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Edited Transcript of ABT.TO earnings conference call or presentation 13-Aug-19 9:00pm GMT

Q4 2019 Absolute Software Corp Earnings Call

VANCOUVER Aug 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Absolute Software Corp earnings conference call or presentation Tuesday, August 13, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christy Wyatt

Absolute Software Corporation - CEO & Director

* Errol Olsen

Absolute Software Corporation - CFO

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Conference Call Participants

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* David Kwan

PI Financial Corp., Research Division - Technology Analyst

* Douglas Taylor

Canaccord Genuity Corp., Research Division - Director

* Kevin Krishnaratne

Paradigm Capital Inc., Research Division - Analyst of Technology

* Richard Tse

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

* Thanos Moschopoulos

BMO Capital Markets Equity Research - VP & Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Absolute Software Corporation's Fiscal 2019 Fourth Quarter and Annual Financial Results Conference Call. (Operator Instructions)

Before beginning its formal remarks, Absolute would like to remind listeners that certain portions of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. Any forward-looking statements contained in today's conference call are made as at 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 may be required by applicable security laws. For more information on the company's risks and uncertainties relating to these forward-looking statements, please refer to the appropriate section of its quarterly MD&A and quarterly financial statements, both of which are available on Absolute's website and SEDAR.

I'd also like to remind everyone that this conference call is being recorded today Tuesday, August 13, at 5 p.m. Eastern time.

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

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

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Good afternoon. Thank you all for joining us on Absolute's Q4 fiscal 2019 conference call. Joining me on this call is Errol Olsen, our Chief Financial Officer.

Fiscal 2019 was a year of change for Absolute, which ended with a strong finish in Q4. We exited fiscal 2019 with ACV of $98 million, up $6.5 million or 7% year-over-year. In Q4, we added $2.8 million of new ACV with 2/3 of that generated from new customers and the remainder from expansion within existing customers. The profitability of our business improved significantly in fiscal 2019 as we generated adjusted EBITDA of $19.3 million, up 110% year-over-year, and adjusted EBITDA margin expanded to 20% this year compared to 10% in fiscal 2018. Q4 adjusted EBITDA was $4.9 million and grew 57% from $3.1 million in Q4 fiscal 2018. Fiscal 2019 was a period of transition for our business. In addition to leadership changes, we invested significantly in our products, while sharpening our focus on developing the team.

Out total headcount remained relatively constant during the year. The complexion of our team changed significantly as we added 124 new individuals at all levels across the company. Hiring activity included the refresh of our senior management team, which was recently further strengthened by the addition of Sandra Toms, our Chief Marketing Officer, who joined us from RSA. Over her 20 years there, Sandra grew the RSA conference into the largest and most notable security networking conference in the world. In Q4, we also expanded our North American market presence with an additional office in San Jose, California. This will allow us to diversify our recruiting efforts as well as better serve our customers and partners in the region. Throughout the year, we continued to deepen our investments in customer success and innovation. These investments translated into our recognition as a leader in the G2 Crowd Grid Winter 2019 report for endpoint management and also saw us named as one of Forbes' top 10 cybersecurity companies to watch in 2019.

The market opportunity for Absolute ahead is increasingly clear. The number of endpoint solutions being deployed within the enterprise and the resulting complexity to reliably manage them while ensuring both endpoint performance and security are resulting in additional exposure and vulnerability for today's enterprise. The ability to utilize near real time data from the endpoint, to leverage that data to deliver actionable insights to IT about where controls are failing, and the ability to apply resilience to self-heal and reinforce the security controls will become a critical skill for every one of our customers. This is the essence of Absolute's platform, which adds resiliency to our customers' operations. We know the need for resiliency is increasing in importance. Industry analysts, like Gartner, are pivoting away from just talking about enterprise security and starting to talk about enterprise resilience. In parallel, IDT recently published its 2019 security priority study that revealed one of this year's top priorities to focus on data security in order to boost corporate resiliency, which is exactly where Absolute is focused. During last quarter's call, I introduced how we've organized the business around 4 strategic pillars, enabling us to capitalize on this growing opportunity. I'm pleased to note that as we head into fiscal 2020 the bulk of our platform modernization work, which took a lot of our focus on capacity through fiscal 2019, is now complete. We've also completed our organizational realignment into these areas and our focus is now shifting to innovation across these segments, focused on new growth and revenue streams. With respect to our persistent strategy with our OEM partners, OEM remains the only persistent solution embedded in the BIOS across vendors, enabling our uninterrupted visibility as the single source of truth for the Enterprise endpoint devices. As we continue to deepen our investment in our OEMs' respective security strategies, we have completed our work to enable Persistence-as-a-Service, enabling partners to leverage our platform to persistent heal their own solutions, independent of our Enterprise software. In the fourth quarter, we signed our first Persistence-as-a-Service deal. We expect this momentum to build in fiscal 2020 and build our -- as we build our ecosystem of partners.

