Absolute Software Corporation

Geoff Haydon - CEO Errol Olsen - CFO

Thanos Moschopoulos - BMO Capital Markets Paul Steep - Scotia Capital Kevin Krishnaratne - Paradigm Capital Michael Kim - Imperial Capital Ralph Garcea - Cantor Fitzgerald

Operator, thank you. Good morning, everyone.

Welcome to our Q4 fiscal 2016 conference call. Joining me today is Errol Olsen, our Chief Financial Officer.

I am pleased to announce financial results continued to improve in Q4, driven directly by the progress we’ve made against our key stated strategic initiatives. These include enriching our product offering, elevating the performance of our global sales organization, and penetrating our targeted geographic and vertical market segments.

Notably, performance this quarter was driven largely by the adoption of new product features, the acquisition of new customers and the growth of our healthcare and corporate markets. Growth is accelerating, with Q4 DDS revenue at 22 million, up 7% from Q4 of fiscal 2015.

Recurring revenue represented 97% of Q4 revenue. Commercial ACV increased by 3% globally and 2% to North America, new customer ACV was 1.8 million almost doubling from Q3.

Existing customer ACV performance was strong at a 100%. DDS billings in Q4 were 30.1 million, representing a 19% increase over Q4 of fiscal 2015.

Looking forward, we are confident momentum will continue to build across our business, driven by continued strong execution against key strategic product development, market focus and sales execution priorities, which I’ll now review. Our product strategy continues to center on enabling enterprise to understand and manage end point and information related risk.

This involves expanding our embedded persistence platform and leveraging it to provide substantially enhanced functionality around end point awareness and resilience. In Q4, we extended our end point awareness capabilities with the launch of Endpoint Data Discovery or EDD.

This is a highly customizable feature that allows customers to identify sensitive data characteristics and to observe the presence of this data throughout their entire end point population across and beyond the corporate network. This ability to observe endpoint data attributes complements our current ability to capture endpoint telemetry on device characteristic, application activity and user properties.

The result is a rich, multi-dimensional, resilient and entirely unique perspective on endpoint risk. The value of this perspective was reflected in the risk management solution for data stored in the cloud we announced earlier this quarter.

Cloud storage applications are used broadly by employees to store and share corporate data, often without the involvement of IT. Because they are hosted off the corporate network and typically not subject to traditional security and compliance controls, cloud storage applications are emerging as a substantial blind spot and source of risk for most enterprises.

This new Absolute feature allows our customers to identify devices that are synchronized with cloud storage applications and to monitor the movement of sensitive data to and from the cloud. DDS can then be used to remediate any potential risk that’s identified around compliance violations or unauthorized user access.

This new offering will soon be extensible beyond storage to any cloud based application and will play a critical role in enabling enterprises to control shadow IT, one of the most prominent sources of insider threat related risk. As an example, a recent survey shows that 69% of US employees are able to access corporate data stored in the cloud even after their employment is terminated.

In Q4, we also made substantial progress in our efforts to extend and monetize our persistence technology around non-Absolute endpoint agents and applications. Our SCCM report feature which was introduced less than six months ago has now been deployed in over 3 million devices.

We also announced persistent services, which enables enterprises to automatically reinstall any endpoint agent or application that is missing or damaged regardless of user or device location. This ability to control endpoint controls has emerged as one of Absolute’s most compelling offerings.

In Q4, new customers adopted this technology to protect a variety of endpoint agents, including Dell case, Symantec Client Management, Pulse VPN, Microsoft BitLocker, and LANDesk. It’s worth noting that 90% of our new customer ACV in Q4 was driven by the adoption of DDS professional and premium versions which are required to realize new features like SCCM report and repair and EDD respectively.

The richness of our new product features and the enthusiastic pace of customer adoption reflect a strengthened capacity to deliver innovative, predictable and marketable product features and to monetize them. For this reason in 2017, we will increase investment in our product development capability with the objective of accelerating our innovation agenda and revenue growth.

This investment will focus on two specific initiatives; first of all, we will enhance our SAAS platform or Software as a Service platform. Ultimately reducing associated operating cost by over 30% and repurposing these savings to expedite product roadmap execution.

