© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Absolute Software Corporation's Third Quarter Fiscal 2018 Conference Call. [Operator Instructions]Before beginning its formal result -- 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 the actual results to differ materially from those projected in those forward-looking statements.Any forward-looking statements contained in today's conference call are made as of the date here for, 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 and otherwise, except for maybe 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 the quarterly MD&A and quarterly financial statements, both of which are available on Absolute's website or SEDAR.I'd like to remind everyone that this conference call is being recorded today, Monday, May 7, at 5 p.m. Eastern TimeI would now like to turn the call over to Mr. Steve Munford, interim Chief Executive Officer. Please go ahead, sir.
Thank you, operator, and good afternoon, everyone. Welcome to our Q3 2018 conference call. Joining me is Errol Olsen, our Chief Financial Officer.During the quarter, I met with customers, partners, industry analysts and my Absolute colleagues, which reinforced my notion that we have a tremendous opportunity in front of us. More specifically, distributed organizations are increasingly challenged to maintain the security on their employees' computers to protect themselves from costly security and data breaches.Data regulations such as HIPAA, which covers U.S. health care organizations, or GDPR, which protects European residents, adds urgency for companies to protect data because of the daunting fines. These regulations require organizations to report data breaches from loss or stolen devices once they can verify the devices have been protected and that data has not been accessed. For a relatively small investment, these companies can implement Absolute's platform and immediately be protected against data breaches that can result in both significant fines and reputational damage.Maintaining the security and integrity of a laptop for distributor organization is increasingly becoming a challenge. At Absolute, we provide a unique and compelling platform that tracks and maintains the security hygiene of laptops regardless of whether these devices are inside or outside the corporate network. No other company does -- with our differentiated platform and ability to solve the challenges of what we refer to as the dark endpoint. The key to improving execution at Absolute is to focus our resources on the right markets with the appropriate level of investments.During the quarter, we analyzed our sales performance and identified those market segments that experience strong demand. That's where we plan to focus moving forward.There are 4 key markets that are the crux of our strategy.One, health care. Absolute's platform quickly enables companies to be in compliance with key provisions of HIPAA regulation. Customers tell us, we provide a strong value proposition. And while health care represents approximately 40% of our enterprise business, we know we are highly underpenetrated and can really grow in this vertical.Second, distributed enterprises. These are global companies with large numbers of distributed knowledge workers in areas such as accounting, consulting, financial services and law firms. Not surprisingly, these workers often hold large amounts of customers' data on their laptops. The companies also face staggering fines and reputational damage if any laptop experiences a data breach. These organizations are becoming more aware that they must deploy the most resilient employee solution to secure their devices, client data across their distributed mobile workforce. Once again, Absolute provides a strong value proposition that can be quickly implemented.Three, mid-market organizations. These organizations have all the data and operational security challenges of large enterprises but limited IT security teams to enforce them. They need a comprehensive solution that helps them automate endpoint security and compliance while closing the gap between office, IT and security operations. Absolute's cloud-based platforms enable them to automate security hygiene and eliminate blind spots across their endpoints. When serving this market, we leverage our inside sales team or channel to increase the velocity of our pipeline and reduce sales cycles.Four, the European region. Our team is increasingly effective at closing opportunities across the 3 previously highlighted segments in North America. We also see strong growth in EMEA countries, triggered by the impending GDPR data regulations deadline. As companies begin to fully understand the ramifications of noncompliance with GDPR, we expect to drive an increased focus on closing the gaps in employee security and stronger demand for Absolute solutions.It is important to note that we are not making major pivots or investment changes in the organization but rather optimizing our current spend and focus in order to bolster those areas where we are seeing repeatable patterns of success. We will focus our activities in areas where we are most productive today while maintaining an appropriate level of effort in those areas that should provide longer-term payoffs.Before I turn it over to Errol for a detailed look at this quarter's financial results, there are a few items I'd like to note. Absolute's enterprise business, which accounts for 52% of total ACV, grew over 9% year-over-year. Customer retention remains strong and we continue to win new customers across a variety of industries while expanding our business with existing accounts. Consistent with my prior comments, success in mid-market and EMEA were significant contributions to this quarter's results while public sector segment ACV of $43 million was down $400,000 from last quarter.The headwind that has existed for a number of quarters in education market remains. However, we look to counter this trend by evolving our offering in education market in order to deliver increasing value that is unique customer segment and by growing core state and local government business.Consistent with these plans, we launched our student teacher analytics offering in February. And while early days, the initial interest appears strong. It may take a couple of quarters to see the effect of this move.Finally, my analysis of the operations confirm the strength of our technology platform and our ability to innovate. I like to share one example. We introduced Application Persistence, an industry-leading first just over a year ago. Today, this unique feature is being actively used by 40% of our top customers and is providing these customers with a valuable layer of security and functionality that no other vendor offers.With that, I'd like to turn the call over to Errol.