Our Enterprise software business, that enables resilience in over 12,000 global customers of all sizes, in the fourth quarter was a significant ACV growth quarter for us and included several significant deals such as a strategic win with a global leader in the financial services sector as well as a government customer in Latin America. The financial services customer is particularly noteworthy as this is a new customer with an ACV of just under $1 million and our service is being delivered through a managed service provider that maintains the customer's computing infrastructure. This deal was significant not only because of the customer win but also because it marks a milestone in our strategy and tools to support MSPs. While FY 2019 was a year with significant investment in our platform migration, we were also able to deliver many critical new capabilities in our Enterprise software offerings, such as new usability and UI elements, better supportability with integrated customer chat and an extended reach library in which we added 84 new scripts, enabling our customers to further automate their endpoint management on and off the corporate network. These capabilities are a direct result of our customer-focused innovation and support for global market success across Enterprise, Government and Education segments.

During our last call, I spoke for the first time about our strategy around intelligence, leveraging our ability to see what no one else can see as a result of our unique position on the device and to deliver valuable insights to our customers. We have continued to build out our data and analytics, and this year we delivered our first Global Endpoint Security Trends Report in the third quarter. This report not only highlights the global trends we are seeing across the endpoints but also demonstrates how customers can use the embedded technology that they already have to improve IT and security performance. In Q4, we leveraged these insights into specific customer environments to demonstrate the effectiveness of resilience. The focus of our analytics team will continue to be creating repeatable insights that add value for customers, developing relevant benchmarking metrics and delivering actionable real time alerts, including Student Technology Analytics to bolster our Education business.

To wrap up, we made good progress in fiscal '19 and are headed in the right direction. In fiscal 2020, we will continue to do what Absolute does uniquely well: to solve critical customer problems around enterprise resilience and remain focused on the execution of our strategy for long-term growth.

With that, I'll now turn the call over to Errol for a review of this quarter's results.

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Errol Olsen, Absolute Software Corporation - CFO [3]

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Thanks, Christy, and good afternoon, everyone. I'll now walk through our fiscal 2019 fourth quarter and full year financial results. The fourth quarter was highlighted by strong ACV base growth, driven by solid performances in both the Enterprise and Government verticals and continued stabilization within the Education vertical.

Q4 revenue of $25.3 million was up 5% year-over-year. Fiscal 2019 revenue of $98.9 million was up 6% over the prior year, an improvement over the 3% revenue growth in fiscal 2018 and reflecting accelerated ACV base growth through most of fiscal 2019. Adjusted EBITDA, which is defined in our press release and MD&A, for Q4 was $4.9 million or 19% of revenue, up from $3.1 million or 13% of revenue in the prior year period. Fiscal 2019 adjusted EBITDA was $19.3 million or 20% of revenue, up 110% over fiscal 2018 adjusted EBITDA of $9.2 million, which represented 10% of revenue. The improvement in profitability reflects revenue growth coupled with a lower expense base, resulting from focused cost management, some delays in hiring associated with leadership changes and a lower Canadian dollar. Gross margin in Q4 was 86% compared to 88% in Q3. The lower gross margin in Q4 reflected a nonrecurring adjustment to warranty accruals as well as to the fact that Q3 gross margin was higher than our historical run rate.

