Absolute Software Corp (ABST) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Absolute Software Corporation fourth-quarter results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

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. For more information on the Company's risks and uncertainties relating to these forward-looking statements, please refer to the section of its annual MD&A.

(OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded today, Tuesday, August 14, 2007, at 10AM Eastern Time.

I would now like to turn the conference over to Mr. John Livingston, Chairman and Chief Executive Officer. Please go ahead, sir.

Thanks, operator. Good morning, everyone, and thank you for joining us to discuss our fiscal 2007 results. We issued our results by press release this morning. If you did not receive the release, it can be found on our website at absolute.com along with our MD&A and financial statements.

With me today in Vancouver is Rob Chase, Absolute's Chief Financial Officer. I would like to begin today's call with an overview of our achievements for the fourth quarter and the 2007 fiscal year. Rob will then review our financial results, after which I will provide some closing comments before opening the call up to questions.

Fiscal 2007 was a breakthrough year for Absolute, both financially and operationally. Leveraging our leading software-as-a-service business model, we generated record sales contracts of C$47.3 million and free cash flow of C$16.9 million for the year. We expanded the number and scope of our embedded partnerships. We launched bundling programs with Dell and Gateway and also launched marketing and sales programs with every one of the Tier 1 PC makers.

We also saw strong growth across all of our market segments and built a platform for international growth. Most importantly, we have made tremendous progress with our vision to establish Computrace as the new computer security standard for computer theft protection, embedded computer tracking and post-theft data protection.

Fourth-quarter results and fiscal year overview -- Q4 sales contracts were C$16.2 million, up 94% over the same period last year, and we generated cash from operations of C$4.5 million for the quarter, a 254% increase in cash generated over last year.

The fourth quarter also represented the 11th straight quarter of year-over-year sales contract growth of 50% or more, and the 12th straight quarter consecutively of positive cash flow.

Fiscal 2007 sales contracts were C$47.3 million, growing 110% over last year. In fiscal 2007, we generated cash from operations of $16.9 million, a 302% increase over last year.

Fourth-quarter strong subscriber growth continues. We added 458,000 customer subscriptions in the fourth quarter and 1.1 million subscriptions during the fiscal year. And now, we ended up the year with approximately 1.6 million subscribers, up from 1.2 million at the end of Q3 and up from 700,000 at the start of the year. Based on our accelerating subscriber base, which has more than doubled in the last year, and the pipeline of opportunities in front of us, we have increased our subscriber target for the second time in 12 months, now up to 4 million subscribers under contract by June 30, 2009.

Fiscal 2007 highlights -- the Computrace LoJack bundle update. The key highlight for the year was the launch of a new Dell consumer theft protection bundle, whereby Dell is automatically including Computrace LoJack for Laptops for customers who purchase Dell's CompleteCare accidental damage offering. This program is on track and has the potential to generate more than 1 million subscribers for each year the program remains active. And it was a key contributor to our Q4 growth.

In addition, during the year we established rebate and bundling program promotion agreements with Gateway, Apple, Symantec and HP.

New BIOS support announcements -- in Q4, we announced embedded support for Toshiba, and during the year, we announced embedded support for Panasonic, Motion, Lenovo, HP and Gateway consumer notebooks.

With eight major OEMs now providing embedded BIOS support for Computrace LoJack, we expect over 35 million laptops to ship Computrace LoJack-ready worldwide in calendar 2007, which will add to our embedded footprint of approximately 35 million laptops already in circulation.

We are absolutely accelerating market demand across all four of our market segments. The corporate segment, which is driven by data privacy concerns and data protection legislation, saw corporate customer sales increasing 118% over fiscal 2006 and represented 44% of total sales for the year.

The education segment, driven by the expansion of student laptop programs -- education segment sales contracts increased 56% over fiscal 2006 and represented 29% of total sales.

The consumer segment, driven by identity theft concerns and the establishment of our partner bundling programs -- consumer segment sales contracts increased 237% over fiscal 2006, representing 20% of total sales.

Finally, the government segment, driven by data privacy concerns and several costly and well-publicized laptop thefts -- government segments sales increased 151%, representing 6% of total sales, and we're very excited about the pipeline of government business that's growing.

International expansion -- as indicated on our prior calls, the UK and broader European market are facing similar data privacy concerns as we are in North America. During fiscal 2007, we opened an office in the UK to support expansion into Europe and increased our overseas recovery team capabilities. Currently, our European operations generate 2% of our business and as such provide a significant growth opportunity for us as we move forward.

