U.S. Markets closed

Edited Transcript of ABT.TO earnings conference call or presentation 11-May-20 9:00pm GMT

Q3 2020 Absolute Software Corp Earnings Call

VANCOUVER Jun 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Absolute Software Corp earnings conference call or presentation Monday, May 11, 2020 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Christy Wyatt

Absolute Software Corporation - CEO, President & Director

* Leigh Palmer Ramsden

Absolute Software Corporation - Interim CFO

================================================================================

Conference Call Participants

================================================================================

* David Kwan

PI Financial Corp., Research Division - Technology Analyst

* Douglas Taylor

Canaccord Genuity Corp., Research Division - Director

* Kevin Krishnaratne

Eight Capital, Research Division - Principal & Equity Analyst

* Richard Tse

National Bank Financial, Inc., Research Division - MD & Technology Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Absolute Software Corporation's Third Quarter Fiscal 2020 Conference Call.

Before beginning the formal remarks, Absolute would like to remind listeners that certain portion of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. Any forward-looking statements contained in today's conference call are made as 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 securities laws.

For more information on the company's risks and uncertainties relating to these forward-looking statements, please refer to the appropriate section of its quarterly MD&A and quarterly financial statements, both of which are available on Absolute's website or SEDAR.

I'd also like to remind everyone that this conference call is being recorded today, Monday, May 11, at 5:00 p.m. Eastern Time.

I would now like to turn the call over to Christy Wyatt, Chief Executive Officer. Please go ahead.

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [2]

--------------------------------------------------------------------------------

Thank you. Good afternoon and thank you all for joining us for Absolute's Q3 Fiscal 2020 Conference Call. Joining me on this call is Leigh Ramsden, our Interim Chief Financial Officer. On today's call, I'd like to briefly review our Q3 results and then focus my comments on 2 areas both relating to COVID-19, the first being our ability to quickly adjust to the current environment; and second, Absolute's growth strategy and alignment with the current macro environment. While the company is not immune to these challenging economic times, we know that we can continue to deliver significant value to our customers who are navigating these current events.

Overall, Q3 was a solid quarter for Absolute. Q3 revenue of $26.1 million was up 5% compared to the prior year period. And we exited Q3 with an ACV base of $101.4 million, up $6.2 million or 7% year-over-year. Pre-IFRS 16 EBITDA of $5.5 million was down 5% year-over-year. However, year-to-date was $17.9 million, up 24% from the prior year. EBITDA has been above our expectations through the first 9 months of the year as we've managed our costs efficiently. The effect of our employees working from home through our fourth quarter will generate further savings. And as a result, we're increasing our EBITDA guidance for the full year. Leigh will provide further details during his prepared remarks.

Cash flow from operations was $3.7 million, and we ended the quarter with $38.9 million of cash and short-term investments with no debt. Absolute continues to maintain a strong balance sheet.

Regarding the dividend, we remain committed to the current distribution as long as it does not limit our ability to operate the business as conditions dictate. At this point, there are no plans to adjust the dividend from current levels.

Some further details around the complexion of the quarter. Remote work and distance learning were the common themes for both ourselves and our customers. We saw growth in ACV in both the enterprise and education markets with heightened activity towards the end of the quarter as a result of our customers' response to COVID-19.

In enterprise, the move to work from home meant more devices connecting to our platform. We saw an increase in both new and existing or refurbished devices as IT departments rapidly looked to mobilize their employees and send them home. Once home, the focus for our customers has become maintaining stability within their environment and ensuring critical security controls remain effective. All of which has meant an increased focus on application persistence, visibility and control to deliver endpoint resilience.

In education, we saw an uptick in demand this quarter. This was the result of schools quickly mobilizing students, teachers and administrators to enable a learn-from-home environment. We saw many school districts look to rapidly increase their support of device numbers for both students and staff, resulting in both increased activations as well as expansion within some accounts. As we approach the end of the school year, we are focused on supporting our customers as asset retrieval and accountability becomes a critical theme, leading then into preparation for the upcoming school year in which we believe the need to support remote learning will continue to be a part of the conversation.

In response to our customer needs across all segments, we mobilized quickly as a company to extend several offers to our customers. Knowing that all customers would require more from their VPN solutions, we extended Absolute Persistence for VPN through all existing customers at no additional cost. We also extended Reach, the ability to run remote shell scripts securely to all customers, enabling them to remotely remediate many employee issues through a library of over 100 scripts and automated workflows. And for our education customers, we also expanded access to web usage, enabling them to monitor student devices being accessed remotely as they transition to remote learning.

On absolute.com, we have posted a detailed resource center entitled the Remote Work and Distance Learning Insight Center that visualizes how this pandemic has been reshaping both education and enterprise endpoint behavior. The objective for this resource is to enable customers across education and enterprise to monitor, manage and measure their programs against millions of Absolute's 8.5 million worldwide active end points.