Total headcount at June 30 was 477 compared to 466 at the end of Q3 and 495 at June 30 of 2018. Our Commercial ACV Base at June 30 was $98 million, representing an increase of 7% over the prior year and an increase of 3% over the Q3 closing balance. The annual increase of $6.5 million represented a significant improvement over the $3.7 million of net growth that we achieved in fiscal 2018, reflecting improvements in both existing customer ACV expansion and new customer acquisition. During fiscal 2019, we secured $5.2 million of ACV from new customers, compared to $3.4 million in fiscal 2018. Q4 performance was particularly strong with new customer ACV of $2.1 million, including a strategic win with a Fortune 500 global financial institution, as mentioned previously by Christy. The Enterprise portion of the ACV base, which represented 55% of the base at June 30, increased 11% year-over-year and was up 5% sequentially. The strong Q4 performance reflected both new customer acquisition as well as strong existing customer expansion activity. The government vertical, which includes state, local and federal government customers, represented 12% of the ACV base at June 30, an increase by 15% year-over-year and by 3% sequentially. Together, the Enterprise and Government verticals now represent 67% of the ACV base and were up a combined 12% year-over-year. The mix of our business continues to shift toward these higher growth segments. The Education vertical, which represents 33% of the ACV base at June 30, was down by 1% year-over-year and was flat sequentially. This is a significant improvement over the 7% decline that this vertical experienced in fiscal 2018 and reflects the impact of new site licensing models and recent product enhancements.

Looking now at performance by geography. Our international business performed particularly well in Q4, with the ACV base up 26% year-over-year and up 12% sequentially. Both our EMEA and Latin American businesses performed exceptionally well during the year. The North American ACV base was up 5% year-over-year and up 2% sequentially, and North American customers accounted for 87% of the ACV base at June 30.

Turning to cash flow, cash from operating activities in Q4 was $3.5 million compared to $5 million in Q4 of last year. Fiscal 2019 cash from operating activities was $10.3 million or 10% of revenue compared to $12.5 million or 13% of revenue in the prior year. The decrease in fiscal 2019 operating cash flow was attributable to a heavier distribution of annual billings in the fourth quarter and related working capital changes

Moving now to our expectations for fiscal 2020. I'll remind listeners that the following expectations constitute forward-looking information and financial outlook and are qualified in their entirety by the cautionary statements contained in the MD&A. And before I start, I would also like to point out that our forecast for adjusted EBITDA and cash from operating activities incorporates the expected impact of IFRS 16 leases, which will be implemented commencing in fiscal 2020 and is expected to positively impact both fiscal 2020 adjusted EBITDA and cash from operating activities, each by between $2 million and $2.5 million or approximately 2% of forecast revenue. This standard is discussed in more detail in the notes to our June 30 financial statements and our MD&A. Revenue is expected to be between $103 million and $106 million, representing 4% to 7% annual growth. Adjusted EBITDA is expected to between 18% to 22% of revenue. During fiscal 2020, we intend to make measured investments in targeted areas of the business where we expect a near-term return on investment and we also expect a stronger Canadian dollar. The areas of incremental investment are in inside sales and channel support, customer success and corporate branding and awareness. These investments will be largely over the first half of the fiscal year and will be tempered against our top line progress. Cash from operating activities is expected to be between 16% and 22% of revenue compared to 10% of revenue in fiscal 2019, with the expansion related to an increase in volume from contracts with annual billings. Capital expenditures are expected to between $3.5 million and $4 million, relatively consistent with $3.9 million in fiscal 2019.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Doug Taylor with Canaccord Genuity.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [2]

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A couple of questions for me. First, within your guidance that you've provided, the 4% to 7% growth, could you give us any color on what your expectations are for the stabilization or rebound of the education market within that, which has been masking the growth in some of the other sectors on your top line?

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Errol Olsen, Absolute Software Corporation - CFO [3]

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Sure, Doug. So yes, with respect to education I would say our outlook remains cautionary -- cautionarily optimistic. So what we've built into our model is a slight improvement over our performance in fiscal 2019 but a very small improvement. So the growth that we expect is largely within the Enterprise and Government sides of the business.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [4]

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Okay. So -- and very quick math there would suggest well north of double-digit growth in the other businesses outside -- the other 65%, is that correct?