More importantly, we will emerge with a SAAS platform that is performant, scalable and extensible, capable of supporting persistence on any application, on any endpoint, in any geography and enabling our vision of establishing persistence as an entirely new platform for ensuring endpoint agent effectiveness. Secondly, this increased R&D investment will begin dematerialize our ambitious vision around next generation insider threat optimized endpoint security.

We will enrich our unique capabilities around device, application, user and data awareness with the objective of positioning Absolute to capitalize on and ultimately to lead the emergence of a new solution category characterized by contextual and predictive endpoint protection. We continued in Q4 to concentrate our go-to-market investments on those specific geographic vertical and the horizontal markets that represent the greatest return on investment for Absolute.

Appropriately, these markets led our growth results this quarter. North American ACV was up 2%, new customer ACV from corporate and healthcare customers exceeded $1 million, and importantly, we continued to see success in large enterprise accounts, driven by the adoption of our newest DDS and persistence offerings and targeted prominently at the insider threat.

Our most significant new customers win in Q4 represented one of the largest deals in the history of Absolute. The customer a Fortune 50 US based multinational manufacturer of medical devices, pharmaceutical and consumer packaged goods is using our DDS technology as a critical component of their strategy to understand and manage user related endpoint risk.

They will also leverage our ability to report on and repair their Microsoft SCCM agents. Finally, they are using the remediation capabilities of DDS to prevent the spread of malware and ransomware across the organization by quarantining and disabling infected devices.

This deal totaled over 2.4 million over four years. We also saw strong renewal and expansion activity within our existing customer base, including a $700,000 order from one of our largest healthcare customers.

This was driven by the renewal of DDS licenses being used to monitor the status of critical, endpoint management and security agents such as encryption and SCCM. This customer also upgraded to the premium addition of DDS to activate the endpoint data discovery capability so they can locate and protect electronic health records.

These results reflect the extent to which our enriched product offerings are being valued, by some of the largest and more sophisticated customers in the world. Once again they also reflect the contribution of our new product features to driving enhanced renewal rates expansion and upsell performance and new customer acquisition.

Our success in Q4 also reflects improvements in the effectiveness of our global field organization. Quota attainment by our sales reps has doubled quarter-over-quarter since Q1.

The number of field reps have met or exceeded their objectives in Q4 was up almost 50% over Q3. This was reflected in our new customers ACV performance in Q4 of 1.8 million once again up from less than a million in Q3.

The billing performance of our new customer acquisition team was up a 134% quarter-over-quarter. In summary, we enter our new fiscal year with strength and momentum.

Through the changes we made in 2016, we have a substantially enhanced product platform, a highly performing product management and development capability, an increasingly productive global field organization and a strong balance sheet. Our priority this year will be to leverage these strengths in conjunction with an accelerated product development agenda, against a secular shift that’s occurring in endpoint security, from traditional, static, precedent based reactive technologies to a persistent, contextual, analytics based predictive approach that Absolute is uniquely positioned and determined to lead.

We will accelerate revenue growth in fiscal year 2017 and put the business firmly on a path to accomplishing our long term operating objective of 20% revenue growth and 20% adjusted EBITDA margins. I’d like now to turn the call over to Errol to discuss our financial results and outlook in more detail.

Errol?

Thanks Geoff. Good morning everyone.

Q4 DDS segment revenue of $22 million grew 7% year-over-year. Recurring revenue in Q4 grew 5% year-over-year with 97% of this quarters DDS revenue derived from occurring licenses and services, as compared to 99% in Q4 of fiscal ’15.

Year-to-date DDS segment revenue was $86 million, a 4% year-over-year increase. Our commercial annual contract value base, which is a predictor of future recurring revenue continued to increase over the course of fiscal ’16.

ACV was flat over the first quarter, followed by a 1% increase in Q2, a 2% increase in Q3, and a 3% increase during Q4. For fiscal ’16 as a whole, the commercial ACV base increased by 5%.

