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Edited Transcript of GUID earnings conference call or presentation 2-May-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Guidance Software Inc Earnings Call

Pasadena May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Guidance Software Inc earnings conference call or presentation Tuesday, May 2, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry J. Plaga

Guidance Software, Inc. - CFO and COO

* Patrick Dennis

Guidance Software, Inc. - CEO, President and Director

* Rasmus van der Colff

Guidance Software, Inc. - CAO and VP of Finance

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Conference Call Participants

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* Brian Matthew Alger

Roth Capital Partners, LLC, Research Division - Head of Technology Research and Senior Research Analyst

* Hendi Susanto

G. Research, LLC - Research Analyst

* Kevin Liu

B. Riley & Co., LLC, Research Division - Senior Analyst

* Michael Wonchoon Kim

Imperial Capital, LLC, Research Division - SVP

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Presentation

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Operator [1]

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Good afternoon, everyone. Welcome to Guidance Software's First Quarter 2017 Earnings Results Conference Call. (Operator Instructions) As a reminder, this call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Rasmus van der Colff, Vice President, Finance and Chief Accounting Officer. Please go ahead.

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Rasmus van der Colff, Guidance Software, Inc. - CAO and VP of Finance [2]

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Good afternoon, and welcome to Guidance Software's First Quarter 2017 Earnings Conference Call. With me today are Guidance Software's President and CEO, Patrick Dennis; and our COO and CFO, Barry Plaga.

We would like to remind everyone that during today's call, we will make certain forward-looking statements regarding the future operations, opportunities and financial performance of Guidance Software within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements involve a high degree of known and unknown risks and uncertainties that could cause actual results to differ materially from those to be discussed. Please also refer to the risk factors and other disclosures contained in the company's most recent report on Form 10-K, 10-Q and 8-K filed with the SEC for a more detailed discussion of these factors.

The forward-looking statements made in today's conference call are based on information available as of today, May 2, 2017, and Guidance Software assumes no obligation to update such statements to reflect events or circumstances after today's date. Additionally, unless otherwise noted, we will discuss non-GAAP results during today's call. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results, which can be found in today's press release and also in our supplemental slide presentation on our website. Lastly, I would like to remind everyone that today's call is also available via webcast on Guidance Software's Investor Relations website. A replay will also be available on this site.

And with that, I would now like to turn the call over to Patrick. Patrick?

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Patrick Dennis, Guidance Software, Inc. - CEO, President and Director [3]

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Thank you, Rasmus, and thank you, everyone, for joining Guidance Software's First Quarter 2017 Earnings Conference Call.

On today's call, we will discuss Q1 in detail and then take questions. Q1 was a solid start toward achieving our 2017 objectives. The company performed well across meaningful operating metrics.

Revenue of $26.8 million or 4% growth year-on-year, earnings per share of $0.07 compared to negative $0.08 in Q1 of 2016. A cash balance of $17.8 million up from $12.6 million sequentially. Product revenue of $8.9 million or 19% growth year-on-year. Forensic Security suite bookings growth of 169% year-on-year. We added 1 million new endpoints and upgraded an additional 4 million and the number of deals over $250,000 doubled year-on-year.

The growth continues to be driven by our security line of business. In total, our enterprise software business was up 90% year-on-year. I'd like to focus on the key wins from Q1 that contributed to this growth. We won new business at one of the world's leading global security and aerospace companies. This company selected Guidance to be the basis for their worldwide enterprise investigations platform.

A global $1 billion IT services company with major operations throughout North America, Europe and Asia, selected Guidance to help secure their critical infrastructure. Our Forensic Security suite was selected to establish an enterprise investigation and security platform. NTT Communications is a leading global provider of information and communications technology solutions within the NTT Group. This customer has about $100 billion in revenue and over 10,000 enterprise clients. NTT chose Guidance as their information investigation, search and collection platform.

The quarter also included transactions with 15 financial services firms, including Barclays, TD Bank, Ecobank, AMEX, FIS, Visa, Cigna, The Hartford and several other major financial institutions in the U.S., Europe and even South Africa. Customers increasingly choose Guidance solutions because they see the value of the Forensic Security suite of products and the universal agent platform technology. Our strategy is delivering results. Revenue, profitability and cash are all trending as planned.

