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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Absolute Software Corporation's Second 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 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 securities 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 3 at 5:00 p.m. Eastern Time. I would now like to turn the call over now to Christy Wyatt, Chief Executive Officer. Please go ahead.
Good afternoon, and thank you all for joining us for Absolute's Q2 Fiscal 2020 Conference Call. Joining me on this call is Leigh Ramsden, our Interim Chief Financial Officer. The second quarter of 2020 was highlighted by continued double-digit growth in enterprise and strong profitability. Q2 revenue of $25.8 million was up 6% compared to the prior year period. We hit a milestone as our ACV surpassed $100 million for the first time. We exited Q2 with an ACV of $100.3 million, up $5 million or 5% year-over-year. We added 5 new Fortune 500 customers and had several notable customer expansions in the quarter, including Mercy Health, State of Louisiana and Hamilton Health Sciences. Enterprise ACV, which accounts for approximately 60% of our total ACV increased by $2.6 million sequentially, which is a record result in this focused segment. We are working hard to build on this result. And shortly, I'll review a number of product and partner highlights that support future growth. Offsetting the strength in enterprise, to some degree, was a weaker-than-expected result in education. This segment is shrinking as a proportion of our overall business, representing just 31% of ACV. However, the $1.4 million sequential decline in ACV this quarter is somewhat above trend. There were 2 onetime factors that led to this higher-than-trend decline: the realignment of the education sales team and a temporary disruption in buying patterns from a large customer. On the operations side, we have continued our path of strong profitability, generating EBITDA of $6.2 million or 24% of revenue, an increase of 38% from last year. This strong result was driven by our ongoing expense management initiatives, deferred lower spending in IT projects as we transition to more cloud services, positive FX effects and current continued lower-than-budgeted headcount. Within our product teams, we have remained focused on solving critical customer problems to our enterprise software. Our Q2 software release incorporated many new user interface enhancements, making it easier for customers to manage their deployments, including the ability to locate, track and manage missing devices. As a part of our focus on enabling a seamless customer experience, we've partnered with ServiceNow to certify the absolute ITSM connector for ServiceNow, enabling our joint customers to view Absolute's single source of truth asset intelligence for Windows and Mac devices. In Q2, we expanded our customers' ability to persist, self-heal and ensure security control applications are undeletable, including VMware Workspace ONE, VMware Carbon Black, CrowdStrike Falcon and Netcloud, bringing the combined total of healable applications within the Resilience product to 39 applications across 34 ISVs. Also in Q2, we saw our first Persistence as a Service licensee ship their Persistence-enabled application and start to onboard their first customers. We continue to monitor this program carefully. In December, we activated our first data center in the European Union hosted in the public cloud, a significant milestone in our journey to the cloud and an important enabler for access to the EU market more broadly. We remain incredibly focused as we go into Q3 on accelerating customer success across our 12,000 customers. In Q2, we added a digital onboarding program that makes it easier for new customers to onboard more quickly and in return, receive value from their purchase more quickly. As we move into Q3, we have initiatives around the increasing renewal rates across all segments and verticals and as a result, increasing sales capacity for new ACV growth across our sales force. As a part of this initiative, we entered into an agreement with ServiceSource, which they announced this morning. This new program allows us to extend our selling reach for renewals through their team and enables us to free up our selling capacity to accelerate expansions and net new logos. This program operationalization will begin this quarter. From a leadership perspective, since our last call, Dianne Lapierre joined the Absolute team as Chief Information Officer. Dianne is a 20-year veteran and most recently led this function for Raymond James Ltd. Diane is working strategically across Absolute to ensure that we are delivering the best employee experience across productivity, technology and techniques, enabling and empowering our employees. We have also added Charles Blauner as an adviser to the company, where he will join existing company adviser, Art Coviello, sharing their market and industry expertise. Charles Blauner is an internationally recognized expert independent adviser on cyber resiliency, information, security, risk management and data privacy. Charles has had a distinguished career working in the information security industry for over 30 years, 25 years in financial services, including being the Chief Information Security Officer at JPMorgan, Deutsche Bank and most recently, the Global Head of Information Security at Citi. We are thrilled to have him on board. As a company, we have continued to build out the critical capabilities and new skill sets across all levels of the team, including 50 -- including filling 90% of all open selling positions in the sales organization, onboarding a new data science team and filling critical product roles, positioning us well to execute against our initiatives. Looking forward, as the industry benchmark for endpoint Resilience, we see our 500 million-plus Persistence deployment base in our ecosystem as a competitive differentiator. We continue to invest in our Persistence technology and strengthen relationships with our partners and OEMs. We remain very focused on the continued execution of our annual plan, which we believe will bring real value to the top line growth of the company. We are also focusing on go-to-market efforts around optimizing our customer experience and renewals processes, building value for our customers by expanding our Resilience ecosystem and continuing to build out our intelligent and analytics platform and insights. I'll summarize by saying it was a solid quarter for us. We were seeing strong traction in our enterprise business and remained focused on executing our plan. Thanks again for your time. And I'd now like to turn the call over to Leigh to walk through our financial results.