From an industry vertical perspective, the combined corporate and healthcare ACV base increased 3% during the quarter, and increased by 10% in fiscal ’16. The combined education and government ACV base increased by 2% in the quarter, and increased by 1% in fiscal ’16.

At June 30, 2016 corporate and healthcare customers represented 47% of our commercial ACV base, and education and government customers represented 53% of the base. From a regional perspective, the North American commercial ACV base increased 2% during Q4, and increased 6% in fiscal ’16.

Internationally, the commercial ACV base increased 6% in the quarter and decreased 2% in fiscal ’16. At June 30, 2016, North American customers represented 89% of our commercial ACV base and international customers represented 11% of the base.

Our adjusted EBITDA for the fourth quarter was $1.9 million, which was down slightly from $2.1 million in Q4 of last year. Fiscal ’16 EBITDA of $11.1 million was down from $17.1 million in the prior year.

The decrease is reflective of the divestiture of the Endpoint and Service Management segment and associated revenue, while adjusted operating expenses which are defined in our press release and MD&A were up 2% year-over-year in fiscal ’16. During the year, our cost base was affected by a full year impact of sales personnel hired at the end of fiscal ’15, and increased research and development headcount.

This was partially offset by a reduction in support and development cost associated with the manage and service operations, as well as foreign exchange related savings on Canadian based activities. The Manage and Service segment contributed $1 million to our annual EBITDA.

Our total headcount at June 30, 2016 was 445, which was flat compared to 444 at June 30 last year. Turning now to cash flow, Q4 cash from operating activities was negative $1.6 million, compared to positive $2.7 million in Q4 of last year.

At a high level, cash flow for the quarter is reflective of prior quarter billings of 20.1 million, which were largely collected in Q4, offset by $20.1 million of adjusted OpEx in the quarter, with other changes being related to working capital. Total operating cash flow for the year was $4.9 million, which was net of tax payments of approximately $2.1 million, transaction fees on the manage and service divestiture of $1.3 million, and restructuring payments in Q1 of $700,000.

DDS segment billings in Q4 were $30.1 million, a 19% increase over Q4 of fiscal 2015. Shifting now to our forward outlook; during fiscal ’16 we completed the final stages of our transformation which involved significant changes to our leadership, go-to-market and product functions in order to position Absolute to capitalize on a significant information security market opportunity.

The impact of these changes was demonstrated through major, rapidly exhausted product releases in Q3 and Q4, accompanied by accelerated ACV and new customer growth in the back half of the year. Additionally, we demonstrated our ability to sell to increasingly larger and more sophisticate end customers.

Based on this demonstrated success, as Geoff has mentioned, we intend to increase our investment in research and development capabilities in order to accelerate our time to market of new DDS features and functions and to accelerate the migration of all of our product offerings to our next generation service platform. This investment combined with go-to-market initiatives supports our objective of continuing to accelerate revenue and realizing on our long term growth and profitability targets.

In terms of topline results, we expect total fiscal ’17 revenue of $92 million to $94.6 million, representing a 7% to 10% annual DDS segment revenue growth. We expect revenue to grow at an accelerating rate as we move through the year, driven by increasing new customer acquisition and continuing sales productivity improvements.

We expect adjusted EBITDA margins of 5% to 8%, reflecting relatively stable spending across most departments and increased investment in research and development capacity, as we have just discussed. This compares to an adjusted EBITDA from the DDS segment of $10.1 million in fiscal ’16.

I want to point out, however, that our increased investment in R&D will be incremental over the year, and it will be aligned with improved sales performance. We expect cash from operations prior to payments for income taxes and restructuring charges as a percentage of revenue to be between 8% and 12%, reflecting a double digit, year-over-year increase in DDS billings.

This implies relatively stable cash from operations compared to fiscal ’16 prior to payments for taxes, restructuring charges and transaction fees as outlined earlier. Tax payments for the year are expected to be in line with our June balance sheet accrual.

With the payment allocated, roughly equally between operating activities and investment activities in the statement of cash flows. We also expect to report a restructuring charge in Q1 of approximately $600,000, this being related to a small reduction in force at the start of the fiscal year.