With that, we remain focused on executing our 2017 plan and we reaffirm our full year guidance.

I will now turn the call over to Barry to cover the financial metrics in more detail and then we'll take questions. Barry?

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Barry J. Plaga, Guidance Software, Inc. - CFO and COO [4]

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Thank you, Patrick. My prepared remarks today will focus on our first quarter performance. Our first quarter revenues were $26.8 million, up from $25.8 million in Q1 of the prior year. This quarter represents our fifth sequential quarter of year-over-year growth, a signal of the ongoing strength and momentum we are achieving through our focus on cybersecurity.

Total product revenues were $8.9 million compared to $7.5 million in the first quarter of 2016. We saw solid enterprise software bookings in the first quarter. Our endpoint security average selling price was $94,000, up 68% compared to the first quarter of 2016. Gross margin on product revenue in the first quarter was 80% compared to 74% in the prior-year period. This improvement was attributable to the increase in the mix of software revenues.

Services revenues were $7.8 million, down from $8.5 million in the year-ago period. The decline includes a product mix shift away from eDiscovery and security software requires fewer related services. Gross margin on services overall was strong at 40%. Maintenance revenues, which represent our recurring revenue stream, were $10.1 million, up 3% compared to the prior-year period. Gross margin on maintenance revenues was 93%, in line with historical periods.

The increase in mix of our enterprise security revenue drove a 2 point overall gross margin improvement in the quarter to 73% versus 71% a year ago. Research and development expenses were 19% of revenues, selling and marketing expenses were 35% of revenues and G&A was 8% of revenues. We also incurred approximately $1.4 million in realignment expenses related mostly to the consolidation of certain of our facilities. For the quarter, non-GAAP net income was $2.2 million or $0.07 per diluted share, as compared to a non-GAAP net loss of $2.2 million or $0.08 per share in the first quarter of last year.

Turning to the balance sheet and some related metrics. Cash and cash equivalents as of March 31, totaled $17.8 million with no borrowings outstanding. This compares to $12.6 million in cash as of December 31, which included $3.5 million in borrowings outstanding. Cash flow from operations for the first quarter was $8.7 million compared to $2.3 million in the prior-year period. We are reiterating our guidance for 2017 as follows: We expect our 2017 revenue to be in the range of $112 million to $118 million with non-GAAP EBITDA in the range of $9 million to $11.8 million, or non-GAAP EBITDA margins of 8% to 10%. In addition, we expect non-GAAP earnings per share in the range of $0.28 to $0.36 per share, a dramatic turnaround from the loss of $0.05 for the full year 2016.

And with that, I'll turn the call back over to Rasmus.

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Rasmus van der Colff, Guidance Software, Inc. - CAO and VP of Finance [5]

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Thank you, Barry. Before going to Q&A, I'd like to mention our upcoming Enfuse Conference in Las Vegas during the week of May 22. We hope to see many of you there as well as at the B. Riley Investor Conference in Santa Monica on May 25.

With that, operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Kevin Liu from B. Riley & Company.

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Kevin Liu, B. Riley & Co., LLC, Research Division - Senior Analyst [2]

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First question, just given the strong product revenue growth you've seen over the past 4 quarters, I'm just curious as to how you're feeling about the pipeline now and what you feel is driving that acceleration in the growth rate?

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Patrick Dennis, Guidance Software, Inc. - CEO, President and Director [3]

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Kevin, it's good to hear from you. So we feel good about the pipeline. You know on these calls, I've historically not reported on pipeline specific metrics, but I give you a sense of whether or not there are large transactions closing, and we tend to give you a feeling for ASP expansion. So I guess, here is how I would characterize the pipeline. We reaffirmed our guidance, so I think you get a sense of where we think the revenue is going to fall. We see strong signals around the security suite. There tends to continue to be a bit of a mix shift here, but if you look at the quarter all up and all in, a significant part of the business came out of forensic security suite and we saw great growth in our enterprise business. Some of that expansion is associated with improved ASPs, along with larger individual transactions and just some great momentum that we had coming out of Q4.