At this point, I would like to pass it over to Rob to look at select financials in more detail. Rob?

Thanks, John, and good morning, everyone. Before reviewing our financial performance, I would like to add a few comments about our subscriber base and software-as-a-service business model.

We generated gross adds of 1.1 million subscriptions in fiscal 2007, and as a result we exceeded our 1 million subscriber base target by nearly 60%, ending the year with 1.6 million subscribers. Importantly, 395,000 of the gross adds came from existing commercial customers, representing renewals from the 201,000 subscriptions that expired in the year and expansion of relationships within these customers.

If history is an accurate predictor of the future, we would expect to generate over 800,000 new and renewal subscriptions in fiscal 2008 from our current subscriber base. A portion of this is expected, again, to come from renewals on the 520,000 subscriptions that expire in fiscal 2008, with the remainder coming from expanding our relationships with existing commercial customers.

This is a testament to the strength of our software-as-a-service business model. In dollar terms, for fiscal 2007, existing customers generated 52% of our sales or nearly C$25 million, exceeding our total sales for the prior year of C$22.5 million by 11%. This trend has continued for a number of years and demonstrates the stability and visibility that our business model can provide.

Turning now to our fiscal 2007 financial results, we reaped the rewards of our growth strategies in the form of strong sales and cash flow performance while continuing to invest in our current operations and future growth strategies. Fourth-quarter sales contracts of C$16.2 million were up 94% from Q4 last year, and year-over-year contracts of C$47.3 million were up 110%. As a result, deferred revenue increased 101% to C$54.2 million from C$27 million last year.

We generated 75% of our fourth-quarter sales and 80% of our sales for the year from commercial customers. Our commercial sales continue to grow on the strength of our embedded footprint and channel sales and marketing strategies, combined with general market trends toward increased spending on securing and managing mobile computers. While we have seen an increase in large customer opportunities in the pipeline and do have customers that spend over C$1 million with us annually, our average deal size continue to be below C$100,000

The remaining 25% of fourth-quarter sales and 20% of sales for the year were generated in the consumer vertical, which grew 230% -- 237%, sorry -- over last year to C$9.6 million. The increase is primarily due to the bundle agreements with Gateway and Dell. Nearly one-half of our consumer sales were generated through the consumer bundle with Dell. However, in exchange for high-volume commitments, these consumer bundle programs have a significantly reduced selling price.

As a result, our average selling price, or ASP, declined to $43.89 for the fiscal year from $55.71 last year. Conversely, the average contract term remained relatively stable at 30 months versus 32 months last year. Despite the reduced ASP, we expect economies of scale from volume increases to enable us to maintain our cash margins.

From an investment perspective, we have focused on building our distribution channel, generating sales and subscriber growth, expanding our support infrastructure and developing the technology and relationships required for our continued growth. As a result, total operating expenses, including cost of goods sold and SG&A, increased 61% over last year to C$26.4 million. Despite this increase, our efficiency actually improved as total operating expenses declined to 56% of sales contracts from 73% last year.

Further, we have funded this investment from current operations and have achieved increasing net cash margins in the process. We believe this to be a positive indicator of our performance and scalability of the business. By cash margins, we are referring to cash from operations as a percentage of sales contracts. Cash margins and cash from operations continue to be the key metrics for evaluating our sales and operational performance.

For fiscal 2007, we significantly improved performance relative to these metrics. Cash margins were 36% for the year compared to 19% last year and exceeded our target range of 30% to 35%. The increased cash margins are primarily the result of growing sales by 110% while keeping cost increases to just 61%, again reflecting the leverage of our business model. For fiscal 2008, we're targeting cash margins of 30% to 35% as we expect to continue investing internationally and in our technology.

In keeping with our strong sales contract performance, cash from operations increased 254% to C$4.5 million in Q4 from C$1.3 million in Q4 last year. For the fiscal year, we increased our operating cash flow by 302% to C$16.9 million compared to C$4.2 million in fiscal 2006.

Turning quickly to our balance sheet, we have the resources necessary to execute on our growth plan. At June 30, 2007, we had cash and short-term investment balances totaling C$34.9 million, up from C$16.7 million at June 30, 2006.

