where it's -- with a weaker Canadian dollar in the first half is -- and then projecting that to continue through the year has contributed to about 2% EBITDA.
Okay. I'd like to just talk a little bit more about the large sale on the education market. You provided a little bit of extra color there. But I just want to understand, I mean, was this state license completed late in the quarter? Or was there a significant amount included in the Q2 results that act to offset some declines in some other parts of the education vertical? Just helping to get a better idea of what the underlying growth rate or decline rate is for that business, would be helpful.
Sure. So that deal was concluded fairly late in the quarter. It's obviously something we've been working on for a very long time, but it was signed and booked fairly late in the quarter, so it didn't have much of an impact on our recorded revenue.
But it did show up in the AC...
You can ask the question?
Yes. So I mean, it was consistent with the ACV growth ticking up higher, while the revenue growth is lagging. Just wanted to be clear that, that was what was going on.
Exactly.
Your next question is from Thanos Moschopoulos with BMO Capital Markets.
Christy, congrats on joining Absolute. Maybe just a question on the billings. I realize it's becoming less relevant to the metrics, but any particular reason for the year-over-year decline, was that just tough comps based on the [indiscernible] new opportunity?
Yes. A couple of things, Thanos. So one was just year-over-year -- exactly as you pointed out, year-over-year comp. The second piece is within the Enterprise, shortening contract term contributed to that as well. So the billings were lighter year-over-year in Q2. Looking forward into the back half of the year though we do see our expiration base is higher. So we should see higher billings in the second half of the year.
Then following up on the large education deal. Just curious, given that you already have so many large U.S. school districts, was there any particular reason as to why that one had not been a customer previously? And how instrumental was student analytics in procuring that contract?
Sure. Maybe I'll start off on this one, Christy. That actually -- that wasn't existing customer, and so we've got very good coverage over most in terms of names anyways for most of the largest school districts in the U.S., but it's actually very rare for us to cover all of the devices within each school district. So we see a lot of opportunity within our installed base to do similar licensing plays, i.e. site licenses as we did in this particular deal.
Okay. Can you comment on, I mean...
To sort of touch on the student, sorry.
Sorry, go ahead.
I was going to comment on your second part of your question, which was around the relevant of student analytics. I think that the mix of this deal was actually -- speaks to kind of the mix that we're seeing across, whereas the kind of usage, the customer -- the use cases that customers are looking for are less about -- sort of retrieving devices after the point of being lost and more about getting rich insights out of the states to try to understand what's going on across the Enterprise or across the state. And in this particular case, trying to get an understanding of the impact of technology on student learning. And so I think the Student Technology Analytics is an important part of our solution to that customer.
Okay, great. Maybe just a question on government. You've talked on recent calls about some of the trends there. But anything in particular this quarter that stood out or in terms of the pipeline that you're seeing in a government space that's developing -- what are [indiscernible] driving that growth?
Sure. In government, I mean, it really -- our success more recently in government has been across all tiers, state, local as well as in federal government. And I mean, the use cases are very similar across all 3. So there's nothing I could call out that might be unique or any of those accelerating any faster than other segments of government.
Okay. So it sounds like pretty broad-based strength across a number of different areas?
That's correct.
Your next question is from Kevin Krishnaratne with Paradigm Capital.
Welcome Christy. First question for you, Christy. Just wanted to get your thoughts on the competitive landscape? What your feel is for Absolute's offerings and solutions market? I know it is unique. They're not necessarily a direct competitor, but could you just talk about the positioning of Absolute versus some of the other end points entering companies Tanium, Carbon Black. Are you seeing opportunities or partnerships instances where clients may be persisting those applications? Just would love to hear your thoughts on the competitive positioning and the technology that you see coming in.
Kevin, great question. So when I think of the companies like Tanium and Carbon Black, I don't necessarily perceive them as competitors. When I look at what we do uniquely, we have a very broad platform for making any critical security capability persistent and resilient and through our resilience product line. And I think, that's one of the more interesting parts of the portfolio for me as I sort of came in looking at the company. So when I look at the category of endpoint capabilities, it's very crowded. It's not unusual for an organization to have 5, 10, 15 plus endpoint engines. And we estimate that a large percentage of them aren't working at any point in time because they collide with one another, you just delete them, they remove them and they crash over time. So the security of the Enterprise degrades over a period of time. I think this is where we can help many of those vendors by partnering with them to actually make them more robust or a part of the immune system or the endpoint resilience of the overall device. And so when I look at that community, I think, there's a lot we can do to help the customer get better value out of the investment they're making on endpoint controls.
I appreciate those comments, Christy. It does kind of lead into the second question may be more for Errol. Looking back over the past year or 2 with Application Persistence being part of the offering for some time, I'm wondering how the trends are looking? If we've got -- what your feel is for the number of -- for the customers that are taking Application Persistence? How many applications are they persisting? Anything of note on some of the more recent ACV wins with new customers at least with regards to the uptake of those kind of Application Persistence, EDD is a higher tier type services?
Sure, Kevin. So we don't provide hard metrics on the number of units deployed, but what I can tell you is that we have -- we've continued to build out a number of applications where we have productized Persistence. I think that we've got within the product itself somewhere close to 20 applications now, which cover the whole spend from things like VPN, encryption, VLP, et cetera. And on top of that, we've also got professional services capabilities where we can persist pretty much any application on the endpoint. So the counts on both of those continue to go up, and it's really all of those are customer driven, of course, but I don't have a hard stat for you in terms of the number, but it's certainly heading in the right direction.