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Errol Olsen, Absolute Software Corporation - CFO [5]

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That's correct. Yes.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [6]

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Okay. The second question. Doing some quick math with your guidance metrics and with respect to cash flow, it would appear that in most of the scenarios that could happen there, you'd have enough free cash flow to cover the current dividend payment. So first, I guess just ask you to check my math there. But I also want to ask -- the IFRS and the accounting treatment, and dragging some of the expenses below the line or into financing, I guess, how much of an impact that has?

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Errol Olsen, Absolute Software Corporation - CFO [7]

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Yes. So on the second part of that question, it's -- so the impact on cash flow is -- on operating cash flow will be between 2.5 -- or $2 million and $2.5 million for the year. And you're right, it is a movement from operating cash flow into financing activities.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [8]

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Right. And even taking that into consideration, you expect to produce enough cash flow to cover the current dividend, is that correct?

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Errol Olsen, Absolute Software Corporation - CFO [9]

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We do. Yes. We do. And the dynamic that's at play here is a reflection of the shortening of prepaid contract terms that we've seen over the last couple of years. And as we've moved to that -- to a higher volume of contracts that are paid annually, we have seen a compression in our cash margins, and we really felt the brunt of that in fiscal 2019. So moving into fiscal 2020, we're seeing a higher volume of contracts with annual payments, hence the expansion in cash flow margins. And we expect that expansion to continue going into fiscal 2021 as well.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [10]

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So do you expect your cash flow margins will approximate your EBITDA margins at some point again or even surpass them as all of that normalizes in the coming years?

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Errol Olsen, Absolute Software Corporation - CFO [11]

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We do. Yes. Yes, over time we expect them to be -- going out sort of 2, 3 years, we expect them to be slightly higher than EBITDA margins, and the reason for that is there will always be a meaningful component of our business that is paying on a prepaid basis on multi-year contracts.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [12]

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Particularly as growth reaccelerates. That's helpful.

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Errol Olsen, Absolute Software Corporation - CFO [13]

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Yes.

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Operator [14]

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Your next question comes from Thanos Moschopoulos with BMO Capital Markets.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [15]

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Given that you just went through the, obviously, a key quarter for Education, great to see stability there, maybe you could elaborate a bit in terms of what you're seeing? How much of that is really Student Analytics offsetting ASP pressure that you would have otherwise seen versus expansion? What are the dynamics in that market?

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Christy Wyatt, Absolute Software Corporation - CEO & Director [16]

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I would say -- I don't attribute a lot of the performance in the previous quarter to Student Technology Analytics yet. I think that we continue to make progress on that product -- on the whole intelligence and analytics pillar as a whole. I think that what we've seen is, I think, another quarter of somewhat stability in terms of renewals and some amount of upsell and expansion as well. So as Errol pointed out earlier, I think we remain cautiously optimistic, but there's been -- there was no -- this wasn't driven by any new product introduction or any other sort of natural cycle.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [17]

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Okay. And can you expand a bit on the MSP deal that you highlighted. Would this be your largest MSP deal to date? Have you done previous deals through this partner? And maybe give us some color in terms of how that sales process went about and what the partner is really using -- or what the customer is using your software for, is it more around patch management? Is it more around security? A bit of both?

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Christy Wyatt, Absolute Software Corporation - CEO & Director [18]

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Sure. So this is not the first MSP we've ever worked with. This is, I believe, the largest MSP deal we've seen with a customer of this size. They're managing the entire infrastructure of the organization, the entire desktop infrastructure essentially. And they're generally using us for what I would characterize as asset management and security control use cases, which is a great starting point. But it's a very broad deployment and it's a really interesting large project.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [19]

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And so with this particular MSP, had you done other deals as well?

