Absolute Software Corporation

Good afternoon and thank you all for joining us on my first conference call as the CEO of Absolute. Before I get started, I would like to share what most excited me about Absolute.

I’ve had the honor of working in Silicon Valley for over two decades with companies such as Apple, Citigroup, Motorola, Good Technology, Palm, Sun and most recently Dtex Systems. I also have the privilege of working with great technology companies such as Silicon Labs, Quotient, and previously Centrify as an Independent Director.

During my career, I had seen firsthand the positive impact of technology across the enterprise. And the resulting acceleration of investments and security teams as they respond to the rapidly changing landscape.

However, despite this increase in investment and security, many companies struggle as the extensive security capabilities they deploy by fail to protect the enterprise when they are disabled by end users misconfigured, outdated or modified by the adapters. From this experience, I see a significant growth opportunity for Absolute as the only provider of our patented cross-vendor Persistence platform embedded in the bios of hundreds and millions of devices in the market today.

After just 60 days on the job, I am happy to say that the strength of my conviction in the opportunity is growing. I have spent much of my time in my first two months at Absolute in discussion with many customers, as well as employees and our strategic OEM partners.

Many of these customers have affirmed for me the important role that Absolute plays in securing their environments and their data. Our unique ability to get persistent visibility and control to their end point making existing endpoint controls more resilient and to provide intelligence about what is happening across their environment ensures that they are maximizing the valuable investments that they are making in data security.

Now, let’s talk about our 2Q performance. Improving execution in the field drove solid results this quarter delivering 24.4 million in total revenue, up 5% over Q2 last year.

Our success comes from both new and existing customers leveraging our premium product tiers and our student analytics capabilities. At the same time, we have continued to focus on investing in our business efficiently, which has resulted in our adjusted EBITDA margin expanding to 18% of revenue as supposed to 10% a year ago.

Absolute's growth strategy is to deliver products that address the dark endpoint by leveraging our unique persistent and resilience capabilities, to drive value for strategic OEM partners, and to focus our field execution on the customers and market segments that more strongly resonate with our value proposition. With respect to product delivery over the past year, our R&D efforts have focused on key new capabilities within the Absolute 7 platform, like which, the ability to remotely execute strips on the endpoint and Application Persistence the ability to self-heal other third- party agents within our resilient data systems.

We have continued to deliver additional features around these offerings such as a global growing library of new scripts and a broadening ecosystems third-party solution persisted through resilience. We continue to see strong customer adoption of these resilient features.

With our OEM partners, we remain focused on the enablement of persistence and resilience across their portfolios in driving value in our combined go-to-market effort. During Q2, we announced a new strategic partnership with VAIO where we have integrated our patented Absolute Persistence capabilities within the new VAIO Pro PA and VAIO A12 laptop.

We also continue to invest in our strategic partnerships with Dell, HP, and Lenovo. This quarter, we integrated application persistence with the Dell Data Guardian and Dell Endpoint Security Suite.

We saw continued momentum across the HP portfolio, as well as with Lenovo and our ThinkShield Endpoint Security portfolio launch. Lenovo ThinkShield includes their newly integrated Lenovo patch solution that adds resilience and intelligence to the Lenovo SCCM patching application.

In previous calls, the team shared with you our strategy for increasing the return on our go-to-market investments by focusing on segments where we feel our solution is particularly strong such as healthcare, financial services, professional services, and education. We also remain focused on growing our international business.

As a result of our focused plan, our business is becoming increasing well diversified. This can be seen in the mix of this quarter’s ACV; 65% of which came from enterprise and government customers and 35% from education.

We were pleased to see our education business growing 1% versus last quarter and included a significant win with one of the top U.S. School District.

This customer educates several thousand students and needed to have both visibility and control with their entire endpoint to stay, as well as access to valuable intelligence and insights about asset usage and trends in the school district in order to help assess the impact of the technology investments we are making with students in learning. With Absolute 7 Resilience and Student Technology Analytics, we were able to deliver against both the visibility and control requirements for this customer, as well as the critical intelligence platform to deliver rich insights.

Looking forward, well my thinking will evolve in the coming months. I am certain that we will remain focused on our execution across these three areas, delivering full solutions that address the challenges of the dark endpoint through persistence, resilience, and intelligence.

Working closely with our OEM Partners to solve customer problems and remaining committed to efficient execution. In summary, this has been a strong quarter for the company and I will remain excited about joining Absolute and having the opportunity to define the next chapter of the company’s evolution.