The data shows that employees working at home are working harder than ever with more than a 50% increase in the amount of heavy device usage, in the enterprise, jumping to an increase of 61%, and education device usage, a student's primary education platform becomes the PC. Our data has also shown, the vulnerability of these devices has also increased, with the average Windows 10 enterprise device being more than 70 days behind on patching in the enterprise, and approximately 180 days behind in education.

Sensitive data is piling up on enterprise devices with a 43% increase in the number of items of sensitive data such as personally identifiable information and protected health information, meaning our electronic data discovery capabilities as well as reach for remediation will continue to play a role for our customers. We feel we are well positioned to be able to support and assist our customers with these critical needs in the coming months.

I'd like to now review the steps we've taken to safeguard our employees and ensure our operations remain robust and reliable and outline how we've been able to quickly help our customers respond to the challenges they are facing. Absolute has a global workforce that is broadly distributed. Through 2019, we invested significantly in remote working capabilities such as standardized online collaboration and video conferencing platform. And as a result, Absolute was able to seamlessly, rapidly and safely mobilize and support our employees to work from home, while ensuring we had secure access to applications, data and IT resources.

As we look into Q4 and beyond, we are evaluating our ongoing operating model, identifying potential efficiencies and are actively managing expenses. We have a robust cash management plan in place. As a part of this program, we will temporarily suspend purchases of our stock under our existing normal course issuer bid as a measure of prudence when we monitor ongoing market conditions.

Our ability to operate effectively and to rapidly mobilize our employees enabled us to remain focused on our customer needs at a critical time. Customers have been faced with many challenges. And while demand has remained strong, we are closely monitoring the business as the broader economy is still absorbing the impacts of COVID-19. Analyst predictions of workforce reductions across certain verticals means that the rationalization of workforce and related computing devices is a possibility. While we've not seen a material impact on our business from this yet, we will be monitoring for this closely in the coming months.

During the quarter, there was a trend towards customers looking for shorter-term contract commitments, resulting in an average of 16 months, the lowest in recent years. We anticipate that customers will continue to use shorter contract terms as an opportunity to conserve cash. Fortunately, this aligns with our own focus on ACV selling, which has been moving us down this path for several quarters. Leigh will expand on this during his remarks.

During the quarter, we also saw heavy demand for PCs and new computing devices across our customer base and observed some supply constraints. We did not see a direct correlation between these terms in our business and did not see material impact on opportunities where we were selling together with our OEM partners. This is an area we'll continue to watch closely.

Looking forward, April has been a busy month with heightened sales activity across all segments. And while it stands to reason that the current environment provides a tailwind for spending on endpoint security services, it is unclear as to the magnitude and duration of this effect.

To wrap up, the catastrophic events that occurred during the quarter have proven the need for an undeletable connection to all endpoints with the ability to secure controls and remediate risk. Absolute is uniquely positioned to continue helping our customers manage remote work and distance learning environment. And while we are taking the necessary actions internally to ensure ongoing stability, you should assume that we're going to continue our conservative approach to balance growth and profitability.

And with that, I will now turn over to Leigh.

--------------------------------------------------------------------------------

Leigh Palmer Ramsden, Absolute Software Corporation - Interim CFO [3]

--------------------------------------------------------------------------------

Thanks, Christy, and good afternoon, everyone. Q3 was a solid quarter for Absolute, highlighted by continued double-digit ACV growth in the combined enterprise and government verticals and continued strong EBITDA margins.

Revenue in Q3 fiscal 2020 was $26.1 million, up 5% compared to Q3 fiscal 2019. Revenue growth is primarily driven by trailing year-over-year growth in the ACV base. As a reminder, the ACV base represents the amount of annual recurring revenue under contract at a given point in time.

Adjusted EBITDA, which is defined in our press release and MD&A, was $6.1 million or 23% of revenue in the third quarter. Our Q3 fiscal 2020 adjusted EBITDA reflected the impact of IFRS 16, the new leases accounting standard, which resulted in a benefit of $600,000 or 2% of revenue. Please refer to our financial statements and MD&A for further details of the impact of IFRS 16 on our financial results.

On a pre-IFRS 16 basis, Q3 adjusted EBITDA was $5.5 million or 21% of revenue, down from $5.8 million or 23% of revenue in the prior year. The continued strength in EBITDA is a result of continued revenue growth, coupled with an efficient operating expense base.

Compared with the third quarter of fiscal 2019, our expense base reflected the impact of higher headcount levels, increased marketing program spending and higher professional fees. As a result of the current macroeconomic uncertainty, we have adjusted our operating expense assumptions for the remainder of fiscal 2020. As a result, we anticipate adjusted EBITDA margins to remain stable through the balance of the year.