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Christy Wyatt, Absolute Software Corporation - CEO & Director [20]

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Or sorry, no. No, we hadn't. This is our first deal with this particular MSP.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [21]

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Okay. And you mentioned the Persistence-as-a-Service deal, remind -- I think this is the first time you've mentioned that deal, if I'm not mistaken. If you could elaborate in terms of any color on that, that'd be helpful.

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Christy Wyatt, Absolute Software Corporation - CEO & Director [22]

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Certainly. So this is very early progress on one of our new initiatives that I started to describe in the last call. Persistence-as-a-Service is essentially the capability for us to license out Persistence independent of our Enterprise software. So in this particular case, a partner is using us to persist an independent application. So it is very, very early days. And as I said it's a new initiative but it does open up some interesting new revenue opportunities for us down the road.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [23]

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And can you comment on whether the partner is an ISV or a consulting firm or what kind of partner they are?

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Christy Wyatt, Absolute Software Corporation - CEO & Director [24]

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I can't really comment on the partner at this moment. They haven't announced publicly the feature or the capability. So once that becomes public, I'm happy to talk about it.

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Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [25]

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Okay. And then finally, you highlighted the strength in Latin America and EMEA. I know that the traction there can be a bit lumpy, based on some of these large deals coming through, but would it be based on deal timing or is there something else that you would highlight as far as the improved growth in that area, recent actions you've taken or otherwise?

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Errol Olsen, Absolute Software Corporation - CFO [26]

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Sure. So in Latin America, we're seeing just an overall increase in volume within that business. So no, I wouldn't say it was just a single quarter that caused that growth. What we're seeing in Latin America, interestingly, is a shift that -- historically that business was largely education-centric. We're seeing a lot more Enterprise volume coming out of Latin America as well as well a lot more government business.

And in EMEA, the dynamic is similar but for different reasons. So in EMEA, once again we're seeing the underlying just increased business -- the underlying business, and a lot of that is on the back of the tailwind that we're getting from GDPR.

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Operator [27]

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Your next question comes from Kevin Krishnaratne with Paradigm Capital.

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Kevin Krishnaratne, Paradigm Capital Inc., Research Division - Analyst of Technology [28]

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I just wanted to go back to the billings dynamic. And you mentioned you're seeing a higher volume of annual deals, and certainly you see that with your average, I think, in the MD&A, noting 24 months for a contract versus it was 36 months a year ago. So just how do we think about what that looks like at an existing customer? So if you've had a customer that previously was on a 3-year deal and they're coming up for a renewal, are -- is it that you're seeing them take an offer and then spread that across an even greater number of devices? Or are they adding a more -- are they going to a higher price point? Just kind of walk through the dynamic there with maybe an existing customer in the billings dynamic?

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Errol Olsen, Absolute Software Corporation - CFO [29]

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Sure. It's a great question, Kevin. And just before I answer that, I'll just clarify on our average contract term, and -- in our MD&A, we have changed the way that we calculate the average contract term, and we've moved to just a simple total invoice amount over the annualized value, and that's where that 24 months comes from. Historically, what we were doing was more of a weighted calculation, which is where that 36 months came from. But what we've seen over the last couple of years is a movement from probably using that simple average calculation from about 30 -- probably 32 months down to 24 months. So it certainly has come down.

Now the dynamic that would happen with a customer who converts to annual billing is that customer traditionally would start through our land-and-expand model with our OEM partners. They might be attaching licenses to devices and buying multi-year prepaid -- call it a 3-year prepaid license on each device. When we go in to that customer, the conversation happens around expanding and instead of the customer just buying on new devices, we license across the entire population of devices in that customer's environment. Now that customer will have -- typically they'll have effectively some prepay on account because they've been buying prepaid licenses. We will apply whatever might be in that prepay, it's in our deferred revenue, to that payment and then the customer, of course, will cut a PO for the difference. And then moving forward they'll be paying annually. So what we're getting from that customer during that play is an ACV expansion because now they're licensing all devices. And typically what will also happen in that scenario is the customer -- that's the opportunity for an upgrade as well. So quite often that customer will be upgrading from our middle tier, which is control, to our top tier, which we call resilience. So ACV expansion happens both through a horizontal expansion as well as vertical.