In closing, we remain excited with both the near- and long-term growth prospects of the business and have accordingly adjusted our near-term subscriber target from 3 million to 4 million by June 30, 2009. Importantly, based on our pipeline forecasts and investment we're making in the business, we expect the bulk of the 1 million target increase to come in fiscal '09.

At this point, I will turn it back over to you, John.

Thanks, Rob. I would like to discuss Absolute's strategy to reach 4 million subscribers. I would like to reiterate that we are very pleased with our fiscal 2007 results. And I also would like to thank our entire team for a fantastic year and a job well done.

Now looking forward, we recently completed our semi-annual national sales and management meetings to plan for the upcoming year. And I know our team is more excited than ever by the strong momentum we continue to see for fiscal 2008. We strongly believe that Computrace LoJack should be a standard layer of any organization's computer security program and that the broader market seems to be coming to a similar conclusion.

With data privacy compliance laws now in place in over 35 states and the public's increasing concern over identity theft, we believe that the market has come to recognize the necessity of maintaining a comprehensive security solution to protect its assets and its data.

With Computrace LoJack attach rates now at 4%, we're still in our infancy in attaching self-protection services to new laptops sold each year in the U.S. market. So we remain focused on further penetrating these core computer and data theft protection markets and see tremendous opportunity in each of our four target verticals.

As we pursue our goal of 4 million subscribers and invest in the future of the business, we will remain focused on the five primary growth strategies. They are, one, embed and leverage our Computrace agent in the BIOS or firmware of leading laptop and desktop computer manufacturers; two, to develop growth-focused sales and marketing initiatives with our PC OEM partners; three, to expand and deepen our sales and marketing activity to our four market segments; four, to defend our market-leading position by licensing, growing and protecting our IP and patent portfolio; and five, to invest in new products and services to strengthen our core product platform and to open new markets and secure new devices.

Finally, as the core of our vision is enabling customer mobility, we're now pursuing a broader range of opportunities across other mobile platforms such as smart devices and cellphones. We will report more on these initiatives as we progress throughout the year.

Thank you again for your support and attending today's call. Operator, at this time, we would like to open the call up to the Q&A session.

(OPERATOR INSTRUCTIONS). Scott Penner, TD Newcrest.

John, could you talk a little bit about this idea of the installed base out in a world of your embedded solution and how you reach the laptops that are, quote/unquote, dark? What programs are you going through with the PC OEMs and then any other partnerships that you have in place?

It is a great question. We do actually have specific programs in place with a couple of OEMs to go after the units that have already been shipped with the Computrace-ready technology, but haven't been activated. So we do have programs in place with two OEMs where, for those customers, if they buy a three-year contract, basically they get the two-year price point. So we have that promotion running right now, which is specifically aimed at units that have the embedded technology, that have been activated. So that is one program. There will continue to be other programs as we roll out.

It's also very helpful because now we have been in a cycle for almost two years, depending on which OEM you look at. So when we are talking to customers and we're talking about protecting every unit in their enterprise, it is very helpful when a significant number of those units have the agent embedded in the BIOS and they are going to get that ultimate firmware protection in terms of tracking.

So yes, there are several specific programs, and it is generally very helpful in closing the deals for new design wins as well.

And just switching to the government vertical, the purchasing patterns in the government space, is that the similar -- starting with small deals, similar to your other verticals? Is that kind of the growth that we're seeing so far?

That is the growth we saw last year in fiscal 2007. I think we anticipate that to change in 2008. We are engaged in sales cycles that are large in terms of numbers of units. We feel very optimistic about the government segment this year. We have invested in the government segment for a year now, and the technology is perfectly suited for federal, state and local government environments. So we are very bullish on the government segment. And I think we will see some large government purchases in the coming quarters.

And given that this coming quarter, or I guess the September quarter, is one of the government's year ends, do you have cycles that are advanced enough that we could possibly see some deals this quarter?

Well, it is certainly in the realm of possibility. So the government cycle is very much September 30, but it is also in October as well. So both the September and October are excellent months for government contracts.

Rob, maybe you could just spend a minute just talking about the comment that the cash flow margin guidance next year, 30% to 35%, is pretty much flat to what it was, even though you just did 36% this year. Any sort of color on some of the variables, why this is sort of implied to be flat to slightly down next year?

Really it is a message that we are going to continue investing in the business to maintain our growth. I think we mentioned a couple things in our MD&A and in John's summary about some of the initiatives we're doing with respect to our embedded position and the technology we have to help improve the services we deliver to mobile devices.