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Kevin Liu, B. Riley & Co., LLC, Research Division - Senior Analyst [4]

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Got it. And given what you have in the pipeline and the current growth rate, can you talk a little bit about how you're thinking about when the right time to start reinvesting back into the sales organization is and whether you have expectations for ramping up headcount there?

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Patrick Dennis, Guidance Software, Inc. - CEO, President and Director [5]

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At this stage, I still think there's room left for us to push on the yield. Again, we don't give a particular sales force metric. What I'd tell you is the team, broadly speaking, is doing a good job. You can see that in the results. We're starting to have a sales force that is getting to have tenure after effectively the reengineering that we did over the last year. So at this stage in the game, I don't necessarily think that it's just about headcount. I think that it's about us pushing on the yields a bit. And if we start to see something super interesting, obviously, we'll take advantage of that opportunity, make sure we communicate that to you folks in advance.

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Kevin Liu, B. Riley & Co., LLC, Research Division - Senior Analyst [6]

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All right. And just lastly for me, with the upcoming Enfuse Conference, wondering if you could preview any sort of significant product introductions or feature updates that you believe could help drive continued growth on the product side?

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Patrick Dennis, Guidance Software, Inc. - CEO, President and Director [7]

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I think that it's going to be a really exciting Enfuse Conference and there might be things worth coming to see.

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Operator [8]

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Our next question is from Brian Alger from Roth.

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Brian Matthew Alger, Roth Capital Partners, LLC, Research Division - Head of Technology Research and Senior Research Analyst [9]

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Just wondering, earlier this year we had Wikileaks dump some data coming out of our U.S. government agencies, basically implying that virtually any electronic device could be hacked and used against people, whether it's by our government or by bad actors. I'm curious if that is included in the endpoint market share data that was done by Gartner or if that's just more traditional enterprise hardware endpoints that were included.

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Patrick Dennis, Guidance Software, Inc. - CEO, President and Director [10]

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It's a really important question. So this is effectively a comment that's more about the Gartner results than it is about our business. What I'd tell you is, Gartner historically and in this report is better at reporting on traditional endpoints. That tends to be the focus of their scope. That said, and Brian it's good to hear from you, and you know this, but for others that might be on the phone, we do think that there's an opportunity for us to grow our business by selling endpoint security software onto an emerging class of endpoints that we refer to as edge points. We think those are the devices that tend to have sensors on them, they tend to have artificial intelligence and they tend to be fairly autonomous. The other point around those devices is as they tend to exist on the edge of an unsecured network. And if you think about the future, where Teslas can drive themselves, and Uber cars can drive themselves and there's drones, all those types of devices, we see those as endpoints and we think that there's an opportunity for us to have some growth in that category.

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Brian Matthew Alger, Roth Capital Partners, LLC, Research Division - Head of Technology Research and Senior Research Analyst [11]

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Okay. That's exactly where I wanted to go with this, in that we seem to be seeing some pretty steady growth here, and it's great to see the triple digit kind of movement that we have in the forensic security. But I guess, if we're going to see a step function or a real jump, don't we need to see a new type of adoption or a new type of implementation of endpoint security for us to accelerate to a different plane?

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Patrick Dennis, Guidance Software, Inc. - CEO, President and Director [12]

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So I think if I were in your -- so first of all, yes. So if I were in your shoes, I would look for us to do something around mobile. I think that's an important segment that's not yet fully and completely served. I think you should expect us to continue to do things in and around cloud, whether that's viewed as an endpoint or it's viewed as a repository for information that needs to be protected, that's an important segment for growth. And then you should expect us to message and bring product out in a leadership position around this edge point opportunity. We think to fully access that opportunity, you need a combination of agent-based, which we're known for, agentless, which we've been using in our threat assessment for the last several quarters and perhaps even embedded technologies. We think some combination of those 3 will help the company reach the maximum portion of the addressable market.

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Operator [13]

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Our next question is from Michael Kim from Imperial Capital.

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Michael Wonchoon Kim, Imperial Capital, LLC, Research Division - SVP [14]

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So just on Endpoint Security, I think you mentioned you had another 1 million new endpoints. But I was curious about the 4 million upgraded endpoints and if that's driving some of the ASP expansion, and how should we think about the contribution as you upgrade your installed base?