Thanks, Christy, and good afternoon, everyone. I will now discuss our fiscal 2020 second quarter financial results. The second quarter of fiscal 2020 was highlighted by continued double-digit ACV growth in the combined enterprise and government verticals, accompanied by healthy EBITDA margins. Q2 revenue was $25.8 million, up 6% compared to Q2 fiscal 2019. The improvement in revenue is a result of trailing year-over-year growth in the ACV base, which represents the amount of annual recurring revenue under contract at a given point in time. Adjusted EBITDA, which is defined in our press release and MD&A was $6.2 million or 24% of revenue in the second quarter.As a reminder, on July 1, 2019, the company implemented IFRS 16, the new leases accounting standard, which resulted in an increase in Q2 adjusted EBITDA of just under $500,000 or 2% of revenue. Further details outlining the impact of IFRS 16 are included in our financial statements and MD&A. On a pre-IFRS 16 basis, Q2 adjusted EBITDA would have been $5.7 million or 22% of revenue, representing an improvement over $4.5 million or 18% of revenue in the prior year. The improvement in profitability has resulted from continued revenue growth coupled with a stable expense base year-over-year. Compared with the second quarter of fiscal 2019, our expense base reflected lower service guarantee expenses, a nonrecurring $500,000 positive adjustment to R&D investment tax credit accruals, increased marketing program spending and marginally lower overall head count. We anticipate adjusted EBITDA margins to trend downward in the balance of the year, in line with our annual guidance as we continue to fill open head count. This hiring activity will be focused in key areas of the business to support further growth in the enterprise market. Total head count at December 31 was 472 compared to 477 at the end of Q4 and 479 at December 31, 2018. Our gross margins remained steady at 88% in the second quarter compared to 87% in the prior year quarter and are in line with our expectations for the year. Our commercial ACV base was $100.3 million at December 31. This represents an increase of 5% over the prior year and a sequential increase of 1% from the first quarter. In Q2, we acquired ACV from new customers of $1.3 million, an improvement from $1.1 million in the first quarter and $1.0 million in the prior year. Net ACV retention from existing customers was 100% in the second quarter, consistent with the first quarter and down marginally from 101% in the prior year quarter. The enterprise and government portion of the ACV base combined, increased 12% year-over-year and was up 4% sequentially. Our continued strength in these verticals resulted in these customer segments representing 69% of the ACV base at December 31. We are encouraged by the momentum we are seeing in these verticals as the overall mix of our business continues to shift towards these higher-growth segments. The education vertical, which represented 31% of the ACV base at December 31, was down 8% year-over-year and 4% sequentially. This decline is above the trend of the past several quarters. Building on Christy's comments, there were 2 onetime items impacting the quarter's result. Firstly, we realigned resources within our education sales team during the first half of this fiscal year. The majority of this activity has now been completed with staffing at approximately 90% of plan. Secondly, we also saw the typical buying pattern of a larger education customer disrupted due to a temporary issue with a third-party equipment supplier. We believe this issue has now been resolved. Looking at our geographical performance. Our international ACV base was up 23% year-over-year and up 4% sequentially. Performance during the quarter was positively impacted by a particular strength in the Latin American SEDAR. The North American ACV base was up 3% year-over-year and 1% sequentially and accounted for 87% of the total ACV base at December 31. Now moving to cash flow. In the second quarter, we generated cash from operating activities of $2.2 million or $1.8 million prior to the implementation of IFRS 16. This compares to cash from operating activities of $1.9 million in Q2 of fiscal 2019. Our operating cash flows reflect the improvement in EBITDA, offset by working capital changes, which will fluctuate on payment and collection cycles. As a reminder, our operating cash flow was especially strong in the first quarter, primarily as a result of strong collections from the seasonally higher billings we typically experience in the fourth quarter of our fiscal years. We expect our operating cash to trend higher than what we experienced in the second quarter for the remainder of the current fiscal year. Finally, I'd like to shift to our expectations for fiscal 2020. 