Thanks, Steve. Good afternoon, everyone. Our Q3 results were headlined by continuing growth in our enterprise business, driven by existing customer expansions as our customers increasingly recognize the value of our newest features when deployed across their entire device populations.Q3 commercial recurring revenue of $22.2 million grew 3% year-over-year, reflecting increases in our commercial ACV base. Total revenue of $23.3 million grew 1% year-over-year as growth in recurring revenue was partially offset by a $400,000 year-over-year decline in nonrecurring and other revenue.Our commercial ACV base was $90.3 million at March 31, representing an increase of 2% over March 31 of last year. Sequentially, the ACV base was up 1% from December 31, reflecting a 100% existing customer retention rate and $800,000 of new customer ACV.The enterprise portion of the ACV base, which represented 52% of the base at March 31, increased 9% year-over-year and 3% sequentially. The growth during the quarter was driven primarily from 3 areas: continuing acceleration with our mid-market sales teams, significant expansions in a number of large health care and professional services organizations and an exceptionally strong performance by our EMEA team. As mentioned previously, customer expansions contributed to the enterprise growth in the quarter. These expansions are associated with the adoption of product features introduced over the past year, including Application Persistence, Absolute Reach and Endpoint Data Discovery. As Steve mentioned, Application Persistence has already been actively deployed across approximately 40% of our top accounts.The public-sector ACV base, which includes both education and government customers, decreased by $1.9 million in Q3 of fiscal '17 and was down $400,000 sequentially. This decrease was attributable to the North American K-12 vertical while the government portion of our business continues to grow. As we've discussed previously, our historic value proposition in the education market, which focused on device recovery, has been negatively impacted by declining device prices. With the recent launch of enhanced Student Technology Analytics, or STA, the value proposition of our solution is extended to enabling administrators and CIOs to understand the learning impact and the ROI of school and technology investments. Initial customer interest in STA appears strong. However, we expect it may take some time to understand the full impact of this feature.At March 31, public sector customers accounted for 48% of the commercial ACV base, with the public sector being further broken down into 36% education and 12% government customers.Looking now at performance by geography. Our North American ACV base was up 2% year-over-year and was flat sequentially. Internationally, the ACV base was up 5% year-over-year and was up 6% sequentially. International customers now account for 11% of our commercial ACV base.Turning to expenditures. Total Q3 adjusted operating expenses, the calculation of which is detailed in our MDA and press release, were $20.9 million, relatively flat from $20.7 million in the prior year. Within the cost portfolio, our sales and marketing costs were down year-over-year on lower marketing, severance and professional fees while research and development was up year-over-year, primarily due to the fact that the prior year included a $1 million positive adjustment to investment tax credit accruals. Total headcount at March 31 was 501 compared to 486 at March 31 of 2017.Adjusted EBITDA for Q3 was $2.4 million or 10% of revenue, consistent with $2.3 million, also 10% of revenue in Q3 of last year. Operating cash flow in Q3 was $2.3 million compared to operating cash flow of $700,000 last year after adjusting for onetime severance payments in that period.Looking at our expectations for the remainder of the year. We have narrowed our revenue guidance range to $93 million to $94 million compared to the previous range of $93 million to $95 million. We are maintaining our expectation for adjusted EBITDA margins of 8% to 10% of revenue, and we are narrowing our expectation for cash from operating activities to 9% to 12% of revenue compared to our previous expectation of 8% to 12% of revenue. We continue to expect capital expenditures for the year of between $3 million and $3.5 million.This concludes our prepared remarks for today. Operator, please open up the call for questions.