So I think it is fair to say that we're continuing to be in an investment mode here because we believe there is a much greater opportunity to increase our overall attach rates. And I think that is the message overall. And longer term as well, we will have eventually tax coming into the equation. So those margins are margins we feel we can maintain in the face of tax coming down the pike in probably '09.

Ranjit Narayanan, MGI Securities.

On the Dell LoJack bundle, would you be in a position to break out what the contribution to sales contracts was in the quarter? Also, how many of your subscribers did this modeling program add?

The actual numbers of subscribers is a confidential number between Dell and ourselves. But as I said on the call, we are on track to do over 1 million during the 12-month program that we have in place with Dell. So we are seeing great uptake. We are very, very pleased with the program. I think Dell is very pleased with the program. So it is a real win-win for Dell, Absolute and Dell's customers. So everything is going very well there. And we're just continuing to roll that out over the course of the 12-month period.

And can you also give us an update on your wireless application? When will this product be available and what will your go-to-market strategy be? Will you be partnering with a handset vendor? And also, any color on pricing here would be great.

We have now, for about three months, we have officially had a wireless team in place that is rolling out wireless products. And we will -- the ultimate go-to-market strategy is to roll out with a handset vendor. And we will be going that route, and we are having those discussions now.

So would this be more of a fiscal '09 impact, or could we expect some contribution to sales contracts in '08 itself?

You may see some sales contracts in '08, '08 and '09, obviously.

And in Q4, the contribution from the education vertical was C$4.7 million, which was well above what you did last Q4 and Q1 of '07. How would you characterize activating the segment this Q1, give we're six weeks into Q1 already?

I would characterize it as robust. We're seeing the education market -- we are seeing the biggest deals we have ever seen in education to date. And we had one of those last quarter. We had the biggest deal we had ever seen. So that was very good. This is a continuation of a strong educational quarter. And we have a very loyal customer base that is growing in education and we are doing a lot of work in the educational market and are focused on it. So I think there's a lot more we can do. But it is a very stable market for us that is growing at a good rate. And we depend on the customer base that we have in place today to continue to be customers for many years to come.

And last question, with respect to Europe -- do you at some point plan to enter the consumer segment? And if so, when? And what could the potential opportunity be?

Yes, I do anticipate that we will provide a consumer product to Europe. I believe we have a tremendous opportunity there. That would also roll out with our OEM partners, and we would make that available. It's an exciting product. There's a lot of requests for it. And it will roll out in this fiscal 2008 year.

Thanos Moschopoulos, BMO Capital Markets.

Just to follow up on the question on Europe, can you comment a bit further as to how things are progressing there and how the pipeline is starting to build?

It is Rob here. And certainly, we made some good headway in Europe. This last year, sales were up basically 82% over the prior year. And we have seen it start to accelerate here in the last half of the year. The team has now been in place for a full year over there. So we have managed to get a bunch of good opportunity in the pipeline, and it's a matter of going and getting those deals converted here in the next few quarters, and certainly are seen great opportunity there to go and hopefully more than double that in the coming -- in fiscal '08.

The 2% number that John mentioned in the prepared remarks -- was that 2% of sales contracts from Europe?

Yes, 2% of sales contracts. And we would expect to be able to increase that to between 5% and 10% in fiscal '08.

Now, with respect to the retail channel, can you update us on how your relationship is proceeding with CompUSA and Apple? What kind of attach rates are we seeing there? And have any new retailers been added to the fold recently?

Yes, we have just recently added OfficeMax, which has I believe around 900 stores nationwide. That rollout is going very well for us. CompUSA, as you may know, downsized last year, unfortunately, cut their store count in about half. So that did impact our sales from that channel by about the same margin.

At the same time, we are being very well received in the Apple stores, as we have from day one. But with the current Symantec/Apple promotion that we're doing, where we are bundling in with Symantec and offering a rebate together, that has been very successful for us. I believe we at the 13th best-selling software title in the Apple stores right now over many other name-brand software titles.

So things are going very well at Apple. There is no question that Apple users have a very high affinity for their machine and will invest in the LoJack for Laptops product to protect it. So it is a good market for us, and we plan on doing more promotions with Apple in fiscal 2008.

And just on the topic of Symantec, can you talk about how that promotion came into being and whether you're actively involved in discussion with them on perhaps broader marketing efforts?

