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Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to Absolute Software Corporation's Fiscal 2018 Fourth Quarter and Annual Financial Results 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 those 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 maybe required by applicable security laws. For more information on the company's risks and uncertainties relating to those 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, Monday, August 13, at 5:00 p.m. Eastern Time. I'd like to turn the call over now to Mr. Steve Munford, Interim Chief Executive Officer. Please go ahead, sir.
Thank you, operator, and good afternoon, everyone. Welcome to our Q4 Fiscal 2018 Conference Call. Joining me is Errol Olsen, our Chief Financial Officer. This is my second full quarter as Interim CEO, and I'm very pleased with the progress that we're making on a number of fronts. Today, I would like to share with you both an update on the progress we've made in Q4, and our outlook as we move into fiscal year '19. On our last call, I talked about Absolute's focus on solving the challenges that organizations faced in protecting against data breaches and maintaining the security and hygiene of other endpoint computers. I also highlighted the markets where we feel our solutions provide the strongest ROI. Specifically, these included health care; distributed enterprises, such as professional service and financial service firms; mid-market organizations and the European market. We continue to see validations that these are the right markets for us to focus on. All these organizations have significant reputational or legal exposure if data is lost. They also face operational challenges in maintaining the security hygiene of their employees laptops, especially as corporate IT moves more and more to what I call a client and cloud architecture, and these devices are less and less on the corporate network. While health care remains our strongest vertical outside of education and represents 40% of our Enterprise business, we're also seeing good growth in both the financial services and professional services firms. With GDPR having come into effect in May, we continue to see growing interest from European organizations in how we can assist in ensuring their compliance. In our last call, we also shared with you the challenges that we had continue to see in education and our efforts to stabilize this business. Q4 was our second quarter in selling Student Technology Analytics and while early days, we have a number of wins or we've had a number of wins with several customers in the process of deploying. In addition, we're seeing traction with our Chromebook offering. We are optimistic that these product initiatives combined with adjustments to our go-to-market strategy can stabilize our education business. In Q4, we saw evidence of the success we're focused in enterprise as well as the new initiatives in education. Overall, we achieved 800k -- $800,000 in new customer ACV and continued our achievement of over 100% dollar retention rate. In addition, enterprise ACV grew 12% in fiscal year '18, up from 10% in fiscal year of '17. Enterprise ACV now is 53% of our total ACV as compared to 49% in fiscal year '17. On our last call, I also talked about the focus on operational efficiency and ensuring we're making the right levels of investment in the right areas. Errol will talk through details of the Q4 results and guidance going forward, but I would like to highlight early evidence the impact of the team's focus. For Q4, we achieved EBITDA of $3.1 million and associated margin was 13%, the highest it's been in 9 quarters. Early demonstration of our potential to grow the business while maintaining relatively flat cost structures leading to continued margin expansion. Moving forward, we'll continue to drive for both growth in our focus verticals and operational efficiency. I'm very pleased with our leadership team and the adjustments we are making. I'm very encouraged as we look forward into fiscal year '19, I think we'll see more evidence of the strength of our offering in our focused verticals in the improvements of our operational leverage as we focus on efficiency. With that, I would now turn it -- the call over to Errol.