With that, I’ll now turn the call over to Errol for a review of our second quarter results.

Thanks Christy and good afternoon everyone. I’ll now walk through our Q2 financial results, which were headlined by double-digit growth in the enterprise and government verticals, improved performance in the education vertical, and continuing adjusted EBITDA margin expansion.

Q2 total revenue of $24.4 million grew 5% year-over-year with commercial recurring revenue up 6% over the prior year. The growth in recurring revenue reflects the recent growth in our Commercial ACV base and improved sales linearity through the quarter.

Our Commercial ACV base at December 31 was $95.3 million, representing an increase of 6% year-over-year, and an increase of 2% over September 30. The $2.2 million sequential increase is the largest quarterly increase that we have seen in ten quarters.

Existing customer ACV retention during the quarter was 101%, compared to 100% in Q2 of fiscal 2018. ACV from new customers in Q2 this year was $1 million dollars, relatively flat with $1.1 million in Q2 of last year.

As discussed on previous calls, our most common selling motion is a land-and-expand model, where new customer wins start with a small deployment and expand over time. Therefore, the new customer ACV in the quarter is representative of a more meaningful revenue opportunity over time.

The enterprise portion of the ACV base, which represented 53% of the base at December 31 increased 12% year-over-year and 3% sequentially. The growth in enterprise continues to be strongest in healthcare, professional services, and financial services markets.

The government vertical, which includes state, local and federal government customers represented 12% of the ACV base at December 31 and increased by 17% year-over-year, and by 4% sequentially. Together, the enterprise in government verticals represent 65% of the ACV base and are up a combined 13% year-over-year.

We were also very pleased with the performance of our education business in the quarter. As Christy mentioned, in Q2, we closed our first site license agreement with a large U.S.

school district. This site license with an annual value north of $1 million, provides the district with the ability to track, secure, and collect usage analytics over roughly 300,000 laptop, desktop, and tablet computers.

We think there’s a good opportunity from more deals of this nature over time, where an existing or new customer can have full access to our education focused solutions at a compelling cost per endpoint. We can see the impact of this site license in our Q2 results were education ACV grew 1% sequentially.

The first sequential increase in education in eight quarters. On a year-over-year basis, education was down 4% versus negative 8% and negative 7% reported in the previous two quarters, respectively.

Education represented 35% of the December 31 ACV base. Looking now at performance by geography.

Our North American ACV base was up 6% year-over-year and up 2% sequentially. Internationally, the ACV base was up 15% year-over-year and up second 4% sequentially.

With international growth continuing to be strongest in the European region. North American customers continue to account for 89% of the ACV base.

I’ll now turn to our expenditures in the quarter. Q2 adjusted operating expenses, the calculation of which is detailed in our MD&A and press release were $20 million, down 4% from $20.8 million in the prior year.

The decrease was driven by lower headcount across all departments, lower marketing program spend, and a weaker Canadian dollar. However, we did experience a year-over-year increase in G&A expense, with the increase being attributable to one-time expenses associated with the CEO transition, as well as to nonrecurring professional fees.

We expect G&A expenses to return to recent historical levels going forward. Total headcount at December 31 was 479, compared to 495 at June 30, and 504 at December 31 of 2017.

Adjusted EBITDA for Q2 was $4.5 million or 18% of revenue, up 88% from $2.4 million or 10% of revenue in Q2 of fiscal 2018. Q2 operating income was $2.4 million or 10% of revenue, up from $1.2 million or 5% of revenue in Q2 of fiscal 2018.

The improvement in profitability reflects our continuing eye on cost control as we pursue accelerated revenue growth. Operating cash flow in Q2 was $1.9 million, compared to $3.2 million in Q2 of last year.

The decrease in operating cash flow was attributable to lower billings in the quarter, related to shorter average prepaid contract terms, as well as to working capital fluctuations. For the year-to-date period of fiscal 2019, cash from operating activities was $5.9 million, up from $5.3 million in the prior year period.

Looking now at our expectations for the remainder of fiscal 2019, we expect fiscal 2019 total revenue to be between $96 million and $99 million. We are increasing our expectations for adjusted EBITDA from between 14% and 17% of revenue to between 16% and 19% of revenue.

We are maintaining our expectations for cash from operations of between 10% and 14% of revenue and we expect capital expenditures for the year of between $3.5 million and $4 million. This concludes our prepared remarks for today.

Operator, please open up the call for questions.

Thank you. Good evening, Christy and Errol, and welcome Christy.