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Kevin Krishnaratne, Paradigm Capital Inc., Research Division - Analyst of Technology [30]

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Okay. Very good. I guess maybe on a related note with maybe going to a new customer, what are you seeing out there with regards to the sales cycle relative to say a year ago? Are you finding that as security, and now resilience, is becoming more important, more in demand, that you're starting to see any shortening of their decision time to purchase? Just if you can walk through what your sales cycle has been looking at like year-over-year?

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Christy Wyatt, Absolute Software Corporation - CEO & Director [31]

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So I'm going to speak anecdotally because I wasn't here a year ago, but Errol will correct me. I think that the need for resilience, I think, is increasingly important. That said, I think a significant percentage of our customer base is still on those lower-tier products, the visibility and control product. And so I do think the expansion cycle Errol was just talking about is really introducing the customer to sort of that higher-tier value proposition. With net new logos, it's going to depend on whether we are being introduced to that new partner or that new customer through a channel partner. Whether it's coming through an attach or in some of the larger deal cases where we're working with the partner directly.

And I think the sales cycle for those, from what I've seen, is pretty typical from what I've seen in other enterprise SaaS businesses, meaning very large financial, for example, federal customers, large strategics, still have a reasonably long sales cycle for a large deployment. Now one of the interesting dynamics of our business, just to close out the thought, is because we do a lot of what Errol was referring to as attach, is that often times some of our largest customers started very small and that landing deal can be very, very tiny in that net new logo bucket, but grow over time as they add new devices. And so I would say there's a lot of variability in terms of how we get introduced and how we close that first deal. I think that what we're very good at is the upsell and expansion piece.

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Kevin Krishnaratne, Paradigm Capital Inc., Research Division - Analyst of Technology [32]

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Great. Question maybe on the Enterprise wins and you mentioned the financial services company, but could you talk about the San Jose office, the opening there, maybe speak to what you might be seeing from those types of customers? What does that speak to the opportunities that you're seeing there? It's been maybe a year or 2, but there was a point in time when you were mentioning wins with customers like Facebook and Uber. I'm just wondering if you could expand upon the strategy there?

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Christy Wyatt, Absolute Software Corporation - CEO & Director [33]

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So I would say -- I don't know that there's been a shift in our sales strategy out of the San Jose office. I think the San Jose office, at this point, is a satellite location -- a new location, I wouldn't call it a satellite location. A new location. There's -- a fair number of the senior team is down there and it's a space where we will continue to grow additional capabilities.

I think with respect to our customers in that region, we continue to have a lot of very strong customer relationships in the Silicon Valley space. I also think another important reason for us to be in Silicon Valley is because of the partner ecosystem. As we work more closely with other enterprise vendors and build up that ecosystem of applications we persist through resilience or even Persistence-as-a-Service, being within that ecosystem and closely connected with those partners is actually going to be increasingly important.

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Kevin Krishnaratne, Paradigm Capital Inc., Research Division - Analyst of Technology [34]

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Great. And maybe just a last one for me. With regards to the sort of intelligence and analytics pillar, I know that's going to be a focus for you in 2020, and you're going to be investing in it. Just how do you think about what the go-to-market strategy there might be like? Would it continue to be with your OEM vendors? Would you need to think about a different type of partner ecosystem? Or just what are your -- I know it's early but kind of talk about what your thoughts are with the approach there?

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

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So I think the 2 pieces we're working on right now, the first is what I would call broad insight, so much like the sort of industry report we released a few months ago, and as I mentioned, we'll continue to come out with more. I think we are in a position to deliver some very unique insights about what's going on across enterprises globally because of the position that we're in on the endpoint. So I think that's going to be -- continue to be an important -- that research component is continuously an important part of the investment. I think the second place where you'll see the investment from the investment -- or for the intelligence products is through the resilience, the Enterprise-focused products. It will show up in terms of new capabilities and new features in the higher-tier version of the product through resilience. At this point, we haven't announced a stand-alone product based on intelligence. That certainly could be something we look at at some point in time, but that's not something we've talked about today.