Thanks, Steve, and good afternoon, everyone. Our Q4 results were headlined by continuing growth in our Enterprise business, positive growth in our Public Sector business and operating margins expansion. Q4 commercial recurring revenue of $22.9 million grew 5% year-over-year reflecting the prior quarter increase in our ACV base, in addition to a strong sales start early in the quarter. Total revenue of $24.1 million, grew 4% year-over-year as growth in recurring revenue was partially offset by $100,000 year-over-year decline in nonrecurring and other revenue. Our commercial ACV base at June 30 was $91.5 million, representing an increase of 4% over June 30 of last year. Sequentially, the ACV base was up 1% from March 31, reflecting a 101% quarterly existing customer retention rate and $800,000 of incremental ACV from new customers. The Enterprise portion of the ACV base, which represented 53% of our commercial ACV base at June 30, increased 12% year-over-year and 2% sequentially. The growth in enterprise during Q4 occurred in a number of target markets, including health care, professional services and financial services. Our success within these markets has led to greater diversity within our business. For example, the health care market now accounts for 40% of enterprise and over 20% of our total business. On the Public Sector side of the business, we are pleased to report net growth in the ACV base for Q4. The Public Sector ACV base grew 1% sequentially, reversing the declining trend present over the prior 4 quarters and resulting in a 3% decline in public for the year. This improvement was primarily due to growth within federal, state and local government customers in the U.S. While the K12 portion of our Public Sector business has not yet returned to growth, we're encouraged by the fact that pricing in this market has been relatively stable throughout fiscal 2018. At June 30, 2018, Public Sector customers accounted for 47% of the commercial ACV base with the Public Sector being further broken down into 36% education and 11% government customers.Looking now at performance by geography, our North American ACV base was up 4% year-over-year and was up 1% sequentially. Internationally, the ACV base was up 11% year-over-year and up 2% sequentially. International customers continue to account for 11% of our commercial ACV base. Turning now to expenditures. Total Q4 adjusted operating expenses, the calculation of which is detailed in our MD&A and press release were $21.0 million, relatively consistent with $21.2 million in the prior year. Within the spend portfolio, our sales and marketing costs were down year-over-year on lower personnel and marketing costs, while R&D was up on higher average headcount, lower investment tax credit accruals and a stronger Canadian dollar. Total headcount at June 30 was 495 compared to 517 at June 30 of last year.Adjusted EBITDA for Q4 was $3.1 million versus $2 million a year ago. Our EBITDA margin expanded to 13% of revenue this quarter, up from 9% in Q4 of last year, reflecting our focus on cost control as we continue to grow our top line. Operating cash flow in Q4 was $5 million compared to operating cash flow of $700,000 in Q4 of last year. The current year period included a $2.3 million tax refund related to a tax loss carryback and excluding the onetime tax effect, cash flow still improved significantly this quarter, which is consistent with the trends that developed through fiscal 2018 as we leveraged the investments that we made in fiscal '17.Looking now at our expectations for fiscal 2019, we expect continued top line growth on a relatively flat expense structure translating into further margin expansion as we progress through the year. We expect total revenue to be between $96 million and $99 million. We expect adjusted EBITDA margins of between 13% and 16% of revenue and cash from operations of between 10% and 14% of revenue. We expect capital expenditures for the year of between $3.5 million and $4 million with the majority of spend directed towards scalability enhancements and server refresh in our hosted data centers. 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 Thanos Moschopoulos with BMO Capital Markets.
Steve, you mentioned you had some sales of the [ Student Analytics ] product, maybe you can expand on that. I mean, was that the key to the selling process even though the deployments are just now in process, what kind of customer interest are you seeing now that you've got that product to the market?
So overall, I think, what we're hearing from our education customers is that they're asking -- they're being asked more and more to prove asset utilization and specifically hardware utilization and application utilization. So specifically in the U.S., there's more scrutiny over the capital budgets and this is a technology that's really needed to understand what is being used and by whom. And also linking back to educational outcomes. And just as a backdrop, we got into this market just last year when our customer -- one of our customers was asking us to do it and then we built -- essentially extended our product to professional services to do it. So the thought process is pretty mature and the work we've been doing has been going on for a number of quarters. I think right now where we're at is that we've got a number of customers that have either deployed or are deploying it. And getting the data they need out of their dashboards. We think that this -- this, one of the nice things about this is that for to be really useful or to be -- to get the ultimate use out of that is you want to deploy across all your machines. And in most of our school districts were only deployed on a portion of the machines. So one, it just brings more relevance to what our product does, but secondly, it gives us a chance to expand in the concept we're in. So it's both an upsell opportunity, but also a cross-sell opportunity.
Great. It's helpful. Billings were down year-over-year and then it was becoming a less relevant metric. But was that driven by the renewal opportunity in the quarter? Or was there some other dynamic like reduction in average contract term?
It was a combination of those 2. So we are -- on the enterprise side of the business, we did see a slight reduction in average contract term. On the education side, contract terms were very consistent with what we saw last year. But the second factor and probably the one that impacted it even more was just the renewal opportunity was down year-over-year.
Okay. And how should we think about the linearity of OpEx throughout the year? Should it be pretty consistent or should there be any sort of ramp up or ramp down as we go through 2019?
With the exception of Q1, you should expect it to be fairly flat through the year. Our Q1 expenses last year they were higher than in the subsequent 3 quarters and we expect the same pattern this year. And the reason for that -- the biggest reason for that is we have our annual sales kickoff in Q1 of each year.