Well, I am not going to speculate on broader marketing efforts, but I just will say that obviously there is a very, very good fit between -- we feel there's a very good fit between Absolute's theft protection products and Symantec and others' anti-virus and Internet security products. So there's obviously a natural fit there. In fact, HP came to us as well and said, can we do a bundled offering with Symantec and Absolute? So we're rolling that out. We just rolled that out recently, and that is doing very well for us as well.

So I think not only are we seeing the fit, I think that others are seeing the fit. And I think we will have more opportunities to do consumer and other segment promotions with the large computer security software vendors such as Symantec and others.

Tom Liston, Versant Partners.

You may have mentioned it, but the two large contracts that you announced a few weeks back, were they near the end of quarter? Would the cash have been received in this past quarter?

They were near the end of the quarter, and so the cash will be received here in Q1.

Perfect. And you talked a lot about the government sector, but one of the comments was that, I think in June here, you've opened the datacenter down there. I believe there's at least a few customers, or was it the majority of U.S. government customers -- were they waiting on that U.S.-based datacenter to go ahead, or was it just one or two major customers that wanted to see that?

Tom, the U.S. datacenter is a key criteria for the federal segment in the U.S. So obviously, now we have our U.S. datacenter up and running. And we're able now to facilitate the interest that we have in the federal segment. So we are excited about that.

Will that be focused only on government or could you potentially monitor other verticals from that center, or would you?

It is a world-class facility. We have two cages there with all kinds of resources, access to resources. So we could host millions of computers from that datacenter.

Just on Dell, a couple things on that -- it sounds like, and correct me if I am wrong, you are slightly more optimistic on the number there. I think you said around 1 million earlier, and it looks like you're saying above 1 million, so I want a comment on that.

The second part, you talked about it continuing in fiscal 2008. Would you see it continuing in calendar 2008 as well?

And the third part of that is, what are you doing maybe to capture some of the upgrades? In other words, I think most of the promotions are around a year -- at least XPS, I think, are for a year. How are you getting some of those customers either early on or later or at least anticipate upgrading them to further years?

We do that on the lojackforlaptops.com website. And we're seeing fantastic upgrade path. The latest numbers I have from my consumer team is an upgrade path of about 60%. So if somebody does get a year's worth of service when they go to the site, 60% of the time they are upgrading to a further year or two-year term. So we're seeing a tremendous uptick. And I think that really speaks to the value of theft protection as a category. This is something that, as we all know, this is something that is very dear to our hearts. If we lose a laptop or if we have our home broken into, it is somewhat of a personal assault. And I think that plays well in the consumers' mind, and they are very apt to upgrade for additional protection in terms of terms -- length of term.

And a question on -- is there any conversation of whether the Dell programs will continue in calendar 2008?

Well, we are continuing to work with Dell, and with that in view. I just don't know the answer yet. We haven't gotten there yet. But I know that there is value. Dell is pleased with the program. We are pleased with the program. And we will obviously work very closely with Dell to do everything in our power to make that happen, that next year of the contract, which is an auto-renewed year, by the way.

And the consumers that upgrade, are they upgrading more towards retail-type rates or somewhere in between?

I'm sorry, when you say retail-type rates, what do you mean?

Is it more of a list price for when they extend their service -- they get the XPS free for a year, and when they extend it a year or two, are they more --

We run all kinds of different offers on the website. So depending on if there's a seasonal offer or a coupon offer available at the time, there may be a discount involved. Otherwise, it's the standard $49, basically, per year. But if you buy three years, obviously, you get it for $99.

Maybe give us a round number or a guesstimate, what your ASP would be if the bundling deals were removed from that average? Would it be similar?

The ASP would be almost bang-on what it was last year.

Finally, and I will pass it on, Georgia -- sorry if this has been asked, but can you tell us about if there is any early traction? I know it is very, very early days, but maybe early traction or expectations with those type of deals, and do you have similar type of deals in the pipeline?

There's a lot of interest in the LoJack brand name in terms of leveraging -- having a theft protection service and leveraging other products and services that may be in a more mature state of their life cycle. So there certainly is, Tom, and I think -- we will have additional exciting things happening during the fiscal 2008, that is for sure.

Glenn Jamieson, Orion Securities.

John, one of your growth drivers of the five points that you laid out there was the idea of you introducing new services. So I just wanted to ask you some questions along that line. I think right now, your theft protection service is by far the dominant driver of your sales. But if we look out a few years, can you give us any sense of where you think your revenue mix will be, and what are the services that you have either existing or in development that will play a more important role a couple of years out?