Total headcount at March 31 was 501 compared to 477 at the end of Q4 fiscal 2019 and 466 at March 31, 2019. Our gross margins remained steady at 87% in the third quarter compared to 88% in the prior year quarter and are in line with our expectations for the year. Our ACV base was $101.4 million at March 31, representing an increase of 7% over the prior year. In Q3, we added ACV from new customers of $1.0 million, consistent with the second quarter and down slightly from $1.1 million in the prior year. Net ACV retention from existing customers was 100% in the third quarter, consistent with the second quarter and up marginally from 99% in the prior year quarter.

As Christy mentioned in her remarks, as we approach the end of the third quarter, we experienced an uptick in demand resulting from the COVID-19 pandemic. As many organizations grappled with IT and security challenges resulting from new work from home and learn from home requirements. It is unknown how long this trend will continue. Additionally, as Christy mentioned, while we have yet to experience any significant negative impact in our customer base, any future impact of expense reduction measures is also currently unknown. We have contemplated these scenarios and our financial planning for the remainder of the fiscal year, with careful consideration of our operating expenses in a number of areas.

The combined enterprise and government portion of the ACV base increased 14% year-over-year. Our continued strength in these verticals resulted in these customer segments, representing 70% of the ACV base at March 31. Overall, we remain encouraged by the continued momentum we are seeing in these verticals. And further, we believe our solutions help customers that are facing challenges posed by remote working arrangements.

The education vertical, which represented 30% of the ACV base at March 31, was down 7% year-over-year, but increased slightly from the second quarter. We saw acceleration in this market at the end of the third quarter as K-12 educational organizations had to contend with new distance learning requirements. Q3 of fiscal 2020 represents the second quarterly sequential increase in education in the past 3 fiscal years.

We believe that the impact of COVID-19 on how users work and learn from home will have a lasting impact on how organizations will plan and manage their workforces with a greater reliance on endpoint control and visibility. While the impact of these trends on our customers and our business over the short-term is still unknown, we believe over the long term, we may see a positive impact as our solutions assist organizations of these endeavors.

Turning to our geographical performance. Our international ACV base was up 24% year-over-year and 6% sequentially. Our performance in the quarter was positively influenced by particular strength in the European theater. The North American ACV base was up 4% year-over-year and continued to account for 87% of the total ACV base at March 31.

Now moving to cash flow. In the third quarter, we generated cash from operating activities of $3.7 million or $3.3 million prior to the implementation of IFRS 16. This compares to cash from operating activities of $0.9 million in Q3 of fiscal 2019. Our operating cash flows reflect increased billings in the first half of fiscal 2020 as compared to the prior year and the impact of working capital changes, which will fluctuate based on collection and payment cycles.

In the third quarter, we experienced a multiyear low in the average prepaid contract term at 16 months. This resulted partially from seasonality as we have a number of large customers with annual renewals in the third quarter and partially from changes in customer buying patterns shifting to shorter terms. In the immediate term, we believe this trend may continue, resulting from customers' desire to conserve cash, given the current macroeconomic uncertainty.

Let's talk briefly about the share buyback. As Christy mentioned, we are temporarily suspending our buyback as a measure of prudence, while we monitor developing market conditions. We adopted the NCIB to ensure that if, for some reason, trading took our share price to a point where we believed we were being undervalued, we would step in to signal that and to take some of the downward pressure out of the market. In these unprecedented times, it is possible that trading will be driven by external factors like volatility or overall market conditions that have nothing to do with a rational estimate of value. We are not looking to overcome that sort of trading using our treasury.

Finally, I'd like to shift to our updated expectations for fiscal 2020. Please be reminded that the following expectations constitute forward-looking information and financial outlook and are qualified in their entirety by the cautionary statements contained in our MD&A.

We are updating our expectations for fiscal 2020 as follows. We are maintaining our outlook on revenue and continue to expect revenue to be between $103 million and $106 million, representing 4% to 7% annual growth. As mentioned, the combination of our operating efficiencies and the adjustments of planned expenses in response to the COVID-19 pandemic results in an increase to our expectations for adjusted EBITDA for the full year from 18% to 22% of revenue to 21% to 25% of revenue. As a reminder, this includes the impact of IFRS 16, equaling approximately 2% of revenue. We continue to expect cash from operating activities to be between 16% and 22% of revenue, also including the impact of IFRS 16. Finally, we are updating our expectations for capital expenditures to a range of $3.0 million to $4.0 million from the previous range of $3.5 million to $4.0 million.

This concludes our prepared remarks for today. Operator, please open up the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question here comes from the line of Thanos Moschopoulos from BMO Capital Markets.

--------------------------------------------------------------------------------

Unidentified Analyst, [2]

--------------------------------------------------------------------------------

This is [Stephen] dialing in for Thanos. I'm just wondering if you can give us a bit more color on the increase in EBITDA margins. You mentioned it's from cost control. Is there any currency impact in it? Are there any changes to hiring or headcount embedded within that number?