We expect fiscal ’17 capital expenditures to be between $3.9 million and $4.4 million, with the spending largely related to upgrades and expansion of our hosted datacenters, office expansion and ongoing hardware refreshes. This concludes our prepared remarks for today.

Operator, please open up the call for questions.

The implied R&D spend is I think higher than many of us were expecting, and you alluded to where that will be directed in your prepared remarks. But maybe you could clarify, how much of this is about adding new functionality to expand your TAM versus maybe addressing some plumbing issues you may have uncovered.

I mean you talked about performance and scalability improvements, does that imply that there were some issues that you identified there which requires step up level of investment.

Thanos there will be efficiency improvements as I alluded to, and we do expect that the conclusion will result in a much more cost efficient operation and the ability to repurpose dollars that are currently being spent to maintain our current infrastructure to focus on innovation. But this is almost entirely about expanding our TAM.

It’s designed to create the infrastructure piece, a platform that will enable the execution of our persistent platform vision, once again to extend that persistent functionality to any end point agent in any geography and to offer customers a variety of deployment capabilities. The other component of the investment on our R&D is once again entirely about TAM creation.

We’re seeing this, as I referenced, tectonic shift away from traditional end point protection to capabilities that are much more focused on resilience, providing context, predicting emerging threats and confronting them before they become consequential. And we’re seeing some substantial investments in these emerging technologies within the large enterprises that we’re selling to.

We think that with our persistent platform and our current awareness capabilities and our balance sheet and go-to-market strength that we’ve got a real head start on some of the emerging, early stage innovative companies that are starting to accelerate the development of this segment, and we intend to bring our collective mass to bear to accelerating the creation of that category and really distinguishing Absolute as the de facto leader of it. So this is really about igniting this next generation of endpoint security that is uniquely enabled by some of Absolute’s technology and go-to-market capabilities.

Can you provide some color as to how we should think about operating leverage longer term? Clearly in 2017, we’re going to see EBITDA margins come down relative to ’16.

I think you’ve talked in the past about striving for a high-teens EBITDA margin level. How far out in the future might that be?

At what point should we start to see some of that potential operating leverage kick in?

Hi Thanos, this is Errol. So in terms of the operating model you’re right that with the additional investment in fiscal ’17 that margins will be lower than they were in fiscal 2016.

We do expect margins to improve actually even towards the end of fiscal ’17 and certainly improve over time. Geoff mentioned in his prepared remarks a 2020 target, which is a 20% revenue growth accompanied by 20% adjusted EBITDA margins.

The timeline for that is - it’s very difficult to pin an exact date on that timeline. I mean that’s what we’re striving and building our model towards.

But you can think of it as kind of a three to five year time horizon.

As far as the restructuring, you’ve been hiring a fair bit lately, and so little surprised to see that. Can you clarify the areas in which they’ll be focused on?

Sure, it was at the start of this fiscal year, it’s a headcount of about 30 and it was across departments. And that’s what really just a factor of starting the fiscal year, kind of retooling and repositioning which is not atypical for us.

Maybe one last one from me, as far as the seasonality of billings, anything we should be aware of? Consistently Q4 and Q1 are your strongest billings quarters, should that remain the case?

How does that look heading in to the education selling cycle?

It’s a good question Thanos, and as you know our billings are highly correlated to our expiring contract opportunity. The expiring contract opportunity for the year as a whole is up mid-single digits, but there is some seasonality to it.

In Q1 the expiring contract opportunity is down mid-single digits, and then it’s up for the remainder of the year and highest in Q4.

Okay, so Q1 has a tough comp, but Q2, Q3, Q4 should be fine in that regard.

That’s right.

Geoff if you could talk a little bit about the new product? It sounds like you’re taking the company towards an entirely new category, away from where the company is traditionally been.

How much are you leveraging any of the base technology or is it, you’re just sort of starting with a clean sheet of paper?

No, we are leveraging all of it. The two functionality dimensions that we’re really doubling down on are persistence which is a core technology and our awareness capabilities which is our DDS agent, which represents our entire revenue base right now with the exception of a very small amount of persistent services which was a new offering that we launched in Q4.