Okay. Maybe final one for me. I noticed sales and marketing headcount came down sequentially. Was this the good run rate or is there, I guess, more work that needs to be done as far as getting the sales organization to the size that you needed to be?
It's -- our year-end headcount, it's a good proxy for what you should expect for the rest of the year on that sales and marketing line item. We have made some changes within the portfolio, within the sales and marketing. But from a headcount standpoint, it could change just by a small number in either direction, but I would just base your modeling off of what we reported for June 30.
Your next question comes from the line of Doug Taylor with Canaccord Genuity.
A couple of questions on your guidance. Wondering if you could decompose your revenue guidance a little bit for us? Specifically, what I'm looking for is whether you expect any significant changes to nonrecurring revenue items and if you are, in fact, modeling within that a decline in education related sales, and what I'm getting at it is I'm trying to get a better idea of what the underlying growth you expect for the Enterprise and other businesses?
Sure. So on the first part, for the nonrecurring and other revenue, we're modeling it fairly flat from what we saw in Q4, which is roughly $1 million per quarter. Overall, for our ACV base, in order for us to hit just because of the delayed recognition of revenue under our subscription billing model, the growth in the ACV base, the implied growth is higher than the revenue growth from the range that we've given. And within that, the split between -- we certainly expect stronger growth on the enterprise side of the business than we do on the public side of the business. Having concluded the year with a 12% year-over-year growth in Enterprise, we certainly expect to sustain and ideally grow that number. Same thing with the government state, in both state and local and federal government. And then, of course, I think that we would all acknowledge that probably the biggest variable on all of this is on the K12 side. We do see a lot of reason for optimism on K12. But we have been very conservative in the assumptions that are built into the guidance. So most of that growth, the net of it is just that growth is really coming from enterprise and state and local.
Okay. And moving on to the EBITDA margin guidance. I know Thanos got into it a little bit, but I mean if I do the math on the guidance you provided there given your revenue and EBITDA guidance, I mean, there is a good chunk of that range which actually would suggest a decline in operating expenses -- adjusted operating expenses year-over-year. I mean, is that something that's a likely scenario to unfold?
Well, it's -- you're correct in that. And then the reason that further decline year-over-year is one of the biggest variables is actually the Canadian dollar. So we have left a bit of a cushion in there for fluctuations in the Canadian dollar, which just for the record, our -- the midpoint of our budget assumes CAD 0.78 to the U.S. dollar. So any further weakening of the Canadian dollar would bring down the cost base. That's the biggest reason for the large range that we put inside the guidance.
Okay. But then in terms of headcount and things like that, you're not anticipating cuts of any magnitudes, more shuffling within the operating expense line items?
Yes, that's exactly it.
Okay. And then last question on the cash flow guidance. Again, not an item that, I think, is as big a focus these days, but with the improved EBITDA guidance, we actually have the cash flow guidance and margins being below EBITDA margins, which is atypical, I think, for Absolute historically. Now is there some working capital items considerations that we should be thinking about that impact that?
Yes, sure. Well, there are 2 things: One is working capital. That's right. And that's the -- there's a line on our balance sheet within intangible assets for deferred contract costs, which is deferral of sales commissions. So that's one piece that will consume some cash. And then the second is we have tried to model out the impact of this on the previous question from Thanos about shorter contract terms, we have modeled out slightly shorter contract terms, once again, only on the enterprise side of the business. It implies more ELA activity, in particular. And that's why we've got the cash flow margins are expected to be slightly lower than EBITDA margins for the year.
Your next question comes from Blair Abernethy with Industrial Alliance.
Steve, I wonder if you could just give us a little more color on new customer activity in the quarter. And I guess, if you're looking back sort of at fiscal '18, did you have stronger new -- has a new customer adoption activity been increasing as you move through the year?
Yes. So one thing I'd would like to do before I kind of get into some of the specifics is just to make sure that we're aligned on the definition for us as new customers. So our new customers, we define it as the first 12 months purchases of a what we call net new logo or a new entity to Absolute. And that's important because, I think, in previous years we've had a couple of large deals that have really kind of impacted that new customer number. The pattern we're seeing now and actually the plays that we're working on is more -- much more focused on land and expand. So getting into new customers with either selling to a division or specific team or selling -- or getting attached to some specific project. And then really operationally do, operationalizing the process of expanding in those accounts. So very much land and expand strategy. And as an example of that, one customer that we landed last year with an initial $25,000 purchase is now one of our top 5 or 6 customers that's in the financial services industry. And that kind of activity, the first 12 months of that would be new customers. The remaining of it would be sell to existing customers. So back to what am I seeing -- what have we seen over the last couple of quarters? We are seeing consistent rising number of new customers. And a focus of those customers in the verticals that I talked about. And that's what we are seeing pattern matching of where we're focusing, how we're going to market through our channels and those initial first sales.