--------------------------------------------------------------------------------

Leigh Palmer Ramsden, Absolute Software Corporation - Interim CFO [3]

--------------------------------------------------------------------------------

Yes. So there are some changes to our headcount plans that we had to come into the fiscal year with. So we're scaling back on some of the investments that we were planning to make. You'll see in our filings that we did implement a hedging program in the third quarter. So we are locking in some foreign exchange benefit compared to our original budget for the year.

--------------------------------------------------------------------------------

Unidentified Analyst, [4]

--------------------------------------------------------------------------------

Okay. And just on the hiring, are there any particular areas where you're slowing down or changing the plans?

--------------------------------------------------------------------------------

Leigh Palmer Ramsden, Absolute Software Corporation - Interim CFO [5]

--------------------------------------------------------------------------------

No. I think...

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [6]

--------------------------------------------------------------------------------

I can take that one. So...

--------------------------------------------------------------------------------

Leigh Palmer Ramsden, Absolute Software Corporation - Interim CFO [7]

--------------------------------------------------------------------------------

Yes. Go ahead.

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [8]

--------------------------------------------------------------------------------

Sorry. I think there's a delay on the line, apologies. So I think through the year, we spent quite a bit of time making sure that our sales organization was fully staffed and ready to go. And we talked a little bit about moving critical R&D roles over to some of the new development areas around data science and analytics. So we feel pretty well equipped. Mostly, what we've done is really slow down new investments as we sort of go towards the end of the year.

--------------------------------------------------------------------------------

Unidentified Analyst, [9]

--------------------------------------------------------------------------------

Okay. And I guess, seasonally, Q4 is your busiest quarter. I mean absent the late-March rush, what sort of -- what's the tenor and -- or rather the tone of the conversations you're having with your customers? Do you get a sense that maybe a bit of demand was pulled forward as everyone was scrambling to get up to speed?

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [10]

--------------------------------------------------------------------------------

That's a great question, [Stephen]. So while we did see an increase in demand as we ended the last month of the previous quarter, and definitely, as we sort of headed into this quarter, our sense is that this is really as a result of change in behavior resulting from work from home as opposed to pulling in of activity from later in the quarter. We have been very thoughtful and very mindful about getting on this quarter early and just to make sure that we are being there for our customers, while they're still ramping and sort of adjusting. But generally, our sense is that the majority of what we're seeing is new demand as opposed to earlier renewals.

--------------------------------------------------------------------------------

Unidentified Analyst, [11]

--------------------------------------------------------------------------------

Okay. And I guess my final question. You're still seeing pretty good growth on the enterprise side. Are there any verticals in particular that you want to call out that sort of surprised you in terms of demand or new signings?

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [12]

--------------------------------------------------------------------------------

I think on the enterprise side, we've seen -- and I would say even, to a certain extent, across enterprise and education, we've seen a lot of the same behavior regardless of vertical, right? What we saw was almost a very horizontal strategy where IT managers were deploying employees as quickly as they could, and collecting as much hardware as they possibly could to ensure that those individuals could be productive when they got home and then sort of looping back to ensure security was retained. So I don't know that we -- that I could call out any sort of distinction by vertical.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Your next question comes from of Doug Taylor with Canaccord Genuity.

--------------------------------------------------------------------------------

Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [14]

--------------------------------------------------------------------------------

Yes. I want to start -- I mean your model is one that it takes a while for changes to show up in terms of the revenue growth trajectory, as evidenced here by your earnings -- or your revenue guidance being unchanged here. But so, I guess, I just wanted to ask that -- from where we sit right now, looking back on COVID or at the current outlook, do you think that it has been negatively impacted or possibly impacted in terms of your revenue growth trajectory from where you stand right now? Because you've got pieces on both sides of kind of the ledger there.

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [15]

--------------------------------------------------------------------------------

So I think the best way I could categorize it, and thank you, Doug, for the question. I think the best way I could categorize it is we're anticipating we're going to see both as we go through the next quarter. I think that we've definitely seen the -- what we -- the tailwinds of the mobilization of workforces and the desire for having that undeletable connection to the end point. I think as we laid out in our comments, we don't yet know whether there's any downstream effect of workforce reductions that some of our customers may see as they go through the rest of this pandemic. I think we tend to look at ACV as the primary indicator for sort of what we see coming down the line. And as I said, we believe that -- well, while we have no visibility into how long right now, rate demand is continuing to hold.

--------------------------------------------------------------------------------

Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [16]

--------------------------------------------------------------------------------

Okay. You had some constructive things to say about the education market, in particular, noting the sequential uptick. I mean ACV growth there still, on an annual basis, still quite negative. So I guess I'd just ask, do you expect these trends to extend into Q4 and perhaps an update on the timing or expectation of being able to fully stabilize your education customer base? So the growth on the other side, which has been strong can show through?