So this is really entirely about strengthening and applying core technologies in new innovative ways, just to clarify. This is about monetizing persistence as a means of ensuring the effectiveness of endpoint agents beyond our own agent, and that core persistence technology has been fundamental to our value proposition for as long as Absolute’s been around.

And DDS today offers, as I mentioned, very rich awareness capabilities and multi-dimensions around device, around data, around user, around applications, and really what we’re looking to do is enhance that telemetry introducing analytics capability that enables us to present that telemetry to an enterprise in a more intelligent and actionable form, and to enrich our investigations tool, so that when an incident or a risk event is identified, we can enable an enterprise to really understand and remediate that in very predictive ways. So, this is entirely about strengthening and applying our current core capabilities in new innovative and market expanding ways.

Just shift gears for a second, to hit the double digit billings growth that’s implied by the CFO number, what has to go right in ’17 and are there any major headwinds in terms of big [indiscernible]. I don’t believe there are, but anyway that would be great to hear.

No, there aren’t, and we will continue to focus on precisely what we have focused on and accelerate it during the course of this year, and that is ensuring that we’re optimizing our existing customer opportunity both through renewals and expansion. We do expect to see an acceleration of expansion as we move through the year.

We’ve introduced some features that really optimize when they are deployed broadly across an entire enterprise endpoint population. We’ve also created a sales organization and go-to-market capability that is more focused on igniting devices that have already been deployed.

So that expansion opportunity is substantial, but the primary driver of growth will continue to be the increase in new customer ACV, that’s going to have the most direct and material impact on accelerated revenue. But we do not see any fundamental headwinds.

To us this is all about continued fundamental execution Paul.

The last one from me is, Errol you sort of alluded to, but back of the envelope I’m playing around with the numbers here. It looks like a significant add to the R&D spend.

Two fold, one, you talked of it being tied incrementally, how much of you front-end loaded in Q1 as we’re walking in the door here in terms of higher R&D spend. And then the second part of that would be what’s preventing you from repurposing a number of the staff that have presumably finished other projects in the base.

So in terms of the R&D ramp, to put it in to some context, our plan - at the high end of our plan I’ll reiterate that the spend will be matched with our revenue growth over the course of the year. But at the end of our plan, we’ll hire as many as 100 additional people in R&D group and those would be spread about half in our Vancouver datacenter and about half in Vietnam, where historically we view as a third part outsource developer in Vietnam and we’re building our own office in Vietnam as well.

So that’s the ramp, the ramp will happen steady throughout the year. And as to the question or repurposing, one thing to put things in context is that Absolute has historically, if you compare us to other software companies and other SAS companies and particularly other information security companies, we have invested in R&D at the low end of the range.

In the information security industry, the average R&D spend is somewhere between 19% and 23%. Absolute historically has spent about 12% of revenue on R&D, and from a competitive standpoint you could say it has put us behind the curve and there’s some catch up to happen within that.

But also, we expect to continue to innovate and to deliver functionality to the market. It’s not as though we can deliver one piece of functionality and kind of walk away and put tools down.

I mean this is a constant innovation effort, both from a competitive standpoint against other companies in our space and also competitively against the bad guys, right. In information security and the funding that’s being applied to the hacking community.

So it’s highly competitive and hence the reason for the higher overall R&D spend in the info sec industry. Now having said all of that, part of the incremental spend is accelerating our movement on to a single platform.

We released our next generation platform probably through fiscal ’16. Our new functionality is being deployed on that platform, but we still need to move our historical functionality over to that single platform.

Once that exercise is complete, we will be able to redeploy resources, and so what that means for us is I think that going forward in to fiscal ’18, we should not expect such a large increase in R&D spend.

Just wanted to get your thoughts on uses cash decisions and priorities for 2017. Just taking a look at your historical there had been times you were in the $15 million-$20 million range.

Just wondering in the way you’re giving guidance for ’17 and probably don’t want to talk too much about ’18 and ’19 going forward, but what does your cash profit look like going forward. What do you think?