Okay. Great. And just shifting over to the product front. Can you just describe how the -- how you're seeing the receptivity of the reach product out there and then, secondly, what sort of what's on tap or what are you looking at for upcoming product launches?
Right. So we continue to see -- it's interesting, overall, we measure very actively overall usage of our products by our customers, and we are -- every quarter, we're seeing an uptick in the amount of both usage that our product is having, but also the number of people within an organization using our product. And that's really showing evidence that as we introduce these new features like Reach, or the ability to persist third-party applications that our customers are seeing value on that. So I don't have the specific numbers in front of me, but we are seeing -- we have seen a continued uptake in the Reach technology and the usage of the Reach technology. But more broadly, we're seeing a lot of increased usage of our products as we add these new pieces of functionality. To your second part of your question, the releases over the next 6 months are really focused on a couple of things: One is we've been replatforming or building up this new platform for the product the last several years, and we really want to compete that by the end of the fiscal year. So we've got a lot of activities to essentially finally migrate 100% of the product over to the new platform and start turning off the old platform, old wholesale product. That's one focus. And secondly, it is improving the usability of the product, and also the reporting of the product to more proactively report the effectiveness of the product and what it's doing and to make it easier to demonstrate ROI. So unlike, I would say, the last 6 months, you're not going to hear a lot about this new piece of net new functionality like Reach, but more about us completing the platform migration and us maturing the product to ensure that the people can get the most out of these features.
Your next question comes from the line of Kevin Krishnaratne with Paradigm Capital.
A question for you guys on the upsell opportunity. I think in the past you've shared statistics indicating that at least 2/3 of your existing customers are on tiers below premium. I'm wondering that Absolute 7 is coming up on a 1-year anniversary of being in the market, is there any shifting in that stat? And if you can even break about that -- break apart that stat when you're looking at, say, enterprise and government only and excluding the education market, what that stat might look like?
Sure, Kevin. So we're seeing a trend towards an increasing proportion of our customers being on the premium version of the product. And in fact, both premium and the midtier of the product, which we call professional. As an example for new customers, last quarter, about 90% of our new customer sales were on either the mid or the top tier of the product. And of course, what we're seeing in the customer base with the net expansion rates that are 100% or higher than a 100%, that's really it's reflective of both deployment expansions and upsell. So I don't know off the top of my head exactly what that percentage is who are on premium at this point. It's certainly -- it's well over 1/3 of our customer base is now on premium. And that applies both across enterprise customers and education customers.
Okay. Good to get a traction there. I guess, on a kind of related note, with regards to Persistence, which, correct me if I'm wrong, but I believe at $7 per year per application. I'm wondering what you guys think the TAM might look like there? For example, if -- to use that application a customer needs to be on the premium, which is about $40 a year. So it looks like per app it could be quite accretive to baseline ARPUs. So I'm just wondering how big you think the Persistence opportunity could be and if there is any kind of metrics you might be able to share on so your top accounts that you've got, your top customers that you've got that might have multiple applications. Just wondering what you're seeing out there?
So just a couple of clarifications: One is, we offered Persistence for BitLocker, which is Microsoft's encryption product and SCCM, which is Microsoft's patch product. And both of those capabilities are included in the top tier platform -- top tier offering. And those, we're seeing very good adoptions with roughly 40% of our customers taking advantage of that functionality. You're right, we have been charging up to $7 for additional applications to process additional applications. And we are seeing, I think, we've got now in the teens the number of applications that we support. I guess, if we look longer-term, we see more and more of that, if you will, those people -- persisting number of applications. As a -- since you asked, people do more applications, we see ourselves coming back from the $7 per application. That's just not a sustainable dollar per application. It just gets too cost prohibitive for a customer to, say, persist 4, 5 agents just to added costs. So we haven't actually figured out the exact pricing model. But, I guess, to kind of bring it down, we're probably going to be including more applications in the top tier model and that's where they get more people there. And then for additional modules bringing down the price from $7 to a number that's smaller than that.