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [17]

--------------------------------------------------------------------------------

Another great question. So I think what's really fascinating for me as we look at the education segment is that I -- we've really seen what I believe is going to be somewhat of a lasting change into how education is going to be working even as we start to hear about cities looking to go back to school or back to work, the anticipation that some amount of hybrid learn-from-home or the requirement to return back to learn from home is still sort of looming out there. I also -- a lot of what we saw was maybe a school that had a shared lab of systems needed to ensure that every student had a system and that, that -- or had access to a system in their home. And so that's where we saw a lot of the scaling where the requirement or the demand was to touch every student and give them the ability to learn. And I have to believe that, well, at least we are of the belief that there is some lasting effect to that, and that there's never really been a better moment to show the value of having that undeletable connection to those devices. Now what we don't know is sort of what the new normal will look like when we exit this event. But we do anticipate that this is not just a moment in time. That there is some lasting effect.

--------------------------------------------------------------------------------

Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [18]

--------------------------------------------------------------------------------

Okay. One more question for me. Another strong margin performance. It's been a trend with you guys, a very positive trend. And I was intrigued when you said in the preamble that you potentially are looking at some areas where there might be some more sustained cost savings. So the question is, I mean, to what degree you believe that your outperformance of your margin targets for the year is completely related to the pandemic versus what might be sustainable gains that would have happened in any environment and we should expect to flow through into next year and beyond?

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [19]

--------------------------------------------------------------------------------

I think interesting indicator is that we were running ahead of our plan in terms of margin to start with clearly COVID and the reduction of travel and certainly marketing spend has an accelerating effect on that. My comments were really focused on sort of as we look ahead. So I think what we've established is that we work very well in a distributed model. I think we've had a relatively seamless transition to this new working model and that opens up a number of possibilities for us from the site planning and real estate perspective, from sort of a workforce management perspective ongoing. So we are spending a lot of time understanding the experience our employees are having and the integrity of our security and our data and the fidelity of our business as we go through this exercise. And we believe that we will be able to take some of those learnings as we design what absolutely will look like when we start to emerge back on the other side.

So I think the answer is sort of 2 pieces. We do believe there is some short-term effects that have some runway, but we also believe that there's some opportunity in the longer-term model for longer-term efficiencies. Anything you'd like to add there, Leigh?

--------------------------------------------------------------------------------

Leigh Palmer Ramsden, Absolute Software Corporation - Interim CFO [20]

--------------------------------------------------------------------------------

No. I think I would just remind everyone that we did see significant savings in the first half of the year due to the thread SRED ITC true-ups and due to a favorable foreign exchange rate and some -- the SRED ITC items are onetime in nature. The foreign exchange rate moving forward will be something that we're monitoring, and we have implemented a hedge program. So there should be some sustained cost savings there, assuming the rate stays approximately where it is today.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Your next question comes from the line of Kevin Krishnaratne with Eight Capital.

--------------------------------------------------------------------------------

Kevin Krishnaratne, Eight Capital, Research Division - Principal & Equity Analyst [22]

--------------------------------------------------------------------------------

A question for you on the guide. I was just wondering what your thoughts are, the underlying assumptions on ACV growth for the year, kind of the mix between new client wins and new ACV. Just given -- you mentioned heightened sales activity in April. I'm wondering if you could comment on what you're seeing with regards to discussions with brand-new customers, if you're seeing sort of a slowdown that other enterprise software they are seeing in the quarter. And on the converse, what you're seeing with existing customers, maybe retention -- net retention ratio as being higher than historical given the increasing adoption of these services?

--------------------------------------------------------------------------------

Leigh Palmer Ramsden, Absolute Software Corporation - Interim CFO [23]

--------------------------------------------------------------------------------

Kevin, thanks for the question. So I think that we're seeing some increased conversations with both net new customers and with our existing customer base. And certainly, at the end of the third quarter, the most rapid time for those discussions was with our existing customer base. We didn't see a significant impact of COVID-19 on our ACV from new customers in the third quarter.

--------------------------------------------------------------------------------

Kevin Krishnaratne, Eight Capital, Research Division - Principal & Equity Analyst [24]

--------------------------------------------------------------------------------

Okay. And then I guess, related to that on the existing customers, you've -- obviously, a few weeks ago to a month ago, you offered the ability to persist the VPN and all of the other offers that you've been giving to existing customers. I'm wondering if you could share how have those offers been received. Any sort of metrics on adoption? What your thoughts are there? And obviously, they run free until the end of August, I believe. I'm just wondering what the conversations are like with customers and your views on how those might translate to something more permanent after the offers drop off.

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [25]

--------------------------------------------------------------------------------

Sure. I can speak to that. So I would say the reception -- so the offers we made were in a couple of different pieces. But first, offer that we extended to customers, pretty much immediately was Application Persistence for VPN. We had about a 205% increase in the customers activating Application Persistence for VPN. So we did have a significant connection to that set of features. We saw an aggressive increase in usage. We knew the customers were going to be having a lot of issues really mobilizing that many employees against VPN and so Resilience for APM or VPN was incredibly well received.