Great. A final one for me. Can you just talk a little bit more about the device mix and some of the new ACV? Any changes? They're clearly a predominantly a laptop first solution. But is that moving towards mobile if you're looking at say, some of the brand-new wins? Or is it still relatively similar to what you might be seeing in the mix base overall?
Sure, yes. So it's still predominantly laptop. The one trend that we're seeing is actually we're seeing more and more desktops coming in as well. So not so much mobile devices, but certainly, the mix between laptops and desktops is we're just seeing a lot more desktops coming in.
Your next question is from David Kwan with PI Financial.
Just on the education side, are you talking about that large win that you guys had signed? I know there's obviously a bunch of moving parts and whatnot. But can you talk about to what extent you are covering all the devices versus a certain number of -- and then obviously, including the student-teacher analytics? How much that -- did it at least keep the kind of the annual contract value you're seeing for this particular customer were actually able to increase covering more devices and restoring in the SGA.
David, thanks. It's a good question, David. And it certainly increased the ACV for this customer. And so really from the customer standpoint, what they were able to achieve the functionality was dramatically reduce cost per endpoint and this enabled them to deploy across all their endpoints. So the aggregate ACV for the customer increased substantially through this deal.
Can you quantify that?
In rough numbers, I would say, it went up by 5 or 6x -- 5 or 6x what they'd started at.
Okay. Quite significant.
Yes. Quite significant, yes.
In budget, I guess, wasn't an issue here?
Well, budget was an issue. And I commented earlier that this deal took a long time to put together. And one of the biggest changes from the customer standpoint is, it does move into an operating budget as compared to traditional education buying, which is coming out of the capital budget. So that was an obstacle that we had to overcome, but it was certainly something that impacted the length of the sales cycle.
Is this something that you hopefully should be able to leverage into convincing some of your other existing and potential new customers on the education side?
I think it is. I mean, I think that this is a very strong validation of both the site licensing model as well as Student Technology Analytics. It's often said a single data point does not constitute a trend, but we certainly have a pipeline that includes several other deals that are very comparable to this one.
Do you think kind of going forward looking at the trajectory of the education business at least, I guess, sequential basis, you should be able to kind of keep the ACV flat and maybe growing a bit for albeit on a year-over-year basis still might see a couple more down quarter?
Well, I think, that -- yes, that's exactly it, right? The design goal is to get education to at least flat and ideally growing. And I think that we're very encouraged by this deal. We're very encouraged by the conversations that we're having with our customers as well. And I would say that the only caution I would throw out there is just how -- it may take some time just to develop a regular cadence of closing these types of deals.
No problem, okay. And just last question. The government has been growing at a pretty good clip. The Enterprise has been kind of stuck in the low-double digit growth on a year-over-year basis. What do you guys need to do there, I guess, to really get it at least into the mid-teens, close to the 20% which I know you guys are targeting?
David, so I think there's a couple of different things. We've been focused very much on sales execution and remembering, our path to market is very collaborative with our OEM vendors. And so focusing on optimizing a sales model that allows us to do that land and expand that Errol talked about, with the OEM partner and then continue to grow value over time, both with the customer and with the OEM partner. So I think continuing to focus on the sales model and making sure that, that remains in balance is really important for us. I think, the second piece is on the product side. I think that there's -- of the Resilience conversation and some of the key components and some pieces of that, that are just approaching readiness right now that are -- that would be more applicable in those larger enterprise environments and as opposed to that mid-market. And I know historically we've talked a lot about our success in mid-market. And so I think this is an evolution that we're on, the product test is with the customer. And so it's got to be driven by product first and building a sales model around it.
Do you think -- Christy, do you think it's achievable, that you guys could get to somewhere may be in the mid-teen exiting this year? Is that something more of the 2020 story?
I think at least on my side, it's a little too early for me to tell to be able to feel comfortable giving that sort of an outlook at this moment.
Your next question is from Richard Tse with National Bank Financial.
I just have one question. You've been there for 60 days now. I wasn't clear whether you sort of complete in terms of your evaluation to pursue the existing strategy? Are you still in that process? And should we expect to see potential changes after that full evaluation?
I would say that not only -- is it not a complete evaluation, but we're always going to be a work in progress. And so I'm trying to be as transparent about what I've seen in the first 60 days as I possibly can. I think -- here's the things I know for certain. And the pass forward for us is through focus, so I think that there's many opportunities for us as a platform. It's about narrowing where we're going to point our execution, and I've highlighted the themes of that around Persistence, Resilience and Intelligence. And there's maybe other things that are also interesting, but may be slightly outside the core of what we're really good at. That's what customers tells us that they're looking to us for. That's where they see our value and that's what we're uniquely good at. So how -- what are the missing pieces from here to there? And how do we talk our course through there, I think is still a work in progress.
At this point, would you be able to tell whether the challenges are on the [up ] side? Or is it on a product side?
I don't know that any headline has emerged in my first 60 days. I think we've been talking pretty openly over the past 12 to 18 months about the products journey we've been on with Absolute 7 and building out some of these newer capabilities, and so that's clearly a work in progress. And that represents -- there's more work to be done on that piece. I think on a go-to-market side, as I highlighted in my comments, we have very strong execution capabilities within our go-to-market team. I think that there's an opportunity to continue to work with our OEM partners and collaborate and we've seen some of those in the headlines for this quarter, I would like to see more of that as well. So I don't think we're overly heavily weighted on one side or the other. I think that there's opportunities all around the table.
This concludes the Q&A portion of the call. I'd now like to turn it back to you, Christy Wyatt for any closing remarks.
Thank you, and thank you, everyone, for joining the call this afternoon. I look forward to updating you at the end of next quarter.
This concludes today's conference call. You may now disconnect.