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Operator [36]

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Your next question comes from David Kwan with PI Financial.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [37]

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A lot of questions have already been asked here, so I just got a handful here. As it relates to the international space where you've seen much stronger growth, albeit off of a lower base, I know -- I think you guys have been somewhat hesitant to invest more into that business given the opportunity you've got in North America and given the strong performance that we've seen over the last 3 quarters in particular. Is that something that you might change strategy there and start to plow more resources into EMEA and Latin America in particular?

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Christy Wyatt, Absolute Software Corporation - CEO & Director [38]

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David, that's a great question. I think the way I view it is through thoughtful expansion. Where we've seen a lot of success in international theaters as well as in North America is where we enter new markets with a partner. So as we're seeing success on some of our OEM strategies here in North America, we're packaging those strategies up and engaging the international teams with those partners. So I think what you should expect from us is that we'll continue to grow with our OEMs in strategic markets. And absolutely you'll continue to see us do more of that. What you probably won't see us do is sort of go out ahead of the partner, right? Go out and start to sell direct, independent. I think what we've found, as I've described before, is this "land with the partner and expand with our products" works very efficiently for us and works very effectively. And so we are spending a lot of time looking at which strategies are working well with which partners and into what international theaters does it make sense for us to take those.

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

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Have you found that there are certain strategies that work well across international regions? Or is it very kind of customized as to how you approach each market that you're -- either what to enter or scale [up]?

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Christy Wyatt, Absolute Software Corporation - CEO & Director [40]

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I think it's very dependent. When we're talking about going to market with our partners, I think it's very dependent on the partner. How they organize and how they operate varies both between partners but also within the organization. How they may be operating in international theater could look very different from how they're going to market within other regions.

So I would say that the product and the offering and the strategies remain the same, but being able to kind of deploy those and make the right connections and go and work and plug into the right places is something that we have to be thoughtful about, as we're starting into a new region, right. And I think for many of these regions we're sort of reopening spaces with them that we haven't been in for a while.

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

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And the partners that you're working with, are they typically ones that are local in a sense that they are really in 1 or maybe 2 countries? Or are there several that you're dealing with that span a much larger footprint?

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

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Well, in most cases when we're talking about landing in a new market, I'm referring to our OEM partners. So these are the large manufacturers that are -- where we're going direct and engaging their customer base directly with them.

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

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Okay. So I didn't know to what extent they might be somewhat like the MSPs that -- where you had a large customer win in Latin America?

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Christy Wyatt, Absolute Software Corporation - CEO & Director [44]

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The MSP, what we've seen is that the MSP is taking an increasingly important role in how you support and deploy security capabilities across the enterprise. So I think in markets where we've started to establish a presence, looking for strategic MSP partners is absolutely a part of our focus. We've done some of the product work that makes it easier for our MSP partners to actually use our product to support multiple customers, and that is one of the themes that you'll see us continue to touch on as we go forward. I don't know that we'd be going out and recruiting MSPs in regions where we don't already have some go-to-market motion. I think it would be in conjunction with.

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

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Okay. And the one that you did talk about, the large financial institution, was that across -- are you guys being deployed across all their endpoints? Or is there still opportunities to upsell them?

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

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Without getting too specific, I would say the design is to be incorporated across a very large percentage of their endpoints as they're going through a significant refresh themselves right now. But I think there definitely is lots of opportunity to expand into higher-tier products as well as onto additional services.

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

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One more question. As it relates to this deal, obviously it's one that -- one of your largest ones, I think, to date. And that was kind of maybe a focus a few years ago in terms of trying to pursue some of these larger deals and that's kind of changed since then. How are you seeing, I guess, the environment right now, for some of these larger deals? Is this something that maybe we don't see every quarter, but could see a little bit more frequently than we've seen in the past couple of years?