We are focused on data protection and the physical asset protection markets, and the management of the PCs, and in some circumstances, obviously, the software on it, the configuration of the PCs and things like that. So really, we play in those three areas -- physical protection, data protection and then computer management.

So within those three areas, there is a tremendous amount of opportunity and a tremendous amount of new services and features that we could add. We are adding a lot of features to our datacenter. Every year, consistently, we're rolling out four or five upgrades to our datacenter. Some customers are getting new reports. We are rolling out some new reports for K12. We've done a lot of work for certain segments in terms of the reporting functionality. So that is one way we can help them gather additional information about the asset or about software on the asset or the configuration of the asset, point out security vulnerabilities on the asset, those kinds of things. So we are adding that in.

Then you can get into the whole area of data leakage, which is a very exciting area right now. We're looking at that area and seeing how our technology can be leveraged to help present data leakage in a distributed environment. So there's some additional areas that we're focused on.

We are also focused on joining forces, if you will, or combining with other products, deploying those products and helping those products move into a software-as-a-service-type business model. So I think you will see us adding some distinct new services in the coming year that will be leveraging other technologies and will be the facilitator of those technologies.

So with our platform, we have that wonderful ability to program the agent from the server. And that really gives us so much flexibility in terms of new services delivery. So look for new services in those three areas -- PC management, physical theft protection and data protection.

And in all cases, those services that you're describing there, there isn't a physical element to the delivery of that service the way that there is with your theft protection service. Is that true?

All of our -- in terms of physical delivery, all of our products and services, the agent is distributed obviously electronically over a LAN, through email, etc., or through SMS and what have you. Is that what you're talking about, Glenn, the distribution of the agent, or--?

The newer services that we can expect to see you roll out, unlike your theft protection service, where there may be the requirement to get some people involved in the recovery phase, the new services that you were describing there really doesn't have -- they don't seem to have a physical component to the delivery of that service.

Right. Well, that is correct. So the additional data security services, etc., that we are getting into are more of a traditional software-as-a-service model in terms of the electronic delivery of them. You are correct, there is not a physical recovery component required for those. Those are services that we can download and execute from our datacenter.

And then the follow-up question is, we've talked a bit about expansion outside of the U.S. and the size of your installed base of agents, the footprint growing. I think the number was 70 million installed agents out there by the end of calendar '07. It would seem that that installed base is growing outside of the U.S. as well as inside the U.S.

And then on the margin, it may be easier for you to activate services outside of the U.S. if they don't require a physical recovery as part of the service.

Right. And that is why products like the data protection product that we have today, the remote data delete product, are very important. So we can offer products in certain jurisdictions where maybe the recovery side of the business is not as easy to rely on. So therefore, in that particular jurisdiction, we would obviously be bundling in other services that we can deliver remotely and rely on to protect the customers' data and computers with less reliance on the recovery mechanism.

We are confident in our ability to recover computers in the UK and across Europe. So I think the recovery service is very relevant there. It's just when we get into some other jurisdictions, when you're getting into jurisdictions where we don't have political ties, that is where the recovery model gets more complicated, obviously.

And just one last question -- is it possible that the non-theft-protection service side of your business becomes as large as theft protection at some point?

Certainly. The theft protection side of our business is a great core business that we have. It is very unique, that we have established over the last 10 years, that we have 25 theft recovery officers. It is extremely relevant for, I believe, North America and Europe. And we are the large player in this market. And it is very important to companies that want to understand the source of the theft and they want to get that stolen computer back because they know that data provides intelligence as to why the computer went missing and who took it. So that is very, very important to some financial institutions and the government and other people like that.

So the theft recovery business is core. But as you suggest, it does come with the theft recovery team component. When we move into the pure data security services model, which we are already in that business, delivering more value in that area, then that can all be done, as you're suggesting, remotely and as a pure software-as-a-service model. So we are very excited about those new security services coming on board in fiscal 2008.

Dushan Batrovic, Canaccord Adams.

Kind of a general question from me on ASPs. How would you -- maybe you could describe to us some of the work you have done around establishing price sensitivities in your target markets. You are at the 4% activation rate right now. What will it require from an ASP standpoint to boost that up to 5% and 10% eventually? And is that different by geography and is that different by vertical segments?