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Patrick Dennis, Guidance Software, Inc. - CEO, President and Director [15]

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Well, Michael, you know this, again, for others on the phone that may not have as deep a familiarity with the company, historically, there had been some pricing challenges. And one of the reasons we started to talk to you all about the upgraded endpoints is, and I think what should hear from us on that is, that's the company able to go back through the installed base and perhaps get clients that were on less favorable contracts onto more favorable contracts, as they see additional value in our newer software products. So we've been releasing software recorder, it gives is a great way to go back and talk to customers who have owned the software for a long time about the new value that they can get. Oftentimes those conversations lead to a node expansion in addition to confirming or renewing their SMS. So I think we're getting pretty good at that. Over time, we'll see if 4 million endpoints is a trend or not. But I think it gives you kind of a good sense of how we've been able to roll back through the customer base and cross sell and upsell based on new capabilities that we have in the forensic security suite.

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Michael Wonchoon Kim, Imperial Capital, LLC, Research Division - SVP [16]

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Great. And then just switching over to the multi-product sales side. Was that a contributor to some of the large deal activity? And I'm not sure if caught this, but did you see any million dollar transactions close in the quarter or pretty close to that?

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Patrick Dennis, Guidance Software, Inc. - CEO, President and Director [17]

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We had a couple of substantial transactions that kind of eked their way close to that bar. What I would tell you is, you ask this question quarter in and quarter out. Typically I've said that there was tended to be 1 product or perhaps 2 products sold. I think we're starting to shift into more of the norm where kind of the core enterprise software transactions include 2 products. It continues to be -- continues to include Endpoint Investigator and then something like Endpoint Security or one of the other products in the suite.

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Operator [18]

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(Operator Instructions) Our next question is from Hendi Susanto with Gabelli & Company.

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Hendi Susanto, G. Research, LLC - Research Analyst [19]

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First question is for both of you. What are your assumptions of service and maintenance revenue in your annual guidance? Specifically would you be able to share some insight, whether the year-over-year service revenue decline is unique to Q1 or whether that trend may continue furthermore?

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Barry J. Plaga, Guidance Software, Inc. - CFO and COO [20]

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Yes, I think -- and let me take maintenance first, because that's the positive one, that we're forecasting that to be up 4% to 5% year-over-year. So we're on target for there. And on services, yes, with our kind of exit or de-emphasis on eDiscovery, we're differently seeing an impact on our eDiscovery Services business. But that's part of the plan. So overall, those services will probably be down somewhere between 5% to 10%, depending on the line item. So we are -- that's the one headwind we're suffering through this year, as we kind of really drive a majority of our business towards the forensic security suite.

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Hendi Susanto, G. Research, LLC - Research Analyst [21]

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And then do you expect that to bottom exiting 2017, Barry?

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Barry J. Plaga, Guidance Software, Inc. - CFO and COO [22]

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Yes, I think for the most part, it will. And it'll flatten out from there.

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Hendi Susanto, G. Research, LLC - Research Analyst [23]

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Okay. And then if I look at your operating margin, your Q1 operating margin is 8.3%, which is above the annual operating margin guidance of 6% to 8%. I'm wondering whether your annual operating margin guidance is conservative. I don't see how operating margin in Q2, Q3 or Q4, like lower than Q1?

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Barry J. Plaga, Guidance Software, Inc. - CFO and COO [24]

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Well, definitely not in the back half, for sure. So I agree with you there, Hendi. We did have some delayed spending in Q1. We came in under our expense plan. So that helped out the operating margin in Q1. I think everybody would agree, we want to have the right level of resources in the company. So we will continue to kind of push that in the right direction, but maintain that kind of target of 8%. So I wouldn't say it's conservative, but we're pretty mindful of our expense run rate, and whenever we can push something off, we do.

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Hendi Susanto, G. Research, LLC - Research Analyst [25]

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That's helpful. And one question for Patrick. Patrick, now that Guidance Software shares the Endpoint Security ASP, how should we analyze and then look into that?

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Patrick Dennis, Guidance Software, Inc. - CEO, President and Director [26]

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So I think you should think of it in phases. So Hendi, you've been with us for really long time. So when we first started to talk about ASPs, frankly, they were pretty modest. We went through a period where they nearly doubled, if not went a bit higher than that. Following the doubling, we went up a little bit from there. Now I think what you're going to see is you're going to see that average selling price increase primarily driven through deal size, no longer just through the changes that we've made to the actual structural part of the pricing. So we should expect it to flatten out a little bit from here on out. And we should expect that expansion that we see in that ASP line has to do with overall increases in deal size. Does that make sense?