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 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. We continue to expect adjusted EBITDA to be between 18% and 22% of revenue. This includes the impact of IFRS 16, equaling approximately 2% of revenue. Cash from operating activities is expected to be between 16% and 22% of revenue, also including the impact of IFRS 16. Capital expenditures are expected to be between $3.5 million and $4.0 million. 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 from Canaccord Genuity.
I'll start with the third-party applications that you've persisted. It's an encouraging trend as you get reclassified as more of a platform play. And I'm wondering if there's any way you can quantify the contributions of these types of third-party applications and the Persistence of those have -- is having on your growth in your enterprise and government ACV base or the new customer sales? Anything that you can help link the 2 for us?
Doug, I think it's a great question. So the suite of applications that we were referencing, customers can now easily access those through our Resilience software offering. And I think we've talked on previous calls that about 40% of our ACV base is actually sitting in our low and mid-tier product. So clearly, the opportunity we see is being able to incent more of those customers to be able to move into Resilience with us and part of making that value proposition more attractive is making more of the universe of solutions that they are relying on to be persistable and have that Resilience attribute. So that's at least indicative in terms of why we track so closely the ISV adoption and collaboration and partnerships that we're establishing.
So put another way, I mean, it's showing up in the net retention rate as opposed to exclusively in the new customer sales. Is that fair to say?
Exactly. Yes, I think that's fair to say.
Okay. Education had the tough comp for the 2 reasons that you mentioned. So now with the contract issue in the rearview mirror and the sales realignment done, I mean do you expect this division to get more back-to-stable type comps with the newly aligned sales force? And perhaps you can weave in some discussion of student analytics and some of the other initiatives that you've got to stabilize that albeit shrinking customer base?
Sure. So first of all I'd say, outside of the 2 data points that Leigh touched on, I don't think we've seen anything around the mix or the movement within the education space that gives us reason to believe that the trends are shifting in any significant way. But as you know, we continue to watch it closely. We did ship this past quarter the first set of capabilities around Student Technology Analytics. As you've heard me say before, I think, Student Technology Analytics as a concept maybe started out as a bespoke education product. It's turned into a broader set of intelligence capabilities that I think are more impactful, clearly within education but then also I would say, outside of education. And we're making significant inroads in that space as well. We actually started to staff out our data science team that will be contributing to some of that. We're starting to build out some of the new capabilities. We did do an announcement with one of our school districts in the education space last quarter that did talk about their adoption of Student Technology Analytics. Although, as I said, as an initial set of capabilities, it's still relatively early days with using analytics in the education space.
Okay. And any way you can help us quantify the contract issue? And has that now been signed? And I mean should we expect that to just snap back in terms of the ACV in Q3, I guess?
So the issue without being able to go into too many details, this wasn't an issue of a contract between us and our customer. This had more to do with how they were procuring in the industry. So it's our understanding that this has largely been resolved. And so we're not expecting any more unusual activity. But again, we're watching it closely as we go through the quarter.