Good question. Certainly we believe there is a good elasticity to it. At this stage, of course, we believe it is still time to be investing in the business and maintaining our ASPs at the traditional rates we have that for our sold product. But where we have opportunities to do bundle agreements and things, certainly they require a much lower price, but the exponential volumes that it creates and the economies of scale that it enables us to realize make that worth the while. So it really comes down to we feel comfortable with where our pricing is today with our standard sold product. And in the future, where we have other bundle opportunities, we really will assess those on a case-by-case basis in terms of just what sort of additional demand they can drive for us.

That is it for me. Nice job on the quarter.

Howard Lis, GMP Securities.

Most of my questions have been asked. I've got just three things to touch on. And maybe I missed the numbers, Rob, but what were the number of contracts signed in the quarter and the numbers that expired in Q4?

The number signed was 458,000, and I believe the expiring in the quarter was around 50,000. But I had just given the numbers for the year on the call, which was expiring -- 201,000 expired in fiscal '07 and we have 520,000 expiring in fiscal '08.

So signed was 458,000?

458,000 in the quarter, yes.

And maybe too early in your activity in the consumer or retail segment, but do you have a sense yet of what the renewal rates are of consumers or retail customers that signed up for a one-year subscription?

The bulk of those, it was interesting -- when we got into the consumer business, we found our average contract term remained around the 30-month average we had traditionally seen in the business. So it is not a significant portion. And additionally, a lot of the people that were buying into one year were actually upgrading to another three years when they first registered with us. But what we are seeing -- I think the time to watch that will be, of course, with the Dell business going on here, because there has been a lot of one-year contracts. And so we really will get a good feel for that next spring, I would believe.

And one final question -- you sort of alluded to it earlier in your comments regarding tax and how that will likely begin in '09. How should we think about what sort of cash taxes you guys will be required to pay starting in that period?

At this point it looks in the 3% to 5% of sales range for estimated tax, income tax in fiscal '09.

That is on GAAP sales?

No, on sales contracts, and hence sort of maintaining our 30% to 35% net cash margins.

Madhu Kodali, Fertilemind Capital.

Congratulations on an outstanding quarter. I've got a couple of questions. Could you give me a breakdown on OEM versus direct sales?

Yes. For the fiscal year, OEM sales were 81% of the -- we generated 81% of our sales through the OEMs. We likely generated or we did generate around 15% of the business from value-added resellers and retailers as well, with the remainder, 4% or so, coming from direct activity, which generally we try to make sure we go through our channels as opposed to doing deals direct.

One other question on the Dell contract -- I think last quarter you gave a number -- 49% of the sales contracts -- I believe that was year to date. Could you update us, give me an update on that for the year?

Yes, again, it stayed at around 49%. Dell has stayed at 49% of our sales contracts for a number of years. They have continued to grow with us. And of course, the other OEMs have accelerated in addition to that, now growing overall OEM to 81% from the mid-70s or low 70s in the prior years.

One last question -- I know you have given out several numbers in terms of new subs, expired and so on. I was wondering if you plan to track some sort of retention rate number as to how many existing customers renew their contracts? Do you do that or are you planning to do that?

Yes, the way we track that today is really to focus on the percentage of business coming from existing customers. And I did give in the call that we generated 395,000 subscriptions out of our existing commercial customer base on 201,000 that were coming up for renewal. So we basically doubled the ones that were coming up for renewal. Now, a majority of those, I would suggest over 90% of the 201,000 that expired would have been renewed, with the remaining 195,000 or so to existing customers being an expansion or penetration, if you will, into the rest of their laptop base.

[Jordan Roberts], Jefferies & Co.

This is actually Katherine Egbert with Jefferies. Just a quick question on your federal business in the U.S. It seems to be doing fine, but yet the federal sector has given some other companies fits, if you will, because spending has been somewhat erratic. Can you talk about what you see for the U.S. federal sector?

It is very early for us in the U.S. federal sector, but we have some good federal customers that have been with us for a number of years. Now that we have started to invest in a team to focus on the federal, we are seeing the beginnings of those early seeds that we've sowed coming to reap now. So we are anticipating that we will have a strong year in the federal segment in 2008.

(OPERATOR INSTRUCTIONS). Mr. Livingston, there are no further questions. Please continue.

Thank you, operator. Once again, thanks, everyone, for taking the time to participate in today's call. We'll look forward to updating you in the coming quarters.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.