[Operator Instructions] Our first question comes from the line of Blair Abernethy of Industrial Alliance Securities.
Steve, I just wondered if you could give us a little more color on the GDPR assessment service that you've put out there. Is this -- can you just tell us how you're getting this to market at this stage? Is it just with existing customers? Or is this opening up some new doors for you?
I mean, overall, we think GDPR is a great opportunity for the company. We're finding many of our either customers or new accounts that we get into, they're still learning that happens -- that are going through. It's a new regulation. And what we can do is we can come into the organization and deploy or activate our agents and do an exercise where we can identify if they have sensitive data or regulated data on the devices and show them how they can both mitigate any negative implication if those devices get lost or talk to them about kind of procedures and policies that they can implement to reduce amount of data going down there. So it's through our traditional sales force, it's through our traditional channel and it's leveraging our existing professional services. So it's really just a kind of package offering that we introduce, again, based on demand and the conversations with customers.
Okay, great. And you didn't mention Absolute Reach in your prepared remarks. I want to see if you can give us a little more color on how that's working in the market.
Sure. And I just want to add one other point to your previous question, which is that service is really not designed to be a big revenue service. It's more to allow discovery, build a relationship and eventually lead to a product sale, just to be clear. Yes, on Absolute Reach, we're really pleased with the level of adoption we're seeing especially within our larger customers. I would say, the product is going through a couple of iterations where we add more capabilities to it and make it, I would say, easier to use for the larger portion of the market. The technology is really, really solid. And I would tell you, we put out there a -- sorry, a tool that can be used by, I would say, power users. And really, now we're focused on making it a little more accessible to further -- broader set of customers. And we think with that, we'll see even stronger adoption.
Okay. And then just over on the education market side. I think last quarter you talked a little bit about how that -- you're working to mitigate the decline and that you thought you could see it stabilize soon. I guess, what's your sense now? Are we a couple of quarters away? Or when do you think or hope to have that at least arrest the decline in education market?
Yes. So the overall, just to echo some of the points that Errol made. One, education is -- we're not seeing necessarily a decline in the accounts or seat. We're seeing more of a pressure on the price per seat as the device goes down in price. We introduced student-teacher analytics. I would call that a version 1. We saw a lot of strong interest, people trialing it. And -- but I would say, we're a couple of quarters away from really seeing the impact of that on the -- on stabilizing the education market. So we're hopeful, but I think to be realistic and until we see a large number of customers beginning to adopt it and become very enthusiastic about it, it's still early days to say whether that is the piece that will stop to decline. We also are focused on a number of other sales activity. One is we traditionally haven't sold large site licenses into our K-12 business, and we think there's an opportunity to go into there and get broader within our existing customer base because most of our customers only use us across a portion of their state. So we think there's some things that we can do to kind of perhaps by going over the entire site, we may be lowering the price per seat but we're overall increasing the value of that account, but also by doing so, get more horizontal and more sticky in those accounts. So we've got a couple activities going on to try to stabilize it. But realistically, it's a tough market. And until we see evidence of those initiatives working, we're going to have to be cautious.
[Operator Instructions] Our next question comes from the line of Thanos Moschopoulos of BMO Capital Markets.
Steve, I guess you kind of alluded to this in your prepared remarks. But now that you've been there for a while longer, can you maybe just update us a bit further in terms of your findings? Most of your initial assessment regarding Absolute that you shared with us on the last call, does most of that still stand? Anything new you'd highlight in terms of what you've learned as you spend more time with the organization?