I’ll start with a question for you after your first couple of months [here at Absolute]. The company does have a bit of momentum going, particularly on the bottom line right now, but I love your perspective in this form about whether you potentially see opportunities for areas for improvement with respect to Absolute Strategy here be that go-to market, product, or otherwise.

Hi, Doug. Nice to meet you and that’s a great question.

I think that as I laid out in my comments, our strategy is three components, and one of those is clearly focusing on efficiency. And so, you shouldn't expect to see that change.

I think the journey for me over the past two months has really been taking the customer view, understanding what that implies terms of gaps in our products or how we're functioning as a company, and then building a plan around that. I’d say we're still in the early days of that.

So, my thinking will continue to evolve, but the bottom-line is, I’m very impressed with both the technical capability we're finding here and the go-to market execution that we have at Absolute. So, I guess my headline would be for now at least no sudden changes, we’re going to continue to execute the plan.

That’s very helpful. This is the second consecutive quarter where you’ve raised EBITDA guidance.

I know you just mentioned that efficiency is certainly a focus item, last quarter you talked a little bit, Errol about being behind on some of your hiring targets, is that same phenomenon still at work here and do you expect to catch up with some of those or is there, have you made some changes to your projected cost structure, which will result in higher sustained margins throughout the forecast?

Sure. The change in our EBITDA guidance was really related two things.

I think one being just a look back at our experience over the first half of the year and then look forward of course. And there are two components to that.

So, one as you pointed out Doug is certainly headcount. We exited the quarter with 479 employees, and our plan for the year, which has been consistent through most of the year is roughly 500.

Although it remains to be seen whether we’ll fill the entire 500. I mean it’s pretty rare that we’re fully staffed, there’s always a certain amount of turnover in the organization, but certainly having had open headcount for the first half of the year, and I would say throughout the organization, I think that everyone is just being very, very thoughtful about when to open up budgeted headcount.

I’d say we’re being a lot more prudent about it than we might have been in the past. So, I do expect we’ll end the year with the headcount slightly below that budgeted amount of 500.

And then the second piece of it, of course is the Canadian dollar where it’s, you know with a weaker Canadian dollar in the first half is, and in projecting that to continue through the year has contributed to about 2% EBITDA.

Okay. I like to just talk a little bit more about the large-sale on the education market.

You provided a little bit of extra color there, but I just want to understand, I mean was this site license completed late in the quarter or was there a significant amount included in the Q2 results that act to offset some declines in some other parts of the education vertical? Just helping to get a better idea of what the underlying growth rate or decline rate is for that business would be helpful?

Sure. So that deal was concluded fairly late in the quarter.

It’s obviously something we’ve been working on for a very long time, but it was signed and booked fairly late in the quarter, so it didn’t have much of an impact on our recorded revenue. Did that answer your question?

Yes. I mean, it seems consistent with the ACV growth taking up higher, while the revenue growth is lagging, just wanted to be clear that that was what was going on.

Exactly.

I appreciate the answers. I’ll jump back in the queue.

Thank you.

Great. Thanks Doug.

Hi, good afternoon and Christy congrats on joining Absolute. Maybe just a question on the billings, I realize it’s becoming less relevant of a metric, but any particular reason for the year-over-year decline was that just a tough comp based on the renewal opportunity?

Yes. A couple of things Thanos.

So, one was just year-over-year – exactly as you pointed out year-over-year comp. The second piece is, within the enterprise of the shortening contract term contributed to do that as well.

So, the billings we’re lighter year-over-year in Q2 looking forward into the back half of the year though we do see our exploration base is higher. So, we should see higher billings in the second half of the year?

Then following up on the large education deal, just curious given that you already have so many large US school districts was there any particular reason as to why that one had not been a customer previously and how instrumental was student analytics in procuring that contract?

Sure. Maybe I’ll start off on this one Christy.

So that actually, that was an existing customer, and so we’ve got very good coverage over most – in terms of names anyways for most of the largest school districts in the U.S., but it’s actually very rare for us to cover all of the devices within each school district. So, we see a lot of opportunity within our install base to do similar licensing plays i.e.

site licenses as we did in this particular deal.

Okay. Can you comment on…

So, to just touch on the student – sorry Thanos, I was going to comment on your second part of your question, which is around the relevance of student analytics. I think that the mix of this deal is actually – speaks to kind of the mix that we’re seeing across, whereas the kind of usage the customers or used cases the customers are looking for are less about for retrieving devices after the point of being lost, and more about getting rich insights out of the states to try to understand what’s going on across the enterprise or across the state, and in this particular case trying to get an understanding of the impact of technology on student learning.