Okay. Last question for me. You've mentioned hiring potentially leading to some pressure on margins in the back half of the year. What is it that gives you confidence you'll be able to fill all the open requisitions? Because I mean, not hitting your hiring targets and outperforming on EBITDA as a result has been sort of a nice problem that you've had over the past few quarters, a kind of a recurring theme. So any comment you'd provide there on your ability to attract talent? And I'll pass the line after that.
Sure. So this was actually a great quarter for us in being able to fill our open reqs. As you know, we sort of came into the fiscal year, establishing our annual operating plan and being pretty prescriptive about where we wanted to invest in the business. I think we've made significant inroads in a variety of those areas. I touched on some of them, I think, in critical sales roles, in the data science teams and some of our other product leadership areas. So I think we've made significant inroads in filling most of that capacity. We still have -- clearly, we're still growing, and we still have a handful of areas that we're still looking at. But I think we feel really good about where we're going into the second half of the year.
Your next question comes from the line of Thanos Moschopoulos from BMO Capital Markets.
Regarding the realignment of the education sales team, can you just expand -- was that a question of swapping out some of the individuals on the team? Or is there some change in go-to-market and how the -- your sales approach is structured?
I think we've talked in earlier calls -- and by the way, Thanos, thanks for the question. We've talked in previous calls about some of the turnover we were seeing with -- in some parts of our sales organization. Part of that had to do with strategic shifts. I think some of that had to do with focus on various different skill sets. I think that we've had some fantastic leadership in that space. And I think they've done a great job of being able to fill out those teams with exactly the kind of folks we'd love to see in the building. So as I said, I think we're feeling very good. I think we commented that we're -- have more than 90% of capacity in all of our selling functions, including education. So we feel really good about that.
All right. R&D head count has come down by 10% in the last 6 months. How much of that is a decision to scale back your investments versus maybe a temporary, I guess, realignment, while you reposition the types of resources that you need on the R&D team?
Thanos, it's Leigh. So I don't think we have an intentional reduction in the number of heads but we are experiencing somewhat increased costs on a per head basis as we move forward. So I think you're seeing the reflection of that dynamic.
Okay. And then in terms of, I guess, the areas that you're focusing on hiring through the second half. Are they more concentrated in one area versus another as far as sales and marketing versus R&D?
I don't know that I have a breakout of that for you today, Thanos. I think that we still have a number of open heads in a variety of different areas. But as I said, I think from a selling capacity, the first half of the year in our selling organization was really focused on selling those open reqs, and now we're really focused on how we accelerate their onboarding, along some of the other renewals initiatives that I touched on earlier. I'd say in R&D, we also have a number of open reqs, but we've talked before about how we've held back investment in some areas to be able to accelerate others, especially those around big data and analytics and some of our move to cloud. We made significant inroads in kind of building out and staffing out our cloud team as well. I would say we're -- as I said, we feel very good going into our -- look -- as we look at our sort of annual initiatives going into the second half of the year.
Great. Then finally, on the international business, you mentioned strength in Latin America. Can you elaborate in terms of what verticals you're seeing that in, what countries?
I don't think we have a breakout by country within Latin America. I think we've seen very strong traction with some of our partners, specifically in mid-market. Although, we had some interesting new customer acquisitions around education and federal last quarter. So interestingly enough, so I think that -- I don't know that there is a more detailed breakout of Latin America that I can provide at this time.
[Operator Instructions] Your next question comes from the line of David Kwan from PI Financial.
On the Persistence as a Service, I guess you also got your first customer live and out in the market there. Can you talk about the revenue model for that?
So I don't think we've broken out the revenue model in detail. As we said, this first initial customer was really around sort of establishing the technical model. I don't know that -- it's certainly not at scale at this point in time. But the best analogy I can sort of draw is you shouldn't envision it as being an enterprise licensing model. The way that you see it in our other enterprise licensing software products. You should think of it more as a sort of transaction service, almost microtransaction service. So as you envision that you have devices with any number of different agents running on them, if some number of those are activated and have some Persistence capabilities, then they'd be calling back into us uniquely and independently on an application basis. So that's probably the best description of what we're doing that I can provide but I don't think we've broken out a separate revenue model for it.