Yes. So just adding color to some of the remarks I made earlier is the challenge of kind of protecting the end device, both from data loss and from overall security breach, is difficult. I would say Absolute's real place in the market is an area called visibility control, so helping customers track the device, helping customers maintain the integrity of the security software running on that device and being able to deploy policies and procedures if that device gets lost or stolen. That's our place in the market. And it's unique. It's unique because of what we do. It's unique because of our Persistence technology. It's unique because of our relationships with the OEMs. And no one else is doing quite what we do. And that's where we should focus, and focus in markets that, that really matters. And that's where we talk about the distributed organizations with high-value data on those devices. So within my remarks, I talked about an increasing level of focus, and that is both on the markets where we're seeing success, where we know we've had success, and that can predict the future. But also not doing other things either we may have been investing in or we just weren't seeing the return. So visibility control for this high-value mobile workforce, I think that's where the winning strategy is and just ensuring that we don't get diverted from that.
That's great. And in terms of the strengths you saw in EMEA, can you drill a bit deeper in terms of what regions that you're getting from? And then more broadly, as you think about your national, where do you see the long-term opportunity there?
Yes. So EMEA, we are just touching the surface. And if you recall, I spent 9 years over there with Sophos. We had obviously a big home court advantage both in the U.K. and so as EMEA. It's a market where if you can leverage your partner network and you can take advantage of some regulatory requirements, there's a tremendous opportunity. So that is where our international focus is. I would say, Asia and South America, we'll still have a presence. But as far as investment and where we see a real strong product market fit, it's EMEA, right? The GDPR regulations, which is just coming into effect in May, really does resemble a lot of the elements of the health care regulation, HIPAA, in the U.S. We've had good success at helping companies comply with that. And I think the opportunity in EMEA, but also -- sorry, in EMEA, is just fantastic. So I don't know what more enthusiasm I can say. We've got a relatively small team. It's a small relatively small number. But I think over the next several quarters, we've got a lot of upside, and I think it's a real opportunity where we should focus our investments.
Great. And last one for me. I know the headcount came down sequentially in the cost of goods team. I guess, it's infrastructure and customer experience teams. Is that primarily rightsizing in the recovery group, given the shifting evolution of your revenue mix?
It's a bit of a couple of things. I think, overall, again, I alluded to in my prepared remarks is I think the overhead level is appropriate. I think there's opportunities and the team has uncovered just to reprioritize the areas that we're investing in and to ensure that all areas are getting the right ROI. So I think what you've see in the cost of goods sold was just a slight reduction. It's just representative of kind of the effort that we're going -- that's going on throughout the entire company.
Your next question comes from the line of David Kwan of PI Financial.
You talked about a couple of the drivers, I guess, for the quarter being the mid-market and EMEA. Can you maybe provide some color on, I guess, why you might have been seeing stronger demand out of the mid-market space? And then out of EMEA, what you might have been doing different there? And was it in part GDPR? Was it something else? Because I know that kind of international really hasn't been a huge focus for you guys.
Yes. I'll talk about mid-market in North America first. There -- when I talk about distributed organization, so large organizations with -- sorry, distributed employees with high-value data on the devices, there's large companies like that, but there's also a lot of mid-market companies as well. And our definition of mid-market is sub-7,500 seats. Since we began to -- if you begin to focus on that market in the mid-market, you see results much quicker. It's just shorter cycle -- shorter sales cycle, less complexity on the customer side from -- going from I want to I buy. And your channel really plays a strong role and helps you get in and validate and close those businesses. So the company invested in strengthening its mid-market sales team several quarters ago. I think it's been building momentum and then I think some of the recent focus that we really are starting to see the results quickly there. Within EMEA, it's also mid-market business, which is driving the growth there, both commercial and state and local government. And again, there it is -- there's GDPR and other regulations that specifically are just in -- that are affecting the European customers. But it's also they leverage the channel, and it's a quick sales cycle. So I think like any sales organizations, when you start to make change or investments, if you're doing the right things, you first see the productivity in your mid-market teams. And sometimes it takes longer for the enterprise teams to, just because of longer sales cycles, to bear fruit.