And so, I think the student technology analytics is an important part of our solution and to that customer.

Okay, great. And then maybe just a question on government, you’ve talked on recent calls about some of the trends there, but anything in particular this quarter that stood out where, in terms of the pipeline that you're seeing in that government space that’s developing [indiscernible] driving that growth?

Sure. In government, it really – our success more recently in government has been across all tiers; state, local, as well as in federal government, and I mean the use cases are very similar across all three.

So, there is nothing I could call out that might be unique or any of those accelerating any faster than other segments of government.

Okay. So, it sounds like pretty broad-based strength across a number of different areas?

That’s correct.

Okay. Alright, thanks.

I’ll pass the line.

Thanks, Thanos.

Hi, there. Good afternoon, and welcome Christy and hi there Errol.

First question for you, Christy, just wanted to get your thoughts on the competitive landscape what your feel is for Absolute’s offerings and solution in the market. I know it is unique there, not necessarily a direct competitor, but could you just talk about the positioning of Absolute versus some of the other end points entering companies Tanium, Carbon Black.

Are you seeing opportunities for partnerships instances where clients may be persisting those applications, just would love to hear your thoughts on the competitive position on the technology that you see coming in?

Kevin, great question. So, when I think of companies like Tanium and Carbon Black, I don’t necessarily perceive them as competitors.

When I look at what we do view uniquely, we have a very broad platform for making any critical security capability persistent and resilient and through our resilient product line. And I think that’s one of the more interesting parts of the portfolio for me as I sort of came in looking at the company.

So, when I look at the category of end point capabilities, it’s very crowded; it’s not unusual for an organization to have 5, 10, 15 plus end point engines. We estimate that a large percentage of them aren’t working at any point in time because they collide with one another, you just delete them, they remove them, they crash over time.

So, the security of the Enterprise degrades over a period of time. I think this is where we can help many of those vendors by partnering with them to actually make them more robust or a part of the immune system or the endpoint resilience of the overall device.

And so, when I look at that community, I think there’s a lot we can do to help the customer get better value out of the investment they are making on endpoint controls.

Thanks for that. I appreciate those comments Christy.

It does kind of lead into a second question, maybe more for Errol, looking back over the past year or two with Application Persistence being part of the offering for some time. I'm wondering how the trends are looking, if you’ve got, what your feel is for the number of, you know for the customers that are taking Application Persistence, how many applications are they persisting, anything of note, and some of the more recent ACV wins with new customers, just with regards to the uptake of those kind of Application Persistence, EDD is a higher tier type service.

Sure, Kevin. So, we don’t provide hard metrics on the number of units deployed, but what I can tell you is that we’ve continued to build out the number of applications where we have productized persistence.

I think that we’ve got within the product itself somewhere close to 20 applications now, which cover the whole span from things like VPN, encryption, DLP, etcetera, and on top of that we’ve also got professional services capability where we can persist pretty much any application on the endpoint. So, the counts on both of those continue to go up and it’s really all of those are customer driven of course, but I don’t have a hard stat for you in terms of the number, but it’s certainly heading in the right direction.

Great. Thanks for that Errol.

Final one from me. Can you just talk a little bit more about the device mix on some of the new ACV, any changes there?

I know clearly, you’re predominantly a laptop first solution, but is that moving towards mobile, if you are looking at say some of the brand-new ends or if it is still relatively similar to what you might be seeing in the mix of the base overall?

Sure. It’s still predominantly laptop.

The one trend that we’re seeing is actually, we’re seeing more and more desktops coming in as well. So not so much mobile devices, but certainly the mix between laptops and desktops is, we’re just seeing a lot of more desktops coming in.

Interesting, alright. Thanks.

I’ll pass the line.

Hi, Christy; hi, Errol. Just on the education side, you were talking about that large when you guys signed and obviously a bunch of moving parts and what not, but can you talk about to what extent covering all the devices versus a certain number of it, and obviously including the Student Technology Analytics?

How much that, did it at least keep kind of the annual contract value the same for this particular customer we’re actually able to increase it because you are covering more devices and you are storing in the [indiscernible]?

Thanks, it’s a good question David. And it certainly increased the ACV for the customer.

So, from the customer standpoint, they were able to achieve beyond the functionality, with a dramatically reduced cost per endpoint and this enabled them to deploy across all of their endpoints. So, the aggregate ACV for the customer increased substantially through this deal.