The second thing that we offered was Reach, which is the ability to execute automated workflows remotely using our secure channel. We extended that one because there was a number of vulnerabilities that were being exposed in Microsoft and other solutions and applications during the beginning of this event, which will be very difficult for IT managers to remediate not being able to touch those systems. So we had about 179% increase in Reach usage overall. And so we saw traction and adoption of that sort of feature very strong as well.

And then the last piece, and quite a bit later was we expanded. We had a sort of the early access of what was formerly known as student analytics, but we're now referring to as web usage. That had been an early access. We made that more generally available. We've had 400,000 devices actively engaged with that. And we've had over 60 accounts sort of take that just within the first couple of weeks. So we've seen a response by existing customers, really strong versus those offers. Of course, we're there to help our customers as they go through this event. And of course, we'd like to see those turn into longer-term usage and longer-term product relationships as well.

--------------------------------------------------------------------------------

Kevin Krishnaratne, Eight Capital, Research Division - Principal & Equity Analyst [26]

--------------------------------------------------------------------------------

Okay that's helpful. Really good metrics there. Nice to hear. I guess maybe one last one for me. Also with regards to some of the stuff you've been putting out there. Really good data that you've been collecting, some pretty striking data points in terms of endpoint usage and sensitive data. So I'm just wondering how are those insights being shared with customers, potential customers. Has that driven -- has that kind of like raised alarm bells or people -- the change in conversation has been positive? And again, also, how is that helping you to potentially lead to a better renewal opportunity or expansion opportunity?

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [27]

--------------------------------------------------------------------------------

Thank you. So the purpose for publishing the resource center, we had started with the endpoint data report about a year ago, and that was incredibly well received. We did the education report last fall. And we were getting ready to release this year's endpoint report, which we will release in the next month, when all of these events started to unfold. And the purpose for posting the resource center was really because we had so many customers that were struggling with the same questions. We wanted to make the data transparent, clearly in an abstract, anonymous way. So they could compare what they're working on and what they're seeing with the rest of their industry. So I think that, that's led to some really interesting conversations with our customers as well as with the industry more broadly. I think it's really helped open up this conversation around the need for Resilience. We've had some very large ISVs and other vendors in the security ecosystem ask to be able to reference our data on their website. We had analysts who are actively working with our data right now. And so we can -- because of this neutral position we hold kind of underneath the security ecosystem, we have some unique insights that we think really help the broader ecosystem as we navigate these events.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Your next question comes from the line of Richard Tse with National Bank Financial.

--------------------------------------------------------------------------------

Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [29]

--------------------------------------------------------------------------------

I was just wondering if there are sort of any permanent changes you think you're going to learn coming out of this in terms of how you run the business here going forward.

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [30]

--------------------------------------------------------------------------------

I think -- we've been talking a lot about Resilience and -- Richard, thanks for the question. So we've been talking a lot about Resilience over the past couple of months. And so the -- for a moment or an event like this to sort of occur, it really just sort of shone a bright spotlight on how difficult it is for IT managers to have solid visibility and control to these devices. And so if there's a benefit to any of it, it is -- that it has really shone the spotlight on the need for visibility, control and the value that we can add. When IT managers can't get their hands on devices because they physically can't get close to them, being the only undeletable connection to those devices that allow you to manage them remotely. I just think it's really helped amplify the message around why these are really some critical capabilities.

So to the extent that we've even seen some of our messaging starting to be mirrored by other vendors in the IT industry, and then we commented before about some of the Resilience conversation, increasing in volume with analysts, with other data sources, I think this is really just an incredible moment in time where the proof of value is kind of in front of everybody right now. Not that there is a -- this is a happy series of events for anybody, but we've just been so happy that we've been able to help. And I think our mantra across the entire company from the beginning of this event has been how do we help. So the mobilizing of software availability, the acceleration of features that we're going to help. It really crisp up exactly what was going to move the needle for our customers and then, of course, for the company.

--------------------------------------------------------------------------------

Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [31]

--------------------------------------------------------------------------------

Okay. That's helpful. And then you talked a little bit about the international regions strength there. I guess my question is more around, are there some regions that are ahead of others in terms of, I guess, where they are on the curve and the ones that are sort of coming out of it, so to speak? Have there been any changes in buying patterns there?

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [32]

--------------------------------------------------------------------------------

So for our international theaters, I think we saw a similar adoption cycle as we saw in North America. EMEA, which is generally focused around our U.K.-based operations, had an incredibly strong quarter. We did also see some strong activity in Latin America as well. We do know that our relationships with our OEM partners, where many of them are rolling out global campaigns to help their customers through this. We're spending quite a bit of time as we go into FY '21 planning, understanding what more can we do to enable some of those international theaters in a more direct way. Leigh, any other commentary on international you'd like to add?