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

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My experience with enterprise software is that's always going to be a lumpy part of your business. I think that we're not -- I don't think that our growth strategy is dependent on what I would call whale hunting, which is kind of going and finding. We absolutely have a very large number of Global 2000 customers, and we continue to engage and expand on our strategic accounts team. I think that there is a tremendous amount of opportunity within our Global 2000 customers to, again, upsell and expand the presence we have within those. And then as we continue to show success at establishing enterprise resiliency as a critical capability for every enterprise, it will be increasingly visible that this is something we can translate across to even new customers. But I think one of the benefits we have is even when we're talking with a Global 2000, as I mentioned before, sometimes our first introduction to them can be quite small. So it can be a relatively small project that we're working on with a partner that gives us the opportunity to go in and talk about the bigger picture. So I'll go back to the land-and-expand strategy, this land with a partner and expand with the value proposition is really critical to our growth.

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

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Last question here. Just on the headcount side, it looks like you're getting back towards the 500 headcount that we've seen historically. Is that still kind of a target? Or are you kind of happy where you are at current levels?

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

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I think we have a little bit more work to do. But as I've said before, I think we have an envelope that we're comfortable operating within from a spend perspective. We have some new projects and some new products. I would talk a little bit more about moving talent around as opposed to any massive hiring objectives. So I would see some incremental expansion at this point. I wouldn't expect any sudden moves.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [51]

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It seems some of the headcount probably is related to the dynamic of more annual payments and renewals, thus more contact with these customers than you might have had in the past, so needing to add headcount as it relates to that?

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

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We definitely have increased our investment in customer success, both in headcount as well as technology. And I think we're very happy with the results that that investment is returning and that's something that you'll continue to see us do. And I think that that's just part of building a very strong SaaS platform that we can then go and layer. Every time we talk about intelligence or resilience or adding new capabilities, that's an opportunity to leverage that customer success team. And some of the technology we've incorporated to sort of instrument the platform that helps us direct that investment. So some part of it is that, yes. I wouldn't know how to break that out at this point, but it's meaningful.

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Errol Olsen, Absolute Software Corporation - CFO [53]

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Yes. But just to add a little bit more color to it is the annual payments, actually, they add efficiency to the sales model. I mean this is where a customer has signed a contract for typically 3 years. It's paid annually. And so that annual contact with the customer is more about just getting a PO and it's not a sale. And it is more efficient than our traditional model, which is where you might have a sales rep quite often popping into a customer every quarter just to maintain the fact that we are -- they're still buying us attached to their new devices. So it's a much more efficient model for us.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [54]

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Right. So one more question for you, Errol, actually on the gross margin side. Obviously, the gross margins came down, I think, to maybe a more normalized number this quarter. Is the kind of the 80% -- 86%-ish range a good number to use going forward?

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Errol Olsen, Absolute Software Corporation - CFO [55]

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Yes. I would say going forward 86% is probably the right number to use, 86% to 87%. We will -- just through scale, we will see a little bit of an uplift in gross margins over time.

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Operator [56]

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

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [57]

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Yes. I just have one question here. Just wondered if you could sort of frame for us the opportunity that you have to driving more productivity within the PC OEM partnerships here and any strategy around that?

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

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By productivity, do you mean the sales productivity?

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [59]

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Yes. I think you've had this long list of PC OEMs for some time and I think -- I've talked to sort of previous management teams, and over the course of time, I think, many of them said that you could potentially drive a lot more productivity out of that base.

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Christy Wyatt, Absolute Software Corporation - CEO & Director [60]

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Absolutely. So as I commented or just touched on briefly a little bit earlier, I think when we think about where we invest our marketing dollars, into channel-focused programs is one of our top 2 priorities. So I think what we've seen over the past year or so is that that's the most efficient use of our marketing dollars. So whether we're talking about going into new theaters with partners, whether we're talking about taking programs into partners, especially some of the Tier 2 partners. There's, I'd say a healthy appetite for us to do more in enabling them to sell and be able to support our products. So that is absolutely one of the areas of our focus as we go into the next year.

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Operator [61]

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There are no further questions at this time. I would now turn the call back over to Christy Wyatt.

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Christy Wyatt, Absolute Software Corporation - CEO & Director [62]

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All right. Well, thank you everyone for joining us, and we look forward to talking to you next quarter.

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Operator [63]

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This concludes today's conference call. You may now disconnect.