Can you quantify that?

In rough numbers, I would say it went up by 5 or 6 times where they had started that.

Okay, quite significant.

Quite significant, yes.

In budget, I guess was it an issue here?

Well budget was an issue and I commented earlier that this deal took a long time to put together and one of the biggest changes from the customer standpoint is, it does move into an operating budget as compared to traditional education buying, which coming out of the capital budget, so that was an obstacle that we had to overcome, it was certainly something that impacted the length of the sale cycle.

Is this something that you hopefully should be able to leverage and convincing some of your other existing and potentially new customers on the education side?

I think it is. I think that this is a very strong validation of both the side licensing model, as well as student technology analytics.

[Indiscernible] single data point does not constitute a trend, but we certainly have a pipeline that includes several other deals that are very comparable to this one.

So, do you think, kind of going forward looking at the trajectory of the education business that, at least on a sequential basis you should be able to kind of keep the ACV flat and maybe growing a bit, albeit on a year-over-year basis, still might see a couple of more down quarters.

Well I think, yes, that’s exactly it. The design goal is to get education to at least flat and ideally growing and I think that we’re very encouraged by this deal, we’re very encouraged by the conversations that we’re having with our customers as well, and I would say that the only caution I would throw out there is just how it may take some time just to develop a regular cadence of closing these types of deals.

No problem. Okay.

Just last question, the government has been growing at a pretty good clip, the enterprise has been kind of stuck in the low double-digit growth on a year-over-year basis, what do you guys need to do there, I guess to really get at least into the mid-teens or close to the 20%, which I know you guys are targeting?

Hi, David. So, I think there are a couple of different things.

We’ve been focused very much on sales execution and remembering our past market is very collaborative with our OEM vendors, and so focusing on optimizing a sales model that allows us to do that land and expand that Errol talked about, which the OEM partner and then continue to grow value over time both with the customer and with the OEM partner. So, I think continuing to focus on the sales model and making sure that remains in balance is really important for us.

I think the second piece is on the product side. I think, of the resilience conversation and some of the key components, and there are some pieces of that that are just approaching readiness right now that will be more applicable in those large area enterprise environment as opposed to that mid-market, and I know historically we’ve talked a lot about our success in the mid-market, and so, I think this is an evolution that we’re on, the product test is with the customer and so it’s got to be driven by products first and building a sales model around it.

Thanks for the color Christy. Do you think it’s achievable that you guys could get to somewhere maybe in the mid-teens exiting this year or is that something more 2020 story?

I think at least on my side it’s a little too early for me to tell to be able to – to feel comfortable giving that sort of an outlook at this moment.

Okay that’s fair, I appreciate it. Thanks.

Yes, thank you. I just have one question.

You’ve been there for 60 days now, it wasn’t clear whether your sort of complete in terms of your evaluation to pursue the existing strategy, are you still kind of in that process, and should we expect to see potential changes after that full evaluation?

I would say that not only it’s a complete evaluation, but we’re always going to be a work in progress and so I’m trying to be as transparent about what I’ve seen in the first 60 days as I possibly can. I think here’s the things I know for certain, and the task forward for us to focus that I think that there is many opportunities for us as a platform, it’s about [narrowing square], we’re going to point our execution, and I’ve highlighted the themes of that around, persistence, resilience and intelligence.

Maybe other things that are also interesting, but maybe slightly outside the core of what we are really good at, you know that’s what customers tell us that they’re looking to us for, that’s where they see our value and that’s what we’re uniquely good at. So, what are the missing pieces from here to there and how do we plot our course through there, I think is still a work in progress.

At this point, would be able to tell whether the challenges are on the [indiscernible] side or is it on the product side?

I don’t know that headline has emerged in my first 60 days. I think we’ve been talking pretty openly overly the past 12 to 18 months about the product journey we’ve been on with Absolute 7 and building out some of these newer capabilities and so that’s clearly a work in progress, and that represents, you know there is more work to be done on that piece.

I think on the go-to-market side as I highlighted on my comments, we have very strong execution capabilities within our go-to-market team. I think that there is an opportunity to continue to work with our OEM partners and collaborates and you’ve seen some of those in the headlines; after this quarter, I would like to see more of that as well.

So, I don’t think we’re overly heavily waited on one side or the other. I think that there is opportunities all around the table.

That’s great. Thank you.

Thank you and thank you everyone for joining the call this afternoon. I look forward to updating you at the end of next quarter.