--------------------------------------------------------------------------------

Leigh Palmer Ramsden, Absolute Software Corporation - Interim CFO [33]

--------------------------------------------------------------------------------

No. I think that we've seen strength in Latin America in the earlier part of the year, and we also see continued strength in Europe. And depending on the quarter, we see increased strength in either of those. And really, there's an element of size going on. So they are smaller regions. So the impact of particular momentum or a large deal or 2 here and there can influence the results on a quarter-to-quarter basis significantly.

--------------------------------------------------------------------------------

Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [34]

--------------------------------------------------------------------------------

Okay. And then last one for me. You've engaged in a bunch of new partnerships over the course of the past year. Has the current situation sort of installed those partnerships? Or has it actually, let's say, fortify those relationships more? I know you were very early, but just curious how that's going.

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [35]

--------------------------------------------------------------------------------

Are you talking about our ISV partners? Is that...

--------------------------------------------------------------------------------

Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [36]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [37]

--------------------------------------------------------------------------------

Okay. So we've talked about 2 different kinds of applications that we work with. We've talked about Persistence as a Service, and that continues to be an area that we're investing with our partners. When this set of events started to unfold, it became clear that the fastest way we could help customers was actually through working with new applications through Resilience, where we persist other people's applications. And so getting really close to our customers' needs and understanding, which applications they were relying on and how we made them more resilient.

We announced just in the last week, actually, we just added Tanium support and Citrix support to that. We announced earlier in the year or end of last calendar year, CrowdStrike and Carbon Black. One of the things we were doing behind the scenes was actually shifting some of our resources into a more focused concerted area to accelerate some of those applications, filling in some of the missing VPNs, bringing in new versions. And so building out that solution set has been a big area of investment for us because it came at a time where customers really, really needed it. As a reminder, the ISVs, when we're persisting somebody else's application, the ISV is not necessarily directly involved. So in some cases, like in the case of Carbon Black, we have a relationship with them and we work directly with them. In other cases, it's really the customer that's persisting that application. And so they're relatively easy for us to sort of enable and accelerate.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Your next question comes from the line of David Kwan with PI Financial.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [39]

--------------------------------------------------------------------------------

I was wondering just as it related to the education side with a lot are obviously learning remotely these days. Have you seen more interest in site-wide licenses?

--------------------------------------------------------------------------------

Leigh Palmer Ramsden, Absolute Software Corporation - Interim CFO [40]

--------------------------------------------------------------------------------

David, thanks for the question. So we didn't see a significant increase in the number of site license activity in education in the quarter.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [41]

--------------------------------------------------------------------------------

Maybe have you seen any changes in the conversations that you had with your customers? So I assume that there's obviously a lot more devices out there that they're going to need insight into, obviously, not just where they are but also ideally with the web analytics, how the students are using it?

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [42]

--------------------------------------------------------------------------------

I think across both education and enterprise, it's important to remember that the events that we've been talking about really started to unfold most aggressively in the month of March, so quite late in the quarter. I would say that we have had a fair number of conversations since then with customers who we had been in conversations with about enterprise of site licenses, potentially looking to accelerate some of those. So I don't think it's one of the many conversations we have with customers who are looking to mobilize their employees relatively quickly. And then we spent some time internally looking at how we sort of operationalize those and package those and make them, in some cases, more accessible to customers. I would say the conversation has definitely increased. I think it's relatively early for where we are today. Clearly, in Q3, we didn't see an increase in the number of site licenses that we executed on.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [43]

--------------------------------------------------------------------------------

That's helpful, Christy. And I guess just quickly sticking on the education side there. I think with last quarter, there was one of your, I think, larger customers have changed the way they were procuring your licenses. Has there been any update on that? Any potential catch-up that we saw this quarter?

--------------------------------------------------------------------------------

Leigh Palmer Ramsden, Absolute Software Corporation - Interim CFO [44]

--------------------------------------------------------------------------------

David, yes. Yes. I was just going to say that, that issue was resolved in the quarter and that customer retained going forward with their purchases. But there was not a significant impact on the quarter due to that.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [45]

--------------------------------------------------------------------------------

Perfect. And did you guys see any impact from your customers just as it related to obviously, the supply chain issues coming out of China? I don't know to what extent that might have impacted some of them in terms of securing new devices in, yes, I guess, your calendar -- or Q3. Did you see any impact on that in Q3 and maybe into your Q4?

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [46]

--------------------------------------------------------------------------------

I can speak to that one. We actually watched very closely for that. I would say it was an interesting quarter from that perspective because we started the quarter hearing a lot about supply constraints. Then we didn't really see the impact of that broadly on our customer base. We did see the demand for new systems increased dramatically as customers were looking to sort of mobilize more employees. And in some cases, they were reaching into closets and grabbing old systems when they couldn't procure new ones. So for that reason, there wasn't really a direct correlation between our activations and what was going on with our PC vendors. I think that's partly attributable to the strong relationships we have with those partners, and we were able to sort of successfully navigate that. But also because a lot of the activations we saw were customers who had existing licenses or had existing systems, but we're looking to sort of spread their license account more aggressively. This phenomenon of kind of devices that were already in the building that were maybe last year's laptops that they had cycled out, quickly became reactivated. In one of the data sets we've spoken about publicly, we've actually talked about on the number of older devices that hadn't really called in, in 6 months or more, suddenly sort of starting to call back in again. And that really was an indicator that there was a lot of these refurbished or second devices reactivating and reconnecting back to the enterprise to mobilize.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [47]

--------------------------------------------------------------------------------

So Christy, were those ones, I guess, ones that were prepaid? Or did they have -- is there a true up that's coming up on those ones?