Do you think you can get back in to those type of numbers and to that point I did noticed that unlike prior two years the dividend decisions was kept on hold with regard to the increase. So just wondering how you’re thinking about cash, the dividend and how the cash profile should look like moving forward.

And also a follow-on on CapEx level, I think it was about $4 million in the year pre-’17 wondering how that looks out going forward.

This is the business that fundamentally continues to have very strong cash generation potential. ’16 was a unique year with, A, a transformation of our business, almost entirely with the divestiture with the dismantling and rebuilding of our sales organization.

We had a depleted expiry base, all of which affected billings and cash performance. As we move in to ’17, we’re looking to ignite some new market opportunities by accelerating investment and innovation in the release of features that we expect we’ll be able to monetize quickly.

But our medium term expectation is, this will continue to be a very strong cash generative business. Now with respect to the dividend, we review our capital allocation strategy constantly, in the context of our evolving strategy and our evolving situation.

In Q4 we had an [inaudible] shift, but we used very modestly, primarily for defensive purposes, we don’t expect that position will change. We declared a dividend.

But as we move in to the year, what you’re seeing is us bringing a very strong balance sheet to bear and the spirit of accelerating innovation and laying the foundation for a much more exciting revenue growth story. And as we continue to demonstrate growth and to improve the strength of our platform that will enable to execute against that growth opportunity, we will continue to orient capital towards the acceleration of that growth.

Just a follow-up on that point there the [inaudible] of R&D. Does the stepped up R&D to your staff increases, does that preclude you from pursuing any unique M&A this year?

I know you previously talked about looking at maybe acquiring technology. What are your thoughts on M&A?

No, not at all. We just think there is a very important opportunity for us to introduce this new feature set, and we are pursuing a combined build and buy strategy.

So we’re accelerating investment in organic development and the spirit of releasing the next generation of this functionality through that effort, but we are also very interesting and actively looking for opportunities to acquire talent and technology that will accelerate the materialization of our product road map.

Maybe just a follow-on or switching gears a little bit, just with respect to the revenue guidance, I’m wondering if you could maybe dig a little deeper in to how you build that out and how you think about that. You’ve got quite good visibilities on your existing base and maybe the conversations that you’re having with the existing clients with regards to any upside opportunities.

But what kind of visibility might you have for the year sitting right now, with regards to brand new customers that might be kicking EDD and pulling in persistence as a result. It seems like there could be potential for even upside to your revenue outlook if you think about the fact, it’s still kind of very early days in these product launches and your discussions are probably still early, so just wondering what kind of visibility you might have in that regard.

You’re right. A lot of our revenue I think in fiscal ’16 it was about 75% of our revenue actually came up the opening balance sheet and we expect something similar to fiscal 2017.

In terms of the elasticity of the guidance that we provided on revenue, certainly we are optimistic that there is upside to it. Definitely we do expect a ramping of revenue over the course of the year and hitting that guidance of 7% to 10% year-over-year DDS revenue growth.

I mean it should just be steady increase through the course of the year and we’re optimistic that by the fourth quarter we’ll be hitting a double digit year-over-year revenue growth rate.

Just wanted to see if you could talk a little more about how you’re addressing problem of shadow IT and do you think you need to compete or partner with some of the cloud access security brokers and some of the IT as a service vendor as well, and how do you see the data loss prevention capability being maybe - you’re integrated with some of those other partners.

We’re very excited about this new offering, and it reflects as I mentioned earlier really an extension of a repurposing of capabilities that we already have. Shadow IT as you know has emerged as I said earlier an epidemic source of risk for enterprises as users start to send confidential information to and from these cloud sites, cloud storage most notably.

But it obviously extends to just about any cloud application. And so our ability to observe persistently to a device that’s on and off the network, the use of the cloud application in conjunction with being able to determine the type of data that’s being exchanged with that cloud application is a very powerful combination.

At the end of the day, the challenge with these types of hard application is visibility. It is awareness.

A lot of this interaction is occurring outside of the scope of IT very often without their approval and beyond traditional security and compliance capability. So our ability to observe a device to be able to enable an enterprise awareness around the presence and use of cloud applications in conjunction with the type of data that’s being exchanged is once again a very unique solution.