I guess, that ties into my next question, Steve, just on the enterprise. To start off, it's been a little while since you've kind of announced a larger enterprise win. I know you kind of have a good -- some good land-and-expand-type growth in recent quarters. Is this something where -- I guess, are you out reallocating resources to kind of the mid-market and other areas where you're seeing stronger demand? Are you still kind of keeping that enterprise team in place and still trying to grind that result there?
Yes. So first point, we are still keeping an enterprise team in place. We -- at this stage, we don't have any plans to expand it. We think it's the right level broadly. We may optimize in a couple of places, but probably we think it's the right level of investment. Just to reflect back, that enterprise sales team is relatively new. It's -- I think most people have been onboard for less than a year. So it does take a while to build up and build the pipeline and win large deals. Now their first priority out of the gate was to work with their existing customers and introduce many of these new features and functionality and packages into our existing customer base. It makes sense for 2 reasons. One is it's the quickest path to producing revenue for this new reps. And secondly, strengthening our base is a very important part of building the foundation for growth. So that's where a lot of the effort has been. But there has been work on net new accounts. But it just -- those sales cycles are typically around 12 months, so the timing of them bearing fruit are -- it takes a bit of time. Now I would say, what we are doing is ensuring that when we look for net new logos that we are focusing on the verticals of it. They match the characteristics that I talked about in the prepared remarks. So I think there's a bit of learning that's happened over the last couple of quarters of within the mid-market and where we're seeing traction and things moving through the funnel in the larger accounts. There are specific characteristics, which are these distributed organizations with high-value data. So law offices and financial services and accounting firms, these types of organizations that we really are a must-have versus a nice-to-have. And I think as the team gets increasingly laser-focused on that and we back that up with the right marketing, the right work with analysts, I think we'll start to see a lot more success.
And just in general on your sales team, are you pretty happy, I guess, having spent some time -- more time directly in the organization, just generally happy with the sales team and like you said it's just more refinement, optimization of resources at this point?
It absolutely is a refinement and a focus. I mean, overall, I would say that I absolutely have been really pleased with the leadership team and the next layer down and the people I've met. I think this is a really, really strong organization. And I think if you kind of step back, so why haven't we achieved the growth that we have anticipated? I think it's largely a lot of the new features and functionality are still -- were only introduced a year, 1.5 years ago while the sales team is relatively new. And I think there could have been some better efforts or work done on where we focus resources and how we back that up with the right marketing. But I like the team and I think, collectively, through the leadership team and the next layers down are getting laser-focused on where we can get repeatable success quickly. And I don't think we had been that focused in the past.
Okay. Two more questions, one for you, Errol. Just well, I guess, on capital allocation. You guys had bought some shares back this quarter. I think it's the first time you've done it in about a year. Can you just talk about what your plans are with the cash and whether you're planning to do more buyback?
Sure. Well, the buyback, we were active during the quarter when the stock was particularly low and there was not a lot of support for the stock. And that's really our intention going forward is to use the buyback defensively. I'd say it's not a central part of our capital allocation strategy right now.
Okay, perfect. And then any update, guys, just on the status for the new CEO search?
Sure. We have hired and retained a search firm, and that process is just kicking off now. So realistically, you should think of that process of being 6 to 9 months out. But hopefully, that doesn't give you the impression that we're just treading water. So we absolutely are moving forward with the strategy and certainly have the mandate from the broad, both me and the management team, to continue to refine this strategy and execute on the plans.
There are no further questions at this time. I will turn the call back over to presenters.
Okay. Thank you very much, and we thank, everyone, for joining the call today, and please reach out directly if you have any further questions. Thanks a lot.
This concludes today's conference call. You may now disconnect.