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [48]

--------------------------------------------------------------------------------

So I think we saw both, right? In some cases, we saw customers who were taking new licenses. In other cases, we saw customers who had existing licenses that they hadn't yet deployed.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [49]

--------------------------------------------------------------------------------

Okay. Perfect. Just few more questions. From a headcount perspective, I think you've kind of got it back to a level where I think you guys have been looking to get to around 500 employees or it was, I think, 1 year, 1.5 years ago. So are you guys kind of happy with where you are right now? And how much of an impact, I guess, from a headcount perspective on the expense side was reflected in Q3?

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [50]

--------------------------------------------------------------------------------

Leigh, do you want to...

--------------------------------------------------------------------------------

Leigh Palmer Ramsden, Absolute Software Corporation - Interim CFO [51]

--------------------------------------------------------------------------------

Yes. So -- yes, I'll just comment on the second part. So a reasonable percentage of the increase in expenses was represented by the headcount, which increased, as I mentioned, to 501 employees. And I think this time last year, we were really at a trough. We went down to 466, and that was the combination of a number of things. So I think over the course of the last 12 months, to your point, we've gotten the head count back up to the levels that we kind of expect it to be at.

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [52]

--------------------------------------------------------------------------------

And I think the second part of your question was really, are we happy with where we're sitting as we're sort of ending the year. We spoke last year about how we were being quite judicious with our spend as we were adding those heads back in and making sure that they were landing in the parts of the business that we were most interested in sort of investing skill sets or increasing head count. And a lot of that had to do with some of these new R&D areas that we spoke about, the cloud operations, the data analytics, some parts of our sales organization. So I think as we ended the calendar year and came into Q3, a lot of that work was behind us, which was why you saw a bit of a jump in our headcount as we came into the quarter. I think we're pretty happy with where we're sitting right now to complete the end of the year.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [53]

--------------------------------------------------------------------------------

Great. And just one last question. I know you're not providing guidance for next year. But obviously, we've seen, at least from a margin standpoint, EBITDA market sitting in the mid-20s right now, which is up sharply from where it was a couple of years ago. Is it fair to assume that we may see the margins moderate a bit here heading out over the next year? I suspect that you might be wanting to invest a little bit more to drive a faster growth rate on the top line.

--------------------------------------------------------------------------------

Leigh Palmer Ramsden, Absolute Software Corporation - Interim CFO [54]

--------------------------------------------------------------------------------

Yes. So thanks for the question. And I think where we're at right now is that we're really watching the market very closely and taking into consideration everything we're seeing on the sales side and the revenue side. And that really informs the level of investment that we're looking to make in the business moving forward. I think that we are optimistic about where the market goes from here. But we are exercising some degree of caution before making some of those investments going forward.

--------------------------------------------------------------------------------

David Kwan, PI Financial Corp., Research Division - Technology Analyst [55]

--------------------------------------------------------------------------------

Do you not feel, though, I guess, given the cash flows that you guys generate and the balance sheet, in particular, that you would have some flexibility, though, not to potentially take advantage of kind of what's going on here and more aggressively go out there and try to win new customers?

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [56]

--------------------------------------------------------------------------------

I can speak to that. So I think we -- this has been a fascinating focusing exercise for us right now. And I think that you shouldn't read into the fact that we are taking a cautious approach to investment. I mean we are being anything less than aggressive and going after the opportunity that's in front of us right now. I think we are very clear on what our customers are dealing with, and we are really getting creative in terms of how we invest in connecting with our customers on that aspect. There are some other longer lead items that had to do with sort of future plans and other areas that we can afford to pace ourselves with as we go through the next couple of months and really just make sure that we see stability in the market around us as we go forward. But again, you shouldn't read into that, that we're taking our foot off the gas in any way around our core value proposition, which is very applicable to the market situation we're sitting in right now.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

And I'm showing no further questions. I will now hand the call back over to Christy Wyatt for closing comments.

--------------------------------------------------------------------------------

Christy Wyatt, Absolute Software Corporation - CEO, President & Director [58]

--------------------------------------------------------------------------------

Thank you. I want to thank you all again for your time today. It has been a very trying time across the industry, and our thoughts and prayers go out to everyone that has been affected directly or indirectly by this pandemic. We appreciate your interest and look forward to speaking you -- with you again next quarter. Thank you so much, and please stay safe.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

And ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.