And it does leverage our company that we acquired for their deal key capability several years ago [policies], we’ve expressed that technology in the form of our endpoint data discovery offering, which we released in Q4, but it’s that addition that really makes this offering so compelling that we’ve been able to inform enterprises about the use of cloud applications for some time. But being able to actually highlight the extent to which sensitive data is being ex-filtrated that’s the big bang and we think there is tremendous opportunity not only for us to monetize that in the enterprise context Michael.

But to your point we do think there are partnering opportunities if that introduces.

And is this capability an opportunity to increase ACV with some of the existing customers as well as drive maybe larger deal sizes with net new logos?

Precisely. And so in order to access EDD which is a critical component of that offering, users have to buy the premium version of DDS, which obviously represents a higher ACV per unit than the other two basic and professional offerings.

And by the way, we’ve seen the impact of EDD very substantially in a short time that it’s been in the market place. In Q4 over 50% of our new customer licenses were premium licenses up from less than 10% in Q1.

And so as we start to apply that EDD capability in combination with other telemetry elements to enable these types of innovative used cases, we expect that we’re going to continue to see a very substantial adoption of that premium offering.

And then one question Errol, with regards to the large deal with the Fortune 50 customer, is that 2.4 million linear over four years from a revenue recognition standpoint, and was all that 2.4 million billed and reflected in the TDS billings for Q4 of 30 million?

It was entirely billed and reflected in the Q4 billings number, and there is a 100,000 to 200,000 that is not going to be recognized as recurring revenue within that number, it will all be recognized in fiscal ’17. But the remaining 2.2 million will be recognized ratably over the 48 month contract term.

Just following up on that large contract, at the start of the sales cycle did you have all the feature sets that the customer wanted or did you have to sort of release it - the new product releases through Q3-Q4 to close that deal and -?

It’s a great question. I would say that the conversation initially centered around asset management.

But as the engagement evolved, we started to cultivate interest in some other capabilities that were either released or on the product roadmap. Ultimately their MVP, the Minimum Viable Product definition spans multiple capabilities not just asset management, but the ability to consumer telemetry in their SCCM platform which was something that we announced last year, the ability to persist SCCM which we announced last year.

They also have an interest in Endpoint Data Discovery. So I would say that the conversation started with a functionality that was available earlier in the year, but as the conversation evolved and as we introduced new features and functions it started to make the conversation much more compelling and substantially expanded the opportunity both to a larger number of end points and to a more premium version of DDS.

So if these were sort of 12 month sales cycle before, are they accelerating? Can you close some of these larger deals in six months from your initial discussion or --?

Well highlighted some large wins last year that we closed within two quarters. Ralph, we’re just trying to determine what an average sales cycle is for these large enterprises.

I mean wins of this caliber are relatively new domain, we’re starting to see much more of them showing up in the pipeline and we’re certainly featuring these more prominently in our earnings call announcements. But there is still a lot of variability in terms of how its taking us to get them done.

It does range from three to six months to nine to 12 months depending on the size of the organization, the complexity of the campaign, and just the nature of the drivers, the importance and urgency of making a decision quickly. So we’ll keep you posted as we learn more about the average term, but they are still quite variable.

But we think as we continue to enrich the future, we’re going to see more of these, we’re going to see larger versions of them and we do think the business cases that we will build will be more compelling and urgent, ideally collapsing some of the sales timelines.

And then for Errol on the R&D headcount, what was the number at the end of June for Q4?

R&D headcount at the end of June was 132.

And on the previous question you said you were going add a 100 through 2017. What’s the split between - you gave the split between Vancouver and Vietnam and the Vietnam headcount obviously would be much cheaper than Vancouver.

You’re right, much lower cost than Vietnam and the split is 50-50.

You’ve been running sort of in the 3 million a quarter run rate, what should we be modeling that going forward through 2017?

In terms of the R&D ramp, is that the question?

Yeah.

It will be spread very evenly over the course of the year.

All right. Well listen I want to take this opportunity to thank everybody for their interest and their time this morning and we’ll look forward to speaking the many of you in the coming days.

Thank you.