Okay. Okay. And then on the data center that you have in the EU, was it something where it was -- I guess, preventing you guys from winning materially more business in the EU? And now that you have it there, that we could see even stronger growth, that's kind of what the dynamic is there?
I think, at least in my time here at Absolute, I think our investment in EU has been quite localized, and we've been going in with specific partners especially around the U.K. area. But we have a fair number of customers in a variety of different parts of the EU. I wouldn't say that we've been seeing a lot of friction. But I do think that this does open up a whole new level of opportunity for us. I think one of the things you have to know going into the EU with any sort of data product is that GDPR and privacy and compliance is a big part of the conversation and we wanted to make sure that both with our security certifications as well as our privacy architecture, we had the ability to be able to meet that in a really scalable way. But I think it probably more -- it speaks to our strategy more around our architecture, our core architecture, than it does to just uniquely an EU strategy. I think we see this move to the cloud as being a way that enables us to reach more customers in a variety of different data configurations you could envision over time. Some customers are very comfortable to public cloud, some customers would like their data closer to home in a private cloud. And so this is I think, a much more fundamental architectural shift that we're working on as we go, again, closer towards our vision of Absolute as the data platform.
All right. On the hiring plans, I guess, previously talking about on especially, on the R&D side. Can you talk about, I guess, the challenges that you're facing? I assume you're probably seeing some attrition in here in Vancouver, given how tight the labor market is. Are you looking to move more of that work over to Vietnam? I'm assuming that's maybe a better market for you guys, obviously, lower cost as well.
I think we're very happy with our investment in Vietnam. I think we're very happy with the stability and the productivity of that team. We find them to be an incredibly innovative team. I think across all of our major hiring centers, San Jose, Austin, Vancouver, all of these are increasingly difficult markets to be attracting talent within. That said, I think we've done a reasonably good job of giving, especially engineers, a platform, something to get excited about something interesting to work on. I don't think we have any major move in the short-term future to move more development capacity overseas. But it's always -- keeping the right balance is always something we're sort of keeping an eye on. Our primary development facility clearly remains in Vancouver.
Okay. Just on the government side, the ACV growth has been trending down here over the last year, I think, just a bit under 10% this quarter. Can you talk about the dynamic there? And whether we could see that growth to hopefully rebounding into the mid-teens maybe?
David, so a lot of our sales team is -- the education sales team also works on state and local government, which is a large percentage of the government number that we report. And I think the dynamic that we explained on the education side played out somewhat on the government side as well.
So that realignment of the sales team impacted the government side?
Correct.
So where we had gaps and we had sales reps or sales leaders that were covering multiple territories, if those territories had state and local accounts as well as education accounts, we saw some of the effect on that as well.
So hopefully, we should see a rebound in the coming quarters here then, I guess, hopefully?
We believe those teams are well staffed and well prepared as they go into the second half of the year.
Okay. Perfect. I guess, one last question just on the education side, obviously, a tough quarter for you guys. I think it was a few quarters back, you had a nice ELA win there. Can you talk about interest from customers on dopping site-wide licenses because obviously, that could have a fairly significant impact on the ACV and obviously, the retention?
So I don't think we've seen any waning of interest in site licenses. Clearly, site licenses being a longer sales cycle would have some effect of the same resource tensions that we talked about a little bit earlier. I think we are spending a lot of time right now taking a look at sort of go-to-market, both sort of the licensing efficiency of how we attach with new customers as well as sort of upsell and expand. Part of this is, again, as we are constantly looking at our selling model and looking at how we accelerate, and then also, part of this is a part of our new thinking and in our partnership with ServiceSource and how we think about freeing up more of our valuable selling capacity to focus on new ACV acceleration as opposed to spending more of that capacity on sort of renewals. So I don't think we've seen any change in the interest level. I think where our attention is more focused is on the efficiency and how we accelerate that process for our selling teams.
There are no further questions at this time. I will turn the call back over to the presenters.
All right. Thank you. I want to thank you all for joining our call today. We look forward to our next update following Q3. Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.