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Hendi Susanto, G. Research, LLC - Research Analyst [27]

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Yes. And then one last question from me, Patrick. In the area security analytics, your EnForce Risk Manager, can you give us some update on the sales traction, how many new customers you have had and then any data point that would be helpful for us?

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Patrick Dennis, Guidance Software, Inc. - CEO, President and Director [28]

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Yes, so we continue to work with customers that are trying to solve for, among other things, these -- the rules and regulations around GDPR. And so as you might imagine, organizations are wrestling with their own policies on how to comply. And therefore, a lot of the risk manager work is right now with clients trying to determine how they can use software to deploy their policies in an automated way. We continue to see interest there. I think many of you are trying to sort out when you're going to start see that revenue really flow through the P&L. I think most of you have said you expect that kind of in the back half of the year and that's probably pretty rational.

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Operator [29]

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Our next question is a follow-up from Michael Kim with Imperial Capital.

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Michael Wonchoon Kim, Imperial Capital, LLC, Research Division - SVP [30]

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Sorry, just one more follow-up question on strategic partnerships. I think you mentioned or you announced a couple of partnerships, kCura, Lastline, Demisto, kind of curious as to how some of those integrations might turn into co-marketing opportunities or where you might be able to leverage your customer base?

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Barry J. Plaga, Guidance Software, Inc. - CFO and COO [31]

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Great question, Michael, thanks for coming back on that one because I think that's really important. We probably don't have time for all of them, so why don't I kind of speak to what we're doing in security with our partnerships broadly, rather than the specifics, for instance, around Lastline and then I want to talk about kCura for second. I think that's meaningful and important. So at the top level, we believe that customers are investing in several security products in an effort to fully and completely protect the operation. However, if you look at most customers, they're not necessarily getting all the value from any one of those products, because many of them work, frankly, as individual tools. As you start to see us shape our next-generation security software, which again, as a plug, might be something could come see at Enfuse, I think you're going to see us take on almost a role-based use of the software. So we're going to expect that there's personas in the software and as such, we want people to stay in our software day in and day out to solve security problems. So these partnerships in the security ecosystem are about bringing more information into our security products, so that a security professional can be more effective. They're also about getting a customer, frankly, better return on investment that they're making on software products. So one of the integrations in our security products I'm always most excited about is Splunk. We have a great integration with Splunk. It brings more value to Splunk and more value to us. So the core strategy in security is, let's make deep relationships and important partnerships with people that are in and around the security apparatus to drive up customer value and keep people in our software more often. I don't want people to think of our Endpoint Security software as a tool anymore. I think our Endpoint Security software, specifically in the newer versions, is going to be the kind of software people really use to investigate and resolve security incidents every day. And for us to do that, we need deep partnerships and deep integrations with other people that are in the security field. So that's a trend you should expect to continue.

A bit different from that is the partnership with kCura, which is all about 2 leaders coming together to bring a best-in-class, end-to-end solution to market. The relationship with kCura takes advantage of the leading hosted review platform and the world's best search and collect technology. We've built a deep integration between our software and kCura's Relativity product that actually allows customers to import information right into Relativity spaces with the metadata map from our evidence files right into their catalog. So for us, that's all about reducing friction for customers that are interested in eDiscovery. That actual -- that integration is shipping as an update to the adjusting product. So our existing customers get that value, along with anybody that also owns Relativity products. The relationship between the 2 organizations has never been better. The CEO of kCura and I have said this is going to be deep and meaningful partnership in the marketplace and with our customers and it's going really, really well.

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Operator [32]

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Ladies and gentlemen, we have reached the end of question-and-answer session. I'd like to turn the call back to Rasmus van der Colff for closing remarks.

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Rasmus van der Colff, Guidance Software, Inc. - CAO and VP of Finance [33]

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Great. Thank you, operator. That concludes our call for today. I'd like to thank everybody for joining us. Thank you.

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Operator [34]

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This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.