[Operator Instructions] Your next question comes from the line of David Kwan with PI Financial.
I saw it in the Public Sector, I guess, I think you already mentioned the sequential increase here 1% year-over-year being driven by state and local versus the education side. Do you think you could continue to see that kind of stronger growth in the state and local side that could more than offset the declines or even if, I think, is flatten out on the K12 going forward?
I think there's 3 pieces then I'll let Errol chime in. One is, there's a number of activities that we're doing to stabilize the education, whether it's student-teacher analytics or also leveraging that to go into sell more seats in education account. So I think, what's in education, we've got some strategies to level that off. Within the state and local, we saw a tremendous opportunity. If you think about what talked about in the enterprise as distributed organizations with high-value data, there is a lot of those characteristics in a lot of the state and local organizations. So police force is a really good work example, health care workers and others. So we were seeing that and we're seeing it in specific states overall like California, but we're also seeing examples that spring out throughout America. So we still think there's a lot of room there to grow. I think state and local should be a very good sector for us.
So you're thinking quite possible if we can see at least flat if not maybe low single-digit growth sequentially for the public sector then going forward?
There's certainly potential for that, right? And I think that it's -- and we're very confident in our ability to grow state and local as Steve just outlined and the piece that remains to be proven and then once again, we are optimistic about it. But we want the proof points before we get excited, overly excited about it though is in K12 and the opportunities that are presented by Student Technology Analytics, and site licensing.
I guess, just looking at it from the bigger picture. In the past, I know you guys have talked about the 2020 target revenue growth and EBITDA margins. You're well on that way on the EBITDA margin side. But, I guess, given the drag that you're seeing from the education side, is that 20% revenue growth really that realistic?
I think the first milestone will be in the commercial space -- enterprise space. So we're low teens now, mid to low teens now. And we absolutely, see the potential to get that into the 20%. But you're right. We -- if can't grow -- if education remains fairly flat, it's going to be a few years out before we can get the overall growth rate to 20%.
And Steve, when do you think you can hit like the 20% growth rate in enterprise side?
I don't want to get too specific in the time frame, but I would hope that as we get into fiscal year '20, we've got a very clear pathway for that. Just to kind of punctuate, I mean, we've been seeing $800,000 of net of ACV from net new customers every quarter. We need to really accelerate that. We think we've got the motions of selling and expanding into our existing accounts, but we just got to get better adding those net new accounts. If we're going to -- for us, to get to that 20% growth rate.
Okay. On the international side, saw some pretty strong growth there. Is that really been driven by GDPR? And kind of what are your plans in terms of trying to maybe grow the business in Europe related to that? Is that primarily relying on your OEM partners and other partners? Or are you planning to maybe add a bit of headcount there?
Yes. So a couple of things there. One is, all international theaters aren't created equal. So we would say Asia Pacific is an area that we've struggled, and an area that we will, I guess, continue to optimize for, but not even further reduce our investment there and take those dollars and put them into Europe where you're right, that is the primary driver of international growth, Europe. And it is on the back of GDPR. And it is by facility working with the channel partners over there. I mean, channels for any organizations tend to have larger role in Europe than they do in North America. And really leveraging the PCOMs that we had such a strong relationship with. Country-by-country in Europe is the way we're focusing.
Just a couple more. Errol just on the gross margin side, saw a nice pickup this quarter. Just wondering how much of it was kind of onetime related I know that you talked about, I guess, some potential onetimers there, but what are your expectations, I guess, for fiscal '19?
Sure, yes, there were some, if you could call it, there were some onetimers in Q4 on the cost of sales lines. So the right expectation going forward certainly in the fiscal '19, we're targeting gross margins around 85%.
Perfect. Just the last question. I think you guys have talked about hiring somebody for the CEO search. Is the expectation still hopefully have somebody in the seat by the end of the year?
Yes, by the end of the year.
There are no further questions at this time.
All right. So thanks, everyone, for taking the time today and your interest. I look forward to talking to you at the end of next quarter, and just to kind of punctuate what we're focused, that is around drive that net new business to further accelerate our Enterprise business, stabilizing K12 and then lot of activities going on there. And getting to mid-teens growth overall for the Enterprise business, while maintaining a flat overhead. I think those are things, I hopefully, look forward to talking to you guys about more at the end of Q1. Thanks very much.
Thank you. Bye.
This concludes today's conference call. Thank you for joining. You may now disconnect.